utstarcom inc (form: 10-k, received: 04/15/2005 15:30:11)

ANNUAL REPORT 2004

UTSTARCOM:CHANGING THE WAY THE WORLD COMMUNICATES

VISION

FOUNDATION

TRANSFORMATION

OPPORTUNITIES

UTSTARCOM is a global leader in IP-based, end-to-end networking and telecommunicationssolutions and international service and support.The company sells its wireless, broadband,handset, and customer premises equipment to operators in both fast growth and establishedtelecommunications markets around the world.

GAAPEPS

20032002

04 $0.56 $1.75

$0.94

0.0 0.5 1.0 1.5 2.0

Revenue

20032002

04 $2,704 $1,965

$982

in millions

0 1000 2000 3000

in millionsNet Income

20032002

04 $73 $216

$108

0 50 100 150 200 250

Backlog

20032002

04 $1,200 $1,006

$605

in millions

0 350 700 1,050 1,400

2004 Financial Highlights

DIE CUT

VISION

FOUNDATION

CORNERSTONE

VISION

In 1991, I traveled to China for a business trip and quicklylearned first hand the tremendous need for telecommuni-cations services there.Trying to make a simple phone call,I had to dial the number dozens of times before the callconnected. I found it amazing that in China, the countrywith the largest population in the world and a fast growingeconomy, reliable telecommunications were not available.

Most experts predicted that China would soon develop intothe largest telecommunications market in world.We foundedUTStarcom with a focus on developing of innovative,disruptive and cost-effective telecommunications solutionsfor China and other fast-growing markets.

The basis of our early success in China was PAS (PersonalAccess System), a citywide wireless solution that allowedfixed-line operators to offer limited-mobility wirelessservices and compete with cellular service providers. WithPAS, consumers were no longer tethered to their fixed-linephones at home.

In 1999, PAS was commercially launched in Yuhang, atiny city in Zhejiang Province. It took almost two years toreach one million PAS subscribers, but by the end of2004, over 66 million people in China had subscribed for

PAS service, more than half of which on networks built onUTStarcom technology. During this remarkable five-yeargrowth period, PAS subscribers in China grew from onemillion to 66 million and UTStarcom’s revenues jumpedfrom $188 million to $2.7 billion, a fourteen-fold increase.

While China and PAS will always be the cornerstone forthis company, our VISION for UTStarcom has grown wellbeyond those two markets. To create long-term value forour shareholders, we have diversified our global customerbase and continue to drive new product innovations. Wehave evolved from a company that has historically derivednearly 90 percent of its revenue from the China and PASmarkets to a company with more than 50 percent of itstotal revenue outside of China in the fourth quarter of2004. This market and product diversification was amonumental undertaking that required the hard work anddedication of all of our employees around the world.

As I look back on 2004 and the accomplishments we’veachieved during this important transition for the company,I’d like to touch on a few key highlights:

• As a company, we significantly broadened our IP-basedproduct portfolio in 2004. In March, we announced the

2004: A Year of Transformation

Hong LuChairman, President and Chief Executive Officer

company’s global wireless strategy and introduced theMovingMedia™ wireless access product family. Thispast fall, we delivered on that strategy and unveiled ourMovingMedia 2000 all-IP CDMA2000 infrastructuresolution and MovingMedia 6000 3G TD-CDMA/UMTSTDD wireless broadband solution, along with relatedcustomer wins in Africa, Southeast Asia and Europe.The last member of the MovingMedia product family isMovingMedia 8000, our 3G WCDMA infrastructuresolution that has been successfully trialed in Beijing, thecapital city of China, and will most likely commerciallydebut in late 2005.

We also introduced several revolutionary broadbandproducts in 2004, including our Gigabit Ethernet PassiveOptical Network (GEPON) Fiber-to-the-Premises(FTTP) solution; mVision™, our end-to-end carrierTVoIP system; and our iAN-8000 multiservice accessnode. These new products and our rich history oftechnology leadership and innovation will serve as the FOUNDATION for UTStarcom’s success in 2005and beyond.

• In 2004, UTStarcom signed contracts with customers in several new global markets, including Latin America

(TelSur, Telmex), Europe (Tiscali, Versatel, UKBB) andthe United States (Vonage, DSSI). In addition, ouracquisition of Audiovox Communications Corporationprovides us with a well-established, first-class saleschannel to sell CDMA handsets to the top carriers inNorth and South America. These new markets offeradditional OPPORTUNITIES for UTStarcom to createnew markets around the world.

While these events illustrate our accomplishments thisyear, 2004 was also a year of significant challenges forUTStarcom associated with our rapid corporate diver-sification and fast growth. The predictability of ourbusiness has changed as new carrier customers bring new parameters for doing business. In addition, the newtechnologies we introduced this past year also present new challenges in product development and delivery to our customers. Finally, we experienced a maturation of ourcore PAS market in China that reiterated the need for the company to have a more diversified product portfolioand customer base.

Despite these challenges, we remain committed to thetransformation of the company and believe we have providedthe foundation for UTStarcom’s success in the future.

Hong Liang Lu

STOCKHOLDER LETTER

UTSTARCOM 3

OPPORTUNITIES

Since the company’s inception in 1995, UTStarcom hasfocused on the development of innovative, disruptivetechnologies, starting with the introduction of PAS in China.UTStarcom introduced several new solutions in 2004,further diversifying our product families and capitalizing onour expertise in IP-based technologies.

In the wireless sector, UTStarcom unveiled the first twomembers of the MovingMedia product family in 2004—the MovingMedia 2000 all-IP CDMA/CDMA2000 1xinfrastructure solution and MovingMedia 6000 3G TD-CDMA/UMTS TDD wireless broadband solution. Bothproducts are currently being deployed with customers inEurope, Africa and southeast Asia and are also in trialswith carriers around the world.

On the broadband side, UTStarcom introduced its Gigabit Ethernet Passive Optical Network (GEPON) and iAN-8000 multiservice access node solutions, both ofwhich are currently deployed with customers in Japan.UTStarcom’s mVision end-to-end TVoIP product, whichwas debuted in October 2004, is the first solution designed

Developing a Comprehensive Portfolio of Disruptive Solutions

Innovative Products that Enable New Revenue Opportunities for Our Carrier Customers

from the ground up to enable carriers to deploy very-large-scale streaming video content over a switched networkarchitecture.

The biggest news in 2004 for UTStarcom came in Junewith the announcement of the acquisition of AudiovoxCommunications Corporation, the wireless handset division of Audiovox Corporation. The acquisition marks UTStarcom’s entry into the competitive CDMAmarketplace, providing the company with a well-recognizedCDMA handset brand, fully certified for the U.S. market.Audiovox also provides the company a comprehensivesales, service, and support platform with long-standingrelationships with top-tier CDMA operators in North andSouth America.

All of UTStarcom’s system solutions, whether wireline orwireless, are based on our mSwitch™ IP-based softswitchplatform. With more than 50 million lines of IP-basedsoftswitch technology deployed globally, UTStarcom is theleader in IP-based networking and telecommunicationstechnologies.

AN2000B-800

UT618X

UTSTARCOM 4

FOUNDATION

In the fall of 2004, UTStarcom introduced its MovingMedia2000 all-IP CDMA/CDMA2000 1x infrastructure solutionand MovingMedia 6000 wireless broadband solution to themarketplace.The MovingMedia 2000 product line enablesmobile operators to offer CDMA-based voice and dataservices over IP, with significant savings on network andbackhaul costs, and new services not enabled by legacyTDM-CDMA based networks. In August, the MovingMedia2000 solution was utilized in an in-flight test of mobilephone communications aboard a commercial AmericanAirlines flight in partnership with QUALCOMM.

UTStarcom’s MovingMedia 6000 3G wireless broadbandsolution turns a range of low-cost licensed frequency bands into valuable assets that are designed to provide a

rapid return on operator investment. Mobile and wirelessbroadband service providers worldwide can deploy thesolution today to offer high-value data services of up to 3Mbps per subscriber, enabling subscribers to access the network from home, work, or any other location. In thenear future, operators will be able to use the MovingMedia6000 solution to offer wireless Voice over IP (VoIP) andhigh-mobility data services.

UTStarcom also made significant progress in 2004 in the race to 3G licensing in China. In December, China’sMinistry of Information (MII) gave UTStarcom a strongrating for its performance in the 3G WCDMA trials inChina. UTStarcom’s MovingMedia 8000 WCDMA solutionis likely to be introduced in the market in late 2005.

Cutting the Cord on Traditional Communications

Tomorrow’s Mobile Voice and Data Solutions for Today’s Wireless World

C2000

XV6600

UTSTARCOM 7

As a leader in IP-DSLAM technology worldwide,UTStarcom consistently develops wireline technologiesthat enable operators to deliver high-speed, high-contentservices and applications, which increase average revenueper user and speed operators’ return on investment.

UTStarcom’s Gigabit Ethernet Passive Optical Network(GEPON) solution allows service providers to offer Fiberto the Premises (FTTP) broadband access to subscribersat Gigabit Ethernet speeds. UTStarcom’s GEPONplatform leverages the operational cost savings of PONtechnology while providing high subscriber density and lowcost of entry, making the solution a compelling alternativeto legacy, last-mile access solutions for delivery of tripleplay services to residential and business users.

Converging similar technologies to provide customers witha common service platform is at the heart of UTStarcom’sproduct strategy. UTStarcom’s iAN-8000 multiservice

access node, introduced in September 2004, combines thefunctions of the company’s AN-2000 IP-based DSLAM, theiAN-2000 VoIP Media Gateway, and a traditional DigitalLoop Carrier (DLC) to enable operators to offer a widevariety of IP-based services through one common platform.

TVoIP was one of the hottest topics in telecom this year.UTStarcom’s mVision end-to-end TVoIP solution is thefirst product on the market designed from the ground up toenable carriers to deploy very-large-scale streaming videocontent over a switched network architecture. WithmVision, subscribers may watch any broadcast TV pro-gram or premium video content ‘Internet style’ at any timethey wish, and record weeks or months of content.Additional services may include pass-through broadcastTV and value-added applications such as Video on Demand(VoD), personalized content, interactive TV, video networkgaming, and video telephony.

Empowering Operators to Deliver Next-Generation Broadband Services

Enabling High-Speed, High-Content Services Consumers Want

BBS 1000

NR25005

UTSTARCOM 8

FOUNDATION

Spanning the Operator Central Office to the Consumer Handset

A Comprehensive Portfolio of Innovative Handsets and Customer Premise Technologies

As a provider of end-to-end telecommunications andnetworking solutions, UTStarcom develops products forboth carriers and consumers. Be it wireless handsets,modems, set-top boxes or wireline phones, UTStarcomoffers a diverse set of consumer products spanning thegamut of features and pricing.

UTStarcom currently offers PAS subscribers more than15 different handsets from the more high-end, feature-richmodels with built-in cameras and MP3 players to the more cost-effective basic phones. Over the last two years,UTStarcom has shipped more than 30 million PAShandsets in China and is the overall leader in both the PAS handset and infrastructure market.

The acquisition of Audiovox Communications Corporationin June 2004 marked UTStarcom’s entry into the CDMAhandset business in North and South America. Withexisting carrier relationships of more than 20 years,

Audiovox has been a leading wireless handset provider toTier 1 operators in the US, Canada, and South America,including Verizon Wireless, Sprint PCS, ALLTEL, USCellular, Bell Mobility, Telus, BellSouth International,Telefonica, Virgin Mobile, MetroPCS, and others. Bycombining Audiovox’s channel assets with UTStarcom’sexisting high-volume handset manufacturing operations,the company can realize significant economies of scalefrom manufacturing, component sourcing, and development,for increased profitability.

In 2005, UTStarcom plans to introduce the company’sfirst internally designed and manufactured CDMA, GSMand WCDMA handsets, as well as several innovative dual-mode and Wi-Fi phones. The company will also continue to work with handset suppliers to manufacturephones that complement UTStarcom models and offeroperators a comprehensive array of diverse handsets.

F1000

MConsole

UTSTARCOM 11

Building New Relationships with International Carriers Around the World

Growth Beyond Asian Market into North America, Europe and Latin America

In 2004, UTStarcom expanded its customer base beyondits foundation in China and developed new relationshipswith carriers in several key markets worldwide.

Latin America The company partnered with Telefonica delSur to offer wireless voice and data services enabled by itsiPAS technology in Chile. UTStarcom also announced acontract with Telmex, the leading telecommunicationsservice provider in Latin America, for its AN-2000 IP-DSLAM platform.This solution will enable the operator tooffer voice, high-speed data and streaming video servicesto its subscribers in Mexico.

Europe Versatel, a telecommunications operator thatoffers services in the Netherlands, Belgium, and Germany,announced that it would deploy UTStarcom’s IP-DSLAMtechnology to offer subscribers high-speed DSL access andmigrate its network to full IP capability in the future. InJune, European Internet communication company Tiscaliannounced that UTStarcom’s IP-DSLAM solution wouldserve as the cornerstone of the operator’s multiservicebroadband network, which will offer integrated data, voice,and entertainment services in eight European countries.

UTSTARCOM 12

UTStarcom announced that UK Broadband, a subsidiaryof PCCW Limited in Hong Kong, selected the company’sMovingMedia 6000 3G TD-CDMA wireless broadbandsolution for the rollout of the operator’s NETVIGATORwireless broadband service in the Thames Valley west ofLondon.

United States Vonage, a leading provider of VoIP service,deployed UTStarcom’s 8250 Personal CommunicationsManagement System (PCMS), which enables customers toaccess voice messages either by phone, online, or via email.

DSSI LLC, a facilities-based competitive local exchangecarrier (CLEC) in the southeastern United States, selectedUTStarcom as the key technology vendor for rollout oftriple play services to more than 100,000 subscribers inAlabama and Florida.The operator plans to offer IP-basedvoice, high-speed data, on-demand video and video gaming,and 100-channel TVoIP service showcasing severalUTStarcom technologies, including the mVision TVoIPsolution, mSwitch softswitch platform, 8250 PersonalCommunications Management System, and GigabitEthernet Passive Optical Network (GEPON).

OPPORTUNITIES

UTStarcom: A Global Leader in IP-Based Telecommunicationsand Networking and International Service and Support

Transforming the Way People Communicate Around the World

2004 was a watershed year for UTStarcom.The companyexpanded its global footprint into new markets around theworld and cultivated new relationships with carriers in Asia,Europe, South America and the United States. In addition,UTStarcom introduced new, innovative technologies thatresponded to the hot trends in the telecom and networkingindustry, including TVoIP, fiber optical access, wirelessbroadband and converged service platforms.

Our successes in 2004 builds on our solid foundation inChina, where we have deployed the largest all-IP networkin the world for China Telecom and China Netcom

supporting more than 36 million users in over 800 cities in23 provinces. We strongly believe that our experience indeploying large-scale networks in China, coupled with our expertise as the leading IP-based technologymanufacturer in the world, will extend the success of thecompany as we expand beyond our successful start in Asiato global markets.

With more than 8,000 employees worldwide and nearly 300customers around the world, UTStarcom is a global leaderin IP-based telecommunications and networking solutionsdeveloping innovative, market-changing technologies.

UTSTARCOM 15

CORPORATE DIRECTORY STOCKHOLDER INFORMATION

Board of Directors

Hong L. LuChairman of the Board, President and Chief Executive OfficerUTStarcom Inc.

Betsy AtkinsChief Executive OfficerBaja Corp.

Jeff ClarkeChief Operating OfficerComputer Associates

Larry D. HornerLead Director

Allen U. LenzmeierVice ChairmanBest Buy Co., Inc.

Thomas J.ToyManaging DirectorPacRim Venture Partners

Ying WuChief Executive OfficerUTStarcom China

Executive Officers

Hong L. LuChairman of the Board, President and Chief Executive OfficerUTStarcom Inc.

Johnny ChouPresident, UTStarcom China

Bill HuangSenior Vice President and Chief Technology Officer

Gerald SolowaySenior Vice President,Business Development

Michael SophieSenior Vice President of Finance and Chief Financial Officer

Ying WuChief Executive Officer UTStarcom China

Corporate Headquarters

1275 Harbor Bay ParkwayAlameda, CA 94502USA510.864.8800www.utstar.com

China Headquarters

10F,Tower E2,The Towers Oriental Plaza#1 East Chang An AvenueDongcheng District Beijing, China 100738

Legal Counsel

Shearman and SterlingMenlo Park, CA

Independent Auditors

PricewaterhouseCoopersSan Francisco, CA

Transfer Agent

Equiserve781.575.3400

Annual Stockholder’s Meeting

May 13, 200510:00 a.m. PSTHilton Hotel1 Hegenberger RoadOakland, CA 94621

Stock Information

The common stock is traded on the Nasdaq Stock Market under thesymbol UTSI.

Investor Relations

For additional copies of this report orthe company’s Annual Report on Form10-K for the year ended December 31,2004 please send requests to InvestorRelations at Corporate Headquarters [email protected].

UTSTARCOM 16

2004 FINANCIALS

The foregoing statements regarding the growth and expansion of the telecommunications market, particularly in China, the migration to newtechnologies in the telecommunications industry, the Company's ability to attract and retain qualified personnel, the Company's methods for andability to penetrate the telecommunications markets of China and other emerging markets, the continued investment in telecommunicationsequipment and systems by China and these other economies, the Company's continued level of investment in its research and development effortsand the success of the Company's products are forward-looking in nature and subject to risks and uncertainties that may cause actual results todiffer materially. These factors include rapidly changing technology, the changing nature of telecommunications markets, possible downturns inthe telecommunications markets, the termination of significant contracts, partnerships or alliances, reductions or delays in system deployments,changes in demand for the Company's products, and uncertainties such as changes in government regulation in China and other countries. TheCompany also refers readers to the risk factors identified in its registration statement on Form S-3 Annual Report on Form 10-K and QuarterlyReports on Form 10-Q filed with the Securities and Exchange Commission.

1275 Harbor Bay Parkway, Alameda, California 94502510.864.8800 www.utstar.com

TRANSFORMATION

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

For the Fiscal Year Ended December 31, 2004

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-29661

UTSTARCOM, INC.

(Exact name of registrant as specified in its charter)Delaware 52-1782500(State or other jurisdictionof incorporation or organization)

(I.R.S. EmployerIdentification No.)

1275 Harbor Bay ParkwayAlameda, California 94502(Address of principal executive offices) (Zip Code)

(510) 864-8800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.00125 par value

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s mostrecently completed second fiscal quarter was approximately $2,777,913,977 based upon the closing price of $30.25 reported for such date

UTSTARCOM INC (Form: 10-K, Received: 04/15/2005 15:30:11)

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on The Nasdaq National Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 10% of theoutstanding shares of Common Stock and shares held by officers and directors of the registrant, have been excluded in that such personsmay be deemed to be affiliates. This determination is not necessarily conclusive for other purposes.

As of March 31, 2005 the registrant had 114,841,976 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 2005 are incorporated herein by reference inPart III.

UTSTARCOM, INC.

TABLE OF CONTENTS PAGE

PART I. Item 1. Business 4Item 2. Properties 19Item 3. Legal Proceedings 20Item 4. Submission of Matters to a Vote of Security Holders 23PART II. Item 5. Market for UTStarcom, Inc.’s Common Equity, Related Stockholder Matters, and Issuer Purchases of

Equity Securities 24Item 6. Selected Financial Data 26Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 27Item 7A. Quantitative and Qualitative Disclosures About Market Risk 76Item 8. Financial Statements and Supplementary Data 78Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 138Item 9A. Controls and Procedures 138Item 9B. Other Information 150PART III. Item 10. Directors and Executive Officers of UTStarcom, Inc. 151Item 11. Executive Compensation 151Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 151Item 13. Certain Relationships and Related Transactions 151Item 14. Principal Accountant Fees and Services 151PART IV. Item 15. Exhibits and Financial Statement Schedules 152 Exhibit Index 152Signatures 156

PART I

ADDITIONAL INFORMATION

“UTStarcom” (which may be referred to as the “Company,” “we,” “us,” or “our”) means UTStarcom, Inc. or UTStarcom, Inc. and itssubsidiaries, as the context requires. The name “UTStarcom” is a registered trademark of UTStarcom, Inc.

In this Annual Report on Form 10-K, references to and statements regarding China refer to mainland China, references to “U.S. dollars” or“$” are to United States Dollars, and references to “Renminbi” are to Renminbi, the legal currency of China.

Unless specifically stated, information in this Annual Report on Form 10-K assumes an exchange rate of 8.2775 Renminbi for one U.S.dollar, the exchange rate in effect as of December 31, 2004.



Throughout this Annual Report on Form 10-K we “incorporate by reference” certain information from other documents filed with theSecurities and Exchange Commission (the “SEC”). Please refer to such information at www.sec.gov .

UTStarcom’s public filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,and any amendments to such reports, are available free of charge at our website, www.utstar.com . The information contained on ourwebsite is not being incorporated herein.

This Annual Report on Form 10-K contains forward-looking statements. Beginning on page 60, we discuss some of the risk factors thatcould cause actual our results to differ materially from those provided in the forward-looking statements.

3

ITEM 1—BUSINESS

OVERVIEW

We design, manufacture and sell telecommunications equipment and provide services associated with their installation, operation, andmaintenance. Our products are deployed and installed primarily by telecommunications service providers. We sell an extensive range ofproducts that are designed to enable voice, data and video services for our customers around the world. While historically, the vast majorityof our sales have been to service providers in China, the Company has expanded its focus to build a global presence and currently sells itsproducts to several other emerging and established growth markets, which include North America, Japan, India, Central and Latin America,Europe, the Middle East and Africa and southeastern and northern Asia.

UTStarcom was incorporated in Delaware in 1991. Our headquarters are based in Alameda, California, with research and design operationsin the United States, Canada, China, India and Korea. Our primary mailing address is 1275 Harbor Bay Parkway, Alameda, California,94502. We can be reached by telephone at (510) 864-8800, and our website address is www.utstar.com . All of our SEC filings can be foundunder the Investor Relations section of our website, and are available free of charge.

STRATEGY

Our objective is to be a leading global provider of end-to-end Internet Protocol (“IP”)-based communications products and services. Weseek to differentiate ourselves by developing innovative products that are designed to allow for additional revenue-generating services;integrate multiple functionalities; reduce network complexity, and enable a migration to a new generation of network technologies. Ourtechnology and products are designed to make carrier deployments, maintenance and upgrades both economical and efficient, allowingoperators to earn a high return on their investment.

Our strategy is built upon the following key concepts:

• driving product innovation to offer our customers an increased number of features and enhanced functionality;

• reducing overall operational and deployment costs of our customers’ networks, enabling them to meet the demandsof a greater number of consumers by expanding their addressable markets; and

• providing custom tailored products and services to suit customers’ unique needs.

Our key strengths in the implementation of our strategy include the following factors:

A History of Technology Innovation

Since our inception, we have focused on the development of new innovative and disruptive communications technologies and products thatare designed to differentiate us from our peers and create new market opportunities for our carrier customers. For example, we helped createa new market for wireless telephony in China based upon the development of our Personal Access Service and IP-based Personal AccessService (collectively “PAS”) solutions offering a low power, low cost alternative to prevailing mobile telephony. We believe PAS becamesuccessful with traditional fixed wireline carriers because it enabled them to leverage their fixed-line networks to offer their consumerswireless mobile services. This service, while limited in range to each specific city or region in which it was offered, afforded a low-costalternative to more expensive traditional cellular services. The rapid rate of adoption for PAS positioned us as one of the leading wirelessinfrastructure and handset providers in China and to date over 35 million subscribers are using services supported by our technology. Inaddition, we believe it has provided a springboard for our development of other similarly disruptive technologies such as IP-based wireless,broadband and switching.

4



A Significant Customer Base and Leverage in China

Over the course of several years, we have built an extensive administrative, research and development, manufacturing, and sales andsupport infrastructure in China. We believe this infrastructure allows us to quickly identify our customers’ needs and to focus ourengineering, product development and sales and marketing efforts to address those needs. In addition, the low-cost research anddevelopment and manufacturing capabilities in China allow us to be competitive on a cost and pricing basis for our products. Finally, byvirtue of its large population and low teledensity, or the number of telephones per person in a region, and our significant customerdeployments, the China market provides a highly conducive platform for us to deploy our most advanced technology in substantial volume.We believe that our infrastructure, cost efficiencies and research and development advances in China provide a significant platform andstrategic advantage for our global success.

A Commitment to Carrier Value

We believe we have been able to develop strong relationships with our customers by delivering end-to-end solutions that are designed toenable carriers to capitalize on economies of scale and to easily customize and extend their service portfolios. To ensure our productsdeliver the most value, the UTStarcom product architecture is designed to allow carriers to offer a full range of services over multiple accessnetworks, whether wireless or wireline. Our wireless products support a broad range of frequencies for cost-effective deploymentworldwide, and our broadband products support both copper- and fiber-based access. To help ensure we offer high value solutions at a lowcost, we leverage our extensive design, development, and manufacturing facilities in China.

A Focused Global Market Diversification Initiative

In 2004, we continued to focus on the diversification of our global customer base and market penetration. Our diversification strategyinvolves a combination of internal efforts and strategic acquisitions. In order to better address new markets outside of China we introduceda number of new products and completed a number of acquisitions, including the acquisition of the selected assets of the AudiovoxCommunications Corporation (“ACC”), the wireless handset division of Audiovox Corporation in November of 2004. We believe theseefforts have significantly enhanced our ability to gain access to the largest and most stable operators worldwide. We intend to seekadditional acquisitions and use partnerships to solidify our market position and expand our technology portfolio and sales channels in newmarkets.

In addition to the large telecommunications service providers in well-established markets, we also target carriers in emerging markets, suchas Softbank Group, Vonage in the United States and Reliance Infocomm Ltd. in India, which have focused their network deployments onIP-based voice, data and video services.

We believe emerging markets beyond China present significant opportunities for growth. We believe that many developing regions see acorrelation between increased teledensity and improved economic growth, recognizing the need to invest in a telecommunicationsinfrastructure in order to compete globally and overcome economic disparities. Our strategy is to develop products and design servicesspecifically tailored to the needs and level of affordability of these emerging-market service providers and their customers. In addition, werecognize that to be successful in these emerging markets, it is often important to commit to establishing a local presence in areas such asresearch and development, manufacturing, sales and support. We continue to explore major growth potential in global markets outside ofChina and believe that many of these markets are ideal candidates for our products and services as well as operations.

5

TECHNOLOGY AND PRODUCTS

Our technology focus centers on an IP-based softswitch core network architecture that creates a single platform for delivering multipleservices to the end user of the telecommunications network. Softswitch is a technological approach to telephony networking where all theservice intelligence for the delivery of telephone services resides in easily adaptable IP-based software. A Softswitch is designed to reducethe cost of long distance and local exchange switching and to create new differentiated voice, data and video services. In contrast, legacynetworks are based on the delivery of a single service, such as voice or data. If a service provider operating a traditional network wanted tooffer multiple services, it would have to build, run and maintain a separate network for each service, including separate billing, networkmanagement and support functionalities, adding significant costs to the carrier’s operating model. An IP-based core network is designed sothat all services can be converged onto one platform with one billing, network management and support function for all services. Inaddition, because it is largely software-based, an IP network is by design more cost-effective to run and maintain than traditionalinfrastructure technologies. All of our products are interoperable and can be integrated into a single IP-based network. We intend tocontinue to support our IP-based wireless and broadband services and enhance their functionality for deployment in all global markets. Wealso intend to continue our research and development efforts on future IP-based access services.



Our IP-based, multi-service softswitch architecture (“mSwitch”), is a diverse assembly of software and hardware-based networkingelements designed to replace traditional central office telephone switches. Our IP-based softswitch platform enables the delivery of acommon set of value-added end-to-end services over a variety of access networks, whether wireless or wireline. Our architecture isdesigned to support a comprehensive set of services, including broadband and narrowband access, call control of telephone and datacommunications and delivery of next generation features not offered by the traditional fixed line switching infrastructure, includingIP-based television (“IPTV”).

mSwitch Platform

Our mSwitch platform enables a next-generation core network for all of our wireless, wireline and broadband networks with the exceptionof CDMA2000, which is supported by its own Softswitch that we expect to integrate into our existing platform in the future. The mSwitchhas been extensively deployed in our Personal Access Systems networks in various networks around the globe. In addition, the mSwitchprovides the softswitch functionality for various other UTStarcom solutions including, but not limited to, Voice over Broadband (“VoBB”),Time Division-Code Division Multiple Access (“TD-CDMA”), Wideband Code Division Multiple Access (“WCDMA”) and Televisionover IP (“TVoIP”).

Our mSwitch platform is designed to reliably transport and route packets as well as to handle signaling, network control, and informationmanagement. The architecture includes operations support systems for associated billing, provisioning, and service management.

Key Product Families

Our key product families fall into three major categories:

• Wireless Infrastructure: technologies and products that enable end users, or subscribers, to send and receive voiceand data communication in either a fixed or mobile environment by using wireless devices;

• Broadband Infrastructure: technologies and products that enable end users to access high-speed, cost effectivefixed data and voice and media communication; and

• Handsets and Customer Premise Equipment: consumer devices that allow customers to access wireless andbroadband services.

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Our products within each of these categories include multiple hardware and software subsystems that can be offered in variouscombinations to suit individual carrier needs. Our system technologies and products are based on widely adopted global communicationsstandards and are designed to allow service providers to quickly and cost-efficiently integrate our systems into their existing networks anddeploy our systems in new broadband, IP and wireless network rollouts. Our system technologies are also designed to allow timely and costefficient transition to future next-generation network technologies, enabling our service provider customers to protect their initialinfrastructure investments. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—NetSales,” for a discussion of our net sales by product lines.

WIRELESS INFRASTRUCTURE

Wireless networking is one of our core technologies that refers to communications networks that enable end users to send and receive voiceand data while mobile by using wireless devices such as cellular telephones, personal computers, personal digital assistants and otherwireless communications devices. Wireless networks require the use of customized equipment that enables an end user or subscriber to beconnected and identified when not in a fixed location within a network. We offer a broad range of wireless infrastructure products andservices, from service platforms to core infrastructure systems for large carriers that can support millions of subscribers.

We provide wireless networking infrastructure products based on a variety of leading global mobile interface standards, including: PersonalHandyphone System (“PHS”), Code Division Multiple Access (“CDMA”), WCDMA, and TD-CDMA. All of our wireless products aredesigned to offer a full suite of integrated, customizable, voice and value-added services, including short-message services, web browsing,e-mail, voice mail, and Internet access.

PHS Wireless Mobile Phone Systems

Personal Access System (“PAS”)/ IP-based Personal Access System (“iPAS”)

Our globally deployed PAS, a family of wireless core infrastructure equipment, based on the Personal Handyphone System (“PHS”)standards developed by The Association of Radio Industries and Telecommunication Technology Committee in Japan, is designed to help



our customers create new revenue opportunities with high quality wireless voice and data services.

Our PAS wireless access system employs micro-cellular radio technology that is designed to enable service providers to offer subscribersboth mobile and fixed access to telephone services. In China, the PAS architecture is designed to allow service providers to transition theirnetwork capabilities from wireline to wireless, allowing them to offer both mobile wireless voice and data services within a city orcommunity. Using our products, service providers can offer new wireless services, including citywide mobility, e-mail, mobile Internetaccess, and short message services.

We designed our PAS equipment to meet the needs of subscribers that do not require all of the features offered by traditional cellulartechnology, but want more than the features offered by standard fixed-line technology, including regional mobility, a more cost-effectivetariff plan, and access to value-added data services. When compared to other traditional macro-cellular wireless systems, PAS offers lowerdeployment costs, easier radio frequency planning, higher traffic capacity, better voice quality, faster data transmission speeds, lighterhandsets with lower power requirements, and better support of advanced information services.

In comparison to traditional macro-cellular systems, PAS base stations are small and are normally installed on existing utility poles orbuildings rather than on large towers. Mounting small transmitters this way greatly reduces the cost and complexity of installation as thereis neither need for a major tower

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construction project nor any significant tower lease fees. Additionally, mounting a small PAS base station close to its antenna andconnecting it to the network using standard telephone wire is far simpler and more cost effective than the traditional cellular approach ofinstalling a large transmitter on the ground and running heavy coaxial cables up a tower to the antennas. PAS base station installation takesa few hours, compared to the several days required to install, power, and commission a traditional wireless cell station. Because PAS uses“dynamic frequency allocation,” a process where each cell “listens to” all available radio channels before selecting one for each call, theoverall radio planning and engineering for PAS is very simple. While adding cells to handle more calls in a traditional cellular networkrequires considerable frequency planning and balancing, adding cells to a PAS network is less difficult because PAS cells can automaticallydetermine what channels to use. This capability, combined with the low cost per cell, allows a carrier to start with a very small systemserving only hundreds of subscribers and grow that system to serve millions, simply by adding small cells.

CDMA, TD-CDMA, WCDMA and TD-SCDMA Wireless Mobile Systems

We have developed a suite of products and services for third-generation (“3G”) wireless networks that support the open 3G wirelessstandards CDMA, WCDMA, TD-CDMA and TD-SCDMA defined under 3GPP, the international standardization body, and the standardsof TIA/EIA, the United States Standardization body.

MovingMedia 2000 Wireless Voice and Data Product (CDMA/CDMA 2000)

In the fall of 2004, we introduced our MovingMedia 2000 All-IP CDMA/CDMA 2000 infrastructure solution. The MovingMedia 2000product line is the first IP-based infrastructure solution in the world for CDMA 2000. It provides for the communication of data and voiceover IP and offers mobile operators savings on infrastructure and transmission costs. It also allows incumbent CDMA operators to transitionsmoothly and efficiently to an all-IP network and to offer new value-add services not provided by legacy CDMA networks. We believethese attributes make MovingMedia 2000 an ideal solution for both incumbent and greenfield CDMA operators.

Our CDMA/CDMA 2000 wireless infrastructure product family includes IP base stations, intelligent media gateways, signaling gateways,and packet data server nodes (PDSN).

Our MovingMedia 2000 solution employs an advanced next-generation network voice and data over IP architecture that distributes all ofthe components of a CDMA system throughout the network, rather than in one centralized location. With a distributed architecture, awireless service provider can deploy various elements of the solution in different cities—New York, Dallas, and San Francisco, forexample—and they would operate as one system transparently to the operator, reducing the size and cost of its infrastructure.

MovingMedia 2000 is designed to be compatible with all wireless equipment designed to internationally defined standards, giving serviceproviders enormous flexibility when designing and developing their networks. In addition, our open, standards-based architecture isdesigned to provide the scalability and flexibility required by service providers for easy deployment of services and applications.

MovingMedia 6000 Wireless Data Product (TDCDMA)

In the fall of 2004, we introduced our MovingMedia 6000 wireless broadband data solution. The MovingMedia 6000 wireless broadbandsolution is based on the Universal Mobile Telecommunications System Time Division Duplexing (“UMTS TDD”) standard for 3G mobilenetworks, which utilizes TD-CDMA technology. We have an established relationship with IPWireless, Inc., which provides the coretechnology for our TD-CDMA portfolio. Our MovingMedia 6000 turns a range of low-cost licensed frequency bands —1900-1920MHz,



2010-2025MHz, 2500-2700MHz, and 3400-3600MHz— into valuable

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assets that we believe will provide a rapid return on operator investment. Mobile and wireless broadband service providers worldwide candeploy the solution today to offer high-value data services of up to 3Mbps per subscriber, enabling subscribers to access the network fromhome, work, or any other location. We anticipate that, in the near future, operators will be able to use our MovingMedia 6000 solution tooffer wireless Voice over IP (“VoIP”) in addition to the high-mobility data services available today.

Our TD-CDMA wireless infrastructure product family includes base stations, radio network controllers, Gateway GPRS Support Nodes,which ensure a secure connection between the packet core network and the IP network, and Serving GPRS Support Nodes that providesession management, traffic processing and mobility management.

MovingMedia 8000 Wireless Voice and Data Product (WCDMA)

We expect to launch our MovingMedia 8000 WCDMA solution to the market in the second half of 2005. In November 2004, wesuccessfully completed the Phase II field trials of our MovingMedia 8000 with China Netcom Corporation in China. These trials wereconducted in conjunction with the Ministry of Information Industry in China.

TD-SCDMA Wireless Voice and Data Product

We are developing and testing a suite of products and services for 3G wireless networks that support the time division-synchronous codedivision multiple access standard, (“TD-SCDMA”) the emerging China-developed 3G standard. As a TD-SCDMA Forum council member,we have been working closely with Datang Telecom Technology on the development of certain elements for a TD-SCDMA product thatwould use the same core network as the MovingMedia 6000 and 8000 series.

BROADBAND INFRASTRUCTURE

Our broadband infrastructure products are designed to satisfy customer demand for high speed and cost effective data, voice and multimediatransport. Our wireline technology enables high-speed voice, video and data transmissions over broadband IP-based networks.

Broadband Access Solutions

Broadband Access Network Solutions reside on the network edge enabling the deployment of IP-based, high-speed Internet, voice, data andmultimedia services over wireline networks. Digital subscriber line (“DSL”) technology allows high-speed data and content transfer whileproviding simultaneous telephone communications over the same fixed copper line. Our IP-based DSL Access Multiplexers(“IP-DSLAMs”) incorporate the latest DSL technologies combined with a range of form factors to enable high-speed access and deliverservices to residential and commercial subscribers using broadband networks.

IP-Based Digital Subscriber Line Access Multiplexer (“IP-DSLAM”) (“AN-2000”)

Our AN-2000 platform represents a new generation of DSLAM products that are based on IP technology. We believe the AN-2000 platformis economical to deploy as it has been designed to eliminate the need for more expensive legacy infrastructure, which we believe will resultin an accelerated return on investment. We have designed our AN-2000 platform to serve a variety of commercial and residential customerapplications.

Our AN-2000 IP DSLAMs convert customer traffic from legacy infrastructure into IP at the edge of the network, simplifying the delivery ofmultiple, high-speed services such as VoIP and TVoIP, in addition to traditional broadband data services. An all-IP network also simplifiesthe process of video streaming,

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incorporating technologies such as IP multicast and IP Quality of Service (“QoS”). To date, we have deployed more than five million IPDSLAM lines globally.

Multi-Service Access Node (“iAN-8000”)

Our iAN-8000 Multi-Service Access Node (“iAN-8000”) platform is an integrated broadband access platform that delivers a mix ofbroadband, traditional voice and data services, and media gateway functionality via copper, fiber, or wireless transmission. The iAN-8000



platform integrates the functionality of our AN-2000 IP DSLAM with a VoIP Media Gateway platform and a traditional digital loop carrier(“DLC”). By consolidating traditionally standalone access devices into one standards-based platform, the iAN-8000 provides operators themaximum amount of service flexibility and allows them to add services and applications efficiently, without incurring additionalinfrastructure expenses.

Service providers can deploy the iAN-8000 throughout their networks, which allows them to bring new VoIP and broadband applications tothe widest possible service area. The iAN-8000 is designed to enable providers to offer multiple services from one platform, includingtraditional voice, VoIP, and high-speed data access using the latest DSL technologies. Because the platform incorporates a DLC, serviceproviders can also deploy it in remote locations to extend their voice service reach beyond the area served by the central office. The mediagateway function allows providers to aggregate VoIP calls from enterprise networks and transport them over one line to the central office.

Optical Multi-Service Transport and Access

Our optical products include scalable, cost-effective transport solutions based upon internationally defined optical transmission standardsand access solutions based upon Gigabit Ethernet Passive Optical Networking (“GEPON”). They support transmission speeds ranging from155 Megabits per second to 10 Gigabits per second that enable multi-speed integrated transport for both traditional voice and high-speeddata and video services. The product platform supports various complex network topologies and includes a sophisticated multi-servicemanagement system. Our optical solutions are also designed to enable providers to easily transition from legacy products to next-generationnetworks.

Gigabit Ethernet Passive Optical Network (“GEPON”)—Optical Access System

In June 2004, we introduced our BBS 1000 GEPON solution, which is designed to enable service providers to offer Fiber To The Premises(“FTTP”) broadband access to their subscribers at high speeds. Our GEPON platform is designed to provide high subscriber density andlow cost of entry, making it a compelling alternative to legacy, last-mile access solutions.

Our BBS 1000 family includes both central office and customer premises equipment, providing the end-to-end optical last mile, with up toone Gigabit per second of bandwidth to residential and business customers. By integrating more functionality into the product, we haveeliminated the need for carriers to deploy additional switching and routing equipment, making the BBS 1000 an optimal transport platformfor support of bandwidth-intensive voice, data and video services.

NetRing™—Optical Transport System

We introduced our NetRing™ Multi-Service Transport Product (“MSTP”) optical product line in December 2003. Our NetRing™ productsare designed to provide a broad range of functions for carriers to manage voice, data and video traffic. NetRing™ provides networkmanagement functions previously available only on multiple independent platforms. The NetRing™ family is designed to satisfy high-end,mid-range, and entry-level application needs in global carrier networks. Our NetRing™ 600 products provide voice and data services formulti-tenant unit buildings (“MTUs”), office buildings, and enterprise campus applications. Our mid-range NetRing™ 2500 products offervoice and data transport when more

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bandwidth and greater capacity is required. Our high-end NetRing™ 10000 products provide service for regional transport applications,when maximum bandwidth and capacity is required. NetRing™ provides the availability and reliability of optical transport platforms thatsupport full redundancy, multiple protection options, and in-service upgrades.

Television over IP System (“TvoIP”)

Our TVoIP system, mVision, is a complete end-to-end solution for delivering television and multimedia over carrier networks based on IPProtocol technology.

mVision

Our mVision family is a suite of carrier-class products and services that enable a service provider to deliver broadcast television andon-demand video services to residential and commercial premises over a switched network architecture. It is a carrier-class product that isdesigned to scale to support millions of users and hundreds of thousands of content hours. We believe mVision is the first solution designedto enable carriers to deploy very-large-scale streaming video content over a switched network architecture.

The mVision product family includes a streaming and storage server system (MediaSwitch); a device (Content Engine) for assimilatingdisparate video signals onto a unified distribution system; a media console set-top-box that resides in the end-user premise and providesInternet access, broadcast TV, video on demand and video conferencing services to the subscribers; and a network management system thatenables non-stop, system-wide operation.



mVision is designed to allow carriers to offer new, revenue-generating television and multi-media services. The system is also designed tohelp providers capture customers of cable and satellite operators by offering a more comprehensive and interactive suite of services.

Handsets and Customer Premise Equipment (“CPE”)

We also design and sell a variety of handsets and CPE targeted at multiple customer segments for our wireless and broadband products.These handsets range from basic, low-cost units to high-functionality, higher-cost models that offer rich functionality and excellent value.Today we feature single, dual and multimode handsets with cameras, video recorders and players, high resolution color displays, multiplering tones, bilingual short message service (“SMS”) and High Speed Internet access and email capability. We believe our strategy ofdesigning handsets in-house, licensing, manufacturing, and direct-sourcing components gives us the flexibility to meet demand whileoffering the broadest line of handsets to our customers.

PAS Handsets

We currently offer more than 20 different PAS handset models from high-end, data-capable and feature-rich models to low-cost valuemodels. According to a November 2004 report by the industry research firm GfK Ltd., we are the market leader for PAS handsets in China,which is the largest handset market in the world according to its Ministry of Information Industry. We shipped more than 14.6 million PAShandsets in 2004.

CDMA/GSM/WiFi and Multi-Mode Handsets

In 2004, we announced our entry into the CDMA, Global System for Mobile Communications (“GSM”) and Wireless Fidelity (“WiFi”)handset markets. We offer carriers a wide selection of price ranges and handset features by providing a broad range of models supportingeach of these technologies.

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Our product portfolio also includes dual-mode and multi-mode models and includes a comprehensive roadmap to include third generationWCDMA and TD-CDMA handsets in the future.

Our acquisition of selected assets of the Audiovox Communications Corporation (“ACC”) in November 2004 marked our entry into theNorth and South American handset markets. With existing carrier relationships of more than 20 years, ACC has been a leading wirelesshandset provider to the regions’ largest operators in the U.S., Canada, and South America, including Verizon Wireless, VerizonInternational, Sprint PCS, ALLTEL, US Cellular, Bell Mobility, Telus, BellSouth International, Telefonica, Virgin Mobile, MetroPCS,T-Mobile and others. By combining ACC’s channel assets with our existing handset design and high-volume manufacturing capabilities, webelieve we will be able to realize significant economies of scale from manufacturing, component sourcing, and development.

Customer Premise Equipment

Our CPE product line is comprised of various single and multi-port DSL modems, set-top boxes and VoIP Analog Telephone Adapters(“ATAs”) that allow residential and business customers to access voice, data and video services. Our products are designed to be rich infunctionality, simple to set-up, easy to install and easy to manage. The diversity and flexibility in the product offering enables them to workwith both our own infrastructure equipment as well as with other vendor’s infrastructure equipment. The comprehensive line of CPEproducts enables carriers to deliver end-to-end services across an array of access technologies including, ADSL2/2+, WiFi/802.11 andGEPON.

SEGMENT DISCLOSURE

For the year ended December 31, 2003 and for the first three quarters of 2004, we managed our business as a single operating segment. Forthe fourth quarter 2004, we determined that our chief operating decision makers were evaluating performance, making operating decisionsand allocating resources based on two operating segments: (i) China and (ii) International, consisting of all regions outside of China. Inaddition, a third operating segment, the Personal Communications Division was formed as a result of our acquisition of the selected assetsof Audiovox Communication Corporation in November 2004.

The China segment was comprised of discrete administrative, research and development, manufacturing and sales and support infrastructurefor China. International was comprised of operations for all other geographic areas including non-China Asia, Europe, the Middle East,Africa and North and South America. The Personal Communications Division focused on the North and South American handset markets.

For additional information on our reportable segments as of December 31, 2004 see “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Segment Disclosures” and Note 2 to the Company’s consolidated financial statements forthe year ended December 31, 2004.

Effective in the first quarter of 2005, we realigned our business into four units, namely Broadband Infrastructure, Wireless Infrastructure,



Terminal Products (which will be reported as Handsets and our Personal Communication Division), and Global Service Solutions. Each unitwill represent its own reporting segment, with the exception of Terminal Products, which will consist of two reporting segments.

MARKETS AND CUSTOMERS

Our products and services are being deployed and implemented in regions throughout the world in markets including China, Japan,India, Central and Latin America, Europe, Middle East and Africa, North America, and southeastern and northern Asia.China continues to be our largest market, representing

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approximately 79% of our overall revenue for the year ended December 31, 2004, 86% for the year ended December 31, 2003 and 84% forthe year ended December 31, 2002. However our focus on geographic diversification and extensive work in new technologyinnovation is beginning to change the percentage of revenue attributed to various regions globally. Worldwide adoptionof our technology and key customer wins in Europe and Africa, North America, Japan, India and the Central and LatinAmerican regions have resulted in a shift in revenue with international (i.e., non-China regions) contributing 53% oftotal revenues for the fourth quarter and 21% of total revenues for the year ended December 31, 2004. Total revenueattributed to the United States totaled approximately 13%, 2%, and less than 1% of total revenues for the years endedDecember 31, 2004, 2003, and 2002, respectively.

Global Customers

Our customers, telecommunications service providers, enable delivery of wireless and broadband access services including data, voice,and/or video communication services to their subscribers. They include but are not limited to, local, regional, national and internationaltelecommunications carriers, including broadband, cable, Internet, and wireline and wireless providers. Telecommunications serviceproviders typically require extensive proposal review, product certification, test and evaluation as well as network design, and, in mostcases, are associated with long sales cycles. Our service provider customers’ networking requirements are influenced by numerousvariables, including their size, the number and types of subscribers that they serve, the relative teledensity of the served geography and theirsubscriber demand for wireless and wireline communications and access services in the served geography. In 2004, the Guangdong andJiangsu provinces accounted for 12% and 10% of our net sales, respectively. In 2003, the Hei Long Jiang province accounted for 11% of netsales; and in 2002, sales to the Zhejiang province accounted for 18% and sales to Softbank BB Corporation, an affiliate of SOFTBANKAmerica Inc., a related party, accounted for 13% of net sales.

Global Sales and Service

Our worldwide sales organization consists of managers, sales representatives, network consultants and technical support personnel. Wehave field sales offices in several locations including China, Japan, India, the Central and Latin American region, the North American,European, Middle Eastern and African regions, and Southeast and North Asia regions. The majority of our products and services are soldand serviced by our direct sales and support staff.

In addition to our product offerings, we provide a broad range of service offerings, including technical support services. Our serviceofferings complement our products with a range of consulting, technical, project, quality and maintenance support-level services including24-hour support through technical assistance centers. Technical support services are designed to help ensure that our products operateefficiently, remain highly available, and benefit from the most up-to-date system software. These services enable customers to protect theirnetwork investments and minimize downtime for systems running mission-critical applications.

China’s Market

China is currently our largest market and we believe that it will continue to be an important market for our current and future technologiesand product development for the foreseeable future. To support this large and growing market, we have sales offices, manufacturingfacilities and research and development centers throughout China that enable us to react and respond to our customers’ needs in anexpeditious manner.

We believe that China continues to be one of the fastest-growing, largest communications markets in the world, and the Chinesegovernment has committed to developing a powerful communications

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infrastructure in order to support demand for communications services in support of economic growth in the region. According to China’sState Statistics Bureau, China’s gross domestic product (“GDP”) grew 9.5% in 2004, and the GDP per capita surpassed $1,265 in 2004. Thebureau also estimates that China’s GDP will grow by approximately 8.1% through 2006. We believe that China will continue to focus on itstelecommunications infrastructure for the foreseeable future. Please refer to the table below for information, provided by China’s Ministryof Information Industry (the “MII”), regarding the increasing telecommunications spending in China:

2004

%increaseover 2003

(in millions) Telecommunications revenue $ 62,500 12 % Telecommunications capital expenditure $ 25,700 - 3 % Fixed line subscribers 312.4 19 % Cellular subscribers 334.8 25 %

Despite the increased teledensity rate of China’s fixed-line and cellular telephony to 25% and 26%, respectively, in 2004, the teledensityremains relatively low in comparison to that of developed countries. In contrast, fixed-line teledensity rates for the United Kingdom, France,Japan and the United States were 59%, 57%, 56%, and 62% respectively, according to a report published by the InternationalTelecommunication Union in May 2004. We believe that China’s low teledensity will continue to drive the growth in itstelecommunications market.

Although voice services predominantly drive China’s communications market growth, the increasing demand for broadband data andmulti-media services also presents a growing opportunity in China. According to data provided by the MII, Internet users in China reached94.0 million by the end of 2004, an increase of 18% from 2003. In order to support this growth in data traffic, service providers in Chinamust continue to expand their networks. In 2004, China’s broadband users increased from 11.9 million at the beginning of the year toapproximately 23.9 million at the close of 2004.

The following chart presents relevant historical and estimated data related to the development of China’s telecommunications, based oninformation provided by the MII: 2000 2001 2002 2003 2004 China’s population (Millions) 1,267 1,276 1,286 1,293 1,300 China’s GDP per capita (RMB) 7,081 7,543 7,930 9,047 10,501 Fixed-line Telephone Subscribers (Millions) 144.8 180.4 214.4 263.3 312.4 Teledensity 11 % 14 % 17 % 20 % 25 %Mobile Telephone Subscribers (Millions) 84.5 144.8 206.6 268.7 334.8 Teledensity 7 % 11 % 16 % 21 % 26 %Internet Users (Millions) 22.5 33.7 59.1 79.5 94.0 Teledensity 2 % 3 % 5 % 6 % 7 %

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Global Markets Outside of China

We have continued to offer our products in growing communications markets outside of mainland China (our “International Sales”),leveraging global sales operations in the Southeast and North Asia region, the Central and Latin American region, the European, MiddleEastern and African region, and the North American region. We continue to increase our penetration of these markets in several ways:

• through direct sales offices located in key market regions;

• by licensing our technology to local manufacturers where import taxation is favorable;

• by developing local sales agency and distributor relationships within specific market regions; and



• by establishing sales relationships with original equipment manufacturers.

Our International Sales division has continued to aggressively build regional in-country sales offices and local directsales staff in order to provide support for our expanding global operations.

North America

With the completion of the acquisition of ACC in November 2004, North America became our second largest market in sales for 2004.Sales in North America are derived primarily from the CDMA handset product portfolio but also include both our broadband and wirelessinfrastructure products. We expect the North American market will continue to be our second largest market going forward.

We supply handsets and infrastructure solutions to some of the leading wireless carriers in North America including Verizon, Sprint,Cingular, T-Mobile, Bell Mobility and Metro PCS amongst others. In 2004, we also gained new customers amongst the emerging NorthAmerican providers such as Vonage whose service is designed to enable anyone to make and receive phone calls—worldwide—with atouch-tone telephone using a high-speed Internet connection.

Japan

Japan was our third largest market in 2004 and also represents our largest market for broadband products. One of our key customers inJapan is Softbank Group (“SBB”), which is a related party to UTStarcom. SBB is a parent company to several of our key service providercustomers in Japan, including Yahoo! BB and Japan Telecom. According to the Japan Ministry of Public Management, Yahoo! BB is theleading provider of broadband service in Japan with over 4.5 million IP-based ADSL lines as of December 31, 2004,representing over 35% of the total market in Japan. Yahoo! BB continues to expand and deploy our AN-2000IP-DSLAM and iAN-8000 MSAN and mSwitch equipment in support of their Voice over Broadband and 8, 12, 26, 45and 50 Mbps ADSL services.

In the fall of 2004, Yahoo! BB also launched its PON, or Passive Optical Network, fiber-based Hikari Service, which willenable the delivery of high-speed broadband voice, data and multi-media services over a single optical connection to thecustomer. We are providing both the network infrastructure and customer premise elements to support this GEPONservice.

SBB Acquired Japan Telecom, LTD in July 2004, and has deployed our iAN-8000 Multi-service access node which isdesigned to enable Japan Telecom to offer the combination of the capabilities of a DLC, a next-generation VoIP MediaGateway and an IP DSLAM in a single multi-service access platform.

India

We continue to see growth opportunities in India for both our broadband and wireless products given its large population and lowteledensity. According to the Telecom Regulatory Authority of India

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(“TRAI”) as of December 31, 2004, India had a population of 1.07 billion and a low fixed line teledensity of approximately 4.4%.

We currently offer our AN-2000 Multi-Service Broadband Access, NetRing™ Optical Solutions and CDMA Wireless Access products andservices in India. With over one million access lines deployed today, we anticipate that we will continue to implement and deploy ourproducts and conduct trials with several operators, including Reliance Infocomm Ltd. and Bharat Sanchar Nigam Ltd.

We continue to focus on both customer development as well as the development of our research and development initiatives in India. Wehave research and development at our facilities in the New Delhi area, Guargan and Bangalore. We have also established localmanufacturing of our AN-2000 technology in association with Himachal Futuristic Communications Limited.

Central and Latin America Region

We have established sales and service operations in support of the Central and Latin American region, and anticipate growth in this marketin fiscal year 2005.

Our target markets in Central and Latin America include, but are not limited to, countries like Brazil, Mexico, Panama, Haiti, Honduras andGuatemala. We have shipped our AN-2000 Multi-Service Broadband Access and PAS wireless equipment to service providers and continueto perform extensive testing and certification for telecommunications carriers within these regions. In 2004, key customers in Central and



Latin America included Telefonos de Mexico, S.A. in Mexico, Telefonica del Sur in Chile and Multifon in Honduras.

European, Middle Eastern and African Region

We continued to expand our presence in the European, Middle Eastern and African (“EMEA”) region in 2004, with both new customerwins and additional sales and service operations.

We offer our AN-2000, PAS, MovingMedia 2000 and MovingMedia 6000 products and services in each of these markets. We expect tocontinue to supply our products and conduct trials within this region in 2005.

Specifically, we have seen increased demand for our wireless data products as a result of increased consumer demand for faster and morecomprehensive data services and proliferation of camera phones, advanced wireless handheld devices and other high data content products.

In 2004, new customers in EMEA included Versatel Nederland BV in the Netherlands, Tiscali S.P.A. in Italy and UK Broadband, asubsidiary of PCCW.

Southeast and North Asia Region

Southeast and North Asia is another region with a large population base and relatively low teledensity rate. We have established businessoperations as well as a sales and service presence to support various countries in this region including, but not limited to, Vietnam, Thailandand Taiwan. At the close of fiscal year 2004, our customers had approximately one million PAS subscribers in Vietnam and Taiwanutilizing our network infrastructure.

Key customers in the region include FITEL and Chunghwa Telecom Co. Ltd. in Taiwan, and Vietnam Post and TelecommunicationsCorporation in Vietnam.

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Competition

We compete in the telecommunications equipment market, providing products and services for transporting data, voice and video trafficacross traditional and IP based networks.

As we expand into new markets, we will face competition from both existing and new competitors, including existing companies withstrong technological, marketing and sales positions in those markets.

We believe our competitive strengths are derived from three main tenets: our early entry and commitment to the development of allIP-based communications technologies; our experience in high-volume, low-cost manufacturing and large-scale technology deployments inChina; and our commitment to developing comprehensive, end-to-end solutions for our carrier customers that allow them to capitalize oneconomies of scale and differentiate their service offerings.

By contrast, our competitive disadvantages include our relatively smaller size in terms of revenues and number of employees as comparedto many of our competitors, our lack of history and experience in selling to many of the largest carriers in well-established markets and ourlack of consumer visibility and brand recognition in markets outside of Asia.

Our principal competitors within our current product categories include the following:

WIRELESS INFRASTRUCTURE

PAS systems: Lucent Technologies, Inc. and Zhongxing Telecommunications Equipment Corporation.

CDMA and WCDMA Systems: Alcatel; LM Ericsson Telephone Company; Huawei Technology Co., Ltd.; Lucent Technologies, Inc.;Motorola, Inc.; Nokia Corporation; Nortel Networks Corporation; Samsung Electronics Co. Ltd.; Siemens AG and ZhongxingTelecommunications Equipment Corporation.

TD-CDMA Systems: InterDigital Communications Corp.

mSwitch: Alcatel; Cisco Systems, Inc.; Clarent Corporation; LM Ericsson Telephone Co.; Huawei Technology Co., Ltd.; LucentTechnologies, Inc.; Motorola, Inc.; Nokia Corporation; Nortel Networks Corporation; Nuera Communications, Inc.; Siemens AG; SonusNetworks, Inc. and Zhongxing Telecommunications Equipment Corporation.

BROADBAND INFRASTRUCTURE

iAN-8000/MSAN and AN-2000/IP DSLAM: Alcatel; Datang Telecom Technology Co. Ltd.; Huawei Technology Co., Ltd.; Lucent



Technologies, Inc.; Tellabs, Inc. and Zhongxing Telecommunications Equipment Corporation.

HANDSETS AND CUSTOMER PREMISE EQUIPMENT

PAS handsets: China PTIC Information Industry Corporation; Zhongxing Telecommunications Equipment Corporation; LucentTechnologies, Inc.; Amoi Electronics Company, Ltd.; Huawei Technologies Co, Ltd; Kyocera Corporation; Nippon Electric Corporationand Sanyo Electric Company, Ltd.

CDMA handsets: LG Electronics, Inc.; Motorola, Inc.; Nokia Corporation; Samsung Electronics Co. Ltd. and Sanyo ElectricCompany, Ltd.

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OPERATIONS

Employees

As of December 31, 2004, we employed a total of approximately 8,200 full-time employees. We also from time to time employ part-timeemployees and hire contractors. Of the total number of full-time employees at December 31, 2004, approximately 3,600 were in researchand development, approximately 700 were in manufacturing, approximately 3,400 were in marketing, sales and support, and approximately500 were in administration. We had approximately 6,500 employees located in China, approximately 1,100 employees located in the UnitedStates, and approximately 600 employees in other countries. Our employees are not represented by any collective bargaining agreement,and we have never experienced a work stoppage. We believe that we have good employee relations.

Sales, Marketing and Customer Support

We pursue a direct sales and marketing strategy in China, targeting sales to telecommunication operators and equipment distributors withclosely associated customers. We maintain sales and customer support sites in all major cities in China. Our customer service operation inHangzhou, China, serves as both a technical resource and liaison to our product development organization. In China, customer servicetechnicians are distributed in the regional sales and customer support sites to provide a local presence.

Our sales efforts in markets outside of China combine direct sales, original equipment manufacturers, distributors, resellers, agents andlicensees. We maintain 48 sales and customer support offices in 29 countries covering the U.S., Canada, Latin America, the Caribbean,Europe, the Middle East, Africa, India, and the Asia-Pacific region.

To capture business opportunities in the growing telecommunication service market and further improve our customer service on a globalbasis, we plan to combine our China and International service operation teams to leverage the strengths from both teams. The new serviceorganization is structured to provide traditional services such as Build, Operate, Turnover and System Maintenance, as well as to workclosely with customers and research and development to develop and deliver value-added customized service solutions.

Manufacturing, Assembly and Testing

We manufacture or engage in the final assembly and testing of our mSwitch, PAS systems, handsets and AN-2000 products at ourmanufacturing facility in the Chinese province of Zhejiang. The manufacturing operations consist of circuit board assembly, final systemassembly, software installation and testing. We assemble circuit boards primarily using surface mount technology. Assembled boards areindividually tested prior to final assembly and tested again at the system level prior to system shipment. We use internally developedfunctional and parametric tests for quality management and process control and have developed an internal system to track quality statisticsat a serial number level.

Our manufacturing facility is ISO 9001-2000 certified. ISO 9001-2000 certification requires that the certified entity establish, maintain andfollow an auditable quality process including documentation requirements, development, training, testing and continuous improvementwhich is periodically audited by an independent outside auditor.

We contract with third parties in China to undertake high volume assembly and manufacturing of our handsets and some high volume singleboards for AN-2000, PAS and mSwitch system and we conduct final assembly, testing and packaging at our own facilities. In addition, wegenerally use third parties for high volume assembly of circuit boards.

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We have also contracted with various suppliers to provide PAS wireless base station components for distribution under the UTStarcomlabel. In China, we undertake final assembly and test our wireless infrastructure products at our own facilities and have begun tomanufacture some of these products ourselves.

Research and Development

We believe that continued and timely development and introduction of new and enhanced products are essential if we are to maintain ourcompetitive position. While we use competitive analyses and technology trends as factors in our product development plans, the primaryinput for new products and product enhancements comes from soliciting and analyzing information about service providers’ needs. Ourrelationships with China’s MII and Telecommunications Administration and individual telecommunications bureaus and our full-servicepost-sale customer support in China provide our research and development organization with insight into trends and developments in themarketplace. The insight provided from these relationships allows us to develop market-driven products such as PAS, mSwitch andIP-DSLAM. We maintain a strong relationship between our research centers in the U.S. and China. We rotate engineers between the U.S.and China to further integrate our research and development operations. We have been able to cost-effectively hire highly skilled technicalemployees from a large pool of qualified candidates in China. We also have a development center in India to take advantage of the talentpool available there, and to support our operations in India. Our research and development centers are ISO 9001-2000 certified.

In the past we have made, and expect to continue to make, significant investments in research and development. Our research anddevelopment expenditures totaled $219.0 million in 2004, $155.3 million in 2003, and $86.2 million in 2002.

Intellectual Property

Our ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark andtrade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We holdU.S. and foreign patents for our existing products expiring between 2014 and 2023, and have patents pending in both the U.S. and in foreigncountries. In addition, we have, from time to time, chosen to abandon previously filed applications. Patents may not be issued and anypatents issued may not cover the scope of the claims sought in the applications. Additionally, issued patents may be found to be invalid orunenforceable in the courts of those countries where we hold or have filed for patents. Our U.S. patents do not afford any intellectualproperty protection in China or other international jurisdictions. Additionally, patents that we hold in countries other than the United Statesdo not afford any intellectual property protection in the United States. Please refer to the discussion of risks associated with our intellectualproperty in the section entitled “Management’s Discussion and Analysis of Financial Statement Results of Operations—Factors AffectingFuture Operating Results.”

Seasonality

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” for adiscussion of the impact of seasonality on our business.

ITEM 2—PROPERTIES

We lease properties in the United States, China and globally totaling approximately 1,372,000 square feet. These properties are used forcorporate headquarters, sales and support offices, research and development and manufacturing purposes.

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In North America, we have approximately 492,000 square feet of leased property used for the following purposes: approximately 63,000square feet for our corporate headquarters in Alameda, 210,000 square feet for research and development, 88,000 square feet for sales andservices, and 131,000 square feet for our new Personal Communications Division including 5,000 square feet of retail space.

We lease approximately 730,000 square feet of property in China. Approximately 85,000 square feet are for corporate offices in Beijing,approximately 200,000 square feet are for sales and support offices, approximately 230,000 square feet are used for manufacturing, andapproximately 215,000 square feet are used for research and development.

In 2001, we purchased the rights to use 49 acres of land located in Zhejiang Science and Technology Industry Garden of Hangzhou Hi-techIndustry Development Zone. As of December 31, 2004, we have substantially completed the construction of a 1,150,000 square footmanufacturing facility at this location which was put in use in October 2004. The facility houses our manufacturing operations andadministrative offices. We anticipate the completion of the remaining construction by the second quarter 2005.

We believe our existing facilities and equipment are well maintained and in good operating condition, and we believe our facilities aresufficient to meet our needs for the foreseeable future.

ITEM 3—LEGAL PROCEEDINGS



Securities Class Action Litigation

On October 26, 2004, an alleged former shareholder of the Company filed a class action complaint in the United States District Court forthe District of Idaho against us and two of our directors and/or officers, purporting to assert claims under the federal securities laws onbehalf of a class of purchasers of the Company’s publicly traded securities in the period from April 16, 2003 through September 20, 2004.Among other things, the complaint refers to our disclosures as to “significant control deficiencies” related to revenue recognition and as tothe deferral of revenue recognition on a particular transaction and the related lowering of our financial guidance. The complaint furtheralleges that the defendants previously made positive statements regarding our business and financial performance that were false andmisleading because such statements, among other things, failed to disclose problems with our internal controls and revenue recognitionpolicies and procedures and failed to disclose that the revenue on the transaction at issue would need to be deferred, which allegedly causedthe price of our publicly traded securities to be artificially inflated. The complaint claims that the plaintiff and other class members weredamaged as a result thereof, and seeks monetary recovery in their favor in an unspecified amount.

Four similar class action complaints were later filed in the United States District Court for the Northern District of California against us andseveral of our directors and officers. In both the Idaho court and the California court, competing motions were filed for appointment of leadplaintiff and approval of lead plaintiffs’ counsel, and in the California court various motions for consolidation of actions were filed as well.On March 15 and 16, 2005, the California court entered orders consolidating the cases pending in that court, appointing the lead plaintiffand approving the lead plaintiff’s counsel. Pursuant to those orders, a consolidated complaint is to be filed in that court within 60 daysthereafter. On April 6, 2005, the Idaho court entered an order appointing the lead plaintiff and approving the lead plaintiff’s counsel.

This class action litigation is in its preliminary stages, and we cannot predict its outcome, as the litigation process is inherently uncertain.However, we believe that the allegations and claims in this litigation are without merit and that we have valid defenses, and we intend tocontest such allegations and claims and defend ourself vigorously. If the outcome of the litigation is adverse to us and if, in addition, we arerequired to pay significant monetary damages, our business would be significantly harmed. At a minimum, this litigation could result insubstantial costs and divert our management’s attention and resources, which could seriously harm our business. As of December 31, 2004,no loss amount has been accrued because a loss is not considered probable or estimable.

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Shareholder Derivative Litigation

On August 31 and September 2, 2004, respectively, two shareholder derivative actions were filed in the Superior Court of California,Alameda County, by alleged shareholders of the Company purporting to assert, on our behalf, claims of breach of fiduciary duty againstcertain of our current and former directors and officers, and also naming us as a nominal defendant. The complaints in these actions refer toour disclosures as to an Audit Committee investigation into revenue recognition issues and as to “significant control deficiencies” related torevenue recognition. The complaints further allege that the individual defendants ignored problems with our accounting and internal controlpractices and procedures and breached their fiduciary duties by failing to maintain adequate internal accounting controls or to make goodfaith efforts to do so. Plaintiffs claim that such alleged breaches damaged the Company, and they seek monetary recovery against theindividual defendants and in favor of the Company, as well as equitable relief. In addition, plaintiffs claim that they should be excused frompre-suit demand requirements based on allegations that our Board of Directors could not have fairly evaluated such pre-suit demand, andthus that such demand would have been futile. On November 22, 2004, the Court entered an order consolidating the two actions andappointing lead plaintiffs’ counsel.

On November 23 and December 2, 2004, two related shareholder derivative actions were filed in the same court. On January 13, 2005, theCourt consolidated these two newer cases with the previously consolidated actions, and directed plaintiffs to prepare and file an amendedconsolidated complaint, which plaintiffs filed on January 31, 2005. On March 17, 2005, we filed a motion, joined by other defendants,seeking dismissal of the consolidated complaint for failure to adequately plead futility of the pre-suit demand.

This derivative litigation is in its preliminary stages, and we cannot predict its outcome, as the litigation process is inherently uncertain.However, we believe that plaintiffs’ allegations of “demand futility” are without merit, and we intend to contest those allegationsvigorously. At a minimum, this derivative litigation could result in substantial costs and divert our management’s attention and resources,which could seriously harm our business. As of December 31, 2004, no loss amount has been accrued because a loss is not consideredprobable or estimable.

IPO Allocation

On October 31, 2001, a complaint was filed in United States District Court for the Southern District of New York against us, some of ourdirectors and officers and various underwriters for our initial public offering. Substantially similar actions were filed concerning the initialpublic offerings for more than 300 different issuers, and the cases were coordinated as In re Initial Public Offering Securities Litigation,21 MC 92. In April 2002, a consolidated amended complaint was filed in the matter against us, captioned In re UTStarcom, Initial PublicOffering Securities Litigation, Civil Action No. 01-CV-9604. Plaintiffs allege violations of the Securities Act of 1933 and the SecuritiesExchange Act of 1934 through undisclosed improper underwriting practices concerning the allocation of IPO shares in exchange for



excessive brokerage commissions, agreements to purchase shares at higher prices in the aftermarket and misleading analyst reports.Plaintiffs seek unspecified damages on behalf of a purported class of purchasers of our common stock between March 2, 2000 andDecember 6, 2000. Our directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, theCourt granted in part and denied in part a motion to dismiss brought by defendants including us. The order dismisses all claims against usexcept for a claim brought under Section 11 of the Securities Act of 1933, which alleges that the registration statement filed in accordancewith the IPO was misleading. In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including us, wassubmitted to the court for approval. The terms of the settlement, if approved, would dismiss and release all claims against the participatingdefendants (including us). In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs fromthe underwriter defendants of at least $1 billion, and

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the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against theunderwriters. The settlement is subject to a number of conditions, including court approval. If the settlement does not occur, and litigationagainst us continues, we believe we have valid defenses and we intend to defend the case vigorously. The total amount of the loss associatedwith the above litigation is not determinable at this time. Therefore we are unable to currently estimate the loss, if any, associated with thelitigation.

Starent Patent Infringement Litigation

We have sued Starent Networks Corporation (“Starent”) for patent infringement in the U.S. District Court for the Northern District ofCalifornia. On March 22, 2004, we filed our Complaint. On June 3, 2004, we served our Complaint on Starent. On July 30, 2004, Starentfiled and served its answer and counterclaims. On August 30, 2004, we served and filed our Amended Complaint. In our AmendedComplaint, we assert that Starent infringes a UTStarcom patent through the manufacture, use, offer for sale, and sale of Starent’s ST-16Intelligent Mobile Gateway. We seek, inter alia, compensatory damages and injunctive relief. Starent filed its answer to the AmendedComplaint and counterclaims on September 17, 2004. In its answer and counterclaims, Starent denies our allegations and seeks adeclaration that the patent-in-suit is not infringed, is invalid and is unenforceable. The Court held an initial case management conference onNovember 2, 2004 and scheduled a hearing to construe the claims of the patent-in-suit for June 30, 2005. At that time the Court will hold anadditional case management conference to schedule a date for trial. On February 17, 2005, we filed a motion for a preliminary injunctionagainst Starent’s use, sale, and offer for sale of products having the infringing feature. A hearing on our motion is set for May 11, 2005.Although we cannot reliably predict the outcome of this litigation, we believe that any adverse judgment on Starent’s counterclaims will nothave a material adverse effect on the business, financial condition, or results of our operations.

Fenner Investments Patent Infringement Litigation

On January 6, 2005, Fenner Investments, Ltd. filed suit against us and co-defendants Juniper Networks, Inc., Nokia, Inc., Nortel NetworksCorp., Lucent Technologies, Inc., and Cisco Systems, Inc. in the U.S. District Court for the Eastern District of Texas. The suit alleges thatunspecified products and services infringe two Fenner patents and seeks compensatory and injunctive relief. On March 1, 2005, we filed amotion to dismiss the complaint due to improper venue; no hearing is yet scheduled for this motion. This lawsuit is in its initial stage and itis not possible to reliably predict the outcome or any relief that could be awarded, as the litigation process is inherently uncertain. We intendto contest the allegations and claims and defend ourselves vigorously. If the outcome of the litigation is adverse to us and if, in addition, weare enjoined or required to pay significant monetary damages, our business may be harmed. At a minimum, this litigation could result insubstantial costs and divert our management’s attention and resources, which could harm our business.

Other

On August 19, 2004, we received a letter from the new management team of Hyundai Syscomm, Inc. (“HSI”) stating that they consider theAsset Purchase Agreement, dated as of February 26, 2004, among HSI, UTSI, Dr. Seong-Ik Jang and 3R Inc. (the “APA”), and the variousancillary agreements entered into in connection with the closing related to the APA on April 27, 2004, to be null and void due tounfulfillment of condition precedents and material breach of terms of such agreements. Such condition precedents and material breach ofterms were not specified in such letter from HSI. In addition, HSI has made allegations and arguments before Korean governmentalagencies and to the Korean press alleging that the technology that was purchased by us pursuant to the APA has been exported outside ofKorea. We believe none of such technology has been exported by us from Korea to any foreign country. In addition,

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we believe that we have materially complied with all provisions of the APA and the ancillary agreements and HSI cannot void or nullifysuch agreements. We have taken, and will continue to take, appropriate legal actions to fully enforce our rights under the APA and the



ancillary agreements. We believe that this dispute with HSI would not have a material adverse effect on our financial condition, results ofoperations or cash flow.

We are a party to other litigation matters and claims that are normal in the course of operations, and while the results of such litigationmatters and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverseimpact on our financial position or results of operations.

In the future we may subject to other lawsuits. Any litigation, even if not successful against us, could result in substantial costs and divertmanagement’s attention and other resources away from our business operations.

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

None.

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PART II

ITEM 5—MARKET FOR UTSTARCOM, INC.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERPURCHASES OF EQUITY SECURITIES High Low Fiscal 2003 First Quarter $ 23.90 $ 16.56 Second Quarter 35.86 19.70 Third Quarter 46.45 31.18 Fourth Quarter 39.07 30.85 Fiscal 2004 First Quarter $ 41.34 $ 28.75 Second Quarter 31.52 25.75 Third Quarter 29.22 13.71 Fourth Quarter 22.35 16.74

Our common stock has been traded on The Nasdaq National Market (“NASDAQ”) under the symbol UTSI since our initial public offeringon March 3, 2000. The preceding table sets forth the high and low closing sales prices per share of our common stock as reported onNASDAQ for the periods indicated. As of March 31, 2005, we had approximately 194 stockholders of record.

To date, we have not paid any cash dividends on our common stock. We currently anticipate that we will retain any available funds tofinance the growth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future. Certainpresent or future agreements may limit or prevent the payment of dividends on our common stock. For example, our convertible debtrequires that we have to provide notice of our intent to pay certain dividends. Additionally, our cash held in foreign countries may besubject to certain control limitations or repatriation requirements, limiting our ability to use this cash to pay dividends.

Equity Compensation Plan Information

The following table sets forth information, as of December 31, 2004, about equity awards under our equity compensation plans:

Plan category(1)

Number of securitiesto be issued uponexerciseof outstandingoptions, warrantsand rights

Weighted-averageexercise price ofoutstanding options,warrants and rights

Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in column (a))

(a) (b) (c) Equity compensation plans approved by securityholders(2) 17,194,626 (3) 21.12 6,186,487 (4) Equity compensation plans not approved by securityholders 1,341,259 (5) 28.55 (6) 217,763 (7) Total 18,535,885 21.64 6,404,250



(1) See Note 15 of our “Notes to Consolidated Financial Statements” for a description of our equity compensationplans.

(2) Includes the 1997 Stock Plan which provides for an annual increase in the number of shares available forissuance under the plan equal to (i) 4% of the outstanding Shares on such date, (ii) 6,000,000

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shares or (iii) a lesser amount determined by the Board, and the 2000 Employee Stock Purchase Plan, which provides for an annual increasein the number of shares available for issuance under the plan equal to (i) 2% of the outstanding shares on such date, (ii) 2,000,000 shares or(iii) a lesser amount determined by the Board.

(3) Includes shares of common stock to be issued upon exercise of options granted under our 1995 Stock Plan, 1997Stock Plan and 2001 Director Option Plan.

(4) Includes 2,826,910 shares of common stock available for issuance under our 2000 Employee Stock PurchasePlan, 2,479,577 shares of common stock available for issuance under our 1997 Stock Plan and 880,000 shares ofcommon stock available for issuance under our 2001 Director Option Plan. There are no shares available for issuanceunder the 1995 Stock Plan.

(5) Includes 1,274,287 options outstanding under the 2003 Non-Statutory Stock Option Plan, a maximum of 49,030performance shares outstanding under the Advanced Communication Devices Corporation Incentive Program and amaximum of 17,942 performance shares outstanding under the Issanni Communications, Inc. Incentive Program. Doesnot include 11,453 shares and 8,580 shares of common stock subject to outstanding options with a weighted-averageexercise price of $2.69 that were assumed in our acquisitions of Advanced Communication Devices Corporation, andRollingStreams Systems, Ltd., respectively.

(6) Represents the average weighted exercise price of 1,274,287 options outstanding under the 2003 Non-StatutoryStock Option Plan. Excludes performance shares outstanding under the Advanced Communication Devices CorporationIncentive Program and the Issanni Communications, Inc. Incentive Program because performance shares do not have anexercise price.

(7) Includes 217,763 shares of common stock available for issuance under our 2003 Non-Statutory Stock OptionPlan.

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ITEM 6—SELECTED FINANCIAL DATA

You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our Consolidated Financial Statements and the Notes thereto included elsewhere in thisreport. Historical results are not necessarily indicative of results that may be expected for any future period. The Company filed anAmendment to its Annual Report on Form 10-K for the year ended December 31, 2003 to reflect the restatement of its consolidatedfinancial statements for the year ended December 31, 2003. See Note 2 to the Consolidated Financial Statements. Year Ended December 31, 2004 2003 2002 2001 2000 (in thousands, except per share data) Consolidated Statement of Operations Data: Net sales(1) $ 2,703,581 $ 1,965,187 $ 981,806 $ 626,840 $ 368,646 Gross profit 601,601 624,385 345,472 224,548 128,181 Operating income(2) 49,902 261,738 145,962 76,728 33,780 Net income 73,415 215,532 107,862 56,954 27,993



Net income available to commonstockholders 73,415 215,532 107,862 56,954 27,013 Basic earnings per share: Income from continuing operations $ 0.64 $ 2.08 $ 0.98 $ 0.56 $ 0.35 Cumulative effect on prior years of the application ofSAB 101, “Revenue Recognition in Financial Statements” — — — — (0.01 )Net income $ 0.64 $ 2.08 $ 0.98 $ 0.56 $ 0.34 Diluted earnings per share: Income from continuing operations $ 0.56 $ 1.75 $ 0.94 $ 0.52 $ 0.28 Cumulative effect on prior years of the application ofSAB 101, “Revenue Recognition in Financial Statements” — — — — (0.01 )Net income $ 0.56 $ 1.75 $ 0.94 $ 0.52 $ 0.27

As of December 31, 2004 2003 2002 2001 2000 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 562,532 $ 377,747 $ 231,944 $ 321,136 $ 149,112 Working capital(3) 1,117,497 883,334 568,215 591,103 369,861 Total assets 3,316,005 2,244,050 1,305,552 1,005,880 591,837 Total short-term debt 351,183 1 — 58,434 43,381 Long-term debt 410,655 410,655 — 12,048 12,048 Total stockholders’ equity $ 1,365,372 $ 893,331 $ 766,395 $ 681,887 $ 412,319

(1) On November 1, 2004, the Company completed its acquisition of Audiovox Communication Corporation.Revenue for the two months ended December 31, 2004 from this acquisition was $277.4 million.

(2) Operating income for the year ended December 31, 2004 included an $11.5 million charge associated with theimpairment of various assets, including $7.0 million of goodwill, related to the substantially abandoned operations ofHyundai Syscomm, Inc. See Note 10 to the Consolidated Financial Statements. Operating income for the year endedDecember 31, 2003 included a charge of $10.7 million for in-process research and development associated with variousacquisitions.

(3) Working capital is equal to current assets less current liabilities.

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ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statementsare based on information that is currently available to management. We intend such forward-looking statements to be covered by the safeharbor provisions of the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complyingwith those provisions. The forward-looking statements include, without limitation, those concerning the following: our expectations as tothe nature of possible trends; our expectations regarding continued growth in our business and operations; our expectation that there will befluctuations in our overall gross profit, gross margin, product mix, quarter to quarter results, customer base and selling prices; our plans forexpanding the direct sales organization and our selling and marketing campaigns and activities; our expectation that we may use our cash,debt or securities to acquire or invest in complementary businesses, technologies or product offerings; our expectation that there will beincreases in selling, marketing, research and development, and general and administrative expenses; our expectations regarding futuregrowth of our business and operations; our expectation that we will continue to invest significantly in research and development; ourexpectations regarding the status of products under development; our expectations regarding our future investments; our expectationsregarding our future levels of cash and cash equivalents, as well as our expectation that existing cash and cash equivalents will be sufficientto finance our operations for the foreseeable future; our expectations regarding licensing requirements and our ability to receive licenses in



China for our PAS system and other products; our expectations regarding the development of a 3G network in China; our expectationsregarding the impact of a reorganization of China telecommunication companies; our expectations regarding the growth of China’s telecommarkets; our expectation that our business will continue to be significantly influenced by the political, economic and legal environment inChina, as well as expectations about the nature of political, economic and legal reform in China and other international markets; ourexpectations regarding market share percentages for our products; our expectations regarding the future allocation of net sales by productgroup; our expectations regarding efficiencies we hope to achieve in supply chain capability; and our expectations regarding our expansioninto new markets around the world. Additional forward-looking statements may be identified by the words, “anticipate,” “expect,”“believe,” “intend,” “will” and similar expressions, as they relate to us or our management. Investors are cautioned that theseforward-looking statements are inherently uncertain. These statements are subject to risks and uncertainties that may cause actual resultsand events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Factors Affecting Future OperatingResults” section of this Form 10-K. We do not guarantee future results and undertake no obligation to update the forward-lookingstatements to reflect events or circumstances occurring after the date of this Form 10-K.

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003

We filed the Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2003 to reflect the restatement of ourconsolidated financial statements for the year ended December 31, 2003 and the quarters ended March 31, 2003, June 30, 2003 andSeptember 30, 2003 and certain corresponding changes described below.

As part of the financial closing process for the year ended December 31, 2004, we identified certain errors resulting in a restatement whichdecreased the provision for income taxes and increased net income by $20.7 million for the year ended December 31, 2003. In addition, as aresult of the correction of the tax provision, retained earnings was increased by $20.7 million, additional paid-in capital was increased$0.9 million, income taxes payable was decreased by $2.5 million, other long-term assets were increased by

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$21.6 million, prepaids were increased by $2.8 million and other current assets were reduced by $5.3 million. There was no net effect oncash provided from operating activities as a result of this error.

During the evaluation of the errors related to the income tax provision, we determined that an additional reclassification of reported 2003results was required. Specifically, cost of sales and other income both increased by $3.5 million for the year ended December 31, 2003 toproperly classify certain incentive payments received for exports and value-added taxes in China.

In addition to the errors in the 2003 tax provision, we did not correctly identify a related party that is deemed a variable interest entity andfor whom we are considered the primary beneficiary in accordance with FASB Interpretation No. 46 (“FIN 46”). We have corrected our2003 financial statements to reflect the consolidation of this variable interest entity, MDC Holding Limited (“MDC Holding”) and itsaffiliated entities (MDC Holding and such affiliated entities are referred to, collectively, as “MDC”). At December 31, 2003, thisconsolidation resulted in a $5.5 million increase in total assets and a $0.7 million increase in total liabilities. There was no effect on netincome as a result of this consolidation.

Furthermore, an impairment charge of $7.4 million, net of taxes of $1.3 million, was recorded to reflect an impairment of MDC equipmentsubject to a revenue sharing arrangement. Due to the uncertainties surrounding the customer’s subscriber income and ability to pay underthis arrangement, we determined that an impairment charge should have been recorded in 2003 when these conditions should have beenidentified. Accordingly, an impairment charge of $7.4 million, net of tax, was recorded, which decreased both total assets and equity by$7.4 million at December 31, 2003.

In addition, we identified the following revisions in classification during the preparation of the restated consolidated financial statements:

(1) Cost of sales for related party revenue transactions is presented separately from cost of sales for non-related party revenue transactionsfor all years presented;

(2) Certain other long-term assets increased and intangible assets decreased by $1.7 million at December 31, 2003;

(3) Changes in restricted cash had been incorrectly categorized as a part of operating cash flows instead of investing cash flows inaccordance with Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,” (“SFAS 95”). Accordingly, we havereflected this change in categorization in the Consolidated Statement of Cash Flows for each of the three years in the period endedDecember 31, 2003. The change for 2003 and 2002 is an increase in cash flows from operating activities and a decrease in cash flows frominvesting activities of $3.2 million and $21.3 million, respectively, and there was no change for 2001; and

(4) A related party which is 31% owned by an individual related to a member of our Board of Directors and associated transactions havebeen identified. See Note 22 to the Consolidated Financial Statements.



EXECUTIVE SUMMARY

We design, manufacture and sell telecommunications equipment and products and provide services associated with their installation,operation and maintenance. Our products are deployed and installed primarily by telecommunications wireless and wireline serviceproviders. We provide an extensive range of products for transportation of voice, data and video traffic for service providers around theworld. Our business is conducted globally in China, Japan, India, the Central and Latin American region, North America, the European,Middle Eastern and African region, and southeastern and northern Asia. Our objective is to be a leading global provider of Internet Protocol(“IP”) networking products and services. We differentiate ourselves with products designed, developed and commercialized to reducenetwork

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complexity, integrate high performance capabilities and that allow a simple transition to next generation networks. This results indeployments, maintenance and upgrades that are both economical and efficient, and that we believe allow operators to earn a high return ontheir investment. Our technologies and products fall into three major categories:

• Wireless Infrastructure: technologies and products that enable end users, or subscribers, to send and receive voiceand data communication in either a fixed or mobile environment using wireless devices;

• Broadband Infrastructure: technologies and products that enable end users to access high-speed, cost effective fixeddata, voice and media communication; and

• Handsets and Customer Premise Equipment: consumer devices that allow customers to access wireless andbroadband networks.

Our products within each of these categories include multiple hardware and software subsystems that can be offered in variouscombinations to suit individual subscriber needs. Our system technologies and products are based on widely adopted globalcommunications standards and are designed to allow service providers to quickly and cost-efficiently integrate our systems into theirexisting networks and deploy our systems in new broadband, IP and wireless network rollouts. Our system technologies are also designed toallow timely and cost-efficient transition to future next-generation network technologies, enabling our service provider customers to protecttheir initial infrastructure investments.

In 2004, we had approximately $2.7 billion of revenue, a 38% increase over 2003, with cost of sales of $2.1 billion, which increased by57% compared to 2003. The growth in revenue was driven by our globalization efforts in gaining sales revenue outside of China as well as$277.4 million of incremental revenue from our acquisition of ACC in November 2004. We believe China remains one of the fastestgrowing telecommunications markets in the world. China continued its growth in fixed-line, mobile telephone and internet subscribership,with approximately 647.2 million subscribers in 2004, a 6% increase from 2003, according to a report published in January 2005 by China’sMII. We believe this subscriber growth continued to support the demand for our PAS services and handsets. We use subscriber growthstatistics to gauge future inventory purchasing requirements, as well as to forecast our anticipated revenue growth.

Historically, substantially all of our sales have been to service providers in China. We derived 79% of our sales for the year endedDecember 31, 2004 from China in comparison to 86% in 2003. In 2004, we earned 13% of our sales from North America. North Americareplaced Japan as our second largest market in 2004 as a result of our global expansion efforts and the ACC acquisition. We continuedexpanding our sales efforts to include other communications markets, such as markets in the Central and Latin American region, theEuropean, Middle Eastern and African region, the North American region, and the Southeast and North Asia region. We intend to penetratethese markets through direct sales offices located in key market regions, by licensing our technology to local manufacturers where importtaxation is favorable, by developing local sales agency and distributor relationships within specific market regions, and by establishing salesrelationships with original equipment manufacturers. Our sales division has continued to establish regional offices and local direct salesrepresentative offices to provide support for our expanding global sales operations.

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The following table summarizes our net sales by geographic region: Years ended December 31, 2004 2003 2002 (in thousands) Sales by region



China $ 2,133,292 79 % $ 1,680,821 86 % $ 822,299 84 %North America 341,751 13 % 31,908 2 % 2,436 0 %Japan 156,416 6 % 194,894 10 % 130,104 13 %Other 72,122 2 % 57,564 2 % 26,967 3 %TOTAL NET SALES $ 2,703,581 100 % $ 1,965,187 100 % $ 981,806 100 %

The number of competitors for communications access and switching systems and handsets in China grew in 2004 in line with China’sgrowing telecommunications market. This growth led to competitive pricing pressure, causing our average selling prices to decrease by10% to 20% in 2004 relative to 2003 levels. We continued to develop products with more advanced features and to enhance the features ofour existing products in 2004, which we believe will enable us to offer our customers a more advanced product at a higher average sellingprice in future periods. In addition, we intend to continue to work to reduce the cost of manufacturing our products by streamlining ourdesign and engineering functions.

In an effort to penetrate new markets around the world, support our growing business and expand our product offerings, we continued toinvest resources in our selling, administrative and research and development groups in 2004. These costs are expected to increase in the nearfuture as we proceed with our expansion into other markets. Operating costs as a percentage of revenue were 20% in 2004 compared to 18%in 2003.

In 2004, we had negative net cash flow from operating activities, mainly due to increases in accounts receivable and inventory balances.Our accounts receivable and inventory balances increased at December 31, 2004, as compared to 2003, and can be attributed to our globalexpansion efforts including the sales generated by our Personal Communications Division (“PCD”), our new division formed in connectionwith the ACC acquisition.

KEY ACQUISITIONS AND OTHER TRANSACTIONS

Since our incorporation, we have focused our resources on developing products for the global communications market. In particular, wehave made several key strategic acquisitions to acquire additional resources to further this development in recent years. These acquisitionswere accounted for as purchases, and the results of operations of the acquired companies have been included in our consolidated financialstatements from the closing dates of the acquisitions.

Our acquisitions often result in a one-time charge to operating expenses related to products under development that have not yet reachedtechnological feasibility, or in-process research and development (“IPR&D”). A project is classified as IPR&D if there are significant risksassociated with completing the development of the acquired technology including both technological and commercial risks. When assessingIPR&D projects, we consider the key project characteristics as well as its future prospects, the rate at which technology changes in thetelecommunications equipment industry, product life cycles and the product’s development stage.

In connection with acquisitions, we often issue stock-based incentives that vest according to terms established in the acquisition agreement.Historically, our stock-based incentives have vested based upon the achievement of product development milestones, the meeting ofrevenue targets or the duration of employment.

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Giga Telecom, Inc.

On October 29, 2004, UTStarcom CDMA Technologies Korea Limited, a limited liability company organized under the laws of Korea andour wholly owned subsidiary (“UTStarcom Korea”), entered into an Asset Purchase Agreement with Giga Telecom, Inc. (“Giga”), a Koreancorporation that develops and manufactures wireless handsets. Pursuant to the Asset Purchase Agreement and related ancillary agreements,UTStarcom Korea will pay $18.6 million for certain assets relating to the research and development of CDMA wireless products, of which(i) $13.0 million will be paid in cash at the closing, (ii) $1.6 million pursuant to a separate arrangement in respect of certain servicesrendered by Giga relating to the design of wireless handsets for UTStarcom Korea, is to be applied against the purchase price, and (iii) $4.0million is to be paid in three separate installments tied to certain product design and production milestones. We completed the acquisitionon January 4, 2005, and at the closing, $13.0 million in cash was paid and an additional $2.0 million was paid into an escrow account thatwill be held by us for a period of six months.

Audiovox Communications Corporation

On November 1, 2004, we completed our acquisition of ACC, the wireless handset division of Audiovox Corporation, and acquired selectassets and liabilities, including inventories, prepaids, payables, accrued expenses and the right to hire approximately 250 employees for$165.1 million in cash. We acquired ACC’s sales, service and support infrastructure, its CDMA handset brand, access to supply-chainchannels, product marketing expertise and key relationships with CDMA operators in North and South America.



In consummating this acquisition, we obtain access to ACC’s distribution channel into the CDMA handset market particularly in NorthAmerica. We believe this distribution channel strengthens our position in the handset market by providing additional volume to benefiteconomies of scale in manufacturing, sourcing and development. We also plan to improve gross margins on the sale of ACC’s CDMAhandsets by supplying products we manufacture to ACC.

Based in part on an independent valuation, the allocation of the purchase price to intangible assets is comprised of customer/dealerrelationships of $24.4 million, supplier relationships of $5.3 million, non-compete agreement of $10.8 million, backlog of $3.2 million,trade name of $4.0 million, and goodwill of $74.1 million. No amount was allocated to IPR&D.

TELOS Technology, Inc.

On May 19, 2004, we completed our acquisition of substantially all of the assets and certain liabilities of TELOS Technology, Inc. and itssubsidiaries (“TELOS”). TELOS is a provider of mobile switching products and services for voice and data communication networks todeveloping rural, enterprise and emerging wireless markets. The total consideration for the acquisition, funded from cash on hand, wasapproximately $30.0 million. We paid $29.0 million in cash, in addition to $1.0 million of acquisition-related transaction costs. Within oneyear of the acquisition date, additional payments totaling a maximum of $19.0 million may become payable based upon revenue recognizedfrom the sale of TELOS products. In the event these revenue milestones are met, the original purchase price will be adjusted for the amountof the contingent payment in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations.” As of December 31, 2004, no additional payments or accruals were required.

The existing technology acquired included the entire TELOS product family of CDMA softswitch technology products, supporting serversand operations maintenance centers. CDMA technology is the common platform on which second and third-generation wireless dataservices and applications are built. By assigning unique codes to each communication to differentiate it from others in the same spectrum,

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CDMA technology allows many users to occupy the same time and frequency allocations in a given band or space. The amount of thepurchase price allocated to existing technology was $15.9 million. The TELOS product line will be integrated with our suite of CDMAproducts, strengthening our existing CDMA product portfolio.

In addition to developed product technology, we acquired fixed assets, IPR&D, an assembled workforce of approximately 60 employees,customer relationships and recorded goodwill. The amount of the purchase price allocated to IPR&D of $1.4 million was charged to ourresults of operations, as no alternative future uses existed at the acquisition date. In assessing TELOS IPR&D projects, we considered keyproduct characteristics including the product’s development stage at the acquisition date, the product’s life cycle and the product’s futureprospects. We also considered the rate at which technology changes in the telecommunications equipment industry, the industry’scompetitive environment and the economic outlook for both local and global markets. We recorded $6.4 million of goodwill related to thisacquisition.

As of the acquisition date, TELOS had two projects under development that qualified for IPR&D: the Sonata SE product family and theiCell product. The objective of both projects is to enhance the functionality of products designed to comply with the CDMA2000technology standard. Specifically, the objective of the Sonata SE product family is to provide additional features to operation maintenancecenter products. The objective of the iCell product is to enhance iCell base station features. The projects under development areenhancements to existing products that do not affect the functionality of those existing products.

As of December 31, 2004, one project was completed and for the other project, the estimated completion date is June 2005, with estimatedremaining costs to complete of $0.6 million.

Hyundai Syscomm, Inc.

On April 27, 2004, we completed our acquisition of the assets, substantially all of the intellectual property, certain employees and certaincontracts related to HSI’s CDMA infrastructure business for markets outside of Korea. Subject to the attainment of certain milestones andthe transfer of certain know-how, the total consideration for this transaction was approximately $12.3 million excluding transaction costs of$1.8 million. Approximately $7.3 million in cash was paid at the closing date and an additional $3.0 million in cash is payable one yearfrom the closing date. The remaining purchase price was comprised of $2.0 million to be paid by us upon the completion of HSI’s trainingof our manufacturing employees in China under the terms of a Training Services Agreement. Not included in the purchase price was $2.0million payable upon the completion of certain revenue milestones. In the event these revenue milestones are met, the original purchaseprice will be adjusted for the amount of the contingent payment in accordance with SFAS 141. In conjunction with this transaction, weloaned HSI $3.2 million at an effective interest rate of 12% per annum, which was used by HSI to satisfy outstanding debt obligations. Theprincipal amount of the loan is due in April 2005. We may offset HSI’s payment obligations against the outstanding $3.0 million of thepurchase price and any other liabilities.



Under the terms of the transaction with HSI, we acquired existing technologies and entered into non-compete and licensing agreements. Theexisting technologies acquired were the base transceiver station (“BTS”) and base station controller (“BSC”) product lines. BTS is theantenna and radio equipment that enables wireless devices to communicate with a land-based transmission network in a given range. BSCperforms radio signal management functions for BTS, managing functions such as frequency assignment and handoff. As part of the assetpurchase agreement, we entered into a training services agreement with HSI, whereby HSI employees were to provide technical training toour manufacturing staff in China for the ninth-month period subsequent to the acquisition. This technology and technological know-howwill strengthen our existing CDMA product portfolio and the development of future CDMA technology.

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In addition to acquiring existing technology, we entered non-compete and licensing agreements with HSI. The non-compete agreementprohibits HSI from competing against us in all countries except Korea for four years from the valuation date. The licensing agreementrequires that HSI pay us 1% of revenue as a royalty for the usage of the intellectual property that we acquired under the terms of theacquisition for fifteen years subsequent to the valuation date. There were no IPR&D projects acquired.

We initially recorded goodwill of $6.8 million in connection with the acquisition and subsequently increased the amount of goodwill by$0.2 million upon the completion of the purchase price allocation. We encountered difficulties integrating the HSI operations into ouroperations after the acquisition. In the fourth quarter of 2004, we decided to wind-down the legacy operations and transfer employees andtangible assets to support our handset engineering operations in Korea during the first quarter of 2005. The decision to abandon theoperations occurred within nine months of the acquisition and before the HSI operations were integrated into our Company. Therefore, inaccordance with SFAS 142, we have written off the entire goodwill of $7.0 million associated with this acquisition. We have also writtenoff all of the remaining values of the intangible assets associated with this acquisition including $3.1 million of purchased technologies,$0.6 million related to non-compete agreements, and $0.8 million related to a license agreement with HSI. At December 31, 2004, webelieved we would utilize most of HSI’s tangible assets to support our new handset design center. If any assets will not be utilized insupport of the handset design center, the net book value of those assets will be written off. We expect to complete the evaluation anddecision during the second quarter of 2005.

CommWorks

On May 23, 2003, we completed our acquisition from 3Com Corporation, a Delaware corporation, (“3Com”) of selected assets andliabilities from 3Com’s CommWorks division (“CommWorks”). We funded the consideration for the acquisition from cash on hand, andpaid $100.0 million in cash and incurred transaction and other related costs of $9.3 million.

Selected assets acquired included CommWork’s portfolio of carrier-focused voice and data networking products and customer support andprofessional services. In addition, we acquired or licensed all of the 3Com intellectual property used by CommWorks. CommWorksdevelops and deploys carrier-class, IP-based multi-service access and service-creation platforms for telecommunications service providers.

Based on an independent valuation, $1.3 million of the purchase price was allocated to IPR&D and was charged to our results of operations,as no alternative future uses existed at the acquisition date.

As of the date of the acquisition, CommWorks had two projects under development that qualified for IPR&D, SLAP and High DensityVoice (“HDV”) 2.0. SLAP is an IPR&D project in the Wireless division of CommWorks. It is an interface that connects our products withradio switch manufacturers’ products in China in order to connect a cellular network to the Internet. HDV 2.0 is an IPR&D project in theBroadband infrastructure product line of CommWorks. HDV 2.0 utilizes software technology to increase data capacity for VoIP solutions.Both the SLAP and HDV 2.0 projects were completed and commercialized in 2004.

RollingStreams

On June 30, 2003, we completed the acquisition of RollingStreams Systems, Ltd. (“RollingStreams”), a development-stage company,pursuant to a share exchange agreement. RollingStreams designs streaming, end-to-end TVoIP products and services fortelecommunications operators and broadband service providers. Our investment in RollingStreams was $0.4 million prior to the acquisition.The purchase consideration for all of the outstanding shares of RollingStreams, other than those already held by us prior to the acquisition,was 301,074 shares of our common stock. In addition, we assumed all

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outstanding RollingStreams options, which became options to purchase an aggregate of 12,742 shares of our common stock, valued at$0.5 million. Of the 301,074 shares, 164,115 shares valued at $5.8 million, were issued at the closing, 28,696 of which are held in escrowfor any undisclosed liabilities or contingencies incurred by RollingStreams prior to the closing or for any breach of the share exchange



agreement. The 28,696 shares held in escrow were released and issued in 2004. Up to 136,959 of the 301,074 shares will be payable in theform of an earnout after an earnout period expiring 18 months after the closing, subject to the achievement of certain revenue milestonesduring such earnout period. No shares have been issued pursuant to the earnout as of March 31, 2005.

The amount of the purchase price allocated to IPR&D was $6.2 million, based on an independent valuation. This amount was charged to ourresults of operations, as no alternative future uses existed at the acquisition date.

As of the date of the acquisition, RollingStreams had one project under development that qualified for IPR&D, MediaSwitch. MediaSwitchis an end-to-end solution designed for telecom operators and broadband service providers to deliver broadcast quality TV and on-demandentertainment services over Internet Protocol networks.

MediaSwitch is considered an IPR&D project because there are significant risks associated with the development of this technology. Theserisks include technological and commercial risks. The technological risks stem from the fact that the technology was 70% complete atDecember 31, 2003. As of December 31, 2004, the project was completed and no further cost is anticipated.

Shanghai Yi Yun

On October 16, 2002, we acquired the assets and intellectual property of Shanghai Yi Yun Telecom Technology Co. Ltd. (“Shanghai YiYun”), a provider of synchronous digital hierarchy equipment. Consideration was $0.2 million of cash and 342,854 shares of restrictedstock valued at $6.0 million. In connection with the acquisition, Shanghai Yi Yun and each of the stockholders that received the 342,854shares of restricted stock executed an indemnity escrow agreement in our favor and such shares of restricted stock were placed in escrow. Inaddition, we issued 514,290 shares of restricted stock valued at that time at $9.0 million to the Shanghai Yi Yun employees that were hiredby one of our subsidiaries. Such shares of restricted stock vest over five years, with accelerated vesting upon the achievement of specifiedmilestones. We have treated these 514,290 shares of restricted stock as deferred compensation.

Equity Transactions

On January 14, 2004, we sold 12.1 million shares of common stock at $39.25 per share in a privately negotiated transaction to an institution,for net proceeds of approximately $474.6 million. The net proceeds are intended to fund strategic and general corporate activities, including,but not limited to, acquisitions, investments, working capital or capital expenditures. During the first and second quarters of 2004, we useda portion of the capital raised to repurchase a total of 3.6 million shares of our common stock, at an average price of $30.25 per share and atotal cost of $107.6 million, including transaction fees.

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On April 5, 2003, we repurchased 8.0 million shares of common stock beneficially owned by SOFTBANK America Inc., at a purchaseprice of $17.385 per share. The total cost of the repurchase was $139.6 million including transaction fees. In connection with thisrepurchase transaction, SOFTBANK America Inc. entered into an agreement with us not to offer, sell or otherwise dispose of our commonstock for a period of one year, subject to a number of exceptions.

Debt Issuance

On March 12, 2003, we completed an offering of $402.5 million of convertible subordinated notes due March 1, 2008 to qualifiedinstitutional buyers pursuant to Rule 144A under the Securities Act of 1933. The notes bear interest at a rate of 7 / 8 % per annum and areconvertible into our common stock at a conversion price of $23.79 per share and are subordinated to all of our present and future seniordebt. Holders of the notes may convert their notes only if: (i) the price of our common stock issuable upon conversion of a note reaches aspecified threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the notes falls below certain thresholds. At theinitial conversion price, each $1,000 principal amount of notes will be convertible into approximately 42.0345 shares of common stock.

Concurrent with the issuance of the convertible notes, we entered into a convertible bond hedge and a call option transaction with respect toour common stock. Both the bond hedge and call option transactions may be settled at our option either in cash or net shares and expire onMarch 1, 2008. The convertible bond hedge and call option transactions are expected to reduce the potential dilution from the conversion ofthe notes. The options have been included in stockholders’ equity in accordance with the guidance in Emerging Issues Task Force IssueNo. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”

RESULTS OF OPERATIONS

Our net sales consist of product and service sales within three broad telecommunications product lines; wireless infrastructure, broadbandinfrastructure and handsets and customer premise equipment. Wireless infrastructure is primarily comprised of the PAS and CDMAproducts. Broadband infrastructure is primarily comprised of the AN-2000, iAN-8000, IP-DSLAM, GEPON, NetRing™ and other wirelineproducts. The handsets and customer premise equipment products include PAS handsets, CPE and CDMA handsets that were introduced inthe fourth quarter of 2004. With many of our product sales, we provide installation services. Additionally, we provide maintenance services



for some of our products. For each of the years ended December 31, 2004, 2003 and 2002, total services sales accounted for less than 10%of net sales.

Approximately 79%, 86% and 84% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively, were in China.Accordingly, our business, financial condition and results of operations are likely to be influenced by the political, economic and legalenvironment in China, and by the general state of China’s economy for the foreseeable future. For example, we experienced lower demandfor our products in China in the fourth quarter of 2004 resulting from the slowdown in China’s economy as well as from the maturation ofthe PAS market. Our results may be adversely affected by, among other things, changes in the political, economic, competitive and socialconditions in China, including changes in governmental policies with respect to laws and regulations, changes in the telecommunicationsindustry and regulatory rules and policies, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods oftaxation. We extend credit to our customers in China without requiring collateral. We monitor our exposure for credit losses and maintainallowances for doubtful accounts. Business activity in China and many other countries in Asia decline considerably during the first quarterof each year in observance of the Lunar New Year. As a result, sales during the first quarter of our fiscal year have typically been lowerthan sales during the fourth quarter of the preceding year, and we expect this trend to continue.

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Cost of sales consists primarily of materials costs, fees to agents, costs associated with manufacturing, assembly and testing of products,costs associated with installation and customer training and overhead and warranty costs. Cost of sales also includes import taxes and tariffson components and assemblies. Some components and materials used in our products are purchased from a single supplier or a limitedgroup of suppliers and, in some cases, are subject to our obtaining Chinese import permits and approvals. We also rely on third partymanufacturers to manufacture and assemble most of our handsets.

Our gross profit has been affected by product mix, average selling prices and material costs. Our gross profit, as a percentage of net sales,varies among our product families. We expect that our overall gross profit, as a percentage of net sales, will fluctuate from period to periodas a result of shifts in product mix, anticipated decreases in average selling prices and our ability to reduce cost of sales.

Selling, general and administrative expenses include compensation and benefits, professional fees, sales commissions, provision fordoubtful accounts receivable and travel and entertainment costs. A large percentage of our costs are fixed and are difficult to quickly reducein periods of reduced sales. We intend to pursue aggressive selling and marketing campaigns and to expand our direct sales organization,and, as a result, our sales and marketing expenses will increase in future periods. We also expect that in support of our continued growth,general and administrative expenses will continue to increase in the foreseeable future.

Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design anddevelopment activities, the cost of parts for prototypes, equipment depreciation and third party development expenses. A large percentage ofour costs are fixed and are difficult to quickly reduce in periods of lower sales. We believe that continued investment in research anddevelopment is critical to our long-term success. Accordingly, we expect that our research and development expenses will increase in futureperiods.

Income tax expense is based upon a blended effective tax rate based upon our expectation of the amount of income to be earned in each taxjurisdiction. The primary drivers for income tax expense include both the total amount and geographic source of the income earned. We usecredits and other tax incentives to minimize our income tax expense. Income tax expense as a percentage of income before taxes willincrease if relatively more income is earned in higher tax jurisdictions.

NET SALES

The following table summarizes our net sales by product line: Years ended December 31, 2004 2003 2002 (in thousands) Sales by product line Wireless infrastructure $ 1,395,521 52 % $ 720,555 37 % $ 447,096 46 %Handsets and customer premise equipment 1,026,483 38 % 983,392 50 % 376,805 38 %Broadband infrastructure 281,577 10 % 261,240 13 % 157,905 16 %TOTAL NET SALES $ 2,703,581 100 % $ 1,965,187 100 % $ 981,806 100 %

Fiscal 2004 vs. 2003

The 38% increase in sales from $2.0 billion in 2003 to $2.7 billion in 2004 was primarily attributable to increased demand for our products



and services and results of our geographic expansion into other markets. Our new customer wins in prior years continued to contribute tothe increased demand for our products and services. In addition, our recent acquisitions also attributed to our growth in sales. For example,our PCD division contributed $277.4 million in sales since the acquisition on November 1, 2004.

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Net sales growth, excluding PCD, was primarily due to an increase in subscribers, requiring telecommunication providers to expand theirtelecommunication infrastructures. Wireless infrastructure revenues are generally affected by the timing of customer acceptance. In 2004,the percentage of total sales for our wireless product line increased from 37% to 52% generally as a result of our international customerswho undertook a number of wireless infrastructure expansion projects including the broadband fiber-to-the-home projects in Japan. Whilewe experienced an increase in our wireless infrastructure revenue between 2004 and 2003, our handset revenue remained relatively flat as aresult of a combination of factors. For one, our handset revenue in China decreased by approximately $225.9 million due primarily to loweraverage selling prices resulting from increased competition by 10% to 20%, depending on products, while units of shipment remained at thesame level as last year. Secondly, the decline in China handset revenue was offset by $277.4 million in handset revenue recognized in thefourth quarter of 2004 by PCD. We believe that in 2005 we will maintain approximately 55% to 60% percent market share in China forPAS wireless infrastructure and 50% to 55% percent market share for PAS handsets as smaller competitive handset vendors exit the market.Additionally, we expect that with the addition of PCD, total handset revenue will represent 50% to 60% of our net sales in 2005. Sales torelated parties decreased from 9.4% in 2003 to 5.4% in 2004 of total net sales. See “—Related Parties” for further discussion.

Most Chinese carriers have three levels of operations; the central headquarters level, the provincial level and the local city/county level.Both central and provincial levels are independent legal entities and have their own corporate mandate. The purchasing decision makingprocess may take various forms for different projects and may also differ significantly from carrier to carrier. We group all of our Chinacustomers together by province and treat each province as one customer since that is the level at which purchasing decisions are made. AtDecember 31, 2004, and 2003, we had 31 customers in China. In 2004, the Guangdong and Jiangsu provinces accounted for 12% and 10%of our net sales, respectively. In 2003, the Hei Long Jiang province accounted for 11% of our net sales.

In the case of PAS systems, all China Netcom contracts are negotiated and entered into between the provincial operators and the Company.However, thecentral headquarters of China Telecom recently began exerting more influence in the purchasing decision-making process bynegotiating contractual terms, such as purchase price, payment terms, and acceptance clauses at the central level. The provincial operatorthen further negotiates the contract based on the guidelines provided by the headquarters. Final contracts are entered into between theprovincial operator and the Company. However, if this trend of centralized decision-making expands to unified purchasing, resulting in thenegotiation and execution of contracts at the central headquarter level, there may be a concentration of customers which could have asignificant impact on our business.

Three months ended December 31, 2004 and 2003

In the fourth quarter 2004, net sales increased by $103 million or 16% over the fourth quarter of 2003. This increase was driven by the PCDdivision, which contributed $277.4 million in sales in the fourth quarter 2004. Excluding the impact of the PCD acquisition, our salesdeclined in the fourth quarter 2004 by 27 % compared to the prior year. The revenue from our Wireless products experienced a decline inthe fourth quarter of 2004 primarily due to the delay of revenue recognition for our PAS infrastructure products due to extended period forproduct acceptance due to certain new contract terms. In addition, our revenue growth continued to be impacted negatively by the maturityof PAS market infrastructure.

The percentage of revenue generated outside of China exceeded 53% of total sales in the fourth quarter 2004 versus 13% of total sales inthe fourth quarter 2003. Excluding PCD, there was a 37% increase in sales from $83 million in the fourth quarter 2003 to $114 million inthe fourth quarter 2004. This was primarily due to telecommunication providers expanding their infrastructure requirements. In addition,there was an increase in our Broadband product sales due to the introduction of our GEPON and NetRing™ products.

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The 100% increase in sales from $981.8 million in 2002 to $1,965.2 million in 2003 was primarily attributable to increased demand for ourproducts and services, the continued strength of our sales in China, as well as an increase in our global sales. Net sales growth was due to anincrease in subscribers, which required telecommunication providers to expand their telecommunication infrastructures. As a result, we hadmore sales to customers that were expanding their existing networks in 2003. Approximately 30% of our sales in 2003 were attributable tonew customers compared to 54% of sales to new customers in 2002. In addition to increasing the amount of infrastructure sales, thisincrease in subscribers also led to an increase in customer demand for handsets. Sales to related parties decreased from 13% in 2002 to 9%



in 2003 of total net sales. See “—Related Parties” for further discussion.

During 2003, the China provincial-level telecommunications service entities continued to consolidate telecommunications purchasingdecisions by province. As a result of this consolidation trend, we grouped all of our China customers together by province, and treat eachprovince as one customer. At December 31, 2003 and 2002, we had approximately 31 such customers. Giving effect to this consolidation, in2003, the Hei Long Jiang province accounted for 11% of our net sales. In 2002, sales to the Zhejiang province accounted for 18% and salesto SBBC accounted for 13% of our net sales.

GROSS PROFIT

The following table summarizes our gross profit: Years ended December 31, 2004 2003 2002 (in thousands) Gross profit $ 601,601 $ 624,385 $ 345,472 Gross profit percentage 22% 32% 35%


Our gross profit varies across our different product lines and is affected by product mix, average selling prices and the cost of materials.Gross profit percentage declined by approximately 10% due to several factors. The International segment experienced the largest drop ingross profit, declining from 58% for 2003 to 34% for 2004. Most of this decrease was driven by the decline in our broadband product,which experienced a shift in product mix from our more traditional DSLAM product to newer optical broadband products. These broadbandproducts have experienced lower initial margins upon product introduction. In addition, the gross profit percentage recognized on handsetsales made through the PCD business is approximately 4% which is significantly lower than those realized on handset sales related to ourPAS systems. PCD was acquired in November 2004 and contributed $11.9 million in gross profit. The lower PCD gross margin resulted ina decrease in consolidated gross margin of 2.1%. The China segment also experienced a decline in gross margin percentage, declining from27% to 23%, primarily attributable to our handset products, which have experienced increased competitive market pricing pressure. Weexpect that there will be continued competitive market pricing pressures on our products in line with current trends in the industry.

In addition, our gross profit was negatively impacted by a $39 million increase in our provision for inventory reserves.

Three months ended December 31, 2004 and 2003

Gross profit for the three months ended December 31, 2004 was $112.2 million or 15% of sales compared to $188.1 million or 29%. Themost significant factor related to this decline is the inclusion of

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two months of PCD sales at approximately 4% gross profit. The lower PCD gross profit percentage decreased the consolidated gross profitby 6% in the three months ended December 31, 2004.

The majority of the remaining decline in gross profit is related to the International segment. During the fourth quarter of 2004, theInternational segment sold more of its newer optical broadband products, which has a lower margin than the DSLAM product. In addition,the fourth quarter gross profit was negatively impacted by provision for inventory and warranty reserves of $34.4 million compared to$12.6 million in the fourth quarter of 2003.


The decrease in gross profit as a percentage of net sales in 2003 from 2002 was attributable to increased competitive market pricingpressures and lower margins on our PAS systems as well as to our having a higher volume of sales of our lower margin handset products.The telecommunications market experienced continued pricing pressures in 2003. Our gross profit decreased in 2003 also due to anincreased cost of sales from foreign exchange losses resulting from our purchasing significant amounts of inventory denominated inJapanese Yen.

OPERATING EXPENSES

The following table summarizes our operating expenses: Years ended December 31,



2004

% of2004 netsales 2003

% of2003 netsales 2002

% of2002 netsales

(in thousands) Selling, general and administrative $ 315,703 11 % $ 188,339 9 % $ 110,263 11 % Research and development 219,045 8 % 155,252 8 % 86,182 9 % In-process research and development 1,400 0 % 10,686 1 % 670 0 % Amortization of intangible assets 15,551 1 % 8,370 0 % 2,395 0 % TOTAL OPERATING EXPENSES $ 551,699 20 % $ 362,647 18 % $ 199,510 20 %

Selling, general and administrative


Selling, general and administrative expenses increased by $127.4 million, or 2% as a percentage of net sales, compared to 2003. Theincrease from 2003 to 2004 was primarily due to the hiring of additional personnel to support our increased business activities both in Chinaand globally. Selling, general and administrative headcount increased approximately 49% from an average of 2,033 employees for 2003 toan average of 3,038 employees for 2004. Additionally, our professional services fees increased by approximately $31.7 million in 2004from 2003 due to expansion of our overall global activities and also driven in part by expenses of approximately $13.3 million related tosystems implementations, Sarbanes-Oxley compliance and supply chain management consulting fees in 2004. The allowance for doubtfulaccounts increased from $31.2 million at December 31, 2003, to $51.2 million at December 31, 2004, due primarily to the increased size ofour receivable balances in China. The net increase in allowance for doubtful accounts was partially offset by a refinement in our estimationmethodology and assumptions in the fourth quarter of 2004. The revision to our allowance for doubtful accounts assumptions reflect thechanging 2004 collection experience and further analysis of collectibility trends within the China accounts receivable balances. Throughout2004, we experienced slower collections cycles. This slowdown has been attributed to a variety of reasons but principally to changes incustomer’s business practices surrounding payment and, to a lesser degree, to maturation of the telecommunications sector. However, we donot believe that the lengthening of the collections cycle will coincide with a reduction in the overall

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recoverability of the associated receivables. This lengthening of the collection cycle caused us to reevaluate our provisioning methodology.The change in estimation resulted in a $10.1 million lower provision for doubtful accounts than would have been provided under theprevious assumptions. Finally, we incurred an asset impairment charge of approximately $11.5 million relating to goodwill and intangibleassets impairment of our HSI acquisition.


The increase in selling, general and administrative expenses was due to the expansion of our overall business activities both in China andglobally. To support our expanding global business, we hired approximately 1,150 additional selling, general and administrative employeesin 2003, which also contributed to the increased selling, general and administrative expenses. The decrease in selling, general andadministrative expenses as a percentage of net sales was primarily due to economies of scale associated with the significant increase in netsales.

Research and development


Research and development expense remained at 8% of total net sales for 2004 as compared to 2003. The research and developmentexpenses increased by $63.8 million primarily due to hiring additional technical personnel to support both product enhancements and newproduct development. Research and development headcount increased approximately 52% from an average of 1,809 employees for 2003 toan average of 2,757 employees for 2004. The significant majority of the increase in research and development expenses from 2003 to 2004was attributable to higher payroll and payroll-related costs resulting from the continued expansion of our research and development teams inChina, from a full year of salaries for CommWorks personnel as compared to seven month’s salaries in the same period in the prior year andfrom approximately 100 employees hired in conjunction with the acquisitions of TELOS and HSI in 2004.


The increase in absolute dollars of research and development expenses was primarily due to the hiring of approximately 950 additionaltechnical personnel in 2003 to support our increased business levels. The decrease of research and development expenses as a percentage ofnet sales was due to the majority of the new personnel being hired in China, where labor costs are less expensive than in the United States,



as well as to increased economies of scale associated with increased business levels.

In-process research and development expenses


The IPR&D charge of $1.4 million for 2004 resulted from our acquisition of TELOS and was based, in part, on an independent valuation.

Please see “Acquisitions and Other Key Transactions” for details on our IPR&D expenses incurred in 2004.

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The IPR&D charge for 2003 resulted from our acquisition of CommWorks and three smaller acquisitions: RollingStreams, Xebeo andShanghai Yi Yun Telecom Technology Co. Ltd., which accounted for $1.3 million, $6.2 million, $1.9 million and $1.3 million,respectively, and were based on independent valuations. The charge for 2002 arose from our acquisition of Issanni Communications, Inc. onApril 19, 2002 and was based on an independent valuation.

Amortization of intangible assets


Amortization of intangible assets increased by $7.2 million in 2004 primarily due to the addition of $68.6 million of intangible assetsrecorded upon our acquisitions of selected assets of ACC and TELOS in 2004. Estimated amortization expenses for the next five years,beginning with the year ended December 31, 2005, are $23.1 million, $18.9 million, $16.0 million, $12.7 million, and $6.9 million,respectively.


The increase in amortization of intangible assets was primarily due to an additional $44.9 million of intangibles recorded upon ouracquisition of CommWorks in May 2003. The estimated useful lives of these purchased intangibles range from one to ten years.

OTHER INCOME (EXPENSE)

Interest income (expense), net


Interest income was $6.2 million in 2004 compared to interest income of $3.2 million in 2003. Interest income increased due to higheraverage cash balances in 2004 compared to 2003 primarily due to cash generated from financing activities.

Interest expense was $6.9 million in 2004 compared to $4.7 million in 2003. The increase of $2.2 million in interest expense was in partattributable to the interest associated with our convertible debt issued in March 2003, which accrues at a rate of approximately $1.4 millionper quarter. In addition, in 2004 we incurred interest expense relating to short-term borrowings in China. These increases in interest expensewere offset by an increase in capitalized interest of approximately $0.8 million relating to the construction of our new manufacturing facilityin Hangzhou, China.


Interest income was $3.2 million in 2003 compared to interest income of $5.5 million in 2002. Interest income decreased due to loweraverage cash and short-term investment balances of $319.2 million in 2003 compared to $372.5 million in 2002, as well as due to areduction in interest rates on deposits.

Interest expense was $4.7 million in 2003 compared to $1.3 million in 2002. The increase of $3.4 million in interest expense was primarilyattributable to the interest associated with our convertible debt issued in March 2003. We capitalized $0.6 million of interest in 2003.

Other income (expense), net


Net other income was $15.4 million in 2004, compared to $4.9 million in 2003. Net other income in 2004 primarily consisted of $10.3million in financial subsidies received from the local Chinese government



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during the first two quarters of 2004. We do not expect to receive any additional financial subsidies or payments in the near future. Thesesubsidies were to encourage our investment in local research and development and manufacturing activities. Net other income also includedJapanese consumption tax refunds of approximately $5.3 million and net investment gains and dividends of approximately $0.9 millionoffset by foreign exchange losses of approximately $0.7 million.


Net other income was $4.9 million in 2003, compared to net other expense of $9.9 million in 2002. Net other income in 2003 primarilyconsisted of a reinvestment incentive payment received in China of $3.9 million, an incentives payment for exports and value added taxes inChina of $6.1 million, government incentives related to our operations in Japan of $6.2 million, offset by foreign exchange losses ofapproximately $8.7 million and expenses attributable to selling or transferring of notes receivable of $2.3 million.

Equity in net loss of affiliated companies


Consolidated equity in net loss of affiliated companies was $1.3 million in 2004 compared to $5.3 million in 2003. The equity loss for 2004primarily consisted of our share of losses relating to our joint venture with Matsushita Communications Industrial Co., Ltd. and MatsushitaElectric Industrial Co., Ltd. to jointly develop, manufacture and sell telecommunications products. We have a 49% ownership interest in thejoint venture. The equity losses for fiscal 2003 were related to losses from the same joint venture.


Consolidated equity in net loss of affiliated companies was $5.3 million in 2003 and $4.1 million in 2002. The equity loss for 2003primarily consisted of our share of losses relating to our joint venture with Matsushita Communications Industrial Co., Ltd. and MatsushitaElectric Industrial Co., Ltd. The equity loss for 2002 was related to losses relating to our interests in investment funds and to our share oflosses generated by GUTS prior to our acquisition of the remaining 49% ownership interest in this entity.

Income tax benefit (expense)


We recorded an income tax benefit of $9.8 million in 2004 and an expense of $45.4 million in 2003. We have a negative 15% effectiveincome tax rate for 2004. There are three principal reasons for the negative income tax rate for 2004.

The first reason relates to the mix in income or loss between income tax jurisdictions. In the United States (a 35% tax jurisdiction), weincurred a loss of $19.7 million before taxes. Therefore, we recorded a tax benefit of approximately $6.9 million related to our 2004domestic losses. In international jurisdictions, we recognized approximately $83.0 million of income in 2004. However, our net statutorytax rate for our international locations, principally China, was substantially lower than the 35% U.S. statutory rate.

Secondly, the Company experienced a significant tax benefit resulting from the increase in the tax rate applied to the temporary differenceswithin our China companies. In 2003, the Company recorded most deferred tax assets for the China jurisdiction at a 15% rate based uponour location within a “high tech zone.” When we moved into our new facility in China in the fourth quarter of 2004, we no longer qualifiedfor the lower rate and consequently, the rate applied to our deferred tax assets and liabilities increased to 24%. The resulting benefit fromthe higher rate applied to our deferred tax assets is $19.6 million. We are currently re-applying for the “high tech zone” certification.However, there can be no assurance that we

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will receive the certification. If we were to receive the approval and our 15% tax rate were to be re-instated, the tax benefit would bereversed.

The third reason for the income tax benefit was the utilization of tax credits, primarily within the United States. This resulted in a reductionin the effective income tax rate by approximately 9%.




Income tax expense was $45.4 million in 2003 and $27.3 million in 2002. The primary reason for the increase in income tax expense wasthat our income increased 91% in 2003 from 2002. Our effective tax rate was 17% in 2003 compared to 20% in 2002.

Minority interest in (losses) earnings of consolidated subsidiaries


Minority interest in losses of consolidated subsidiaries was ($0.3) million in 2004 and ($1.0) million in 2003. Minority interest in the lossesof our consolidated subsidiaries represents the minority interest in losses of MDC Holding Limited (“MDC Holding”) and its affiliatedentities (MDC Holding and such affiliated entities are referred to, collectively, as “MDC”), a variable interest entity consolidated inaccordance with Financial Accounting Standards Board (“FASB”) Interpretation 46, net of the 10% share of earnings of our Chongqingmanufacturing joint venture UTStarcom Co., Ltd. (“CUTS”) attributable to our joint venture partner.


Minority interest in (losses) earnings of consolidated subsidiaries was ($1.0) million in 2003 and $1.2 million in 2002. The change was dueprimarily to the minority interest in losses in 2003 of MDC, a variable interest entity included in our consolidated financials in the fourthquarter of 2003, and to the acquisition of the remaining 12% ownership interest in our Zhejiang manufacturing joint venture, UTStarcomTelecom Co., Ltd. (“HUTS”) during 2002. Minority interest in losses of consolidated subsidiaries for 2003 represented the minority interestin losses of MDC, net of the 10% share of earnings of CUTS attributable to our joint venture partner. Minority interest in earnings ofconsolidated subsidiaries for 2002 represented the share of earnings in HUTS attributable to our joint venture partner, prior to ouracquisition of the remaining 12% ownership interest in HUTS in May 2002. HUTS is now a wholly-owned subsidiary.

Related Parties

Softbank

We recognized revenue of $143.7 million, $184.4 million, and $123.0 million during the years ended December 31, 2004, 2003, and 2002,respectively, with respect to sales of telecommunications equipment to Softbank BB Corporation (“SBBC”), an affiliate of SOFTBANKCORP. and SOFTBANK America Inc., a significant stockholder of the Company. SBBC offers asynchronous digital subscriber line(“ADSL”) coverage throughout Japan, which is marketed under the name “YAHOO! BB.” In addition, we support SBBC’s newfiber-to-the-home service through sales of its carrier class Gigabit Ethernet Passive Optical Network (“GEPON”) product as well as itsmulti-service optical transport product (“NetRing™”). Revenue recognized for the GEPON and NetRing™ products for the twelve monthsended December 31, 2004 was $93.4 million. Both the GEPON and NetRing contracts were obtained through a form of auction. Included inaccounts receivable at December 31, 2004 and 2003, were $86.8 million and $43.9 million, respectively, related to these contracts.

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During 2000, we invested $10.0 million in Softbank China, an investment fund established by SOFTBANK CORP. focused on investmentsin Internet companies in China. This investment permits us to participate in the anticipated growth of Internet-related businesses in China.Our investment constitutes 10% of the funding for Softbank China, with SOFTBANK CORP. contributing the remaining 90%. The fundhas a separate management team, and none of our employees are employed by the fund. Many of the fund’s investments are and will be inprivately held companies, many of which are still in the start-up or development stages. These investments are inherently risky as themarket for the technologies or products the companies have under development are typically in the early stages and may never materialize.We account for this investment under the cost method and recorded insignificant losses in 2004 and losses of $0.2 million, and $2.8 milliondue to an other-than-temporary decline in the carrying value of this investment in 2003, and 2002, respectively. The balance in thisinvestment was $5.3 million at December 31, 2004.

During the first quarter of fiscal 2002, we invested $2.0 million in Restructuring Fund No. 1, a venture capital investment limitedpartnership established by SOFTBANK INVESTMENT CORP., an affiliate of SOFTBANK CORP. The fund focuses on leveraged buyoutinvestments in companies in Asia undergoing restructuring or bankruptcy proceedings. The total fund offering is expected to be betweenapproximately $150.0 million and $226.0 million, with each investor contributing a minimum of $0.8 million. The fund has a separatemanagement team, and none of our employees are employed by the fund. We account for this investment under the equity method ofaccounting. We recorded immaterial equity losses during the years ended December 31, 2004 and 2003. The balance in this investment was$1.8 million at December 31, 2004.

On August 29, 2002, we completed the repurchase of 6.0 million shares of our common stock for $72.9 million from SOFTBANKAmerica Inc.

On April 5, 2003, we repurchased 8.0 million shares of our common stock beneficially owned by SOFTBANK America Inc., at a purchaseprice of $17.385 per share. The total cost of the repurchase was $139.6 million, including transaction fees. In connection with thisrepurchase transaction, SOFTBANK America Inc. entered into an agreement with us not to offer, sell or otherwise dispose of our common



stock for a period of one year, subject to a number of exceptions. As of December 31, 2004 and 2003, SOFTBANK America Inc.beneficially owned approximately 12.8% and 14.1% respectively, of our outstanding stock.

On July 17, 2003, we entered into a Mezzanine Loan Agreement with BB Modem Rental PLC (“BB Modem”), an affiliate of SOFTBANKCORP. Under the terms of the agreement, we loaned BB Modem $10.1 million, for the purpose of investing in a portfolio of ADSLmodems and associated modem rental agreements, from SOFTBANK BB CORP., formerly BB Technologies, an affiliate of SOFTBANKCORP. SOFTBANK BB CORP. will continue to service such modems and modem rental agreements. Our loan is subordinated to certainsenior lenders of BB Modem, and repayments are payable to us over a 42-month period through January 31, 2007, with a substantial portionof the principal amount of the loan schedule to be repaid during the last 16 months of this period. Our recourse for nonpayment of the loanis limited to the assets of BB Modem, the account into which subscriber payments are made and its rights under the securitizationtransaction documents. The value of BB Modem’s modems that serve as collateral for the loan may decrease over time and may not besufficient upon sale to pay the outstanding amounts on the loans. We assess the loan for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. We periodically review the underlying quality of the asset poolsecuring the loan to assess whether impairment has incurred and needs to be recorded. We recorded $1.3 million and $0.5 million in interestincome in respect to this loan in 2004, and 2003, respectively. The loan receivable at December 31, 2004 and 2003, were approximately$11.8 million and $11.2 million respectively.

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During August 2004, we entered into several agreements with Japan Telecom Co., Ltd (“JT”), a wholly owned subsidiary of SOFTBANKCorp., related to the sale of telecommunication equipment and promotional services. The nature of these agreements contemplate the sale ofiAN-8000 equipment with specified value and delivery dates, as well as an oral agreement, which subsequently converted into specificservice contracts to manage a sales promotional program for JT. We have determined that the service activities revenue should be recordednet of expected promotional spending. Because we have not provided these activities in the past and cannot estimate the fair value of theseservices, we have determined under guidance of SAB 104, that all revenue related to these agreements will be deferred and included incustomer advance until the above-mentioned promotional activities are complete. We delivered the majority of the equipment during thethird and fourth quarters of 2004.

The promotional services discussed above involve contracting with third party promotional vendors, who in turn, facilitate the marketingand subscriber recruitment for the JT fiber-to-the-home program. During the fourth quarter of 2004, we determined that we would end ourinvolvement with the JT promotional program after completion of the contract discussed above. Accordingly, late in the fourth quarter of2004 and the end of the first quarter of 2005, we have either cancelled or assigned to another party, all third party contracts withpromotional vendors related to the JT contract. We now expect to satisfy all equipment and promotional obligations by the end of the firstquarter of 2005.

The terms of these agreements specify that JT was to remit 50 percent of the contract value in cash to us within one month of the executionof the contract, which was August 20, 2004. The remaining 50 percent is due shortly after delivery of the equipment. As of December 31,2004, approximately 73% of the total expected cash had been received. All cash received from JT in advance of revenue recognition hasbeen accounted for as a customer advance. As we spend cash for promotional activities, such spending is accounted for as a reduction ofcustomer advance. As of December 31, 2004, there was $217.5 million included in customer advance related to these agreements.

We also entered into an agreement during the third quarter in 2004 with JT to supply chassis equipment with an approximate value of $75million. Although some of the equipment was shipped to the customer during the third quarter, it is considered linked to the iAN-8000 salenoted above and as such, the revenue from this contract will be deferred until the completion of the above-mentioned promotional activities.

Cellon

In September 2001, we invested $2.0 million in Cellon International Holdings Corporation (“Cellon”). Cellon designs wireless terminalsand related technology for handset manufacturers and private distributors. We invested an additional $3.0 million each in April andDecember 2002. As of December 31, 2004, we had a 9% ownership interest in Cellon. In October 2002, we entered into a license and aroyalty agreement with Cellon International Holding Corporation (“Cellon”). We paid $0.8 million to license certain technology for thedevelopment of certain handset products in China. Per the terms of the royalty agreement, we are required to pay Cellon $3 per unit shippedfor a minimum of 0.1 million units. This agreement is not material to the overall financial results of Cellon.

Fiberxon

In September 2002, we invested $2.0 million in Fiberxon Inc. (“Fiberxon”), a company that develops and sells optical modules and relatedsystems. In March 2004, we invested an additional $1.0 million in Fiberxon. We have an outstanding purchase commitment with Fiberxon,in which we have an 11% ownership interest, to purchase component parts for optical networking products. In addition, we provided a letterof credit for $5.0 million to purchase raw materials for the manufacture of these component parts. This commitment should be fulfilledwithout adverse consequences material to our operations or financial



45

condition. Purchases from Fiberxon totaled $15.1 million in 2004 and we had $13.3 million in accounts payable to Fiberxon atDecember 31, 2004.

Mitsubishi

We recognized revenue of $1.0 million for the year ending December 31, 2004 with MELCO, an affiliated member of Mitsubishi, which isan insignificant shareholder of the Company. We have purchased from Mitsubishi components associated with base station units used toproduce our PAS products totaling approximately $97.4 million in 2004, $363.1 million in 2003, and $157.2 million in 2002. In addition wehad $6.4 million in accounts payable to Mitsubishi at December 31, 2004 and $12.7 million at December 31, 2003.

Starcom Products, Inc.

We obtain engineering consulting and employee placement services from Starcom Products, Inc. (“Starcom”), which is 31% owned by anindividual related to a member of our Board of Directors. We paid to Starcom $1.1 million in 2004, $1.4 million in 2003, and $0.7 millionin 2002 for engineering consulting and employee placement services provided by Starcom.

Segment Disclosures

During 2004, we continued to expand our focus on markets and operations outside of China. Effective with the fourth quarter of 2004, itwas determined that our chief operating decision makers, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information,” were evaluating performance, making operating decisions and allocating resources based on two operatingsegments, i) China and ii) all other regions referred to as International (“International”).

On November 1, 2004, we acquired selected assets of ACC, the wireless handset division of Audiovox Corporation. The acquired businesshas been integrated into the Company as a separate and distinct operating division referred to as the Personal Communications Division. Aswe determined to evaluate performance and allocate resources to this division, it was considered a third operating segment.

As a result, as of December 31, 2004, we were organized in three operating segments, China, International and PCD, and each segmentconsisted of one reporting unit. For the year ended December 31, 2003 and for the first three quarters of 2004, we managed our business asa single reportable segment.

We evaluate operating performance of and allocate resources to the operating segments based on segment gross profit. Certain corporateheadquarters expenses are not allocated but rather are included in the International segment. In addition, none of the non-operating items areallocated to a segment.

The following table sets forth certain financial information for each of our operating segments described above: Year Ended December 31, 2004 China International PCD Adjustments(1) Consolidated Revenues from external customers $2,133,292 $292,879 $277,410 $— $2,703,581 Inter-segment revenues 233,345 573,014 — (806,359 ) — Gross profit 490,868 98,847 11,886 — 601,601 Depreciation and amortization 34,962 38,955 2,286 — 76,203

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Year Ended December 31, 2003 China International PCD Adjustments(1) Consolidated Revenues from external customers $1,680,821 $284,366 $— $— $1,965,187 Inter-segment revenues 47,271 724,708 — (771,979 ) — Gross profit 460,408 163,977 — — 624,385 Depreciation and amortization 16,972 27,736 — — 44,708

Year Ended December 31, 2002 China International PCD Adjustments(1) Consolidated



Revenues from external customers $822,299 $159,507 $— $— $981,806 Inter-segment revenues 42,223 307,862 — (350,085 ) — Gross profit 301,813 43,659 — — 345,472 Depreciation and amortization 9,173 13,262 — — 22,435

Year Ended December 31, 2004 China International PCD Adjustments(1) Consolidated Capital expenditures $111,442 $23,505 $628 $— $135,575 Total long-lived assets 229,469 37,960 1,330 — 268,759 Total assets 1,857,281 1,271,909 363,301 (176,486 ) 3,316,005

Year Ended December 31, 2003 China International PCD Adjustments(1) Consolidated Capital expenditures $91,947 $31,267 $— $— $123,214 Total long-lived assets 153,653 33,386 — — 187,039 Total assets 1,495,782 906,759 — (158,491 ) 2,244,050

(1) Adjustments reflect elimination of inter-segment transactions and investments in subsidiaries.

Effective in the first quarter of 2005, we realigned our business into four units, namely Broadband Infrastructure, Wireless Infrastructure,Terminal Products (which will be reported as Handsets and PCD), and Global Service Solutions. Each unit will represent its own reportingsegment, with the exception of Terminal Products, which will consist of two reporting segments.


Revenues from external customers in the China segment increased from $1.7 billion in 2003 to $2.1 billion in 2004. For most of 2004, wecontinued to benefit from the increased demand due to the expansion of wireless infrastructure in China. Revenues from external customersin the International segment increased slightly from 2003 to 2004. Revenues from external customers in the PCD segment increased by$277.4 million in 2004, due to the acquisition of ACC and the creation of the PCD segment in 2004.

Gross profit percentage declined by 10% due to several factors. The International segment experienced the largest drop in gross profitdeclining from 58% for 2003 to 34% for 2004. Most of this decrease was driven by the decline in our broadband product, whichexperienced a shift in product mix from our more traditional DSLAM product to newer optical broadband products. We typicallyexperience lower margins in the early stages of a product life cycle. In addition, the gross profit percentage recognized on handset salesmade through the PCD business is approximately 4% which is significantly lower than that realized on handset sales related to our PASsystems. PCD was acquired in November 2004 and contributed $11.9 million in gross profit. The China segment also experienced a 4%decline in gross margin percentage primarily attributable to our handset products, which have experienced increased competitive marketpricing pressure. In addition, our gross profit was negatively impacted by a $39.0 million increase in our provision for inventory reserves.

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Revenues from external customers in the China segment increased from $822.3 million in 2002 to $1,680.8 million in 2003 is attributable tothe increased demand of our products resulting from the strong growth in the China telecommunication market. Revenues from externalcustomers in the International segment increased from $159.5 million in 2002 to $284.4 million in 2003 and can primarily be attributed tosales growth in Japan.

Gross profit from the China segment increased from $301.8 million in 2002 to $460.4 million in 2003. The increased sales contributed tothe increase in gross profit. Gross profit from the International segment increased from $43.7 million in 2002 to $164.0 million in 2003.

Liquidity and Capital Resources

Operating Activities

2004

Net cash used in operating activities for the year ended December 31, 2004 was $95.0 million. Operating cash was affected by changes inaccounts receivable, inventory and customer advances offset by changes in accounts payable and deferred costs/inventories at customersites under contract.



The $455.9 million increase in accounts receivable was attributable to increased sales, and longer collection periods experienced during2004. The increase in accounts receivable was, in part, due to the addition of ACC sales revenue. Approximately 14.4% of the accountsreceivable balance outstanding at December 31, 2004 was attributable to PCD. Inventory increased by $197.6 million in 2004 and includes$156.0 million of inventory for PCD. Customer advances decreased by $134.2 million for the year ended December 31, 2004. Customeradvances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon receiptof final acceptances, customer advance is reduced and revenue and cost of sales is recorded. The reduction of customer advances anddeferred costs for inventory at customer sites in 2004 is largely a result of our customers in China transitioning from new systeminstallations to system expansions, which generally requires a shorter period between customer advance and acceptance. Our workingcapital of $1.1 billion increased in proportion to the growth of our business in addition to the $175.0 million increase associated with ouracquisition of ACC.

Offsetting the activity that decreased operating cash for the period were net income and non-cash charges including a $12.7 millionprovision for asset impairment and write-downs, $76.2 million in depreciation and amortization, a $39.0 million inventory provision, and a$21.3 million provision for doubtful accounts. Accounts payable increased by $98.3 million, consistent with increased inventorypurchasing. Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs, separate from what washistorically considered inventory. The title and risk of loss of this inventory is transferred to the customer. Revenue and costs of sales arerecorded when final acceptance is received from the customer. Deferred costs/Inventories at customer sites under contracts decreased by$299.9 million from December 31, 2003 to December 31, 2004. The decrease in deferred costs resulted from a greater number of customeracceptances, corresponding to the decrease in customer advances.

2003

Net cash provided by operating activities for the year ended December 31, 2003 was $45.2 million. Operating cash was affected by changesin accounts receivable, inventory, accounts payable, other assets and offset by changes in deferred revenue. The $151.9 million increase inour accounts receivable balance, attributable to a 100% increase in sales in 2003, reduced our net cash provided by operations. In 2003, wesold $298.8 million of our notes receivable with associated expenses of $2.3 million. Cash provided by operating activities was also reducedby an $81.6 million and $301.1 million increase in inventory and

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deferred costs, respectively. Operating cash also decreased due to a $5.9 million decrease in accounts payable. The decrease in operatingcash in 2003 was offset by an increase in customer advances and deferred revenue of $294.2 million and $27.4 million, respectively. Wecollected approximately $2.5 billion in cash from our customers in 2003.

2002

Net cash provided by operating activities in fiscal 2002 was $178.6 million. Net cash provided by operations was mainly due to a$170.5 million and $87.8 million increase in accounts payable and customer advances, respectively, offset by increases in inventories,deferred costs, accounts receivable and other assets of $76.1 million, $137.8 million, $34.2 million and $24.6 million, respectively.

Investing Activities

2004

Net cash used in investing activities was $468.0 million for the year ended December 31, 2004. The most significant components of ourinvesting activities are business acquisitions, additions to property, plant and equipment and the net investment in short-term securities.Cash used for business acquisitions totaled $217.8 million during 2004, including approximately $178.3 million for selected assets of ACC;$30.0 million for substantially all assets and liabilities of TELOS, and $9.1 million for HSI. Cash used for the purchase of property, plantand equipment, including $57.1 million for the construction of our Hangzhou facility, totaled $135.6 million. Net cash used for the purchaseof short-term investments was $82.8 million.

2003

Net cash used in investing activities was $176.5 million for the year ended December 31, 2003. This change was mainly due to$123.2 million of property, plant and equipment purchases, $106.7 million of business acquisitions and offset by $69.6 million of netproceeds from the sale of short-term investments.

2002

Net cash used in investing activities in fiscal 2002 was $165.4 million. This was mainly due to $75.3 million of property, plant andequipment purchases, $17.7 million of business acquisitions, primarily attributable to our purchase of the remaining interest in HUTS and$28.9 million of investments in affiliates, which primarily comprised investments in public and private technology companies, offset by



$22.4 million of net purchases of short-term investments.

Financing Activities

2004

Net cash provided by financing activities was $742.7 million for the year ended December 31, 2004. This was primarily due to proceedsraised from the sale of 12.1 million shares of common stock at $39.25 per share to Banc of America Securities, LLC, in January 2004 fornet proceeds of approximately $474.6 million. In addition, we incurred net borrowing of $350.0 million during the year from existing linesof credit in China to fund our operations needs in China. We also received $25.7 million for the issuance of common stock through stockoption and warrant exercises. Offsetting cash provided by financing activities, during the first and second quarter of 2004, we used a portionof the capital raised to repurchase a total of 3.6 million shares of our common stock at an average price of $30.25 per share for a total costof $107.6 million, including transaction fees.

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2003

Net cash provided by financing activities was $275.3 million for the year ended December 31, 2003. This was primarily due to the$58.9 million in proceeds from the issuance of common stock through ESPP and stock option exercises, and $399.6 million proceeds fromnet borrowing, and offset by the repurchase of our shares and related transaction costs of $139.6 million and the purchase of a convertiblebond hedge and a call option totaling $43.8 million.

2002

Net cash used in financing activities in fiscal 2002 was $102.4 million. This was primarily due to the repurchase of our shares and relatedtransaction costs of $72.9 million and net payments of $70.5 million on borrowings under our lines of credit. This was offset by$40.9 million in proceeds from the underwritten sale of common stock at the same time SOFTBANK America, Inc. sold 10.0 million sharesof our common stock through an underwriter and the issuance of common stock through stock option exercises.

Liquidity

Our working capital was $1,117.5 million and $883.3 million at December 31, 2004 and 2003, respectively. This increase in workingcapital is due to increased cash on hand. Cash on hand increased from $377.7 million in cash and cash equivalents and $48.6 million ofshort-term investments, in 2003 to $562.5 million in cash and cash equivalents and $136.3 million of short-term investments in 2004. Ourworking capital also increased due to larger accounts receivable and inventory balances, which were offset by increases in accounts payableand notes payable balances.

We believe that our existing credit facilities and cash and cash equivalents, short-term investments and cash from operations will besufficient to finance our operations through at least the next 12 months. As of December 31, 2004, we had cash, short-term restricted cashand investments of $732.2 million. We also had credit facilities, excluding the $8.2 million bank loan resulting from the consolidation ofMDC, totaling $780.4 million of which $388.0 million remained available for future borrowings. Of the $388.0 million available creditfacilities, $380.8 million expires in 2005 and $7.2 million expires in 2010. We are proceeding with the extension or renewal of these creditfacilities, however, such renewal is not certain. Interest rates for borrowings under these credit facilities range from approximately 2.58% to6.21%. We have not guaranteed any debt that is not included in the consolidated balance sheet.

Of our total cash and short-term investment balance, $342.6 million is held in China where currency exchange controls exist. As a result,our ability to make payments in other jurisdictions could be limited by our ability to transfer money from China to other jurisdictions.

In the event that our current cash balances, future cash flows from operations and current credit facilities are not sufficient to meet ourobligations or strategic needs or in the event that market conditions are favorable, we would consider raising additional funds in the capitalor equity markets. Due to the delinquent filing of our Annual Report on Form 10-K for the year ended December 31, 2004, we are noteligible to register equity securities using Form S-3, which could have an impact on our ability to raise additional funds. If additionalfinancing is needed, there can be no assurance that such financing will be available to us on commercially reasonable terms, or at all. Inaddition, the delayed filing has resulted in a technical default of the Company’s 7 ⁄ 8 % Convertible Subordinated Notes due in 2008.Upon filing of this Form 10-K, the technical default will be cured.

Income taxes

Certain subsidiaries and joint ventures located in China enjoy tax benefits in China which are generally available to foreign investmententerprises, including full exemption from national enterprise



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income tax for two years starting from the first profit-making year and/or a 50% reduction in national income tax rate for the followingthree years. In addition, local enterprise income tax is often waived or reduced during this tax holiday/incentive period. Under currentregulations in China, foreign investment enterprises that have been accredited as technologically advanced enterprises are entitled toadditional tax incentives. These tax incentives vary in different locales and could include preferential national enterprise income taxtreatment at 50% of the usual rates for different periods of time. The tax holidays discussed above are applicable or potentially applicable toCUTS, HUTS, Hangzhou UTStarcom Telecom Co., Ltd. (“HSTC”) and UTStarcom China Co., Ltd. (“UTSC”), our active subsidiaries inChina, as those entities may qualify as accredited technologically advanced enterprises. HSTC and CUTS were exempt from income tax forthe year ended December 31, 2004.

We are currently in the process of applying for a Knowledge Intensive, Technology Intensive Certificate (“Certificate”) for our newHangzhou manufacturing facility. If we are not granted the Certificate, HUTS will continue to be subject to a 24% tax rate and, HSTC andCUTS will then be subject to a 12% tax rate for the year ending December 31, 2005. If we are granted the Certificate, HUTS will then besubject to a 15% tax rate. In addition, HSTC and CUTS will be subject to a 7.5% tax rate, which will expire on December 31, 2007.

UTSC currently enjoys a 10% holiday tax rate that expires on December 31, 2005, at which point it will be subject to a 15% tax rateprovided they remain as an advanced and high-tech enterprise and the Government does not change the tax laws.

We are working to implement a research and development cost sharing arrangement among our key worldwide entities. The purpose of costsharing is to enable its participants to jointly develop and own intangibles. Under research and development cost sharing, the total researchand development expense is paid by cost-sharing participants in proportion to each participant’s future sales. The benefit is that there isgreater certainty with respect to transfer pricing and defined ownership of IP. Cost sharing in China is a new concept and we are workingclosely with the China Tax and Regulatory Authorities to gain approval for cost sharing.

Off balance sheet arrangements

Under the definition contained in Item 303(a)(4)(iii) of Regulation S-K, we do not have any off balance sheet arrangements.

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Contractual obligations and other commercial commitments

Our obligations under contractual obligations and commercial commitments are primarily with regard to leasing arrangements and standbyletters of credit and are as follows:

December 31, 2004Payments Due by Period

Total Less than1 year

1-3years

3-5years

More than5 years

(in thousands) Contractual Obligations Notes payable $ 1,183 $ 1,183 $ — $ — $ — Bank loans $ 358,155 $ 350,000 $ 8,155 $ — $ — Convertible subordinated notes $ 402,500 $ — $ — $ 402,500 $ — Interest payable on convertible notes $ 12,327 $ 3,522 $ 8,805 $ — $ — Operating leases $ 48,914 $ 19,750 $ 23,912 $ 3,412 $ 1,840 Other Commercial Commitments Standby letters of credit $ 35,160 $ 32,920 $ 2,240 $ — $ — Purchase commitments $ 578,291 $ 578,291 $ — $ — $ —

Certain sales contracts include provisions under which customers would be indemnified by us in the event of, among other things, athird-party claim against the customer for intellectual property rights infringement related to our products. There are no limitations on themaximum potential future payments under these guarantees. We have not accrued any amounts in relation to these provisions as no suchclaims have been made and we believe we have valid enforceable rights to the intellectual property embedded in our products.



Notes payable

Occasionally, we issue short-term notes payable to our vendors in lieu of trade accounts payable. The payment terms are normally three tonine months and are typically non-interest bearing.

Bank loans

At December 31, 2004, we had loans with various banks totaling $350.0 million with interest rates ranging from 2.58% to 6.21% perannum. These bank loans mature during 2005 and are included in short-term debt.

The Company has a bank loan in connection with an equipment purchase resulting from the consolidation of MDC. On January 10, 2003, athird party established a bank loan with Shanghai Pudong Development Bank for the purchase of the equipment. The obligations of thebank loan and related equipment were assumed by the Company on January 23, 2003, and were subsequently transferred to MDC onJanuary 31, 2003. The bank loan of $8.2 million bears interest at a rate of 4.94% per annum, and expires on January 10, 2006. TheCompany does not serve as legal obligor for the loan.

Convertible subordinated notes

Our $402.5 million of convertible subordinated notes, due March 1, 2008, bear interest at a rate of 7 ⁄ 8 % per annum, payablesemiannually on May 1 and September 1, are convertible into our common stock at a conversion price of $23.79 pershare and are subordinated to all present and future senior debt of the Company. The principal is due only at maturity ofthe notes.

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Operating leases

We lease certain facilities under non-cancelable operating leases that expire at various dates through 2023.

Standby letters

We issue standby letters of credit primarily to support international sales activities outside of China. When we submit a bid for a sale, oftenthe potential customer will require that we issue a bid bond or a standby letter of credit to demonstrate our commitment through the bidprocess. In addition, we may be required to issue standby letters of credit as guarantees for advance customer payments upon contractsigning or performance guarantees. The standby letters of credit usually expire six to nine months from date of issuance without beingdrawn by the beneficiary thereof.

Purchase commitments

We are obligated to purchase raw materials and work-in-process inventory under various orders from our suppliers, all of which areexpected to be fulfilled, with no adverse consequences material to our operations or financial condition. As of December 31, 2004, totalopen commitments under these purchase orders were approximately $578.3 million.

We have entered into various earnout agreements related to certain acquisitions, which are subject to the completion of performancemilestones. See “Note 5 to the Consolidated Financial Statements.”

Accounts receivable transferred to notes receivable

We accept commercial notes receivable from our customers in China in the normal course of business. The notes are typically non-interestbearing, with maturity dates between three and six months. Notes receivable available for sale were $27.0 million and $11.4 million atDecember 31, 2004 and December 31, 2003, respectively. We may discount these notes with banking institutions in China. A sale of thesenotes is reflected as a reduction of notes receivable and the proceeds of the settlement of these notes are included in cash flows fromoperating activities in the consolidated statement of cash flows. There were no notes receivable sold during the year ended December 31,2004 and there were $298.8 million of notes receivable sold during the year ended December 31, 2003. Any notes that have been sold arenot included in our consolidated balance sheets as the criteria for sale treatment established by Statement of Financial Accounting StandardsNo. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” (“SFAS 140”) has been met. Thecosts of settling or transferring these notes receivable were $2.3 million for the years ended December 31, 2003, and were included in otherincome (expense), net in the consolidated statements of operations.

Investment commitments

As of December 31, 2004, we had invested a total of $2.0 million in Global Asia Partners L.P. that is recorded as a



long-term investment. The fund size is anticipated to be $100 million and the fund was formed to make private equityinvestments in private or pre-IPO technology and telecommunications companies in Asia. We have a commitment toinvest up to a maximum of $5.0 million. The remaining amount is due at such times and in such amounts as shall bespecified in one or more future capital calls to be issued by the general partner.

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Joint venture funding

Pursuant to the joint venture agreement with Matsushita Communications Industrial Co., Ltd. and Matsushita Electric Industrial Co., Ltd.,we are jointly liable for the losses incurred in the operations of the joint venture up to the maximum of our investment in the entity. AtDecember 31, 2004, and 2003, we recorded losses of $1.3 million and $4.8 million, respectively. In the fourth quarter of 2004, we made anadditional capital contribution of $9.3 million.

Intellectual property


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial condition and results of operations are based on certain critical accounting policies and estimates, which include judgments,estimates, and assumptions on the part of management. Estimates are based on historical experience, knowledge of economic and marketfactors and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ fromthose estimates. The following summary of critical accounting policies and estimates highlights those areas of significant judgment in theapplication of our accounting policies that affect our financial condition and results of operations.

Revenue Recognition

Revenues from sales of telecommunications equipment and handsets are recognized when persuasive evidence of an arrangement exists,delivery of the product has occurred, customer acceptance has been obtained, the fee is fixed or determinable and collectability isreasonably assured. If the payment due from the customer is not fixed or determinable due to extended payment terms, revenue isrecognized as payments become due from the customer, assuming all other criteria for revenue recognition are met. Any payments receivedprior to revenue recognition are recorded as customer advances. Normal payment terms differ for various reasons amongst differentcustomer regions, depending upon common business practices for customers within a region. Shipping and handling costs are recorded asrevenues and costs of revenues. Any expected losses on contracts are recognized when identified.

Sales may be generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in theareas of multiple element arrangements. Where multiple elements exist in an arrangement, the arrangement fee is allocated to the differentelements based upon verifiable objective evidence of the fair value of the elements, as governed under Emerging Issues Task Force Issue(“EITF”) No. 00-21, and SAB 104. Multiple element arrangements primarily involve the sale of PAS, a family of wireless access handsets,wireless consumer products and core infrastructure equipment or Internet Protocol-based PAS (“iPAS”), wireless access systems thatemploy micro cell radio technology and specialized handsets, allowing service providers to offer subscribers both mobile and fixed accessto telephone services. These multiple element arrangements include the sale of PAS or iPAS equipment with handsets, installation andtraining and the provision of such equipment to different locations for the same customer. Revenue is recognized as each element is earned,namely upon installation and acceptance of equipment or delivery of handsets, provided that the fair value of the undelivered element(s) hasbeen determined, the delivered element(s) has stand-alone value, there is no

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right of return on delivered element, and we are in control of the undelivered element(s). For arrangements that include service elements,including promotional support and installation, for which verifiable objective evidence of fair value does not exist, revenue is deferred untilsuch services are deemed complete.

Final acceptance is required for revenue recognition when installation services are not considered perfunctory. Final acceptance indicatesthat the customer has fully accepted delivery of equipment and we are entitled to the full payment. We will not recognize revenue before



final acceptance is granted by the customer if acceptance is considered substantive to the transaction. Additionally, we do not recognizerevenue when cash payments are received from customers for transactions that do not have the customer’s final acceptance. We record thesecash receipts as customer advances, and defer revenue recognition until final acceptance is received.

Where multiple elements exist in an arrangement that includes software, and the software is considered more than incidental to theequipment or services in the arrangement, software and software related elements are recognized under the provisions of Statement ofPosition 97-2, as amended, and EITF No. 03-05. We allocate revenues to each element of software arrangements based on vendor specificobjective evidence (“VSOE”). VSOE of each element is based on the price charged when the same element is sold separately. We use theresidual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and VSOE of thefair value of all the undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is recognized as revenue. If evidence of fair value of one or more undelivered elements does notexist, revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

We recognize revenue for system integration, installation and training upon completion of performance and if all other revenue recognitioncriteria are met. Other service revenue, such as that related to maintenance and support contracts, is recognized ratably over the contractterm. Revenues from services were less than 10% of revenues for all years.

We also sell products through resellers. Revenue is generally recognized when the standard price protection period, which ranges from 30 to90 days, has lapsed. If collectability cannot be reasonably assured in a reseller arrangement, revenue is recognized upon sell-through to theend customer and receipt of cash. There may be additional obligations in reseller arrangements such as inventory rotation, or stockexchange rights on the product. As such, revenue is recognized in accordance with Statement of Financial Accounting Standards No. 48,“Revenue Recognition When Right of Return Exists,” (“SFAS 48”). We have developed reasonable estimates for stock exchanges.Estimates are derived based on historical experience with similar types of sales of similar products.

We have sales agreements with certain wireless customers that provide for a rebate of the selling price to such customers if the particularproduct is subsequently sold at a lower price to such customers or to a different customer. The rebate period extends for a relatively shortperiod of time. Historically, the amounts of such rebates paid to customers have not been material. We estimate the amount of the rebatebased upon the terms of each individual arrangement, historical experience and future expectations of price reductions, and we record ourestimate of the rebate amount at the time of the sale. We also enter into sales incentive programs, such as co-marketing arrangements, withcertain wireless and handset customers. We record the incurred costs related to the incentive as a reduction of revenue when the salesrevenue is recognized.

The assessment of collectability is also a factor in determining whether revenue should be recognized. We assess collectability based on anumber of factors, including payment history and the credit worthiness of the customer. We do not request collateral from our customers. Ininternational sales, we often require letters of credit from our customers that can be drawn on demand if the customer defaults on itspayment.

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If we determine that collection of a payment is not reasonably assured, we recognize revenue at the time collection becomes reasonablyassured, which is generally upon receipt of cash. Occasionally, we enter into revenue sharing arrangements. Under these arrangements, wecollect revenues only after our customer, the telecommunications service provider, collects service revenues. When we enter a revenuesharing arrangement, we do not recognize revenue until collection is reasonably assured.

Because of the nature of doing business in China and other emerging markets, our billings and/or customer payments may not correlate withthe contractual payment terms and we generally do not enforce contractual payment terms prior to final acceptance. Accordingly, accountsreceivable are not booked until we recognize the related customer revenue. Advances from customers are recognized when we havecollected cash from the customer, prior to recognizing revenue. Deferred revenue is recorded if there are undelivered elements after finalacceptance has been obtained.

Product Warranty

We provide a warranty on our equipment and handset sales for a period generally ranging from one to three years from the time of finalacceptance. Very rarely, we have entered into arrangements to provide limited warranty services for periods longer than three years. Thelongest such warranty period is ten years. We provide for the expected cost of product warranties at the time that revenue is recognizedbased on an assessment of past warranty experience.

Variable Interest Entities

The Financial Accounting Standards Board, (“FASB”) issued FASB Interpretation No. 46, (“FIN 46”). FIN 46 requires that if an entity isthe primary beneficiary of a variable interest entity, (“VIE”), the assets, liabilities, and results of operations of the VIE should be included inthe consolidated financial statements of the entity. We have adopted FIN 46 in the quarter ended December 31, 2003, and consolidated a



related party deemed a VIE and for whom we are the primary beneficiary.

Receivables

We accept bank notes and commercial notes from our customers in China in the normal course of business and estimate the collectability ofour trade receivables and notes receivable. The notes are typically non-interest bearing, with maturity dates between three and six months.We provide an allowance for doubtful accounts for the estimated losses on the trade receivables and notes receivable when collection mayno longer be reasonably assured. We assess collectability of the receivable by determining whether the creditworthiness of the customer hasdeteriorated and could result in an inability to collect payment; if collectability is doubtful, we record an allowance against the receivable. Ifthe financial condition of our customers was to deteriorate and their ability to make payments suffers as a result, we may need to increaseour allowances for our receivables. With the greater concentration of accounts receivable with certain customers, the financial condition ofany specific or individual customer may result in increased concentration risk exposure. Although we evaluate customer creditworthinessprior to a sale, we generally assess the collectibility of an individual receivable balance based upon the length of time a receivable hasremained outstanding.

We periodically reassess our evaluation methodologies based upon changes in facts and circumstances. For example, our experience inChina throughout 2004 caused us to review our estimates. Throughout 2004, we experienced a lengthening of the collection cycle for ourChina based receivables; however, this lengthening did not necessarily coincide with a change in the overall estimate of recoverability of anindividual receivable balance. As a result, we revised our estimates to reflect the changed environment. The incremental amount providedunder the new estimate was $10.1 million lower than would have been provided using historical estimates in the fourth quarter of 2004. Thelengthened

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collection cycle has been attributed to a number of factors, but principally to changes in customers’ business practices surrounding paymentand to a lesser degree to the maturation of the telecommunications sector. Although these factors did not result in a reduction of the overallcollectibility of individual receivables in 2004, the lengthening payment cycle could result in a reduction of the overall collectibility of ourreceivable balances in the future. If we were to observe a deterioration of the actual collectibility of our receivables, our allowance fordoubtful accounts would increase resulting in additional bad debt expense.

Inventories

Inventories consist of inventories held at our manufacturing facility, warehouses or at customer sites prior to signing of contracts. We mayship inventory to existing customers that require additional equipment to expand their existing networks prior to the signing of an expansioncontract. Our inventories are stated at the lower of cost or net realizable value, net of write-downs for excess, slow moving and obsoleteinventory. Inventory is written down for estimated obsolescence or unmarketable inventory equal to the difference between inventory costand the estimated market value. Write-downs are based on our assumptions about future market conditions and customer demand, includingprojected changes in average selling prices resulting from competitive pricing pressures. We continually monitor inventory valuation forpotential losses and obsolete inventory at our manufacturing facilities as well as at customer sites.

Deferred costs/Inventories at customer sites under contracts

Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs. Title associated with this inventoryhas transferred to the customer who has assumed the risk of physical loss. Deferred costs also include labor related to third party integratorsand freight. All deferred costs are stated at cost. We periodically assesses the recoverability of deferred costs and provide reserves againstdeferred cost balances when recovery of deferred costs is not probable. Recoverability is evaluated based on various factors includinglength of time inventory has been held at the customer site, the viability of payment, including assessment of product demand if a revenuesharing arrangement exists. Revenue and cost of sales are recorded when final acceptance is received from the customer. With greaterconcentration of inventory at customer sites under contract with specific or individual customer, the financial conditions of any specific orindividual customer may result in increased concentration risk exposure for our inventory.

Research and Development and Capitalized Software Development Costs

Our research and development costs are charged to expense as incurred. We capitalize software development costs, incurred in thedevelopment of software that will ultimately be sold, between the time technological feasibility has been attained and the related product isready for general release. Management judgment is required in assessing technological feasibility, expected future revenues, estimatedproduct lives and changes in product technologies, and the ultimate recoverability of our capitalized software development costs.

Deferred Income Taxes

We recognize deferred income taxes as the difference between the tax bases of assets and liabilities and their financial statement amountsbased on enacted tax rates. Management judgment is required in the assessment of the recoverability of our deferred tax assets based on our



assessment of projected taxable income. Numerous factors could affect our results of operations in the future. If there was a significantdecline in our future operating results, our assessment of the recoverability of our deferred tax assets would need to be revised, and any suchadjustment to our deferred tax assets would be charged to income

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in that period. If necessary, we record a valuation allowance to reduce deferred tax assets to an amount management believes is more likelythan not to be realized.

Goodwill and Intangible Assets

We have recorded goodwill and intangible assets in connection with our business acquisitions. Management judgment is required in theassessment of the related useful lives, assumptions regarding our ability to successfully develop and ultimately commercialize acquiredtechnology, and assumptions regarding the fair value and the recoverability of these assets. We perform our annual goodwill impairmentreview in the fourth quarter of each year or when changes in circumstances indicate a potential impairment exists. During the fourth quarterof 2004, with the consummation of the acquisition of ACC, we evaluated our management operation and reporting and determined that weoperated as three operating segments for the fourth quarter of 2004. Those segments were the Personal Communications Division (“PCD”),China and International. PCD includes the legacy activities of the ACC selected assets acquisition. The China segment represents ouractivities within our China companies and the International segment includes all other non-China and non-PCD operations. Managementhas determined that each segment is its own reporting unit as there are no management or reporting structures below this segment reportinglevel. We have reallocated our goodwill between our segments and each have a single reporting unit. We have performed goodwillimpairment analysis at the reporting unit level. When assessing potential impairment to goodwill, we compare our book value to our fairmarket value. Fair market value is determined based on the present value of estimated future cash flows.

Long-Term Investments

We have invested in a fund focused on investments in Internet companies in China and a fund focused on investments in companies in Asiaundergoing restructuring or bankruptcy procedures. We have also invested directly in a number of private technology-based companies inthe early stages of development and in publicly listed technology companies traded on NASDAQ and the New York Stock Exchange. Whilequoted market prices are readily available to determine the fair value of our investments in these publicly traded companies, managementjudgment is required to determine when losses are other than temporary. Furthermore, management judgment is required in evaluating thecarrying value of our private company investments for possible impairment. For our private technology company investments, we assessimpairment based on an evaluation of the achievement of business objectives and milestones, the financial condition and prospects of thesecompanies and other relevant factors. We continually monitor these investments for impairment, and charge to income any impairmentamounts in the period such a determination is made.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board, “FASB”, issued SFAS No. 123 (revised 2004), “Share-Based Payment,”(“SFAS 123(R)”). SFAS 123(R) will require us to measure all employee stock-based compensation awards using a fair value method andrecord such expense in its consolidated financial statements. In addition, the adoption of SFAS 123(R) will require additional accountingrelated to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements.We do not currently have any plans to modify our existing compensation programs.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which provides guidance regarding the application ofSFAS 123(R). SAB 107 expresses views of the staff regarding the interaction between SFAS No. 123(R), Share-Based Payment, and certainSEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for publiccompanies. In particular, SAB 107 provides guidance related to share-based payment transactions with

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nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, theclassification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123(R) in an interim period,capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-basedpayment arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to adoption of SFAS 123(R) anddisclosures in Management’s Discussion and Analysis (“MD&A”) subsequent to adoption of SFAS 123(R).

On April 14, 2005, the SEC approved a new rule that delays the effective date for SFAS 123(R) to annual periods beginning after June 15,



2005. The adoption of SFAS 123(R) on January 1, 2006 is expected to have a material impact on the Company’s consolidated results ofoperations, financial position and statement of cash flows. The Company is evaluating the transition method and pricing model alternativesupon adoption.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,”(“SFAS 153”). SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions thatshould be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges occurring infiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material effect on our consolidatedfinancial position or results of operations.

In November 2004, the FASB issued SFAS 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”). SFAS 151clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) arerequired to be recognized as current period charges. The provisions of SFAS 151 are effective for the fiscal year beginning after June 15,2005. The adoption of SFAS 151 is not expected to have a material impact on our consolidated financial position, results of operations andcash flows.

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004,” (“FSP FAS 109-2”). The American Jobs Creation Act of 2004provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan for reinvestment in theUnited States, provided certain criteria are met. FSP FAS 109-2 is effective immediately and provides accounting and disclosure guidancefor the repatriation provision. FSP FAS 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earningsfor the purpose of applying the “indefinite reversal criteria” under APB Opinion No. 23, “Accounting for Income Taxes—Special Areas,”and requires explanatory disclosures from companies that have not yet completed the evaluation. We are currently evaluating the effects ofthe repatriation provision and their impact on our consolidated financial statements. We do not expect to complete this evaluation before theend of 2006. The range of possible amounts of unremitted earnings that is being considered for repatriation under this provision is betweenzero and $541 million and the related potential range of income tax is between zero and $28 million.

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FACTORS AFFECTING FUTURE OPERATING RESULTS

RISKS RELATED TO OUR COMPANY

Our future product sales are unpredictable and, as a result, our operating results are likely to fluctuate from quarter to quarter.

Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate in the future due to a variety of factors,some of which are outside of our control. Factors that may affect our future operating results, in addition to those described below, include:

• the timing and size of the orders for our products;

• changes in our customers’ subscriber growth rate;

• the lengthy and unpredictable sales cycles associated with sales of our products;

• cancellation, deferment or delay in implementation of large contracts;

• issues that might arise from the integration of acquired entities or the inability to achieve expected results from suchacquisitions;

• revenue recognition, which is based on acceptance, is unpredictable;

• a seasonal reoccurrence of an outbreak of severe acute respiratory syndrome (“SARS”) or other illnesses;

• the decline in business activity we typically experience during the Lunar New Year, which leads to decreased salesduring our first fiscal quarter;

• changes in accounting rules, such as recording expenses related to employee stock option compensation plans;

• shift in our product mix or market focus; and

• quality issues resulting from the design or manufacture of the products, or from the software used in the product.



As a result of these and other factors, period-to-period comparisons of our operating results are not necessarily meaningful or indicative offuture performance. In addition, the factors noted above may make it difficult for us to forecast and provide in a timely manner publicguidance (including updates to prior guidance) related to our projected financial performance of the Company. Furthermore, it is possiblethat in some future quarters our operating results will fall below the expectations of securities analysts or investors. If this occurs, thetrading price of our common stock could decline.

Competition in our markets may lead to reduced prices, revenues and market share.

We have experienced intense competition in the past years, and we believe that we will continue to face intense competition from bothdomestic and international companies in our target markets, many of which may operate under lower cost structures or may be givenpreferential treatment by applicable governmental regulators and policies and have much larger sales forces than we do. Additionally, othercompanies not presently offering competing products may also enter our target markets. Many of our competitors have significantly greaterfinancial, technical, product development, sales, marketing and other resources than we do. As a result, our competitors may be able torespond more quickly to new or emerging technologies and changes in service provider requirements. Our competitors may also be able todevote greater resources than we can to the development, promotion and sale of new products. These competitors may be able to offersignificant financing arrangements to service providers, which may give them a competitive advantage in selling systems to serviceproviders with limited financial and currency

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resources. In many of the developing markets in which we operate or intend to operate, relationships with local governmentaltelecommunications agencies are important to establish and maintain. In many such markets, our competitors may have or be able toestablish better relationships with local governmental telecommunications agencies than we have, which could result in their ability toinfluence governmental policy formation and interpretation to their advantage. Additionally, our competitors might have better relationshipswith their third party suppliers and obtain component parts at a reduced rate, allowing them to offer their end products at reduced prices.Moreover, the telecommunications and cable industries have experienced significant consolidation , and we expect this trend to continue. Ifwe have fewer significant customers, we may be more reliant on such large customers and our bargaining position and profit margins maysuffer. Increased competition is likely to result in price reductions, reduced gross profit as a percentage of net sales and loss of market share,any one of which could materially harm our business, financial condition, cash flows, and results of operations.

If we seek to secure additional financing and are not able to do so, our ability to expand strategically may be limited. If we are able tosecure additional financing, our stockholders may experience dilution of their ownership interest, or we may be subject to limitations onour operations and increased leverage.

We currently anticipate that our available cash resources, which include existing cash and cash equivalents, short-term investments and cashfrom operations, will be sufficient to meet our anticipated needs for working capital and capital expenditures for the foreseeable future. Ifwe are unable to generate sufficient cash flows from operations, we may need to raise additional funds to develop new or enhancedproducts, respond to competitive pressures, take advantage of acquisition opportunities or raise capital for strategic purposes. If we raiseadditional funds through the issuance of equity securities, our stockholders will experience dilution of their ownership interest, and thenewly issued securities may have rights superior to those of common stock. If we raise additional funds by issuing debt, we may be subjectto limitations on our operations and increase our leverage. For example, in connection with the sale of convertible debt securities inMarch 2003, we incurred $402.5 million of indebtedness. As a result of this indebtedness, our principal and interest payment obligationshave increased substantially. The degree to which we are leveraged could materially and adversely affect our ability to obtain financing forworking capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Ourability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business andother factors affecting our operations, many of which are beyond our control. Finally, we are not certain that we can maintain our existingunsecured credit line available to our China operations or additional sources of financing may not be available on reasonable terms or at allif and when we require it, which could harm our business.

The average selling prices of our products may decrease, which may reduce our revenues and our gross profit. As a result, we mustintroduce new products and reduce our costs in order to maintain profitability.

The average selling prices for communications access and switching systems and handsets have historically declined as a result of a numberof factors, including:

• increased competition;

• aggressive price reductions by competitors;

• rapid technological change; and



• constant change in customer buying behavior and market trends.

The average selling prices of our products may continue to decrease in the future in response to product introductions by us or ourcompetitors or other factors, including price pressures from customers. Certain of our products, including wireless handsets, havehistorically had low gross profit margins , and any

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further deterioration of our profit margins on such products could result in losses with respect to such products. Therefore, we must continueto develop and introduce new products and enhancements to existing products that incorporate features that can be sold at higher averageselling prices. Failure to do so could cause our revenues and gross profit to decline.

Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures or lead to improved gross profit, as apercentage of net sales. In order to be competitive, we must continually reduce the cost of manufacturing our products through design andengineering changes. We may not be successful in these efforts or in delivering our products to market in a timely manner. In addition, anyredesign may not result in sufficient cost reductions to allow us to reduce the prices of our products to remain competitive or to improve ormaintain our gross profit, as a percentage of net sales, which would cause our financial results to suffer.

Sales in China have accounted for most of our total sales, and our business, financial condition and results of operations are to asignificant degree subject to economic, political and social events in China.

Approximately $2.1 billion, or 79%, and $1.7 billion, or 86%, of our net sales in the years ended December 31, 2004 and 2003,respectively, occurred in China. While we anticipate expansion into other markets, a significant portion of our net sales will be derived fromChina for the foreseeable future. In addition, we plan to continue to make further investments in China in the future. Therefore, ourbusiness, financial condition and results of operations are to a significant degree subject to economic, political, legal and socialdevelopments and other events in China. Please read the risks detailed below under the heading “Risks Related to Conducting Business inChina” for additional information about the risks we face in connection with our China operations.

Our market is subject to rapid technological change, and to compete effectively, we must continually introduce new products andproduct enhancements that achieve market acceptance.

The market for communications equipment is characterized by rapid technological developments, frequent new product introductions andevolving industry and regulatory standards. Our success will depend in large part on our ability to enhance our network and broadbandaccess and switching technologies and develop and introduce new products and product enhancements that anticipate changing serviceprovider requirements and technological developments. We may need to make substantial capital expenditures and incur significantresearch and development costs to develop and introduce new products and enhancements. If we fail to develop and introduce new productsor enhancements to existing products that effectively respond to technological change on a timely basis, our business, financial conditionand results of operations could be materially adversely affected. Certain of our products, including wireless handsets, have a short productlife. Moreover, from time to time, our competitors or we may announce new products or product enhancements, technologies or servicesthat have the potential to replace or shorten the life cycles of our products and that may cause customers to defer purchasing our existingproducts, resulting in inventory reserve due to obsolescence. Future technological advances in the communications industry may diminishor inhibit market acceptance of our existing or future products or render our products obsolete.

Even if we are able to develop and introduce new products, they may not gain market acceptance. Market acceptance of our products willdepend on various factors, including:

• our ability to obtain necessary approvals from regulatory organizations within the countries in which we operateand for any new technologies that we introduce;

• the length of time it takes service providers to evaluate our products, causing the timing of purchases to beunpredictable;

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• our products being compatible with legacy technologies and standards existing in previously deployed networkequipment;



• our ability to attract customers who may have preexisting relationships with our competitors;

• product cost relative to performance;

• the level of customer service available to support new products; and

• the timing of new product introductions meeting demand patterns.

If our products fail to obtain market acceptance in a timely manner, our business and results of operations could suffer.

We depend on some sole source and other key suppliers, as well as international sources, for handsets, base stations, components andmaterials used in our products. If we cannot obtain adequate supplies of high quality products at competitive prices or in a timelymanner from these suppliers or sources, or if the suppliers successfully market their products directly to our customers, our competitiveposition, reputation and business could be harmed.

We have contracts with a single supplier or with a limited group of suppliers to purchase some components and materials used in ourproducts. If any supplier is unwilling or unable to provide us with high-quality components and materials in the quantities required and atthe costs specified by us, we may not be able to find alternative sources on favorable terms, in a timely manner, or at all. Further, a suppliercould market its products directly to our customers. In particular, our PCD division is highly dependent on a single supplier for our handsetdevices. The possibility of a supplier marketing its own products would create direct competition and may affect our ability to obtainadequate supplies. Our inability to obtain or to develop alternative sources if and as required could result in delays or reductions inmanufacturing or product shipments. From time to time, there could be shortages of different products or components. Moreover, oursuppliers may supply us with inferior quality products. If an inferior product supplied by a third party is embedded in our end product andcauses a problem, it might be difficult to identify the source of the problem as being due to the component parts. If any of these eventsoccur, our competitive position, reputation and business could suffer.

Our ability to source a sufficient quantity of high-quality, cost-effective components used in our products may also be limited by importrestrictions and duties in the foreign countries in which we manufacture our products. We require a significant number of importedcomponents to manufacture our products, and imported electronic components and other imported goods used in the operation of ourbusiness may be limited by a variety of permit requirements, approval procedures, import duties and registration requirements. Moreover,import duties on such components increase the cost of our products and may make them less competitive.

Product defects or performance quality issues could cause us to lose customers and revenue or to incur unexpected expenses.

Many of our products are highly complex and may have quality issues resulting from the design or manufacture of such product, or from thesoftware used in the product. Often these issues are identified prior to the shipment of the products and may cause delays in marketacceptance of our products, delays in shipping products to customers, or the cancellation of orders. In other cases, we may identify thequality issues after the shipment of products. In such cases, we may incur unexpected expenses and diversion of resources to replacedefective products or correct problems. Such pre-shipment and post-shipment quality issues could result in delays in the recognition ofrevenue, loss of revenue or future orders, and damage to our reputation and customer relationships. In addition, we may be required to paydamages for failed performance under certain customer contracts.

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Our recent growth has strained our resources, and if we are unable to manage and sustain our growth, our operating results will benegatively affected.

We have recently experienced a period of rapid growth and anticipate that we must continue to expand our operations to address potentialmarket opportunities. Our expansion has placed and will continue to place a significant strain on our management, operational, financial andother resources. To manage our growth effectively, we will need to take various actions, including:

• enhancing management information systems, including forecasting procedures;

• further developing our operating, administrative, financial and accounting systems and controls;

• managing our working capital and sources of financing to fund our expansion;

• maintaining close coordination among our engineering, accounting, finance, marketing, sales and operationsorganizations;

• expanding, training and managing our employee base;



• enhancing human resource operations and improving employee hiring and training programs;

• reorganizing our business structure to more effectively allocate and utilize our internal resources;

• improving and sustaining our supply chain capability;

• managing the expansion of both our direct and indirect sales channels in a cost-efficient and competitive manner;and

• fully reviewing our new customers’ credit histories to ensure their financial stability before finalizing contracts.

If we fail to implement or improve systems or controls or to manage any future growth and expansion effectively, our business could suffer.

Our success is dependent on continuing to hire and retain qualified personnel, and if we are not successful in attracting and retainingthese personnel, our business will suffer.

The success of our business depends in significant part upon the continued contributions of key technical and senior management personnel,many of whom would be difficult to replace. In particular, our success depends in large part on the knowledge, expertise and services ofHong Liang Lu, our Chairman of the Board, President and Chief Executive Officer, Ying Wu, our Chairman and Chief Executive Officer ofChina Operations, and Philip Christopher, President and Chief Executive Officer of our PCD. The loss of any key employee, the failure ofany key employee to perform satisfactorily in his or her current position or our failure to attract and retain other key technical and seniormanagement employees could have a significant negative impact on our operations.

To effectively manage our recent growth as well as any future growth, we will need to recruit, train, assimilate, motivate and retainqualified employees both locally and internationally. Competition for qualified employees is intense, and the process of recruiting personnelin all fields, including technology, research and development, sales and marketing, administration and managerial personnel with thecombination of skills and attributes required to execute our business strategy can be difficult, time-consuming and expensive. As we growglobally, we must implement hiring and training processes that are capable of quickly deploying qualified local residents to knowledgeablysupport our products and services. Alternatively, if there is an insufficient number of qualified local residents available, we might incursubstantial costs importing expatriates to service new global markets. For example, we have historically experienced difficulty findingqualified accounting personnel knowledgeable in both U.S. and

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Chinese accounting standards who are Chinese residents. If we fail to attract, hire, assimilate or retain qualified personnel, our businesswould be harmed.

Competitors and others have in the past, and may in the future, attempt to recruit our employees. In addition, companies in thetelecommunications industry whose employees accept positions with competitors frequently claim that the competitors have engaged inunfair hiring practices. We may be the subject of these types of claims in the future as we seek to hire qualified personnel. Some of theseclaims may result in material litigation and disruption to our operations. We could incur substantial costs in defending ourselves againstthese claims, regardless of their merit.

Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute our stockholders and harm our operatingresults.

We have acquired other businesses, products and technologies. For example, during the second quarter of 2004, we completed ouracquisitions of TELOS and HSI for $30.0 million and $14.1 million, respectively. On November 1, 2004, we completed our selected assetacquisition of ACC for $165.1 million. Additionally, in October 2004, we entered into an asset purchase agreement with Giga Telecom, Inc.to acquire certain assets related to the research and development of various products. Any anticipated benefits of these acquisitions may notbe realized. We have in the past and will continue to evaluate acquisition prospects that would complement our existing product offerings,augment our market coverage, enhance our technological capabilities, or that may otherwise offer growth opportunities. Acquisitions mayresult in dilutive issuances of equity securities, use of our cash resources, the incurrence of debt and the amortization of expenses related tointangible assets. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of operations, technologies,products and personnel of the acquired company, diversion of management’s attention from other business concerns, risks of enteringmarkets in which we have no direct or limited prior experience, the potential loss of key employees of the acquired company, unanticipatedcosts and, in the case of the acquisition of financially troubled businesses, challenges as to the validity of such acquisitions from third partycreditors of such businesses. For example, in the fourth quarter 2004, we encountered difficulties in integrating HSI’s legacy operations intoour operations and determined to abandon HSI’s legacy operations. As a result, in the fourth quarter 2004, we wrote off the entire goodwilland intangibles associated with HSI. In addition, the acquisitions of businesses involved in the manufacturing or sales of handset productscould introduce specific litigation risk from the potential harmful effects of electric and magnetic fields (“EMF”).



We may be unable to adequately protect the loss or misappropriation of our intellectual property, which could substantially harm ourbusiness.

We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations to protect our technology. Wehave applied for patents in the United States and internationally. Additional patents may not be issued from our pending patent applications,and our issued patents may not be upheld. In addition, we have, from time to time, chosen to abandon previously filed applications.Moreover, we may face difficulties in registering our existing trademarks in new jurisdictions in which we operate. We cannot guaranteethat the intellectual property protection measures that we have taken will be sufficient to prevent misappropriation of our technology ortrademarks or that our competitors will not independently develop technologies that are substantially equivalent or superior to ours. Inaddition, the legal systems of many foreign countries do not protect or honor intellectual property rights to the same extent as the legalsystem of the United States. For example, in China, the legal system in general, and the intellectual property regime in particular, are still inthe development stage. It may be very difficult, time-consuming and costly for us to attempt to enforce our intellectual property rights inthese jurisdictions.

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We may be subject to claims that we infringe the intellectual property rights of others, which could substantially harm our business.

The industry in which we compete is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual propertyrights. From time to time, we have become aware of the possibility or have been notified that we may be infringing certain patents or otherintellectual property rights of others. Regardless of their merit, responding to such claims could be time consuming, divert management’sattention and resources and cause us to incur significant expenses. In addition, although some of our supplier contracts provide forindemnification from the supplier with respect to losses or expenses incurred in connection with any infringement claim, certain contractswith our key suppliers do not provide for such protection. Moreover, certain of our sales contracts provide that we must indemnify ourcustomers against claims by third parties for intellectual property rights infringement related to our products. There are no limitations on themaximum potential future payments under these guarantees. Therefore, we may incur substantial costs related to any infringement claim,which may substantially harm our results of operations and financial condition.

We may, in the future, become subject to litigation to defend against claimed infringements of the rights of others or to determine the scopeand validity of the proprietary rights of others. Future litigation may also be necessary to enforce and protect our trade secrets and otherintellectual property rights. Any intellectual property litigation or threatened intellectual property litigation could be costly, and adversedeterminations or settlements could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licensesfrom or pay royalties to third parties which may not be available on commercially reasonable terms, if at all, and/or prevent us frommanufacturing or selling our products, which could cause disruptions to our operations.

In the event that there is a successful claim of infringement against us and we fail to develop non-infringing technology or license thepropriety rights on commercially reasonable terms and conditions, our business, results of operations or financial condition could bematerially and adversely impacted.

Our multinational operations subject us to various economic, political, regulatory and legal risks.

We market and sell our products globally, with the majority of our sales made in China. The expansion of our existing multinationaloperations and entry into new markets will require significant management attention and financial resources. Multinational operations aresubject to a variety of risks, such as:

• the burden of complying with a variety of foreign laws and regulations;

• the burden of complying with United States laws and regulations for foreign operations, including the ForeignCorrupt Practices Act;

• difficulty complying with continually evolving and changing global product and communications standards andregulations for both our end products and their component technology;

• market acceptance of our new products, including longer product acceptance periods in new markets into which weenter;

• reliance on local original equipment manufacturers (“OEMs”), third party distributors and agents to effectivelymarket and sell our products;

• unusual contract terms required by customers in developing markets;



• changes in local governmental control or influence over our customers;

• changes to import and export regulations, including quotas, tariffs, licensing restrictions and other trade barriers;

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• evolving and unpredictable nature of the economic, regulatory, competitive and political environments;

• reduced protection for intellectual property rights in some countries;

• longer accounts receivable collection periods; and

• difficulties and costs of staffing and managing multinational operations, including but not limited to internalcontrols and compliance.

We do business in markets that are not fully developed, which subjects us to various economic, political, regulatory and legal risksunique to developing economies.

Less developed markets present additional risks, such as the following:

• customers that may be unable to pay for our products in a timely manner or at all;

• new and unproven markets for our products and the telecommunications services that our products enable;

• inconsistent infrastructure support;

• lack of a large, highly trained workforce;

• difficulty in controlling local operations from our headquarters;

• variable ethical standards and an increased potential for fraud;

• unstable political and economic environments; and

• a lack of a secure environment for our personnel, facilities and equipment.

In particular, these factors create the potential for physical loss of inventory and operating assets. We have in the past experienced cases ofvandalism and armed theft of our equipment that had been or was being installed in the field. If disruptions for any of these reasons becometoo severe in any particular market, it may become necessary for us to terminate contracts and withdraw from that market and suffer theassociated costs and lost revenue.

We are subject to claims of possible health risks from wireless handsets.

There have been claims made alleging a link between the use of wireless handsets and the development or aggravation of certain cancers,including brain cancer. The scientific community is divided on whether there is a risk from wireless handset use, and if so, the magnitude ofthe risk. Even if there is no link established between wireless handset use and cancer, the negative publicity and possible litigation couldhave a material adverse effect on our business.

In the past, several plaintiffs’ groups have brought class actions against wireless handset manufacturers and distributors, alleging thatwireless handsets have caused cancer. To date, we have not been named in any of these actions and none of these actions has beensuccessful. In the future we could incur substantial costs in defending ourselves against similar claims, regardless of their merit. Also,claims may be successful in the future and have a material adverse effect on our business.

We are subject to risks relating to currency rate fluctuations and exchange controls.

Because most of our sales are made in foreign countries, we are exposed to market risk for changes in foreign exchange rates on our foreigncurrency denominated accounts and notes receivable balances. Historically, the majority of our sales have been made in China anddenominated in Renminbi; as such, the impact of currency fluctuations of Renminbi thus far has been insignificant as it is fixed to the U.S.dollar.

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However, in the future, China could choose to revalue the Renminbi versus the U.S. dollar, or the Renminbi-U.S. dollar exchange rate couldfloat, and the Renminbi could depreciate relative to the U.S. dollar. Additionally, during 2004, we made significant sales in both JapaneseYen and in Euros. Fluctuations in currency exchange rates in the future may have a material adverse effect on our results of operations.

We enter into transactions that may expose us to foreign currency rate fluctuation risk. Historically, the largest component of our foreigncurrency exchange loss has resulted from our purchasing inventory denominated in foreign currencies. If we continue to purchase inventoryin foreign currencies, we may incur additional foreign currency exchange losses, causing our operating results to suffer.

We may, from time to time, enter into foreign exchange forward contracts to hedge certain translation exposures, due to fluctuation of theU.S. dollar to the Japanese Yen, resulting from Japanese Yen-dominated balance sheet accounts . However, our management has hadlimited prior experience in engaging in these types of transactions, and the hedging may not be effective in limiting our exposure to adecline in operating results.

Moreover, some of the foreign countries in which we do business might impose currency restriction that may limit the ability of oursubsidiaries and joint ventures in such countries to obtain and remit foreign currency necessary for the purchase of imported componentsand may limit our ability to obtain and remit foreign currency in exchange for foreign earnings. For example, China employs currencycontrols restricting Renminbi conversion, limiting our ability to engage in currency hedging activities in China. Various foreign exchangecontrols may also make it difficult for us to repatriate earnings, which could have a material adverse effect on our ability to conductbusiness globally.

Business interruptions could adversely affect our business.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, external interference with ourinformation technology systems, incidents of terrorism and other events beyond our control. For example, our Hangzhou manufacturingfacility’s ability to produce sufficient products is dependent upon a continuous power supply. However, the Hangzhou facility has in thepast been subject to power shortages, which has affected our ability to produce and ship sufficient products. We do not have a detaileddisaster recovery plan, and the occurrence of any events like these that disrupt our business could harm our operating results.

We may suffer losses with respect to equipment held at customer sites, which could harm our business.

We face the risk of loss relating to our equipment held at customer sites. In some cases, our equipment held at customer sites is undercontract, pending final acceptance by the customer. We generally do not hold title or risk of loss on such equipment, as title and risk of lossare typically transferred to the customer upon delivery of our equipment. However, we do not recognize revenue and accounts receivablewith respect to the sale of such equipment until we obtain acceptance from the customer. If we do not obtain final acceptance, we may notbe able to collect the contract price and recover this equipment or its associated costs. In other cases, particularly in China, wheregovernmental approval is required to finalize certain contracts, inventory not under contract may be held at customer sites. We hold title andrisk of loss on this inventory until the contracts are finalized and, as such, are subject to any losses incurred resulting from any damage to orloss of this inventory. If our contract negotiations fail or if the government of China otherwise delays approving contracts, we may notrecover or receive payment for this inventory. Moreover, our insurance may not cover all losses incurred if our inventory at customer sitesnot under contracts is damaged prior to contract finalization. If we incur a loss relating to inventory for any of the above reasons, ourfinancial condition, cash flows, and operating results could be harmed.

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We have been named as a defendant in securities litigation and other lawsuits, as well as lawsuits in the ordinary course of business.

We are currently a defendant in several securities litigation class actions and other lawsuits, as well as lawsuits in the ordinary course of ourbusiness. In the future, we may be subject to similar litigation. The defense of these lawsuits may divert our management’s attention, andwe may incur significant expenses in defending these lawsuits (including substantial fees of lawyers and other professional advisors andpotential obligations to indemnify officers and directors who may be parties to such actions). In addition, we may be required to payjudgments or settlements that could have a material adverse effect on our results of operations, financial condition and liquidity.

Restrictions on the use of handsets while driving could affect our future growth.

Several foreign governments and U.S. state and local governments have adopted or are considering legislation that would restrict or prohibitthe use of wireless handsets while driving. Widespread legislation that restricts or prohibits the use of wireless handsets while driving couldnegatively affect our future growth.



Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 couldhave a material adverse effect on our business and stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) requires that we establish and maintain an adequate internalcontrol structure and procedures for financial reporting and include a report of management on our internal control over financial reportingin our annual report on Form 10-K. That report must contain an assessment by management of the effectiveness of our internal control overfinancial reporting and must include disclosure of any material weaknesses in internal control over financial reporting that we haveidentified. In addition, our independent registered public accounting firm must attest to and report on management’s assessment of theeffectiveness of our internal control over financial reporting. These requirements first apply to this Annual Report.

We have identified material weaknesses in our internal controls over financial reporting. See “Item 9A—Controls andProcedures—Management’s Report on Internal Control Over Financial Reporting” for a discussion of these material weaknesses. As of thedate of this Annual Report on Form 10-K, we are still in the process of implementing remedial measures related to the material weaknessesidentified as discussed at Item 9A—“Controls and Procedures—Management’s Report on Internal Control Over Financial Reporting.” Ifour efforts to remedy the weaknesses we identified are not successful, our business and operating results could be harmed and the reliabilityof our financial statements could be impaired, which could adversely affect our stock price. The requirements of Section 404 of theSarbanes-Oxley Act are ongoing and also apply to future years. In addition, during 2005, we will apply the requirements of theSarbanes-Oxley Act to our November 2004 acquisition of ACC, which was exempted from our 2004 assessment as permitted under theSarbanes-Oxley Act. We expect that our internal controls over financial reporting will continue to evolve as we continue in our efforts togrow and expand our business in the future. Although we are committed to continue to improve our internal control processes and we willcontinue to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with theSection 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, notabsolute, assurance that its objectives will be met. Therefore, we cannot assure you that in the future additional material weaknesses orsignificant deficiencies will not exist or otherwise be discovered.

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Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs.

The Sarbanes-Oxley Act , has required and will continue to require changes in some of our corporate governance and securities disclosureor compliance practices. The Sarbanes-Oxley Act also requires the SEC to promulgate new rules on a variety of subjects, in addition torule proposals already made, and NASDAQ has revised its requirements for companies that are quoted on it. These developments (i) haverequired and may continue to require us to devote additional resources to our operational, financial and management information systemsprocedures and controls to ensure our continued compliance with current and future laws and regulations, (ii) will make it more difficult andmore expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage, increase ourlevel of self-insurance, or incur substantially higher costs to obtain coverage, and (iii) could make it more difficult for us to attract and retainqualified members on our board of directors, or qualified executive officers. To ensure our compliance with Section 404 of theSarbanes-Oxley Act and other related security rules, we incurred costs of approximately $4.6 million in 2004 relating to the implementationof plans designed to ensure our compliance. We continue to evaluate and monitor regulatory developments and cannot estimate the timingor magnitude of additional costs that we may incur as a result of such developments.

Changes in accounting rules.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Theseprinciples are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting policies. Achange in these policies can have a significant effect on our reported results and may even retroactively affect previously reportedtransactions. For example, there have been recent changes to FASB guidelines relating to accounting for stock-based compensation that willincrease our compensation expense, could make our net income less predictable in any given reporting period and could change the way wecompensate our employees or cause other changes in the way we conduct our business.

RISKS RELATED TO CONDUCTING BUSINESS IN CHINA

China’s governmental and regulatory reforms may impact our ability to do business in China.

Since 1978, the Chinese government has been in a state of evolution and reform. The reforms have resulted in and are expected to continueto result in significant economic and social development in China. Many of the reforms are unprecedented or experimental and may besubject to change or readjustment due to a variety of political, economic and social factors. Multiple government bodies are involved inregulating and administrating affairs in the telecommunications industry, among which the MII, the National Development and ReformCommission (“NDRC”) and the State Asset Supervisory Administrative Commission (“SASAC”) play the leading roles. These governmentagencies have broad discretion and authority over all aspects of the telecommunications and information technology industry in China,including but not limited to, setting the telecommunications tariff structure, granting carrier licenses and frequencies, approving equipmentand products, granting product licenses, specifying technological standards as well as appointing carrier executives, all of which may impact



our ability to do business in China.

While we anticipate that the basic principles underlying the reforms will remain unchanged, any of the following changes in China’spolitical and economic conditions and governmental policies could have a substantial impact on our business:

• the promulgation of new laws and regulations and the interpretation of those laws and regulations;

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• inconsistent enforcement and application of the telecommunications industry’s rules and regulations by the Chinesegovernment between foreign and domestic companies;

• the restructuring of telecommunications carriers in China;

• the introduction of measures to control inflation or stimulate growth;

• the introduction of new guidelines for tariffs and service rates, which affect our ability to competitively price ourproducts and services;

• changes in the rate or method of taxation;

• the imposition of additional restrictions on currency conversion and remittances abroad; or

• any actions that limit our ability to develop, manufacture, import or sell our products in China, or to finance andoperate our business in China.

For example, on November 1, 2004, as a continuation of the restructuring of telecom carriers relating to the initial public offering of ChinaNetcom in 2004, SASAC decided to swap the senior executives of China Mobile, China Unicom, China Telecom and China Netcom in aneffort to ease competition among carriers. This led to business interruption between China Telecom and China Netcom, which had anadverse impact of delaying revenue recognition in the fourth quarter of 2004. Moreover, we are not certain whether there may be additionalgovernment interference, including government imposed mergers or spin-offs of the existing carriers.

In addition to modifying the existing telecommunications regulatory framework, the Chinese government is currently preparing a draft of astandard, national telecommunications law (the “Telecommunications Law”) to provide a uniform regulatory framework for thetelecommunications industry. We do not yet know the final nature or scope of the regulations that would be created if theTelecommunications Law is passed. Accordingly, we cannot predict whether it will have a positive or negative effect on us or on some orall aspects of our business.

Under China’s current regulatory structure, the communications products that we offer in China must meet government and industrystandards. In addition, a network access license for the equipment must be obtained. Without a license, telecommunications equipment isnot allowed to be connected to public telecommunications networks or sold in China. Moreover, we must ensure that the quality of thetelecommunications equipment for which we have obtained a network access license is stable and reliable, and will not negatively affect thequality or performance of other installed licensed products.

The product quality supervision department of the China State Council, in concert with the MII, performs spot checks to track and supervisethe quality of licensed telecommunications equipment and publishes the results of such spot checks.

China’s changing economic environment may impact our ability to do business in China.

Since 1978, the Chinese government has been reforming the economic system in China to increase the emphasis placed on decentralizationand the utilization of market forces in the development of China’s economy. These reforms have resulted in significant economic growth.However, any economic reform policies or measures in China may from time to time be modified or revised by the Chinese government.While we may be able to benefit from the effects of some of these policies, these policies and other measures taken by the Chinesegovernment to regulate the economy could also have a significant negative impact on economic conditions in China, which would result ina negative impact on our business. China’s economic environment has been changing as a result of China’s entry, in December of 2001, intothe World Trade Organization (the “WTO”). Entry into the WTO requires that China reduce tariffs and eliminate non-tariff barriers,including quotas, licenses and other restrictions by early 2005 at the latest,

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and we cannot predict the impact of these changes on China’s economy. Moreover, although China’s entry into the WTO and the relatedrelaxation of trade restrictions may lead to increased foreign investment, it may also lead to increased competition in China’s markets fromother foreign companies. If China’s entry into the WTO results in increased competition or has a negative impact on China’s economy, ourbusiness could suffer. In addition, although China is increasingly according foreign companies and foreign investment enterprisesestablished in China the same rights and privileges as Chinese domestic companies as a result of its admission into the WTO, special laws,administrative rules and regulations governing foreign companies and foreign investment enterprises in China may still place foreigncompanies at a disadvantage in relation to Chinese domestic companies and may adversely affect our competitive position.

Uncertainties with respect to the Chinese legal system may adversely affect us.

We conduct our business in China primarily through our wholly owned subsidiaries incorporated in China. Our subsidiaries are generallysubject to laws and regulations applicable to foreign investment in China. Accordingly, our business might be affected by China’sdeveloping legal system. Since 1978, many new laws and regulations covering general economic matters have been promulgated in China,and government policies and internal rules promulgated by governmental agencies may not be published in time, or at all. As a result, wemay operate our business in violation of new rules and policies without having any knowledge of their existence. In addition, there areuncertainties regarding the interpretation and enforcement of laws, rules and policies in China. The Chinese legal system is based on writtenstatutes, and prior court decisions have limited precedential value. Because many laws and regulations are relatively new and the Chineselegal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform. Moreover, the relativeinexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of any litigation, and the interpretation ofstatutes and regulations may be subject to government policies reflecting domestic political changes. Finally, enforcement of existing lawsor contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement, or toobtain enforcement of a judgment by a court of another jurisdiction. Any litigation in China may be protracted and result in substantial costsand diversion of resources and management’s attention.

If tax benefits available to our subsidiaries located in China are reduced or repealed, our business could suffer.

The Chinese government is considering the imposition of a “unified” corporate income tax that would phase out, over time, the preferentialtax treatment to which foreign investment enterprises, such as our Company, are currently entitled. While it is not certain whether thegovernment will implement such a unified tax structure or whether our Company will be grandfathered under into any new tax structure, if anew tax structure is implemented, a new tax structure may adversely affect our financial condition. Moreover, certain of our subsidiariesand joint ventures located in China enjoy tax benefits in China that are generally available to foreign investment enterprises. If these taxbenefits are reduced or repealed due to changes in tax laws, our business could suffer.

Our ability to continue successful deployment of PAS system and sales of PAS handsets are limited by certain factors, including thefollowing:

Maturing PAS market and increased competition in handsets and tariffs.

The market for PAS exceeded 66 million users as of the end of fiscal year 2004 and is present throughout China. As the PAS market hasmatured, we believe that it may level off in the near future. In addition, the increase in handset competitors entering the market during 2004has resulted in decreased average selling prices and margins. If additional handset competitors enter the market or if competitors decide tofurther reduce pricing, our sales of PAS handsets may be adversely impacted.

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Furthermore, competition from mobile operators, such as China Mobile and China Unicom, has increased in cities where PAS is deployed.Mobile operators offering special promotional pricing or incentives to customers, such as free incoming calls or free mobile-to-mobile calls,have harmed the ability of our customers, China Telecom and China Netcom, to compete effectively. The continued use of such incentiveprograms by mobile operators may adversely impact China Telecom and China Netcom’s ability to increase PAS subscriptions. Due to ourrelationships with China Telecom and China Netcom, reduced subscription growth at these carriers may have a material adverse effect onour pricing and harm our business or results of operations.

Our PAS system and handsets sales may experience a sharp decline if China Telecom or China Netcom obtain licenses allowing them todeliver mobile services.

China’s media sources have widely reported that the MII may grant 3G mobile licenses to China Telecom or China Netcom, or to bothduring 2005. If China Telecom or China Netcom obtain 3G mobile licenses, they may re-allocate capital expenditures to construct 3Gnetworks, and as a consequence, may significantly reduce capital expenditures relating to PAS networks that utilize our existing products.In addition, it is possible that current PAS frequency bands utilized by PAS networks may be reallocated for use by 3G networks, resultingin the restriction of or shutting down of PAS networks. If this were to occur, we could lose current and potential future customers of our



products, and our financial condition and results of operations could be significantly harmed.

We only have trial licenses for the PAS system and handsets in China.

We only have trial licenses for our PAS systems and handsets. We have applied for, but have not yet received, a final official networkaccess license for our PAS systems and handsets. Based upon conversations with the MII, we understand that our PAS systems and handsetsare considered to still be in the trial period and that sales of our PAS systems and handsets may continue to be made by us during this trialperiod, but that licenses will ultimately be required. If we fail to obtain the required licenses, we could be prohibited from making furthersales of the unlicensed products, including our PAS systems and handsets, in China, which would substantially harm our business, financialcondition and results of operations. The regulations implementing these requirements are not very detailed, have not been applied by a courtand may be interpreted and enforced by regulatory authorities in a number of different ways. Our legal counsel in China has advised us thatChina’s governmental authorities may interpret or apply the regulations with respect to which licenses are required and the ability to sell aproduct while a product is in the trial period in a manner that is inconsistent with the information received by our legal counsel in China,and either of these conditions could have a material adverse effect on our business, financial condition and results of operations.

Increasing centralization of purchasing decision-making by carriers may lead to customer concentration and affect theresults of our business.

Most Chinese carriers have three levels of operations; the central headquarters level, the provincial level and the local city/county level.Both central and provincial levels are independent legal persons and have their own corporate mandate. The purchasing decision makingprocess may take various forms for different projects and may also differ significantly from carrier to carrier.

In the case of PAS systems, all China Netcom contracts are negotiated and entered into between the provincial operators and the Company.However, the central headquarters of China Telecom recently began exerting more influence in the purchasing decision-making process bynegotiating contractual terms, such as purchase price, payment terms, and acceptance clauses at the central level. The provincial operatorthen further negotiates the contract based on the guidelines provided by the headquarters. Final contracts are entered into between theprovincial operator and the Company. However, if this trend of centralized

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decision-making expands to unified purchasing, resulting in the negotiation and execution of contracts at the central headquarter level, theremay be a concentration of customers which could have a significant impact on our business.

RISKS RELATED TO OUR STOCK PERFORMANCE AND CONVERTIBLE DEBT SECURITIES

Our stock price is highly volatile.

The trading price of our common stock has fluctuated significantly since our initial public offering in March of 2000. Our stock price couldbe subject to wide fluctuations in the future in response to many events or factors, including those discussed in the preceding risk factorsrelating to our operations, as well as:

• actual or anticipated fluctuations in operating results, actual or anticipated gross profit as a percentage of net sales,levels of inventory, our actual or anticipated rate of growth and our actual or anticipated earnings per share;

• changes in expectations as to future financial performance or changes in financial estimates or buy/sellrecommendations of securities analysts;

• changes in governmental regulations or policies in China;

• our, or a competitor’s, announcement of new products, services or technological innovations;

• the operating and stock price performance of other comparable companies; and

• news and commentary emanating from the media, securities analysts or government bodies in China relating to usand to the industry in general.

General market conditions and domestic or international macroeconomic factors unrelated to our performance may also affect our stockprice. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results. In addition, followingperiods of volatility in a company’s securities, securities class action litigation against a company is sometimes instituted. This type oflitigation could result in substantial costs and the diversion of management’s time and resources.



In addition, public announcements by China Telecom, China Netcom, China Mobile, and China Unicom each of which exert significantinfluence over many of our major customers in China, may contribute to volatility in the price of our stock. The price of our stock may reactto such announcements.

SOFTBANK CORP. and its related entities, including SOFTBANK America Inc., have significant influence over our management andaffairs, which it could exercise against the best interests of our stockholders.

SOFTBANK CORP. and its related entities, including SOFTBANK America Inc. (collectively, “SOFTBANK”), beneficially ownedapproximately 12.8% of our outstanding stock as of December 31, 2004. As a result, SOFTBANK has the ability to influence all matterssubmitted to our stockholders for approval, as well as our management and affairs. Matters that could require stockholder approval include:

• election and removal of directors;

• merger or consolidation of our Company; and

• sale of all or substantially all of our assets.

This concentration of ownership may delay or prevent a change of control or discourage a potential acquirer from making a tender offer orotherwise attempting to obtain control of our Company, which could decrease the market price of our common stock.

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Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if thetransaction would benefit our stockholders.

Other companies may seek to acquire or merge with us. An acquisition or merger of our Company could result in benefits to ourstockholders, including an increase in the value of our common stock. Some provisions of our Certificate of Incorporation and Bylaws, aswell as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable.These provisions include:

• authorizing the board of directors to issue additional preferred stock;

• prohibiting cumulative voting in the election of directors;

• limiting the persons who may call special meetings of stockholders;

• prohibiting stockholder action by written consent;

• creating a classified board of directors pursuant to which our directors are elected for staggered three year terms;and

• establishing advance notice requirements for nominations for election to the board of directors and for proposingmatters that can be acted on by stockholders at stockholder meetings.

Together with the holders of our convertible subordinated notes due in 2008, we face a variety of risks related to the notes.

Holders of our convertible subordinated notes due in 2008 (the “Notes”) and we face a variety of risks with respect to the Notes, includingthe following:

• we may be limited in our ability to purchase the Notes in the event of a change in control, either for cash or stock,which could result in our defaulting on the Notes at the time of the change in control and purchases for stock would besubject to market risk;

• an event of default under our senior debt, including one of our subsidiaries, could restrict our ability to purchase orpay any or all amounts due on Notes, and after paying our senior debt in full, we may not have sufficient assetsremaining to pay any or all amounts due on the Notes;

• there is no listed trading market for the Notes, which could have a negative impact on the market price of the Notes;

• we have significantly increased our leverage as a result of the sale of the Notes which could have an adverse impact



on our ability to obtain additional financing for working capital;

• hedging transactions related to the Notes and our common stock and other transactions, as well as changes ininterest rates and our creditworthiness, may affect the value of the Notes and of our common stock; and

• the Notes might not be rated or may receive a lower rating than anticipated by investors, ultimately having anegative affect on the price of the Notes and of our common stock.

• In addition, we are subject to various covenants and obligations pursuant to the terms of the indenture governing theNotes (the “Indenture”). Should we default on certain of these obligations, then all unpaid principal and accrued intereston the Notes then outstanding could become immediately due and payable. For example, as of April 1, 2005, we were intechnical noncompliance under the Indenture due to the untimely filing of our Annual Report on Form 10-K for the yearended December 31, 2004. If we had failed to file this Annual Report within 60 days of written notice being provided tous be either the trustee under the Indenture or the holders of at least 25%

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in aggregate principal amount of the Notes then outstanding, an event of default under the Indenture would have occured. If an event ofdefault under the Indenture occurs and if payment of principal and accrued interest on the Notes is accelerated, our business could beseriously harmed.

Nasdaq has informed us that our common stock may be delisted, which could materially impair the ability of investors to trade in ourcommon stock and could have a material adverse effect on our stock price.

On April 5, 2005, we received a notice from the staff of Nasdaq, indicating that we failed to comply with Marketplace Rule 4310(c)(14),due to the fact that we did not file this Annual Report on Form 10-K with the SEC by March 31, 2005. Beginning at the opening of businesson April 7, 2005, Nasdaq appended the fifth character “E” to the trading symbol for our common stock. We have requested a hearing beforea Nasdaq Listing Qualifications Panel, (the “Panel”), to review the Nasdaq staff’s determination. The hearing request has stayed thedelisting of our common stock pending the Panel’s decision. There can be no assurance that the Panel will grant our request for continuedlisting. In the event that the Panel denies our request for continued listing and our common stock is delisted from Nasdaq, the ability of ourinvestors to buy and sell shares of our common stock could be materially impaired. In addition, the delisting of our common stock fromNasdaq could have a material adverse effect on our stock price.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes, changes in foreign currency exchange rates and changes in the stock market.

Interest Rate Risk:

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The fair value of our investmentportfolio would not be significantly affected by either a 10% increase or decrease in interest rates due mainly to the short-term nature ofmost of our investment portfolio. However, our interest income can be sensitive to changes in the general level of U.S. interest rates sincethe majority of our funds are invested in instruments with maturities of less than one year. Our policy is to limit the risk of principal loss andto ensure the safety of invested funds by generally attempting to limit market risk. Funds in excess of current operating requirements aremostly invested in government-backed notes, commercial paper, floating rate corporate bonds, fixed income corporate bonds andtax-exempt instruments. In accordance with our investment policy, all short-term investments are invested in “investment grade” ratedsecurities with minimum A or better ratings. Currently, most of our short-term investments have AA or better ratings.

The table below represents carrying amounts and related weighted-average interest rates of our investment portfolio at December 31, 2004and 2003: December 31, 2004 2003

(in thousands, exceptinterest rates)

Cash and cash equivalents $562,532 $377,747 Average interest rate 0.84 % 1.19 %Restricted cash $24,712 $3,943 Average interest rate 1.93 % 0.50 %Restricted short-term investments $8,635 $20,461 Average interest rate. 2.48 % 1.19 %



Short-term investments $136,283 $48,617 Average interest rate 1.50 % 1.36 %Total investment securities $732,162 $450,768 Average interest rate 1.02 % 1.20 %

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Equity Investment Risk:

Our investment portfolio includes equity investments in publicly traded companies, the values of which are subject to market pricevolatility. Economic events could adversely affect the public equities market and general economic conditions may continue to worsen.Should the fair value of our publicly traded equity investments decline below their cost basis in a manner deemed to beother-than-temporary, our earnings may be adversely affected. We have also invested in several privately held companies as well asinvestment funds which invest primarily in privately held companies, many of which can still be considered in the start-up or developmentstages. These investments are inherently risky, as the market for the technologies or products they have under development are typically inthe early stages and may never materialize.

Debt Investment Risk:

Our debt investment portfolio consists of an $11.8 million note receivable from BB Modem, an affiliate of SOFTBANK CORP., pursuant toa Mezzanine Loan Agreement we entered into with BB Modem on July 17, 2003. Our loan is subordinated to certain senior lenders of BBModem, and repayments are payable to us over a 42- month period, with a substantial portion of the principal amount of the loan scheduleto be repaid during the last 16 months of this period. Our recourse for nonpayment of the loan is limited to the assets of BB Modem, theaccount into which subscriber payments are made and its rights under the securitization transaction documents. The value of BB Modem’smodems that serve as collateral for the loan may decrease over time and may not be sufficient upon sale to pay the outstanding amounts onthe loan.

Foreign Exchange Rate Risk:

We are exposed to foreign exchange rate risk because most of our sales in China are denominated in Renminbi and portions of our accountsreceivable and payable are denominated in Japanese Yen. Due to the limitations on converting Renminbi, we are limited in our ability toengage in currency hedging activities in China. Although the impact of currency fluctuations of Renminbi to date has been insignificant,fluctuations in currency exchange rates in the future may have a material adverse effect on our results of operations. Additionally, during2004 we made significant sales in both Japanese Yen and in Euros. Although we are expanding our global operations outside of China, as ofDecember 31, 2004, we have not experienced a material foreign exchange rate risk due to the fact that the significant majority of ourbusiness has remained in China as well as our increased presence in the United States. We maintain Japanese yen bank accounts forpurchasing portions of our inventories and supplies. The balance of these Japanese Yen accounts at December 31, 2004 was approximately$223.4 million.

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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedules Page

Financial Statements: Report of Independent Registered Public Accounting Firm 79 Consolidated Balance Sheets at December 31, 2004 and 2003 84 Consolidated Statements of Operations for the years ended December 31, 2004, 2003, and 2002 85 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003, and 2002 86 Condensed Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002 87 Notes to Consolidated Financial Statements 88 Financial Statement Schedules: For each of the three years in the period ended December 31, 2004, 2003, and 2002 I—Condensed Financial Information of Registrant 158



II—Valuation and Qualifying Accounts 162

All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statementsor notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of UTStarcom, Inc.:

We have completed an integrated audit of UTStarcom, Inc.’s (the “Company”) 2004 consolidated financial statements and of its internalcontrol over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordancewith the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presentedbelow.

Consolidated financial statements and financial statement schedules

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financialposition of UTStarcom, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the UnitedStates of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index presents fairly, in allmaterial respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Thesefinancial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to expressan opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit offinancial statements 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 statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board InterpretationNo. 46 in 2003.

Internal control over financial reporting

Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reportingappearing under Item 9A—Controls and Procedures, that UTStarcom, Inc. did not maintain effective internal control over financialreporting as of December 31, 2004, because (1) the Company did not maintain effective controls over the financial reporting process due toan insufficient complement of personnel with a level of accounting knowledge, experience and training in the application of generallyaccepted accounting principles commensurate with the Company’s financial reporting requirements, (2) the Company did not maintaineffective controls over the identification of and accounting for related party relationships and related party transactions, (3) the Companydid not maintain effective controls over the monitoring of its accounting functions located outside of the U.S. and (4) the Company did notmaintain an effective control environment based on criteria established in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over

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financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining anunderstanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and



operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesseshave been identified and included in management’s assessment.

1. As of December 31, 2004, the Company did not maintain effective controls over the financial reporting process due to an insufficientcomplement of personnel with a level of accounting knowledge, experience and training in the application of generally accepted accountingprinciples commensurate with the Company’s financial reporting requirements. This material weakness contributed to the following controldeficiencies relating to the preparation of the Company’s financial statements which are individually considered to be material weaknesses:

a) The Company did not maintain effective controls over its revenue and deferred revenue accounts and associatedcost of sales. Specifically, the Company’s controls over its processes and procedures related to the recording and reviewof its revenue and deferred revenue accounts were not adequate to ensure that such accounts were completely andaccurately recorded. In particular, the following exceptions were identified in which revenue recognition criteria werenot properly assessed: treatment of upgrade protection in a multiple element arrangement, non-standard contractualterms and conditions, exceptions to final acceptance confirmations received from customers, tracking of proof ofdelivery and timing of execution of final acceptance confirmations, and the identification of the appropriate costsassociated with selected sales transactions. This control deficiency resulted in adjustments to the second quarter 2004financial statements and audit adjustments to the fourth quarter 2004 financial statements to properly recognize revenueand cost of sales.

b) The Company did not maintain effective controls over its inventory, deferred costs, inventory reserve accountsand cost of sales. Specifically, the Company’s controls failed to adequately identify, document and analyze theconditions that should have been considered relative to the existence and expected recoverability of inventory anddeferred costs. Principally in Japan, controls were not adequate to properly track and confirm inventory movements orensure the

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timely recognition of cost of goods sold. In addition, certain inventory purchases were approved locally but were not in accordance with theCompany’s usual procurement polices and procedures. This control deficiency resulted in certain audit adjustments to the fourth quarter2004 financial statements to correct cost of goods sold and the related inventory and deferred costs accounts.

c) The Company did not maintain effective controls over its processes for accounting for goodwill. Specifically,the Company’s controls over its processes and procedures related to its assessment of the impairment of its goodwillaccount were not sufficiently detailed to identify instances of impairment as required under generally acceptedaccounting principles. This control deficiency resulted in an audit adjustment to the fourth quarter 2004 financialstatements to recognize the impairment of the Company’s goodwill associated with the operations of an entity acquiredand substantially abandoned in 2004.

d) The Company did not maintain effective controls over the process for the translation of its accounts andtransactions denominated in a currency other than U.S. dollars. Specifically, the Company’s controls over its processes



and procedures related to the translation of transactions and account balances denominated in a currency other than U.S.dollars failed to identify and utilize the appropriate foreign exchange rates, primarily related to the cash, accountsreceivable, accounts payable, and other comprehensive income accounts. This control deficiency resulted in certainaudit adjustments to the fourth quarter 2004 financial statements to properly record unrealized foreign exchange gains.

e) The Company did not maintain effective controls over the recording of accrued expenses, primarily in Chinaand Japan. Specifically, the Company’s controls over its processes and procedures related to accrued expenses failed tocompletely and accurately record expenses in the proper period. The review of open purchase orders and invoicesreceived as part of the close process was insufficient to ensure that the 2004 year-end accrued expense balances werecompletely and accurately recorded in the proper period. This control deficiency resulted in certain audit adjustments tothe fourth quarter 2004 financial statements to properly record certain accrued expense and related income statementaccounts.

f) The Company did not maintain effective controls over the financial reporting process to ensure the accuratepreparation and review of its financial statements. Specifically, the Company’s controls over the completeness,accuracy and review of its documentation of close processes relating to reconciliations, journal entries, spreadsheets,international reporting packages and review and preparation of monthly expenditure reports were ineffective in theirdesign and execution. In addition, the Company did not have effective controls over the process for identifying andaccumulating all required supporting information to ensure the completeness of its footnote disclosures, including thesupport for the accounting positions taken on non-routine transactions, goodwill impairment, purchase accounting,segment reporting, accounting for potential variable interest entities, intercompany profit eliminations and income taxaccounting and proper classification of inventory and deferred costs, deferred revenue and accounts receivable, andrevenue and cost of goods sold. These control deficiencies resulted in certain audit adjustments to and additionaldisclosures made in the 2003 and 2004 financial statements.

g) The Company did not maintain effective controls over the completeness and accuracy of its income taxprovision and related balance sheet accounts. Specifically, as part of its 2004 year-end close process, certain errorsrelated to income taxes payable, deferred income tax assets and liabilities, other long-term assets, prepaids and othercurrent assets were identified in the calculation of the Company’s 2003 income tax provision. This control deficiencyresulted in the restatement of the Company’s financial statements for the quarters and full year of 2003 as well

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as audit adjustments to the fourth quarter 2004 financial statements to adjust the provision for income taxes, stockholders’ equity, incometaxes payable, other long-term assets, prepaids and other current assets.

h) The Company did not maintain effective controls in relation to segregation of duties and user access to certainOracle business process applications nor were there effective controls in place to monitor user access. There wereinstances in which either information technology or finance personnel maintained access to specific applications withinthe Oracle environment beyond that needed to perform their individual job responsibilities. This deficiency related tofinancial reporting, inventory and purchasing applications in China and financial reporting applications in the UnitedStates.

As discussed above, certain of these control deficiencies resulted in either the restatement of the Company’s financial statements for each ofthe quarters in 2003 and the year ended December 31, 2003, and/or audit adjustments to the second or fourth quarter 2004 financialstatements. Additionally, these control deficiencies could individually or in the aggregate result in a material misstatement to the annual orinterim financial statements that would not be prevented or detected. Accordingly, management has determined that these controldeficiencies constitute material weaknesses.

2. As of December 31, 2004, the Company did not maintain effective controls over the identification of and accounting for related partyrelationships and related party transactions. Specifically, the Company’s controls over its policies and procedures were ineffective inidentifying all significant related party relationships and transactions on a timely basis in order for such relationships and transactions to beappropriately reflected in the Company’s financial statements in accordance with generally accepted accounting principles. Specifically, apreviously undisclosed significant related party relationship was identified during the 2004 financial close process. This related party was



also determined to be a variable interest entity in which the Company was determined to be the primary beneficiary. This control deficiencyresulted in a restatement of the Company’s financial statements for the year ended December 31, 2003, as well as an auditadjustment to th e 2004 financial statements. Additionally, this control deficiency could result in a materialmisstatement to annual or interim financial statements that would not be prevented or detected. Accordingly,management has determined that this control deficiency constitutes a material weakness .

3. As of December 31, 2004, the Company did not maintain effective controls over the monitoring of its accounting functions locatedoutside of the U.S. The Company’s policies and procedures with respect to the review and supervision of its accounting operations inforeign locations, principally Japan and China, were inadequate. Specifically, corporate senior financial management did not provideadequate oversight of the accounting functions based principally in Japan and China, nor was there sufficient and accurate information formonitoring the financial results of non-U.S. operations. Reviews of local financial results were inadequate in either their design or operationto detect errors to the Company’s financial statements as described in items 1 and 2 above. Additionally, this control deficiency could resultin a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management hasdetermined that this control deficiency constitutes a material weakness.

4. As of December 31, 2004 the Company did not maintain an effective control environment. The financial reporting organizationalstructure was not adequate to support the size, complexity, operating activities or locations of the Company. Deficiencies in localaccounting operations, such as the lack of a senior finance director in China with sufficient depth and skill in the application of U.S.generally accepted accounting principles and inadequate understanding of U.S. generally accepted accounting principles by local accountingstaff resulted in the adjustments to the financial statements

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as discussed in items 1—3 above. In addition, in some cases, certain key finance positions were staffed with individuals who did not havethe appropriate skills, training and experience to meet the objectives as outlined in their job descriptions or that should be expected of theseroles. Further, the following specific areas are examples of some of the corporate departments in the Company where additional skilledresources are required: tax, external financial reporting, revenue recognition, treasury, financial planning and analysis and corporateaccounting. This control deficiency, together with the material weaknesses described in items 1—3 above, indicate that the Company didnot maintain an effective control environment. These control deficiencies could result in a material misstatement to annual or interimfinancial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiencyconstitutes a material weakness.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reportingdoes not affect our opinion on those consolidated financial statements.

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Audiovox CommunicationsCorporation from its assessment of internal control over financial reporting as of December 31, 2004 because it was acquired by theCompany through a purchase business combination in November 2004. We have also excluded Audiovox Communications Corporationfrom our audit of internal control over financial reporting. Audiovox Communications Corporation is a wholly-owned subsidiary whosetotal assets and total revenues represent approximately 11.0% and approximately 10.3%, respectively, of the related consolidated financialstatement amounts as of and for the year ended December 31, 2004.

In our opinion, management’s assessment that UTStarcom, Inc. did not maintain effective internal control over financial reporting as ofDecember 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issuedby the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectivesof the control criteria, UTStarcom, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004,based on criteria established in Internal Control—Integrated Framework issued by the COSO.PricewaterhouseCoopers LLPSan Jose, CaliforniaApril 14, 2005

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UTSTARCOM, INC.



CONSOLIDATED BALANCE SHEETS(In thousands, except share data)

December 31,2004

December 31,2003

ASSETS Current assets: Cash and cash equivalents $ 562,532 $ 377,747 Short-term investments 136,283 48,617 Accounts receivable, net of allowances for doubtful accounts 719,625 325,288 Accounts receivable-related parties, net of allowances for doubtful accounts 86,988 43,944 Notes receivable 26,982 11,362 Inventories 590,832 257,065 Deferred costs/Inventories at customer sites under contracts 198,155 542,060 Prepaids 112,525 139,103 Current deferred taxes 143,123 18,179 Short-term restricted cash and investments 33,347 24,404 Other current assets 42,058 30,320 Total current assets 2,652,450 1,818,089 Property, plant and equipment, net 268,759 187,039 Long-term investments 35,590 24,066 Goodwill 180,627 100,180 Intangible assets, net 98,211 44,051 Other long-term assets 80,368 70,625 Total assets $ 3,316,005 $ 2,244,050

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 407,536 $ 251,121 Short-term debt 351,183 1 Income taxes payable 143,778 14,265 Customer advances 323,938 450,499 Deferred revenue 66,941 44,958 Other current liabilities 241,577 173,911 Total current liabilities 1,534,953 934,755 Long-term debt 410,655 410,655 Total liabilities 1,945,608 1,345,410 Commitments and contingencies (Note 18) Minority interest in consolidated subsidiaries 5,025 5,309 Stockholders’ equity: Common stock: $0.00125 par value; authorized: 750,000,000 shares; issued andoutstanding: 114,486,632 and 104,272,477 at December 31, 2004 and 2003, respectively 144 131 Additional paid-in capital 1,123,065 654,483 Deferred stock compensation (6,102 ) (7,761 )Retained earnings 243,452 243,058 Accumulated other comprehensive income 4,813 3,420 Total stockholders’ equity 1,365,372 893,331 Total liabilities, minority interest and stockholders’ equity $ 3,316,005 $ 2,244,050

See accompanying notes to the consolidated financial statements.

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UTSTARCOM, INC.CONSOLIDATED STATEMENTS OF OPERATIONS



(In thousands, except per share amounts) Year ended December 31, 2004 2003 2002 Net sales: Unrelated party $ 2,558,908 $ 1,780,751 $ 858,768 Related party 144,673 184,436 123,038 2,703,581 1,965,187 981,806 Cost of net sales: Unrelated parties 2,010,571 1,261,284 587,799 Related party 91,409 79,518 48,535 Gross profit 601,601 624,385 345,472 Operating expenses: Selling, general and administrative 315,703 188,339 110,263 Research and development 219,045 155,252 86,182 In-process research and development costs 1,400 10,686 670 Amortization of intangible assets 15,551 8,370 2,395 Total operating expenses 551,699 362,647 199,510 Operating income 49,902 261,738 145,962 Interest income 6,172 3,194 5,522 Interest expense (6,916 ) (4,671 ) (1,251 )Other income (expense), net 15,431 4,921 (9,908 )Equity in loss of affiliated companies (1,300 ) (5,260 ) (4,053 )Income before income taxes and minority interest 63,289 259,922 136,272 Income tax benefit (expense) 9,841 (45,399 ) (27,254 )Minority interest in (losses) earnings of consolidated subsidiaries (285 ) (1,009 ) 1,156 Net income $ 73,415 $ 215,532 $ 107,862 Basic earnings per share $ 0.64 $ 2.08 $ 0.98 Diluted earnings per share $ 0.56 $ 1.75 $ 0.94 Weighted average shares used in per-share calculation: —Basic 114,135 103,659 109,566 —Diluted 135,541 124,909 114,407


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UTSTARCOM, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands, except share data)

Common Stock Additional DeferredStock Retained

NotesReceivablefrom

AccumulatedOtherComprehensive

TotalStockholders’ Comprehensive

Shares Amount Paid-in-Capital Compensation Earnings Stockholders Income/(Loss) Equity Income Balances, December 31, 2001 109,302,816 $138 $638,697 $(6,045 ) $49,146 $(381) $332 $681,887 Common stock issued upon exercise of options 1,717,899 3 9,162 9,165 Common stock issued upon Softbank offering,net of expenses 1,500,000 2 28,933 28,935 Common stock issued upon ESPP purchases 182,437 2,828 2,828 ACD acquisition-related stock issuances 84,756 — Repurchase of Softbank shares, including fees (6,000,000 ) (8 ) (36,433 ) (36,488 ) (72,929 ) Cancellation of deferred compensation chargesdue to employee terminations (1,282 ) 1,282 — Amortization of deferred stock compensation 103 2,997 3,100 Acquisition-related deferred compensation 10,000 (10,000 ) — Tax benefits for non-qualified stock optionexercises 6,538 6,538 Collections on notes receivable fromstockholders 99 99 Net income 107,862 107,862 $107,862



Other comprehensive income: Unrealized holding loss (net of tax of $298) (952 ) (952 ) (952 ) Translation adjustment (138 ) (138 ) (138 ) Total comprehensive income $106,772 Balances, December 31, 2002 106,787,908 135 658,546 (11,766 ) 120,520 (282 ) (758 ) 766,395 Common stock issued upon exercise of options 4,490,195 6 55,053 55,059 Common stock issued upon ESPP purchases 261,103 3,839 3,839 Repurchase of Softbank shares, including fees (8,000,000 ) (10 ) (46,605 ) (92,994 ) (139,609 ) Purchase of convertible bond hedge and calloption (43,792 ) (43,792 ) Common stock issued for RollingStreamsacquisition 164,115 6,233 6,233 Shanghai Yi Yun acquisition-related stockissuance 226,302 — Deferred compensation related toRollingStreams acquisition (434 ) (434 ) Cancellation of deferred compensation chargesdue to employee terminations (156 ) 156 — Amortization of deferred stock compensation 4,283 4,283 Common stock issued for Shanghai Yi Yunacquisition 342,854 6,001 6,001 Tax benefits for non-qualified stock optionexercises 15,364 15,364 Collections of notes receivable fromstockholders 282 282 Net income 215,532 215,532 $215,532 Other comprehensive income: Unrealized holding gain (net of tax of $506) 2,166 2,166 2,166 Translation adjustment 2,012 2,012 2,012 Total comprehensive income $219,710 Balances, December 31, 2003 104,272,477 131 654,483 (7,761 ) 243,058 — 3,420 893,331 Common stock issued upon exercise of options 1,191,877 2 18,525 18,527 Common stock issued upon ESPP purchases 445,844 7,130 7,130 Common stock issued upon secondary offering,net of expenses 12,100,000 15 474,539 474,554 Common stock issued upon exercise of warrants 32,000 80 80 Common stock repurchased per RepurchasePlan, including fees (3,555,566 ) (4 ) (34,544 ) (73,021 ) (107,569 ) Amortization of deferred stock compensation 519 519 Cancellation of deferred compensation chargesdue to employee terminations (1,140 ) 1,140 — Tax benefits for non-qualified stock optionexercises 3,992 3,992 Net income 73,415 73,415 $73,415 Other comprehensive income: Unrealized holding loss (net of tax of $516) (1,351 ) (1,351 ) (1,351 ) Translation adjustment 2,744 2,744 2,744 Total comprehensive income $74,808 Balances, December 31, 2004 114,486,632 $144 $1,123,065 $(6,102 ) $243,452 $— $4,813 $1,365,372


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UTSTARCOM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year ended December 31 2004 2003 2002

CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 73,415 $ 215,532 $ 107,862 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 76,203 44,708 22,435 Loss on sale of assets 2,201 1,920 1,098 Loss on impairment of long-term assets — 8,762 — Loss on impairment of goodwill and intangible assets 12,706 — — Loss on sale of notes receivable — 2,286 —



In-process research and development costs 1,400 10,686 670 Amortization of debt issuance costs 2,332 1,953 — Warrants adjustment to fair value (46 ) (424 ) — Loss (gain) on sale of investment (1,912 ) 73 — Impairment of long-term investment 1,608 75 4,442 Stock compensation expense 519 4,302 3,100 Provision for doubtful accounts 21,284 4,922 7,197 Provision for inventory reserve 39,000 14,626 18,937 Equity in loss of affiliated companies 1,300 5,261 4,053 Deferred income taxes (119,220 ) (10,675 ) (14,704 ) Minority interest in losses (earnings) of consolidated subsidiary (285 ) (1,009 ) 1,156 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (455,865 ) (151,863 ) (34,207 ) Inventories (197,604 ) (81,618 ) (76,056 ) Deferred costs/Inventories at customer sites under contracts 299,918 (301,081 ) (137,806 ) Other current and non-current assets (14,074 ) (120,206 ) (24,551 ) Accounts payable 98,281 (5,906 ) 170,452 Income taxes payable 133,509 16,626 9,007 Customer advances (134,157 ) 294,163 87,776 Deferred revenue 21,918 27,379 47 Other current liabilities 42,564 64,681 27,683 Net cash (used in) provided by operating activities (95,005 ) 45,173 178,591 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (135,575 ) (123,214 ) (75,271 ) Investment in affiliates, net of cash acquired (19,292 ) (661 ) (28,933 ) Issuance of note receivable to related party — (10,071 ) — Purchase of businesses, net of cash acquired (217,751 ) (106,713 ) (17,706 ) Proceeds from disposal of property, plant and equipment 428 21 175 Purchase of intangible assets (4,158 ) (2,340 ) — Change in restricted cash (8,943 ) (3,153 ) (21,251 ) Purchase of short-term investments (319,253 ) (147,544 ) (140,583 ) Proceeds from sale of short-term investments 236,497 217,180 118,168 Net cash used in investing activities (468,047 ) (176,495 ) (165,401 ) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of stock, net of expenses 25,737 58,878 40,928 Purchase of convertible bond hedge and call option — (43,792 ) — Proceeds from borrowing 390,000 422,976 39,621 Payments for borrowing (40,000 ) (23,389 ) (110,101 ) Repurchase of stock (107,569 ) (139,609 ) (72,929 ) Proceeds from equity offering 474,554 — — Proceeds from stockholder notes — 282 99 Net cash provided by (used in) financing activities 742,722 275,346 (102,382 ) Effect of exchange rate changes on cash 5,115 1,779 — Net increase (decrease) in cash and cash equivalents 184,785 145,803 (89,192 ) Cash and cash equivalents at beginning of period 377,747 231,944 321,136 Cash and cash equivalents at end of period $ 562,532 $ 377,747 $ 231,944


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1—DESCRIPTION OF BUSINESS

UTStarcom Inc. (the “Company”), a Delaware corporation, provides Internet Protocol (“IP”) networking product and service platforms andglobal service and support. The Company sells wireless infrastructure, broadband infrastructure and handsets and customer premiseequipment to operators in both fast growth and established telecommunications markets around the world. The Company enables itscustomers to rapidly deploy revenue-generating access services using their existing infrastructure, while providing a migration path tocost-efficient end-to-end IP networks. The Company was incorporated in 1991 and is headquartered in Alameda, California.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority (over 50 percent)owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in the preparation of the consolidatedfinancial statements. Minority interest in consolidated subsidiaries and equity in affiliated companies are shown separately in theconsolidated financial statements. The Company also consolidates variable interest entities (“VIE”) as defined by Financial AccountingStandards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.”

Restatement of Consolidated Financial Statements:

The Company filed the Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2003 to reflect therestatement of its consolidated financial statements for the year ended December 31, 2003 and the quarters ended March 31, 2003, June 30,2003 and September 30, 2003 and certain corresponding changes described below.

As part of the financial closing process for the year ended December 31, 2004, the Company identified certain errors resulting in arestatement which decreased the provision for income taxes and increased net income by $20.7 million for the year ended December 31,2003. In addition, as a result of the correction of the tax provision, retained earnings was increased by $20.7 million, additional paid-incapital was increased $0.9 million, income taxes payable was decreased by $2.5 million, other long-term assets were increased by $21.6million, prepaids were increased by $2.8 million and other current assets were reduced by $5.3 million. There was no net effect on cashprovided from operating activities as a result of this error.

During the evaluation of the errors related to the income tax provision, the Company determined that an additional reclassification ofreported 2003 results was required. Specifically, cost of sales and other income both increased by $3.5 million for the year endedDecember 31, 2003 to properly classify certain incentive payments received for exports and value-added taxes in China.

In addition to the errors in the 2003 tax provision, the Company had not correctly identified a related party that is deemed a variable interestentity and for whom the Company is considered the primary beneficiary in accordance with FASB Interpretation No. 46 (“FIN 46”). TheCompany has corrected its 2003 financial statements to reflect the consolidation of this variable interest entity, MDC Holding Limited(“MDC Holding”) and its affiliated entities (MDC Holding and such affiliated entities are referred to, collectively, as “MDC”). AtDecember 31, 2003, this consolidation resulted in a $5.5 million increase in total assets and a $0.7 million increase in total liabilities. Therewas no effect on net income as a result of this consolidation.

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Furthermore, an impairment charge of $7.4 million, net of taxes of $1.3 million, was recorded to reflect an impairment of MDC equipmentsubject to a revenue share arrangement. Due to the uncertainties surrounding the customer’s subscriber income and ability to pay under thisarrangement, the Company determined that an impairment charge should have been recorded in 2003 when these conditions should havebeen identified. Accordingly, an impairment charge of $7.4 million, net of tax, was recorded, which decreased both total assets and equityby $7.4 million at December 31, 2003.

In addition, the Company identified the following revisions in classification during the preparation of the restated consolidated financialstatements:

(1) Cost of sales for related party revenue transactions is presented separately from cost of sales for non-relatedparty revenue transactions for all years presented;

(2) Certain other long-term assets increased and intangible assets decreased by $1.7 million at December 31, 2003;

(3) Changes in restricted cash had been incorrectly categorized as a part of operating cash flows instead of investingcash flows in accordance with Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,”(“SFAS 95”). Accordingly, the Company has reflected this change in categorization in the Consolidated Statement of



Cash Flows for each of the three years in the period ended December 31, 2003. The change for 2003 and 2002 is anincrease in cash flows from operating activities and a decrease in cash flows from investing activities of $3.2 millionand $21.3 million, respectively, and there was no change for 2001 and

(4) A related party which is 31% owned by an individual related to a member of the Company’s Board of Directorsand associated transactions have been identified. See Note 22 to the Consolidated Financial Statements.

Use of Estimates:

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States ofAmerica requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expensesduring the reporting period. Estimates are used for revenue recognition, allowance for doubtful accounts and sales returns, reserves forinventory, deferred costs and accrued product warranty costs, tax valuation allowances, goodwill impairments and loss contingencies,among others. Actual results could differ from those estimates.

During 2004, the Company changed its estimate related to allowance for doubtful accounts to reflect new trends in the collection cycles,primarily in China. At December 31, 2004, this change in estimate resulted in a $10.1 million lower allowance for doubtful accounts thanwould have been recorded using the prior rates.

Cash and Cash Equivalents:

Cash and cash equivalents consist of highly liquid instruments with maturities of three months or less at the date of purchase.

Short-term Investments:

Short-term investments consist of investments with original or remaining maturities of more than three months but less than twelve months.In accordance with the Company’s investment policy, all short-term investments are invested in “investment grade” rated securities with aminimum of A or better

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ratings. Currently, most of the Company’s short-term investments have AA or better ratings. Marketable securities are classified asavailable-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are recordedas a separate component of stockholders’ equity. Unrealized losses on securities classified as available-for-sale that are determined to beother-than-temporary are reported in earnings. Realized gains and losses are reported in earnings. The fair value of investments is based onquoted market prices. At December 31, 2004 and 2003, short-term investments in available-for-sale securities consisted of (in thousands): December 31, 2004

AmortizedCost

GrossUnrealizedGains

EstimatedFairValue

Debt securities $ 136,283 $ — $ 136,283 Total current available for-sale securities $ 136,283 $ — $ 136,283

December 31, 2003

AmortizedCost

GrossUnrealizedGains

EstimatedFairValue

Debt securities $ 48,617 $ — $ 48,617 Total current available for-sale securities $ 48,617 $ — $ 48,617

Long-term Investments:

The Company has investments in various privately held companies and investments funds. Investments in less than majority-ownedaffiliates over which we exercise significant influence are accounted for under the equity method pursuant to Accounting Principles BoardOpinion No. 18. All other investments in affiliates are carried at cost. The Company monitors for impairment and makes appropriatereductions in the carrying value if the Company determines that an impairment charge is required based on the financial condition andnear-term prospects of these companies.



Revenue Recognition:

Revenues from sales of telecommunications equipment and handsets are recognized when persuasive evidence of an arrangement exists,delivery of the product has occurred, customer acceptance has been obtained, the fee is fixed or determinable and collectability isreasonably assured. If the payment due from the customer is not fixed or determinable due to extended payment terms, revenue isrecognized as payments become due from the customer, assuming all other criteria for revenue recognition are met. Any payments receivedprior to revenue recognition are recorded as customer advances. Normal payment terms differ for various reasons amongst differentcustomer regions, depending upon common business practices for customers within a region. Shipping and handling costs are recorded asrevenues and costs of revenues. Any expected losses on contracts are recognized when identified.

Sales may be generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in theareas of multiple element arrangements. Where multiple elements exist in an arrangement, the arrangement fee is allocated to the differentelements based upon verifiable objective evidence of the fair value of the elements, as governed under Emerging Issues Task Force Issue(“EITF”) No. 00-21, and SEC Staff Accounting Bulletin No. 104 (“SAB 104”). Multiple element arrangements primarily involve the sale ofPersonal Access Systems (“PAS”), a family of wireless access handsets, wireless consumer products and core infrastructure equipment orInternet Protocol-based PAS, (“iPAS”), wireless access systems that employ micro cell radio technology and specialized handsets, allowingservice providers to offer subscribers both mobile and fixed access to telephone services. These multiple element arrangements include thesale of PAS or iPAS equipment with handsets, installation and

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training and the provision of such equipment to different locations for the same customer. Revenue is recognized as each element is earned,namely upon installation and acceptance of equipment or delivery of handsets, provided that the fair value of the undelivered element(s) hasbeen determined, the delivered element(s) has stand-alone value, there is no right of return on delivered element(s), and the Company is incontrol of the undelivered element(s). For arrangements that include service elements, including promotional support and installation, forwhich verifiable objective evidence of fair value does not exist, revenue is deferred until such services are deemed complete.

Final acceptance is required for revenue recognition when installation services are not considered perfunctory. Final acceptance indicatesthat the customer has fully accepted delivery of equipment and the Company is entitled to the full payment. The Company will notrecognize revenue before final acceptance is granted by the customer if acceptance is considered substantive to the transaction.Additionally, the Company does not recognize revenue when cash payments are received from customers for transactions that do not havethe customer’s final acceptance. The Company records these cash receipts as customer advances, and defers revenue recognition until finalacceptance is received.

Where multiple elements exist in an arrangement that includes software, and the software is considered more than incidental to theequipment or services in the arrangement, software and software related elements are recognized under the provisions of Statement ofPosition 97-2, as amended, and EITF No. 03-05. The Company allocates revenues to each element of software arrangements based onvendor specific objective evidence (“VSOE”). VSOE of each element is based on the price charged when the same element is soldseparately. The Company uses the residual method to recognize revenue when an arrangement includes one or more elements to bedelivered at a future date and VSOE of the fair value of all the undelivered elements exists. Under the residual method, the fair value of theundelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of fair value of oneor more undelivered elements does not exist, revenue is deferred and recognized when delivery of those elements occurs or when fair valuecan be established.

The Company recognizes revenue for system integration, installation and training upon completion of performance and if all other revenuerecognition criteria are met. Other service revenue, such as that related to maintenance and support contracts, is recognized ratably over thecontract term. Revenues from services were less than 10% of revenues for all years.

The Company also sells products through resellers. Revenue is generally recognized when the standard price protection period, whichranges from 30 to 90 days, has lapsed. If collectability cannot be reasonably assured in a reseller arrangement, revenue is recognized uponsell-through to the end customer and receipt of cash. There may be additional obligations in reseller arrangements such as inventoryrotation, or stock exchange rights on the product. As such, revenue is recognized in accordance with Statement of Financial AccountingStandards No. 48, “Revenue Recognition When Right of Return Exists,” (“SFAS 48”). The Company has developed reasonable estimatesfor stock exchanges. Estimates are derived based on historical experience with similar types of sales of similar products.

The Company has sales agreements with certain wireless customers that provide for a rebate of the selling price to such customers if theparticular product is subsequently sold at a lower price to such customers or to a different customer. The rebate period extends for arelatively short period of time. Historically, the amounts of such rebates paid to customers have not been material. The Company estimatesthe amount of the rebate based upon the terms of each individual arrangement, historical experience and future expectations of pricereductions, and the Company records its estimate of the rebate amount at the time of the sale. The Company also enters into sales incentiveprograms, such as co-marketing arrangements, with certain wireless and handset customers. The Company records the incurred incentive asa reduction of revenue when the sales revenue is recognized.



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The assessment of collectability is also a factor in determining whether revenue should be recognized. The Company assesses collectabilitybased on a number of factors, including payment history and the credit worthiness of the customer. The Company does not request collateralfrom its customers. In international sales, the Company often requires letters of credit from its customers that can be drawn on demand if thecustomer defaults on its payment. If the Company determines that collection of a payment is not reasonably assured, the Companyrecognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Occasionally, the Companyenters into revenue sharing arrangements. Under these arrangements, the Company collects revenues only after its customer, thetelecommunications service provider, collects service revenues. When the Company enters a revenue sharing arrangement, the Companydoes not recognize revenue until collection is reasonably assured.

Because of the nature of doing business in China and other emerging markets, the Company’s billings and/or customer payments may notcorrelate with the contractual payment terms and the Company generally does not enforce contractual payment terms prior to finalacceptance. Accordingly, accounts receivable are not booked until the Company recognizes the related customer revenue. Advances fromcustomers are recognized when the Company has collected cash from the customer, prior to recognizing revenue. Deferred revenue isrecorded if there are undelivered elements after final acceptance has been obtained.

Product Warranty:

The Company provides a warranty on its equipment and handset sales for a period generally ranging from one to three years from the timeof final acceptance. Very rarely, the Company has entered into arrangements to provide limited warranty services for periods longer thanthree years. The longest such warranty period is ten years. The Company provides for the expected cost of product warranties at the timethat revenue is recognized based on an assessment of past warranty experience.

Accounts and Notes Receivable:

The Company accepts bank notes and commercial notes from its customers in China in the normal course of business and estimates thecollectability of its trade receivables and notes receivable. The notes are typically non-interest bearing, with maturity dates between threeand six months. An allowance for doubtful accounts is maintained for the estimated losses on the trade receivables and notes receivablewhen collection may no longer be reasonably assured. The Company assesses collectability of the receivable by determining whether thecreditworthiness of the customer has deteriorated and could result in an inability to collect payment; if collectability is doubtful, theCompany records an allowance against the receivable. If a customer’s financial condition were to deteriorate, causing their ability to makepayments to suffer as a result, the allowances for receivables may need to be increased. With greater concentration of accounts receivablewith certain customers, the financial conditions of any specific or individual customer may result in increased concentration risk exposure.Allowances for doubtful accounts were $51.2 million and $31.2 million at December 31, 2004 and 2003, respectively, for total receivables,including accounts receivable from related parties.

Inventories:

Inventories consist of inventories held at the Company’s manufacturing facility, warehouses or at customer sites prior to signing ofcontracts. The Company may ship inventory to existing customers that require additional equipment to expand their existing networks priorto the signing of an expansion contract. Inventories are stated at the lower of cost or net realizable value, net of write-downs for excess,slow moving and obsolete inventory. With the exception of the handset inventory for our Personal Communications Division (“PCD”),which is based on weighted average cost, inventory cost is computed using standard cost, which approximates actual cost on a first-in,first-out basis. Inventory is written down

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for estimated obsolescence or unmarketable inventory equal to the difference between inventory cost and the estimated market value.

Deferred costs/Inventories at customer sites under contracts:

Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs. Title associated with this inventoryhas transferred to the customer who has assumed the risk of physical loss. Deferred costs also includes labor related to third partyintegrators and freight. All deferred costs are stated at cost. Management periodically assesses the recoverability of deferred costs andprovides reserves against deferred cost balances when recovery of deferred costs is not probable. Recoverability is evaluated based onvarious factors including length of time inventory has been held at the customer site, the viability of payment, including assessment ofproduct demand if a revenue sharing arrangement exists. Revenue and cost of sales are recorded when final acceptance is received from the



customer. With greater concentration of inventory at customer sites under contract with specific or individual customer, the financialconditions of any specific or individual customer may result in increased concentration risk exposure for our inventory.

Research and Development and Capitalized Software Development Costs:

Research and development costs are charged to expense as incurred. Research and development costs include payroll related costs,contractor fees, facility expenses, third party license fees and allocations of overhead costs.

Costs incurred in the development of software that will ultimately be sold are capitalized during the time between when technologicalfeasibility has been attained and the related product is ready for general release. During 2004 and 2003, the Company capitalized $5.3million and $4.2 million of software development costs, respectively. Amortization of capitalized development costs were $3.0 million,$1.8 million and $1.1 million in 2004, 2003 and 2002, respectively. Unamortized capitalized software development costs for 2004 and 2003were $15.9 million and $7.5 million, respectively. Direct costs of software developed for internal use are expensed during the preliminaryproject stage and capitalized during the application development stage.

Property, Plant and Equipment:

Property, plant and equipment are recorded at cost and are stated net of accumulated depreciation. Depreciation is provided for on astraight-line basis over the estimated useful lives of the related assets. Land use rights related to property leased by the Company in Chinaare amortized over the life of the lease. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life ofthe improvements or the term of the lease. When assets are disposed of, the cost and related accumulated depreciation are removed from theaccounts and the resulting gains or losses are included in results of operations. The Company generally depreciates its assets over thefollowing periods: Years Furniture, test or manufacturing equipment 5 Computers and software 2-3 Buildings land use rights Automobiles 5 Land use rights life of use rights Leasehold improvements lesser of 5 or remaining lease life

The Company capitalizes interest incurred related to construction of property, plant or equipment until it is ready for use. During 2004, and2003, the Company recorded $1.4 million and $0.6 million, respectively, of capitalized interest applicable to the construction of itsHangzhou manufacturing facility.

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The Hangzhou manufacturing facility was placed in service in October 2004. Capitalized interest is being amortized on a straight-line basisover the life of the building.

Consolidation of Variable Interest Entities:

The Financial Accounting Standards Board, (“FASB”) issued FASB Interpretation No. 46, (“FIN 46”). FIN 46 requires that if an entity isthe primary beneficiary of a variable interest entity, (“VIE”), the assets, liabilities, and results of operations of the VIE should be included inthe consolidated financial statements of the entity. The Company has consolidated a related party deemed a VIE and with whom theCompany is the primary beneficiary.

Goodwill and Intangible Assets:

The Company has recorded goodwill and intangible assets in connection with business acquisitions. Management judgment is required inthe assessment of the related useful lives, assumptions regarding the ability to successfully develop and ultimately commercialize acquiredtechnology, and assumptions regarding the fair value and the recoverability of these assets. An annual goodwill impairment review isperformed in the fourth quarter of each year or when changes in circumstances indicate a potential impairment exists. In the fourth quarterof 2004, the Company reorganized its operations into three reportable segments and each have a single operating segment/reporting unit.The Company performed a goodwill impairment analysis at the reporting unit level. At this time, no impairment was identified. Whenassessing potential impairment to goodwill, book value of a reporting unit is compared to its fair value. Fair value is determined based onthe present value of estimated future cash flows.

Impairment of Long-Lived Assets:

Long-lived assets and certain intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the



carrying amount may not be recoverable. If undiscounted expected future cash flows are less than the carrying value of the assets, animpairment loss will be recognized based on the excess of the carrying amount over the fair value of the assets. Long-lived assets that are tobe disposed of by sale are measured at the lower of book value or fair value less cost to sell.

Advertising Costs:

The Company expenses all advertising costs as incurred. Payment to customers for marketing development costs are accounted for as areduction of the revenue associated with customers as incurred. For the years ended December 31, 2004, 2003 and 2002, advertising coststotaled $8.0 million, $4.2 million and $1.7 million, respectively.

Stock-Based Compensation:

The Company accounts for employee stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” (“APB 25”) and has adopted the disclosure-only alternative of SFAS No. 123, as amended by SFAS No. 148,“Accounting for Stock- Based Compensation,” (“SFAS 123”). Under APB 25, compensation expense is based on the difference, if any, onthe date of grant between the fair value of the common stock and the exercise price of the option.

The fair value of warrants, options or stock exchanged for services from non-employees is expensed over the period benefited. The warrantsand options are valued using the Black-Scholes option-pricing model.

On December 31, 2004, a sub-committee of the Company’s Board of Directors (the “Board”) approved an immediate and full accelerationof vesting of all stock options outstanding under the

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Company’s 1997 Stock Option Plan with a per share exercise price greater than $22.15 (the “Acceleration”). The Company amended allrelevant option agreements to reflect the Acceleration. The Company adopted the Acceleration in anticipation of the impact of FASBStatement No. 123(R), which requires expensing unvested options starting on January 1, 2006. As a result of the Acceleration, options topurchase approximately 6.4 million shares of the Company’s common stock became immediately exercisable as of December 31, 2004. TheAcceleration had the effect of decreasing 2004 pro forma net income by approximately $33.0 million. The Acceleration had no impact onthe financial statements as of and for the year ended December 31, 2004 and is not expected to have an impact on the Company’s results ofoperations upon adoption of FASB Statement No. 123(R).

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognitionprovisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data): Year ended December 31, 2004 2003 2002 Basic Net income: As reported $ 73,415 $ 215,532 $ 107,862 Add: Stock-based employee compensation expense included inreported net income, net of related tax effects 370 3,071 2,209 Deduct: Total compensation expense determined under fair value basedmethod for all awards, net of related tax effects (68,083 ) (30,290 ) (20,060 )Pro forma net income $ 5,702 $ 188,313 $ 90,011 Basic income per share: As reported $ 0.64 $ 2.08 $ 0.98 Pro forma $ 0.05 $ 1.82 $ 0.82 Diluted Net income: As reported $ 73,415 $ 215,532 $ 107,862 Effect of dilutive securities 7 ⁄ 8 % convertible subordinated notes — 3,090 — Add: Stock-based employee compensation expense included inreported net income, net of related tax effects 370 3,071 2,209 Deduct: Total compensation expense determined under fair value basedmethod for all awards, net of related tax effects (68,083 ) (30,290 ) (20,060 )Pro forma net income $ 5,702 $ 191,403 $ 90,011 Diluted income per share:



As reported $ 0.56 $ 1.75 $ 0.94 Pro forma $ 0.05 $ 1.57 $ 0.81

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The following assumptions were used to calculate the fair values: Year ended December 31, Stock Options: 2004 2003 2002 Expected remaining term in years 3.00 3.00 3.00 Weighted average risk-free interest rate 2.78 % 1.91 % 3.43 %Expected dividend rate 0.00 % 0.00 % 0.00 %Volatility 55.90 % 64.00 % 67.50 %

Year ended December 31, ESPP Shares: 2004 2003 2002 Expected remaining term in years 0.53 0.74 0.50 Weighted average risk-free interest rate 1.15 % 1.48 % 1.96 %Expected dividend rate 0.00 % 0.00 % 0.00 %Volatility 47.0 % 57.5 % 57.5 %

The weighted average fair value per share of options granted in 2004, 2003, and 2002 was $11.38, $11.41, and $9.16, respectively.

The weighted average fair value per share of ESPP shares granted in 2004, 2003, and 2002 was $7.41, $5.57, and $7.07, respectively.

Comprehensive Income:

Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. Accumulated othercomprehensive income or loss is shown in the consolidated statement of stockholders’ equity. As of December 31, the components ofAccumulated other comprehensive income were as follows (in thousands): 2004 2003 2002 Unrealized gains and losses on available-for-sale securities, net of tax $(11 ) $1,340 $(826 )Foreign currency translation 4,824 2,080 68 Accumulated other comprehensive income $4,813 $3,420 $(758 )

Income Taxes:

The Company accounts for income taxes under the liability method, and d eferred income taxes are recognized for the differencesbetween the tax bases of assets and liabilities and their financial statement amounts based on enacted tax rates.Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to berealized. The Company is required to adjust its deferred tax asset and liabilities in the period when tax rates or theprovisions of the income tax laws change.

The Company does not provide for U.S. Federal taxes on undistributed earnings of its foreign subsidiaries or affiliates as they areconsidered reinvested for an indefinite period.

Segment Reporting:

As of December 31, 2004, the Company was organized in three reportable segments: China, International and PCD. The China reportablesegment was comprised of discrete administrative, research and development, manufacturing, and sales and support infrastructure. TheInternational segment was comprised of operations of all other geographic areas including non-China Asia, Europe, the Middle East, Africa,and North and South America. Resulting from the Company’s acquisition of selected assets of Audiovox Communication Corporation, thehandset division of Audiovox Corporation, the acquired business was integrated into the Company as a separate and distinct operatingdivision referred to as the Personal Communications Division (“PCD”) and became the third reportable segment of the Company.



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Financial Instruments and Derivatives:

Financial instruments consist of cash and cash equivalents, short and long-term investments, notes receivable, accounts receivable andpayable, convertible subordinated debt, purchased and written call options and accrued liabilities. The carrying amounts of cash and cashequivalents, short-term investments, accounts receivable and payable and accrued liabilities approximate their fair values because of theshort-term nature of those instruments. The carrying amounts of the loan receivable approximates its fair value based on the discountedvalue of future cash flow expected to be received from this loan.

The Company uses derivative financial instruments to manage its exposures to foreign currency exchange rate changes. The objectives forholding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively aspossible. Derivative instruments are recognized as either assets or liabilities on the balance sheet. The Company measures those instrumentsat fair value and recognizes changes in the fair value of derivatives in earnings in the period of change unless the derivative qualifies as aneffective hedge that offsets certain exposures. Such contracts are designated at inception to the related foreign currency exposures beinghedged.

The following table summarizes the Company’s carrying values and fair values of its other financial instruments: December 31, 2004 2003 Carrying value Fair value Carrying value Fair value (In thousands) Convertible debt $(402,500 ) $(475,200 ) $(402,500 ) $(686,263 )Bank loans (358,155 ) (358,155 ) (8,155 ) (8,155 )Convertible bond hedge 125,040 151,610 125,040 356,314 Written call option (81,248 ) (107,582 ) (81,248 ) (283,730 )Long-term investments $35,590 $47,398 $24,066 $35,545

Foreign Currency Translation:

Company operations are conducted through international subsidiaries and the financial statements of those subsidiaries are translated fromtheir respective, functional currencies into U.S. dollars in accordance with SFAS No. 52, “Foreign Currency Translation.” All foreigncurrency assets and liabilities are translated at the period-end exchange rate and all revenues and expenses are translated at the averageexchange rate for the period. The effects of translating the financial statements of foreign subsidiaries into U.S. dollars are reported as acumulative translation adjustment, a separate component of comprehensive income in stockholders’ equity. Some inventory purchases aremade in Japan and consequentially, portions of accounts payable are denominated in Japanese Yen. Foreign currency transaction gains andlosses are reported in earnings and were $0.8 million, $8.7 million and $5.4 million of losses in 2004, 2003, and 2002, respectively.

Earnings Per Share (“EPS”):

Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of theCompany’s common stock outstanding during the period. Diluted EPS is determined by adjusting net income as reported by the effect ofdilutive securities and increasing the number of shares by potentially dilutive common shares outstanding during the period. Potentiallydilutive common shares consist of employee stock options, a written call option, warrants, convertible subordinated notes and vestedacquisition-related stock options.

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The following is a summary of the calculation of basic and diluted EPS (in thousands, except per share data): Year ended December 31, 2004 2003 2002 Numerator: Net income (for basic EPS computation) $ 73,415 $ 215,532 $ 107,862 Effect of Dilutive Securities 7 ⁄ 8 % Convertible subordinated notes 2,785 3,090 —



Net income adjusted for dilutive securities $ 76,200 $ 218,622 $ 107,862 Denominator: Shares used to compute basic EPS 114,135 103,659 109,566 Dilutive common stock equivalent shares: Stock options 3,839 5,770 4,510 Written call option 262 1,235 — Conversion of convertible subordinated notes 16,919 13,674 — Warrants 9 29 28 Other 377 542 303 Shares used to compute diluted EPS 135,541 124,909 114,407 Basic earnings per share $ 0.64 $ 2.08 $ 0.98 Diluted earnings per share $ 0.56 $ 1.75 $ 0.94

Certain potential shares related to employee stock options and warrants outstanding during the years ended December 31, 2004, 2003 and2002 were excluded in the diluted per share computations, since their exercise prices were greater than the average market price of thecommon shares during the period and, accordingly, their effect is anti-dilutive. For the years ended December 31, 2004, 2003 and 2002,these shares totaled 24.0 million with a weighted average exercise price of $31.32 per share, 17.6 million with a weighted average exerciseprice of $32.22 per share, 2.8 million shares with a weighted average exercise price of $23.35 per share, respectively.

On December 31, 2004, the Company’s 7 ⁄ 8 % convertible subordinated notes outstanding were ineligible for conversion intoshares of common stock. For each $1,000 of aggregate principal amount of notes converted, the Company will deliverapproximately 42.0345 shares of common stock, if the Company’s closing stock price exceeds a specified threshold asof the last trading day of the immediately preceding fiscal quarter. At December 31, 2004, the closing price of theCompany’s common stock was below the specified threshold. In September 2004, the EITF reached a consensus relatedto EITF No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The consensusrequires contingently convertible debt instruments with a market price trigger to be treated the same as traditionalconvertible debt instruments for purposes of computed earnings per share using the “if converted” method. The EITFpronouncement is effective and conversion is assumed in this diluted EPS computation.

The Company entered into convertible bond hedge and call option transactions to reduce the potential dilution from conversion of the notes.Both the bond hedge and call option transactions may be settled at the Company’s option either in cash or net shares and expire on March 1,2008. During the year ended December 31, 2004, the average price of the Company’s stock was below the specified strike prices of both theconvertible bond hedge and call option transactions that the Company entered into to reduce the potential dilution from conversion of thenotes.

For the twelve months ended December 31, 2004, the dilutive and anti-dilutive effects of the call option and the bond hedge were derivedby taking the weighted average of the first, second, third and

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fourth quarters, in accordance with SFAS 128. For the twelve months ended December 31, 2004, this would have the effect of decreasingthe denominator for diluted earnings per share by 2.0 million shares for the bond hedge transaction, and increasing the denominator fordiluted earnings per share by 0.3 million shares for the call option transaction. For the twelve months ended December 31, 2003, this wouldhave the effect of decreasing the denominator for diluted earnings per share by 2.9 million shares for the bond hedge transaction, andincreasing the denominator for diluted earnings per share by 1.0 million shares for the call option transaction. However, only the dilutiveeffect of the 0.3 million shares for the twelve months ended December 31, 2004, and the 1.0 million shares for the twelve months endedDecember 31, 2003, with respect to the call option transaction, were included in the Company’s diluted earnings per share calculationabove. The convertible bond hedge, under SFAS 128, is always anti-dilutive.

The net income for the diluted EPS computation reflects the reduction in interest expense of $2.8 million and $3.1 million for the yearsended December 31, 2004 and 2003, respectively, that would result from an assumed conversion of the 7 ⁄ 8 % convertible subordinatednotes.

Recent Accounting Pronouncements:



In December 2004, the Financial Accounting Standards Board, “FASB”, issued SFAS No. 123 (revised 2004), “Share-Based Payment,”(“SFAS 123(R)”). SFAS 123(R) will require the Company to measure all employee stock-based compensation awards using a fair valuemethod and record such expense in its consolidated financial statements. In addition, the adoption of SFAS 123(R) will require additionalaccounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based paymentarrangements.

In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) which providesguidance regarding the application of SFAS 123(R). SAB 107 expresses views of the staff regarding the interaction between SFASNo. 123(R), Share-Based Payment, and certain SEC rules and regulations and provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based paymenttransactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such asexpected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123(R) in an interimperiod, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects ofshare-based payment arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to adoption of SFAS123(R) and disclosures in Management’s Discussion and Analysis (“MD&A”) subsequent to adoption of SFAS 123(R).

On April 14, 2005, the SEC approved a new rule that delays the effective date for SFAS 123(R) to annual periods beginning after June 15,2005. The adoption of SFAS 123(R) on January 1, 2006 is expected to have a material impact on the Company’s consolidated results ofoperations, financial position and statement of cash flows. The Company is evaluating the transition method and pricing model alternativesupon adoption.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,”(“SFAS 153”). SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions thatshould be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges occurring infiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material effect on the Company’sconsolidated financial position or results of operations.

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In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”). SFAS151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage)are required to be recognized as current period charges. The provisions of SFAS 151 are effective for the fiscal year beginning afterJune 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the Company’s consolidated financial position,results of operations and cash flows.

In December 2004, the FASB issued FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings RepatriationProvision within the American Jobs Creation Act of 2004.” The American Jobs Creation Act of 2004 provides a one-time 85% dividendsreceived deduction for certain foreign earnings that are repatriated under a plan for reinvestment in the United States, provided certaincriteria are met. FSP No. FAS 109-2 is effective immediately and provides accounting and disclosure guidance for the repatriationprovision. FSP No. FAS 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earnings for the purposeof applying the “indefinite reversal criteria” under APB Opinion No. 23, “Accounting for Income Taxes—Special Areas,” and requiresexplanatory disclosures from companies that have not yet completed the evaluation. The Company is currently evaluating the effects of therepatriation provision and their impact on our consolidated financial statements. The Company does not expect to complete this evaluationbefore the end of 2006. The range of possible amounts of unremitted earnings that is being considered for repatriation under this provisionis between zero and $541 million and the related potential range of income tax is between zero and $28 million.

NOTE 3—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Year ended December 31, 2004 2003 2002 (in thousands) Cash paid during the period for: Interest $ 5,074 $ 2,795 $ 1,492 Income taxes $ 11,177 $ 47,192 $ 18,442

Non-cash activities were as follows: Year ended December 31, 2004 2003 2002 (in thousands)



Non-cash operating activities were as follows: Accounts receivable transferred to notes receivable $ 118,021 $ 92,181 $ 14,545 Non-cash investing and financing activities were as follows: Common stock issued in conjunction with acquisitions $ — $ 12,234 $ —

NOTE 4—SHORT-TERM RESTRICTED CASH AND INVESTMENTS

At December 31, 2004, the Company had short-term restricted cash and investments of $33.3 million, primarily comprised of $24.3 millionof restricted cash and $8.6 million of restricted short-term investments held for standby letters of credit. At December 31, 2003, theCompany had restricted cash and short-term investments of $24.4 million primarily comprised of $20.5 million of restricted short-terminvestments for standby letters of credit and restricted cash of a $3.7 million time deposit required for Japanese tax purposes.

The Company issues standby letters of credit primarily to support international sales activities outside of China. When the Companysubmits a bid for a sale, often the potential customer will require that the Company issue a bid bond or a standby letter of credit todemonstrate its commitment through the bid

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process. In addition, the Company may be required to issue standby letters of credit as guarantees for advance customer payments uponcontract signing or performance guarantees. The standby letters of credit usually expire six to nine months from date of issuance withoutbeing drawn by the beneficiary thereof. Finally, the Company may issue letters of credit in support of purchase commitments.

NOTE 5—ACQUISITIONS AND DIVESTITURES OF COMPANIES

Audiovox Communications Corporation

On November 1, 2004, the Company completed its acquisition of Audiovox Communications Corporation (“ACC”) of select assets andliabilities, including inventories, prepaids, payables, accrued expenses and the right to hire approximately 250 employees for $165.1 millionin cash. The Company acquired ACC’s sales, service and support infrastructure, its CDMA handset brand, access to supply-chain channels,product marketing expertise, and key relationships with CDMA operators in North and South America. The goodwill created in thisacquisition results from this decreased time to market and volume related synergies. This goodwill is tax deductible.

The purchase agreement allows for purchase price adjustments based on the actual working capital balances at the date of acquisition. As aresult of the working capital calculation, the purchase price will increase by $8.5 million. The Company made an additional payment of $5.7million in cash in 2004 and paid the remaining balance of $2.8 million related to the working capital adjustment subsequent to year-end.Additionally, the Company incurred professional fees of $4.6 million in connection with the acquisition. The following table summarizesthe allocation of the purchase price for ACC based in part upon an independent valuation: (in thousands) Fair value of tangible net assets: Property, plant and equipment $873 Inventory 116,254 Deferred income taxes 7,739 Other tangible assets 5,719 Fair value of identified intangible assets: Customer/dealer relationships 24,400 Supplier relationships 5,300 Non-compete agreement 10,800 Trade names 4,000 Backlog 3,200 Liabilities assumed (74,159 ) Excess of costs of acquiring ACC over fair value of identified net assets acquired (goodwill) 74,125 $178,251

The Company acquired $47.7 million of intangible assets, principally consisting of carrier and dealer relationships and non-competeagreement. No amount was allocated to in-process research and development. The fair value of these identifiable intangible assets wereestimated based, in part, on an independent valuation.

The intangible assets have estimated useful lives ranging from one to ten years as follows: customer relationships, ten years; dealer



relationships, two years; supplier relationships, two years; non-compete agreement, four years; trade name, three years; and backlog, oneyear.

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The results of operations of ACC have been included in the Company’s consolidated results of operations beginning on the acquisition dateof November 1, 2004.

Refer to the consolidated table below for pro forma results of operations reflecting the combined results of the Company and ACC for theyears ended December 31, 2004 and 2003 as if the business combination occurred at the beginning of the period. These results do notpurport to be indicative of what would have occurred had the acquisition been made as of that date or the results of operations which mayoccur in future periods.

TELOS Technology, Inc.

On May 19, 2004, the Company completed its acquisition of substantially all of the assets and certain liabilities of TELOS Technology, Inc.and its subsidiaries (“TELOS”). TELOS is a provider of mobile switching products and services for voice and data communicationnetworks to developing rural, enterprise and emerging wireless markets. The total consideration for the acquisition, funded from cash onhand, was approximately $30.0 million. The Company paid $29.0 million in cash, in addition to $1.0 million of acquisition-relatedtransaction costs. Within one year of the acquisition date, additional payments totaling a maximum of $19.0 million may become payablebased upon revenue recognized from the sale of TELOS products. In the event these revenue milestones are met, the original purchase pricewill be adjusted for the amount of the contingent payment in accordance with Statement of Financial Accounting Standards No. 141,“Business Combinations,” (“SFAS 141”).

The existing technology acquired included the entire TELOS product family of code division multiple access (“CDMA”) softswitchtechnology products, supporting servers and operations maintenance centers. The TELOS product line will be integrated with theCompany’s suite of CDMA products, strengthening the Company’s existing CDMA product portfolio. In addition to developed producttechnology, the Company acquired fixed assets, in-process research and development (“IPR&D”), an assembled workforce ofapproximately 60 employees, customer relationships and recorded goodwill. The goodwill created in this acquisition results from decreasedtime to market in CDMA technologies. This goodwill is tax deductible.

Subsequent to the May 19, 2004 acquisition of TELOS, the Company completed the allocation of the purchase price based in part upon anindependent valuation. The amount of the purchase price allocated to IPR&D of $1.4 million was charged to the Company’s results ofoperations, as no alternative future uses existed at the acquisition date. The Company initially recorded goodwill of $6.6 million inconnection with the acquisition. During the third quarter of 2004, the Company reduced both the purchase price and goodwill associatedwith this acquisition by $0.2 million to reflect the difference between the estimated and actual professional services fees incurred related tothis acquisition. In total, the Company recorded $6.4 million of goodwill related to this acquisition. The results of operations of TELOShave been included in the Company’s consolidated results of operations beginning on the acquisition date of May 19, 2004.

As of the acquisition date, TELOS had two projects under development that qualified for IPR&D. The objective of both projects is toenhance the functionality of products designed to comply with the CDMA2000 technology standard. In assessing TELOS IPR&D projects,the Company considered key product characteristics including the product’s development stage at the acquisition date, the product’s lifecycle and the product’s future prospects. The Company also considered the rate at which technology changes in the telecommunicationsequipment industry, the industry’s competitive environment and the economic outlook for both local and global markets.

The projects under development are enhancements to existing products that do not affect the functionality of those existing products. Assuch, the significant risk the Company faces is to complete these projects within the scope of the budget. As of the closing date, theseprojects were approximately 20% and 30% complete, respectively. As of December 31, 2004, one project was completed, and for the

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other project, the estimated completion date is June 2005, with estimated remaining costs to complete of $0.6 million.

The following table summarizes the allocation of the purchase price for TELOS based upon the independent valuation (in thousands):Fair value of tangible net assets: Property, plant and equipment $2,010 Inventory 1,382 Other tangible assets 1,242



Fair value of identified intangible assets: Customer relationships 5,000 Existing technology 15,900 In-process research and development 1,400 Liabilities assumed (3,380 )Excess of costs of acquiring TELOS over fair value of identified net assetsacquired (goodwill) 6,449 $30,003

The estimated useful lives of the customer relationships and existing technology intangible assets are five years.

Refer to the consolidated table below for the pro forma results of operations reflecting the combined results of the Company and TELOS forthe year ended December 31, 2004 and 2003 as if the business combination occurred at the beginning of the period. These results do notpurport to be indicative of what would have occurred had the acquisition been made as of that date or the results of operations which mayoccur in future periods.

Hyundai Syscomm, Inc.

On April 27, 2004, the Company completed its acquisition of the assets, substantially all of the intellectual property, certain employees andcertain contracts related to Hyundai Syscomm, Inc.’s (“HSI”) CDMA infrastructure business for markets outside of Korea. Subject to theattainment of certain milestones and the transfer of certain know-how, the total consideration for this transaction was approximately $12.3million excluding transaction costs of $1.8 million. Approximately $7.3 million in cash was paid at the closing date and an additional $3.0million in cash is payable one year from the closing date. The remaining purchase price was comprised of $2.0 million to be paid by theCompany upon the completion of HSI training of the Company’s manufacturing employees in China under the terms of a Training ServicesAgreement. Not included in the purchase price was $2.0 million payable upon the completion of certain revenue milestones. In the eventthese revenue milestones are met, the original purchase price will be adjusted for the amount of the contingent payment in accordance withSFAS 141.

In conjunction with this transaction, the Company loaned HSI $3.2 million at an effective interest rate of 12% per annum, which was usedby HSI to satisfy outstanding debt obligations. The principal amount of the loan is due in April 2005. The Company may offset HSI’spayment obligations against the outstanding $3.0 million of the purchase price and any other liabilities.

Under the terms of the transaction with HSI, the Company acquired existing technologies and entered into non-compete and licensingagreements. The existing technologies acquired were the base transceiver station (“BTS”) and base station controller (“BSC”) product lines.As part of the asset purchase agreement, the Company and HSI entered into a training services agreement, whereby HSI employees were toprovide technical training to Company manufacturing staff in China for the ninth-month period

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subsequent to the acquisition. This technology and technological know-how will strengthen the Company’s existing CDMA productportfolio and the development of future CDMA technology.

In addition to acquiring existing technology, the Company entered non-compete and licensing agreements with HSI. The non-competeagreement prohibits HSI from competing against the Company in all countries except Korea for four years from the consummation date.The licensing agreement requires that HSI pay the Company 1% of revenue as royalty for the usage of the intellectual property that theCompany acquired under the terms of the acquisition for fifteen years subsequent to the consummation date.

Subsequent to the April 27, 2004 acquisition of HSI, the Company completed the allocation of the purchase price based in part upon anindependent valuation. The Company recorded goodwill of $7.0 million in connection with the acquisition. The results of operations of HSIhave been included in the Company’s consolidated results of operations beginning on the acquisition date of April 27, 2004.

The following table summarizes the final allocation of the purchase price for HSI based upon the final independent valuation (in thousands):Fair value of tangible net assets: Property, plant and equipment $1,440 Other tangible assets 437 Fair value of identified intangible assets: Existing technology 3,559 Non-compete agreement 761 IP license agreement 891 Excess of costs of acquiring HSI over fair value of identified net assets acquired (goodwill) 7,042



$14,130

The intangible assets have estimated useful lives ranging from three to five years as follows: existing technology, five years; non-competeagreement, three years; and intellectual property license agreement, three years. In the fourth quarter 2004, a decision was made tosubstantially abandon the acquired operations due to integration difficulties. Thus, the entire goodwill and all intangibles were written off inthe fourth quarter 2004. Refer to Note 10, Goodwill and Intangible Assets, for discussion of write-off in relation to the HSI acquisition.

Refer to the consolidated table below for unaudited pro forma results of operations reflecting the combined results of the Company and HSIfor the years ended December 31, 2004 and 2003, as if the business combination occurred at the beginning of the period. These results donot purport to be indicative of what would have occurred had the acquisition been made as of that date or the results of operations whichmay occur in future periods.

The unaudited pro forma results of operations include historical operations of the Company, TELOS, HSI and ACC (in thousands, exceptper share data): Year Ended December 31, 2004 2003 (In thousands, except per share data) Pro forma adjusted net sales $ 3,793,118 $ 2,777,440 Pro forma adjusted net income $ 65,054 $ 154,992 Pro forma adjusted basic earnings per share $ 0.57 $ 1.50 Pro forma adjusted diluted earnings per share $ 0.48 $ 1.27

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Giga Telecom, Inc.

On October 29, 2004, UTStarcom CDMA Technologies Korea Limited, a limited liability company organized under the laws of Korea anda wholly owned subsidiary of the Company, entered into an Asset Purchase Agreement with Giga Telecom, Inc., (“Giga”) a Koreancorporation that develops and manufactures wireless handsets. Pursuant to the Asset Purchase Agreement and related ancillary agreements,the Company will pay $18.6 million for certain assets relating to the research and development of CDMA wireless products, of which $13.0million will be paid in cash at the closing, $1.6 million that has been paid by the Company pursuant to a separate arrangement in respect ofcertain services rendered by Giga relating to the design of wireless handsets for the Company will be applied against the purchase price and$4.0 million is to be paid in three separate installments tied to certain product design and production milestones. The closing of thetransaction is subject to consent by creditors holding not less than 80% of Giga’s aggregate debt (including all debt held by certain financialinstitutions) and other customary closing conditions, including approvals and/or clearances from applicable governmental agencies(including those necessary to transfer assets acquired in the transaction outside the country) and certain other material consents andapprovals. This transaction closed on January 4, 2005. See Note 23, Subsequent Events.

2003

CommWorks

On May 23, 2003, the Company completed its acquisition of selected assets and liabilities of the CommWorks division (“CommWorks”)from 3Com Corporation, a Delaware corporation, (“3Com”). The Company paid $100.0 million in cash and incurred related transaction andother related costs of $9.3 million. The Company funded the consideration for the acquisition from cash on hand.

Selected assets acquired included CommWork’s portfolio of carrier-focused voice and data networking products and customer support andprofessional services. In addition, the Company acquired or licensed all of the 3Com intellectual property used by CommWorks.CommWorks develops and deploys carrier-class, IP-based multi-service access and service-creation platforms for telecommunicationsservice providers.

The Company made a preliminary allocation of the purchase price based in part upon a preliminary independent appraisal. During the threemonths ended September 30, 2003, the Company completed the allocation of the purchase price of CommWorks. The estimated amountsfor intangible assets and goodwill changed due to revised assumptions of future revenues from existing customers. The amount of thepurchase price allocated to in-process research and development (“IPR&D”) of $1.3 million was charged to the Company’s results ofoperations, as no alternative future uses existed at the acquisition date. The Company recorded goodwill of $52.3 million, the excess ofcosts of acquiring CommWorks and the fair value of identified net assets acquired, in connection with the acquisition. Goodwill is expectedto be deductible for tax purposes. The results of operations of CommWorks have been included in the Company’s consolidated results of



operations beginning on the acquisition date of May 23, 2003.

In assessing CommWork’s IPR&D projects, the key characteristics of the products under development were considered as well as futureprospects, the rate at which technology changes in the telecommunications equipment industry, product life cycles, and the projects’ stagesof development.

As of the date of the acquisition, CommWorks had two projects under development that qualified for IPR&D, which were approximately60% and 40% complete. As of the fourth quarter of 2004, both projects were completed.

The following table summarizes the final allocation of the purchase price for CommWorks based upon the final independent valuation. Thefinal valuation resulted in changes in estimated fair value, changes in the estimated useful lives of the intangible assets acquired and achange in the amount

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attributable to goodwill, mainly due to revised assumptions of future revenues from existing customers. The Company also recordedadditional employee-related liabilities. The estimated useful life of purchased technology is from one to five years, the estimated useful lifeof customer relationships is ten years, and the estimated useful lives of backlog and trade names are from one to two years. (in thousands) Fair value of tangible net assets Property, plant and equipment $10,973 Other tangible assets 6,522 Deferred transition costs 6,588 Fair value of identified intangible assets Customer relationships 27,820 Backlog 1,950 Trade names 940 Existing technology 14,190 In-process research and development 1,290 Liabilities assumed (13,315 ) Excess of costs of acquiring CommWorks over fair value of identified net assets acquired(goodwill) 52,349 $109,307

The following unaudited pro forma results of operations reflect the combined results of the Company and CommWorks for the years endedDecember 31, 2003 and 2002 as if the business combination occurred at the beginning of the period. These results do not purport to beindicative of what would have occurred had the acquisition been made as of that date or the results of operations which may occur in futureperiods. Year Ended December 31, 2003 2002 (In thousands, except per share data) Pro forma adjusted net sales $ 2,006,975 $ 1,142,146 Pro forma adjusted net income $ 190,585 $ 18,132 Pro forma adjusted basic earnings per share $ 1.84 $ 0.17 Pro forma adjusted diluted earnings per share $ 1.55 $ 0.16

The unaudited pro forma results of operations include historical operations of the Company and CommWorks. Certain non-recurringcharges were recorded by CommWorks and are included above including a $15.0 million restructuring charge in both the first and secondquarter of 2002 and a $15.0 million and $6.1 million charge relating to goodwill impairment, which was recorded in the second quarter of2002 and the first quarter of 2003, respectively.

RollingStreams

On June 30, 2003, the Company completed the acquisition of RollingStreams Systems, Ltd. (“RollingStreams”), a development-stagecompany, pursuant to a share exchange agreement. RollingStreams designs streaming, end-to-end TV-over-Internet-Protocol (“TVoIP”)solutions for telecommunications operators and broadband service providers. The Company’s investment in RollingStreams was$0.4 million prior to the acquisition. The purchase consideration for all the outstanding shares of RollingStreams, other than those already



held by the Company prior to the acquisition, was 301,074 shares of the Company’s common stock. In addition, the Company assumed alloutstanding RollingStreams options, which became options to purchase an aggregate of 12,742 shares of

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the Company’s common stock, valued at $0.5 million. Of the 301,074 shares, 164,115 shares valued at $5.8 million, were issued at theclosing, including 28,696 of which were held in escrow for any undisclosed liabilities or contingencies incurred by RollingStreams prior tothe closing or for any breach of the share exchange agreement. These shares will be distributed to the former shareholders ofRollingStreams within ten days of the six-month anniversary of the closing, after deducting any claims. Up to 136,959 of the 301,074 shareswill be payable in the form of an earnout after an earnout period expiring 18 months after the closing, subject to the achievement of certainrevenue milestones during such earnout period. 28,696 shares held in escrow were released and issued in 2004.

The amount of the purchase price allocated to IPR&D was $6.2 million. This amount was charged to the Company’s results of operations,as no alternative future uses existed at the acquisition date. The results of operations of RollingStreams have been included in theCompany’s consolidated results of operations beginning on July 1, 2003. As such, operations are considered immaterial and pro formapresentation is not deemed necessary.

As of the date of the acquisition, RollingStreams had one project under development that qualified for IPR&D, MediaSwitch. The projectwas 70% complete as of December 31, 2003. As of December 31, 2004, the project was completed and no further cost is anticipated.

The following table represents the final allocation of the purchase price for RollingStreams. The allocation of the purchase price is based inpart upon an independent valuation. (in thousands) Fair value of tangible net assets acquired $34 In-process research and development 6,189 Investment (363 ) Deferred compensation 434 Liabilities assumed (3 ) $6,291

Xebeo

On May 7, 2003, the Company completed the purchase of all of the assets of Xebeo Communications, Inc. (“Xebeo”) for $2.4 million incash. Xebeo develops and manufactures optical packet switches that enable telecommunications carriers to provide single fiber,multi-service access to customers. In addition, an amount up to $0.7 million may be payable based on future contingencies related toemployment. The results of operations of Xebeo are not considered material and as such pro forma presentation is not deemed necessary.

The amount of the purchase price allocated to IPR&D of $1.9 million was charged to the Company’s results of operations, as no alternativefuture uses existed at the acquisition date.

As of the date of the acquisition, Xebeo was focusing its resources on the development of its first product, MetroBridge, an optical packetswitching solution, and was considered in the development stage. The development of MetroBridge was 60% complete as of the closingdate. The technological feasibility of the technology was not established and the technology had no future alternative uses, therefore thedevelopment of MetroBridge is considered IPR&D. The product achieved its technical milestones as of November 2003, however theproduct was never commercialized.

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The following table represents the final allocation of the purchase price for Xebeo based, in part, upon an independent valuation. (in thousands) Fair value of tangible net assets acquired $ 659 In-process research and development 1,888 Liabilities assumed (129 ) $ 2,418



Shanghai Yi Yun

On October 16, 2002, the Company acquired the assets and intellectual property of Shanghai Yi Yun Telecom Technology Co. Ltd.(“Shanghai Yi Yun”), a provider of synchronous digital hierarchy equipment. Shortly thereafter, there was a claim surrounding potentialinfringement of the intellectual property acquired which led to a possible recision of the transaction, creating a contingency whose outcomewas not determinable beyond a reasonable doubt. This transaction was recorded in March 2003, when the Company determined that none ofthe intellectual property acquired was subject to the claim. Consideration was $0.2 million of cash and 342,854 shares of restricted stockvalued at $6.0 million. In connection with the acquisition, Shanghai Yi Yun and each of the stockholders that received part of the 342,854shares of restricted stock executed an indemnity escrow agreement in favor of the Company and such shares of restricted stock were placedin escrow. In addition, the Company issued 514,290 shares of restricted stock valued at that time at $9.0 million to the Shanghai Yi Yunemployees that were hired by one of the Company’s subsidiaries. Such shares of restricted stock vest over five years through 2007, withaccelerated vesting upon the achievement of specified milestones. The Company has treated these 514,290 shares of restricted stock asdeferred compensation. During 2003, 226,302 of these shares vested upon achievement of specified milestones. The results of operations ofShanghai Yi Yun is not considered material and as such proforma presentation is not deemed necessary.

This acquisition will enable the Company to enter the synchronous digital hierarchy transport market with internally developed products.Goodwill of $3.0 million was recorded in connection with this acquisition and is expected to be deductible for tax purposes. The amount ofthe purchase price allocated to in-process research and development of $1.3 million was charged to the Company’s results of operations, asno alternative future uses existed at the acquisition date.

The following represents the allocation of the purchase price for Shanghai Yi Yun: (in thousands) Fair value of tangible net assets acquired $ 250 Fair value of identified intangible assets—technology 1,870 In-process research and development 1,319 Excess costs of acquiring Shanghai Yi Yun Telecom over fair value of net assets acquired(goodwill) 3,021 $ 6,460

2002

HUTS and GUTS

On December 18, 2001, the Company entered into an agreement to acquire the remaining 49% ownership interest in GUTS, one of theCompany’s two primary manufacturing facilities in China, for a total consideration of $3.6 million in cash, in order to achieve 100%ownership in the joint venture. On January 21, 2002, the Company entered into an agreement to acquire the remaining 12% ownership

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interest in HUTS, one of the Company’s two primary manufacturing facilities in China, for a total consideration of $14.5 million in cash. Asa result of the GUTS and HUTS transactions, which closed in May 2003, the Company was able to conduct its operations in China throughwholly owned subsidiaries.

Issanni

On April 19, 2002, the Company completed the purchase of Issanni Communications, Inc. (“Issanni”). The Company’s investment inIssanni was $2.0 million prior to the acquisition. The purchase consideration for all the outstanding shares of Issanni, other than thosealready held by the Company prior to the acquisition, was $2.1 million in cash. In addition, $2.0 million will be payable in the form of anearnout to all Issanni shareholders of record at closing, subject to the completion of certain performance milestones during 2002, 2003 and2004. This earnout will be recorded as additional purchase price when earned. No milestones have been met as of December 31, 2003.Furthermore, the Company adopted an incentive program providing for the issuance of 39,876 shares of common stock valued at $1.0million to Issanni employees who will continue to perform services for the Company. These shares vest at the earlier of five years or uponthe achievement of certain performance milestones. The Company records this amount as compensation expense ratably over the vestingperiod and will accelerate the amortization if the milestones are met. The amount of the purchase price allocated to in-process research anddevelopment of $0.7 million was charged to the Company’s results of operations, as no alternative future uses existed at the acquisitiondate. Goodwill of $0.2 million was recorded in connection with the acquisition and is deductible for tax purposes. The results of operationsof Issanni were included in the Company’s consolidated results of operations beginning on April 19, 2002.



NOTE 6—INVENTORIES

As of December 31, 2004 and 2003, inventories consist of the following (in thousands): December 31, 2004 2003 Inventories Raw materials $ 154,977 $ 66,753 Work-in-process 65,551 51,116 Finished goods 271,357 48,206 Inventories at customer sites without contracts 98,947 90,990 $ 590,832 $ 257,065

As of December 31, 2004 and 2003, inventory balances by segment (in thousands): December 31, 2004 2003 China $ 372,457 $ 241,452 International 62,352 15,613 PCD 156,023 — $ 590,832 $ 257,065

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NOTE 7—ACCOUNTS AND NOTES RECEIVABLE

The Company accepts commercial notes receivable from its customers in China in the normal course of business. The notes are typicallynon-interest bearing, with maturity dates between three and six months. Notes receivable available for sale were $27.0 million and $11.4million at December 31, 2004 and December 31, 2003, respectively. The Company may discount these notes with banking institutions inChina. A sale of these notes is reflected as a reduction of notes receivable and the proceeds of the settlement of these notes are included incash flows from operating activities in the consolidated statement of cash flows. There were no notes receivable sold during the year endedDecember 31, 2004, and there were $298.8 million of notes receivable sold during the year ended December 31, 2003. Any notes that havebeen sold are not included in the Company’s consolidated balance sheets as the criteria for sale treatment established by Statement ofFinancial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,”(“SFAS 140”), has been met. The costs of selling these notes receivable were $2.3 million for the year ended December 31, 2003.

NOTE 8—PROPERTY, PLANT AND EQUIPMENT

As of December 31, 2004 and 2003, property, plant and equipment consists of the following: December 31, 2004 December 31, 2003 (In thousands) Buildings $ 138,277 $ 406 Leasehold improvements 16,235 10,446 Automobiles 6,171 5,587 Software 34,537 14,616 Equipment and furniture 181,704 119,796 Construction in progress 3,651 104,548 $ 380,575 $ 255,399 Less accumulated depreciation (111,816 ) (68,360 ) $ 268,759 $ 187,039

Depreciation expense was $55.8 million, $34.3 million, and $18.9 million for the years ended December 31, 2004, 2003, and 2002,respectively.

NOTE 9—LONG-TERM INVESTMENTS



The Company’s investments are as follows: December 31, 2004 December 31, 2003 Softbank China $ 5,294 $ 5,308 Cellon International 8,000 8,000 Restructuring Fund No. 1 1,836 1,861 Global Asia Partners L.P. 1,150 1,653 Fiberxon Inc. 3,000 2,000 InterWave Communications International Ltd. — 3,319 ImmenStar 2,000 — Matsushita Joint Venture 7,959 517 GCT SemiConductor 3,000 — Infinera 1,902 — Others 1,449 1,408 Total $ 35,590 $ 24,066

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Softbank China

The Company has a $5.3 million investment in Softbank China, an investment fund established by SOFTBANK CORP. focused oninvestments in Internet companies in China. This investment permits the Company to participate in the anticipated growth of Internetrelated businesses in China. SOFTBANK CORP. and its related companies are significant stockholders of the Company. The Company’sinvestment constitutes 10% of the funding for Softbank China, with SOFTBANK CORP. contributing the remaining 90%. The fund has aseparate management team, and none of the Company’s employees are employed by the fund. Many of the fund’s investments are and willbe in privately held companies, many of which are still in the start-up or development stages. These investments are inherently risky as themarkets for the technologies or products the companies have under development are typically in the early stages and may never materialize.The Company accounts for this investment under the cost method. The Company recorded losses of $0.2 million and $2.8 million due to another-than-temporary decline in the carrying value of this investment during the years ended December 31, 2003 and 2002, respectively.Refer to Note 22, Related Party Transactions.

Cellon International

In September 2001, the Company invested $2.0 million in Cellon International Holdings Corporation (“Cellon”). Cellon designs wirelessterminals and related technology for handset manufacturers and private distributors. The Company invested an additional $3.0 million eachin April and December 2002. As of December 31, 2004, the Company had a 9% ownership interest in Cellon. This investment is accountedfor under the cost method, and its carrying value has been evaluated for possible impairment based on the achievement of businessobjectives and milestones, the financial condition and prospects of the company and other relevant factors. As of December 31, 2004, theCompany has not recorded any impairment of this investment. The Company has outstanding purchase commitments to Cellon. Refer toNote 22, Related Party Transactions.

Restructuring Fund No. 1

During the first quarter of fiscal 2002, the Company invested $2.0 million in Restructuring Fund No. 1, a venture capital investment limitedpartnership established by SOFTBANK INVESTMENT CORP., an affiliate of SOFTBANK CORP. SOFTBANK America Inc., an entityaffiliated with SOFTBANK CORP., is a significant stockholder of the Company. The balance of this investment was $1.8 million and $1.9million at December 31, 2004 and 2003, respectively. The fund focuses on leveraged buyout investments in companies in Asia undergoingrestructuring or bankruptcy procedures. The total fund offering is expected to be between approximately $150.0 million and $226.0 million,with each investor contributing a minimum of $0.8 million. The fund has a separate management team, and none of the Company’semployees are employed by the fund. The Company accounts for this investment under the equity method of accounting. The Companyrecorded immaterial equity losses during the years ended December 31, 2004 and 2003. The Company recorded no loss during the yearended December 31, 2002.

Global Asia Partners L.P.

In June 2002, the Company invested $1.0 million in Global Asia Partners L.P., and an additional $1.0 million in June 2003, with acommitment to invest up to a maximum of $5.0 million. The remaining amount is due at such times and in such amounts as shall bespecified in one or more future capital calls to be issued by the general partner. The fund size is anticipated to be $100 million and the fund



was formed to make private equity investments in private or pre-IPO technology and telecommunications companies. The fund’sgeographic focus is on technology investments in Asia, in particular India and China. The Company accounts for this investment under theequity method of accounting. The balance in this investment was $1.2 million and $1.7 million at December 31, 2004 and 2003,respectively. The Company recorded equity

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losses of $0.5 million; $0.2 million and $0.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Fiberxon Inc.

In September 2002, the Company invested $2.0 million in Fiberxon Inc. (“Fiberxon”), a company that develops and sells optical modulesand related systems. In March 2004, the Company invested an additional $1.0 million in Fiberxon. This investment is accounted for underthe cost method, and its carrying value is evaluated for possible impairment based on the achievement of business objectives andmilestones, the financial condition and prospects of the company and other relevant factors. As of December 31, 2004, the Company has notrecorded any impairment in respect of this investment. The Company has outstanding purchase commitments with Fiberxon. Refer to Note22, Related Party Transactions.

InterWave Communications International Ltd.

During 2002, the Company purchased approximately 5.8 million shares of common stock of InterWave Communications International Ltd.,a technology company listed on Nasdaq, for approximately $3.0 million. In addition, the Company received warrants to purchase 2.0million shares of InterWave’s common stock at $0.21 per share. The Company’s holdings were adjusted for a 1:10 reverse stock split onApril 30, 2003, and were 0.6 million shares of common stock and warrants to purchase 0.2 million shares of InterWave’s common stock at$2.10 per share.

During the third quarter of 2004, the Company sold its shares of InterWave common stock at an average price of $5.65 per share. TheCompany recorded a $2.1 million gain as a result of this sale within other income. During the fourth quarter of 2004, the Company net shareexercised its warrants for shares of common stock and then sold the shares for $0.5 million resulting in a $0.3 million realized loss recordedwithin other income (expense). At December 31, 2004, the Company no longer owned any investments in InterWave.

ImmenStar

On September 28, 2004, the Company invested $2.0 million in the Series A preferred stock of ImmenStar, Inc. (“ImmenStar”). ImmenStaris a development stage company that is designing a chip that can be used in the Company’s product. This investment is accounted for underthe cost method and there have been no gains or losses recorded during the year ended December 31, 2004, related to this investment.

Matsushita Joint Venture

On July 5, 2002, the Company entered into a joint venture agreement with Matsushita Communication Industrial Co., Ltd., a stockholder ofthe Company, to jointly design and develop, manufacture and sell telecommunication products. The Company has a 49% ownership interestin the joint venture company, which had an original registered share capital of $10.0 million. The cash consideration of $4.9 million payableby the Company was paid in October 2002. As the Company does not have voting control over significant matters of the joint venturecompany, the investment in and results of operations of the joint venture company are accounted for using the equity method of accounting.During the fourth quarter of 2004, the Company contributed an additional $9.3 million (its 49% interest of the $19 million capital call) tothe joint venture. The Company has recorded equity losses of $1.9 million; $4.8 million and $0.2 million for the years ended December 31,2004, 2003 and 2002, respectively.

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GCT Semiconductor

In October 2004, the Company invested $3.0 million in three million shares of GCT Semiconductor, Inc. (“GCT”) Series D Preferred Stockat $1.00 per share. The investment represents approximately a 2% interest in the company, which designs, develops and markets integratedcircuit solutions for the wireless communications industry. The investment is accounted for under the cost method and there have been nogains or losses recorded during the year ended December 31, 2004 in relation to this investment.

Infinera



In July 2004, the Company invested $3.0 million in 1,339,285 shares of Infinera Corporation (“Infinera”) Series D Preferred Stock at $2.24per share. The investment represents an approximately 2% interest in Infinera, which develops optical telecommunications systems usingphotonic integrated circuits. This investment is accounted for under the cost method. In September 2004, Infinera closed a Series EPreferred Stock round at $0.60 per share. As a result of the close proximity between the Series D and Series E preferred stock financingrounds and the decrease in the share price between rounds, Infinera and the Company entered into an exchange agreement whereby theCompany exchanged 669,643 shares of Series D preferred stock for 2,500,000 shares of Series E preferred stock. After the exchange, theCompany owns a total of 669,643 shares Series D and 2,500,000 shares of Series E preferred stock. For the year ended December 31, 2004,the Company recorded a loss of $1.1 million to reflect the other-than-temporary decrease in the fair value of its remaining Series D shares.

NOTE 10—GOODWILL AND INTANGIBLE ASSETS

Goodwill: December 31, 2004 2003 Goodwill $ 180,627 $ 100,180

As of December 31, 2004 and 2003, goodwill was $180.6 million and $100.2 million, respectively. Goodwill increased by $80.4 millionduring the year ended December 31, 2004 and was attributable to the goodwill acquired through Audiovox Communications Corporation(“ACC”) of $74.1 million, TELOS Technology, Inc. (“TELOS”) of $6.4 million and Hyundai Syscomm, Inc. (“HSI”) of $7.0 million. In thefourth quarter 2004, a decision was made to substantially abandon the acquired operations of HSI due to integration difficulties. Thus, theentire goodwill and all intangibles associated with the HSI acquisition were written off in the fourth quarter 2004. In addition, goodwilldecreased $0.1 million from the finalization of the purchase accounting for the CommWorks acquisition.

Goodwill increased by $55.4 million during the year ended December 31, 2003. The increase during the year ended December 31, 2003 wasmainly attributable to goodwill of $52.3 million that was recorded on the acquisition of CommWorks.

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During the fourth quarter, with the consummation of the acquisition of ACC, the Company evaluated its management operation andreporting and determined that the Company operated as three operating segments for the fourth quarter of 2004. Those segments were thePersonal Communications Division (“PCD”), China and International. PCD includes the legacy activities of the ACC selected assetsacquisition. The China segment represents the Company’s activities within its China companies and the International segment includes allother non-China and non-PCD operations. Management has determined that each segment is its own reporting unit as there are nomanagement or reporting structures below this segment reporting level. The Company has reallocated its goodwill between its segments(reporting units) and the reallocation is reflected as follows:

September 30,2004 Re-organization

ACCAcquisition

HSIImpairment

December 31,2004

(in thousands) UTStarcom $113,544 $(113,544 ) $— $— $— China — 69,370 49,417 — 118,787 International — 44,174 — (7,042 ) 37,132 Personal Communications Division — 24,708 — 24,708 Total $113,544 $— $74,125 $(7,042 ) $180,627

Intangible Assets:

As of December 31, 2004 and 2003, intangible assets consisted of the following (in thousands): December 31, 2004 2003 Existing technology $ 39,530 $ 23,630 Less accumulated amortization (14,933 ) (7,255 ) $ 24,597 $ 16,375 Customer relationships $ 57,220 $ 27,820 Less accumulated amortization (5,455 ) (1,623 ) $ 51,765 $ 26,197 Supplier relationships $ 5,300 $ —



Less accumulated amortization (442 ) — $ 4,858 $ — Trade names $ 4,940 $ 940 Less accumulated amortization (966 ) (274 ) $ 3,974 $ 666 Backlog $ 5,150 $ 1,950 Less accumulated amortization (2,483 ) (1,137 ) $ 2,667 $ 813 Non-compete $ 10,800 $ — Less accumulated amortization (450 ) — $ 10,350 $ — Total intangible assets $ 98,211 $ 44,051

Amortization expense was $15.6 million, $8.4 million, and $2.4 million for the years ended December 31, 2004, 2003 and 2002,respectively. The estimated aggregate amortization expense for intangibles for each of the five years beginning 2005 through 2009 is$23.1 million, $18.9 million, $16.0 million, $12.7 million and $6.9 million, respectively. There is no significant foreign exchange impactrelated to intangible assets.

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The weighted average amortization period for each class of unamortized identifiable intangible assets includes:Identified Intangible Asset Class Weighted Average Life Technology 4.7 years Customer Relationships 9.4 years Supplier Relationships 2 years Trade Names 2.8 years Backlog 1 year Non-compete 4 years Total 6.5 years

Intangible assets increased by $54.2 million during the year ended December 31, 2004. The increase during the year ended December 31,2004 was mainly attributable to intangible asset recorded on acquisitions in 2004 including customer/supplier relationships of $34.7 million,purchased technology of $15.9 million and other intangibles of $18.0 million and offset by the amortization expenses for the year. Theestimated useful lives of customer relationships are ten to five years, the estimated life of purchased technology is five years, and theestimated useful lives of other intangibles are from one to four years.

During the second quarter of 2004, the Company consummated the acquisition of HSI in order to gain a foothold in the CDMAinfrastructure market. The Company encountered difficulties integrating the HSI operations into the Company’s CDMA operations after theacquisition. In the fourth quarter of 2004, the Company decided to wind-down the legacy operations and transfer employees to supporthandset engineering in Korea. The decision to substantially abandon the operations occurred within nine months of the acquisition andbefore the HSI operations were integrated into the Company. Therefore, the Company has written off all of the remaining values of theintangible assets associated with this acquisition including $3.1 million of purchased technology; $0.6 million related to non-competeagreement; and $0.8 million related to a license agreement with HSI. The write-offs are all recorded under “Selling, general andadministrative” expense in the statement of operations for the year ended December 31, 2004.

Intangible assets increased by $49.1 million during the year ended December 31, 2003. The increase during the year ended December 31,2003 was mainly attributable to intangible assets of $44.9 million which was comprised of purchased technology of $14.2 million, customerrelationships of $27.8 million and other intangibles of $2.9 million that was recorded on the acquisition of CommWorks, based on the finalpurchase price allocation. The estimated useful life of purchased technology is from one to five years, the estimated useful life of customerrelationships is ten years, and the estimated useful lives of backlog and trade names are from one to two years.

NOTE 11—DEBT

The following represents the outstanding borrowings at December 31, 2004 and 2003 (in thousands): December 31, Note 2004 2003



Notes payable $ 1,183 $ 1 Bank loans 358,155 8,155 Convertible subordinated notes 402,500 402,500 Total Debt $ 761,838 $ 410,656 Long-term debt 410,655 410,655 Short-term debt $ 351,183 $ 1

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Occasionally, the Company issues short-term notes payable to its vendors in lieu of trade accounts payable. The payment terms arenormally three to nine months and are typically non-interest bearing.

At December 31, 2004, the Company has loans with various banks totaling $350.0 million with interest rates ranging from 2.58% to 6.21%per annum. These bank loans mature during 2005 and are included in short-term debt.

The Company has a bank loan in connection with an equipment purchase resulting from the consolidation of MDC. On January 10, 2003, athird party established a bank loan with Shanghai Pudong Development Bank for the purchase of the equipment. The obligations of thebank loan and related equipment were assumed by the Company on January 23, 2003, and subsequently transferred to MDC onDecember 31, 2003. The bank loan of $8.2 million bears interest at a rate of 4.94% per annum, and expires on January 10, 2006. For each ofthe years ended December 31, 2004 and 2003, total interest expense related to this loan amounted to $0.4 million. The Company does notserve as legal obligor for the loan.

On March 12, 2003, the Company completed an offering of $402.5 million of convertible subordinated notes due March 1, 2008 to qualifiedbuyers pursuant to Rule 144A under the Securities Act of 1933. The notes bear interest at a rate of 7 / 8 % per annum and are convertibleinto the Company’s common stock at a conversion price of $23.79 per share and are subordinated to all present and future senior debt of theCompany. Holders of the notes may convert their notes only if: (i) the price of the Company’s common stock issuable upon conversion of anote reaches a specified threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the notes falls below certainthresholds. At the initial conversion price, each $1,000 principal amount of notes will be convertible into approximately 42.0345 shares ofcommon stock. Expenses associated with the convertible subordinated notes issuance were $11.7 million and have been recorded with inother long-term assets and are being amortized over the life of the notes. The convertible subordinated notes include covenants surroundingthe timely filing of financial reports with the Securities and Exchange Commission. See Note 24, Subsequent Events.

Concurrent with the issuance of the convertible notes, the Company entered into a convertible bond hedge and call option transaction at acost of $43.8 million. The convertible bond hedge allows the Company to purchase 16.9 million shares of its common stock at $23.79 pershare from the other party to the agreement. The written call option allows the holder to purchase 16.9 million shares of the Company’scommon stock from the Company at $32.025 per share. Both the bond hedge and call option transactions may be settled at the Company’soption either in cash or net shares and expire on March 1, 2008. The Company recorded these instruments at cost, and their carrying value atDecember 31, 2004 equaled their original cost. The convertible bond hedge and call option transactions are expected to reduce the potentialdilution from conversion of the notes. The options have been included in stockholders’ equity in accordance with the guidance in EITFNo. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”

The Company has credit facilities, excluding the $8.2 million bank loan resulting from the consolidation of MDC, totaling $780.4 million ofwhich $388.0 million remained available for borrowing as of December 31, 2004. Of the $388.0 million available credit facilities, $380.8million of these facilities expire in 2005 and $7.2 million of these facilities expire in 2010 with interest rates of up to 6.21%. There is noguarantee that these facilities will be renewed. The Company has not guaranteed any debt not included in the consolidated balance sheet.The Company had available borrowing facilities of $583.7 million as of December 31, 2003.

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NOTE 12—OTHER CURRENT LIABILITIES

Other current liabilities at December 31, 2004 and 2003 consist of the following (in thousands): December 31, 2004 December 31, 2003 Accrued contract costs $ 86,565 $ 67,950



Warranty costs 46,596 26,267 Accrued payroll and compensation 41,187 34,200 Accrued other taxes 20,596 10,725 Accrued construction costs 3,642 20,462 Other 42,991 14,307 $ 241,577 $ 173,911

Other current liabilities primarily consist of accrued contract costs, which relate to purchases of inventory, installation services and othertesting and consulting work performed by outside vendors for which the Company has not yet received invoices; accrued payroll andcompensation costs, which relate to wages, bonuses, and commissions earned but not yet paid; warranty costs, which are estimated costs ofequipment replacement and repair and accrued construction costs, which represent accruals for work performed and materials purchased inrelation to the facility being built in Hangzhou. The construction is expected to be fully completed in April 2005.

NOTE 13—WARRANTY OBLIGATIONS AND OTHER GUARANTEES

Warranty obligations are as follows (in thousands):Balance at January 1, 2003 $13,297 Accruals for warranties issued during the period 36,523 Warranty obligations assumed upon acquisition 1,381 Settlements made during the period (24,934 )Balance at December 31, 2003 $26,267 Accruals for warranties issued during the period 53,777 Warranty obligations assumed upon acquisition 6,964 Settlements made during the period (40,412 )Balance at December 31, 2004 $46,596

Certain of the Company’s sales contracts include provisions under which customers would be indemnified by the Company in the event of,among other things, a third-party claim against the customer for intellectual property rights infringement related to the Company’s products.There are no limitations on the maximum potential future payments under these guarantees. The Company has accrued no amounts inrelation to these provisions as no such claims have been made and the Company believes it has valid, enforceable rights to the intellectualproperty embedded in its products.

The Company issues standby letters of credit primarily to support international sales activities outside of China. When the Companysubmits a bid for a sale, often the potential customer will require that the Company issue a bid bond or a standby letter of credit todemonstrate its commitment through the bid process. In addition, the Company may be required to issue standby letters of credit asguarantees for advance customer payments upon contract signing or performance guarantees. The standby letters of credit usually expire sixto nine months from date of issuance without being drawn by the beneficiary thereof. The Company may issue commercial letters of creditin support of purchase commitments.

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NOTE 14—PROVISION FOR INCOME TAXES

United States and foreign income (loss) before income taxes and minority interest were as follows (in thousands): Year ended December 31, 2004 2003 2002 United States $ (19,666 ) $ 57,784 $ 13,245 Foreign 82,955 202,138 123,027 $ 63,289 $ 259,922 $ 136,272

The components of the (provision) benefit for income taxes are as follows (in thousands): Year ended December 31, 2004 2003 2002 Current:



Federal $ 18,060 $ (8,376 ) $ (12,222 )State/Other 2,081 242 (1,515 )Foreign (127,321 ) (47,940 ) (28,222 )Total current (107,180 ) (56,074 ) (41,959 )Deferred: Federal 2,728 (7,214 ) 6,665 State 933 1,351 315 Foreign 113,360 16,538 7,725 Total deferred 117,021 10,675 14,705 Total $ 9,841 $ (45,399 ) $ (27,254 )

In establishing its deferred income tax assets and liabilities, the Company makes judgments and interpretations based on the enacted taxlaws and published tax guidance applicable to its operations. The Company records deferred tax assets and liabilities and evaluates the needfor valuation allowances to reduce the deferred tax assets to realizable amounts. The likelihood of a material change in the Company’sexpected realization of these assets is dependent on future taxable income, its ability to use foreign tax credit carryforwards and carrybacks.Changes to the Company’s income tax provision or in the valuation of the deferred tax assets and liabilities may affect its annual effectiveincome tax rate.

Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in theconsolidated financial statements. The Company recorded a $91.7 million current deferred tax asset for the year ended December 31, 2004in relation to the $217.5 million deferred revenue recorded under customer advances pertaining to several agreements entered into withJapan Telecom Co., Ltd in 2004. Refer to Note 22, Related Party Transactions.

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A summary of the components of net deferred tax assets is as follows (in thousands): U.S. China Other Total December 31, 2004: Current deferred tax assets: Allowances and reserves $ 17,455 $ 36,209 $ — $ 53,664 Deferred revenue, net — 8,117 91,668 99,785 Other — 119 — 119 Total current deferred tax assets $ 17,455 $ 44,445 $ 91,668 $ 153,568 Current deferred tax liability: Investments (1,276 ) — — (1,276 )Accrued royalty — (2,312 ) — (2,312 )Prepaids (399 ) (6,458 ) — (6,857 )Total current deferred tax liability (1,675 ) (8,770 ) — (10,445 )Total current deferred tax assets, net $ 15,780 $ 35,675 $ 91,668 $ 143,123 Non-current deferred tax assets: Net operating loss carryforward $ 384 $ — $ 4,564 $ 4,948 Tax credit carryforwards 9,644 — — 9,644 Fixed assets 876 4,717 — 5,593 Demo equipment income — 7,435 — 7,435 Accrued warranties 4,808 — — 4,808 Investments 3,223 — — 3,223 Other 1,019 1,107 — 2,126 Total non-current deferred tax assets $ 19,954 $ 13,259 $ 4,564 $ 37,777 Valuation allowance (328 ) — (4,564 ) (4,892 )Net non-current deferred tax assets $ 19,626 $ 13,259 $ — $ 32,885 Non-current deferred tax liability (2,457 ) — — (2,457 )Non-current deferred tax assets, net (included in other long-termassets) $ 17,169 $ 13,259 — $ 30,428



December 31, 2003: Current deferred tax assets: Allowances and reserves $ 7,632 $ 12,833 $ — $ 20,465 Deferred revenues, net — 2,244 — $ 2,244 Total current deferred tax assets $ 7,632 $ 15,077 $ — $ 22,709 Current deferred tax liability $ (199 ) $ (4,331 ) $ — $ (4,530 )Total current deferred tax assets, net $ 7,433 $ 10,746 $ — $ 18,179 Non-current deferred tax assets: Net operating loss carryforward $ 1,186 $ — $ 853 $ 2,039 Tax credit carryforwards 3,830 — — 3,830 Fixed assets 1,276 1,658 — 2,934 Demo equipment income — 14,513 — 14,513 Accrued warranties 1,360 — — 1,360 Investments 2,849 319 — 3,168 Other 897 — — 897 Total non-current deferred tax assets 11,398 16,490 $ 853 28,741 Valuation allowance (328 ) — — (328 )Non-current deferred tax assets, net (included in other long-termassets) $ 11,070 $ 16,490 $ 853 $ 28,413

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Deferred taxes have not been recognized on undistributed earnings from foreign subsidiaries because the Company does not intend torepatriate such earnings. As of December 31, 2004, undistributed earnings from investments in foreign subsidiaries amounted to $541million.

As of December 31, 2004, state net operating loss carryforwards were $0.1 million (tax effected and net of valuation allowance of $0.3million). The state net operating loss carryforwards will expire in varying amounts between 2005 and 2007 and could not be utilized in2004. As of December 31, 2004, the Company had foreign net operating loss carryforwards (“NOLs”) of approximately $4.6 million (taxeffected), for which a $4.6 million valuation allowance was provided. The NOLs do not expire and can be carried forward indefinitely.However, given the lack of earnings, management concluded these losses did not meet the more likely than not standard contained in FAS109 and has therefore placed a valuation allowance on such losses.

The Company’s subsidiaries UTSC, HUTS, CUTS and HSTC were granted tax holidays, which started to phase out in 1999. Income taxexemption for HSTC and CUTS ended December 31, 2004. The net impact of these tax holidays was to decrease tax expense byapproximately $16.2 million, $38.0 million and $10.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.

The difference between the Company’s effective income tax rate and the federal statutory rate is reconciled below: Year ended December 31, 2004 2003 2002 Federal statutory rate 35 % 35 % 34 %State taxes, net of federal income tax benefit (1 ) 1 — Permanent differences (2 ) 1 5 Amortization of deferred compensation — — 1 Effect of difference in foreign tax rates (4 ) (13 ) (16 )Deferred tax asset rate adjustment (34 ) — — Tax credits and other (9 ) (7 ) (4 )Effective rate (15 )% 17 % 20 %

The deferred tax rate adjustment of 34% is primarily due to the tax benefit of $19.6 million resulting from the revaluation of deferred taxassets in China due to statutory rate increases for certain of the Company’s subsidiaries in China from 15% to 24% in the fourth quarter of2004.

No significant audits of the Company’s income tax returns were underway as of December 31, 2004.



NOTE 15—COMMON STOCK AND STOCK INCENTIVE PLANS

Stock Option Plans

The 1995 Stock Plan:

On July 31, 1995, the Board of Directors adopted, and in October 1995, the Company’s stockholders approved, the Company’s 1995 StockPlan. Under the 1995 plan, officers, employees and consultants were eligible to acquire shares of common stock pursuant to options or stockpurchase rights. At the time of adoption, 3,705,232 shares of common stock were reserved for issuance under the 1995 plan. In 1995 and1996, the Company’s Board and stockholders added an additional 5,400,000 shares to the 1995 plan, raising the total number of authorizedshares reserved under the 1995 plan to 9,105,232. As of December 31, 2004, there were 6,711,744 shares authorized for issuance under the1995 plan and options to purchase 88,885 shares of common stock were outstanding under the 1995 plan. On January 31, 1997, the Boardof Directors elected not to grant any further options under the 1995 plan. Upon the adoption of the 1997 plan, all remaining unissued sharesunder the 1995 plan not already subject to options or other awards ceased to be reserved for issuance under the 1995 plan.

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The 1997 Stock Plan:

On January 31, 1997, the Board of Directors adopted, and the Company’s stockholders approved, the Company’s 1997 Stock Plan. Underthe 1997 plan, officers, employees and consultants are eligible to receive options to purchase shares of common stock and stock purchaserights. In December 1999, the Board of Directors amended the 1997 plan, which the Company’s stockholders approved in February 2000.As of December 31, 2004, the Company is authorized to issue up to 29,645,836 shares subject to options under the plan. During the term ofthe 1997 plan, the number of shares issuable under the plan will be increased annually on the first day of each fiscal year beginning in 2001by an amount equal to 6,000,000 shares, or 4% of the outstanding shares of common stock on that date, or a lesser amount determined bythe Board. The plan terminates in January 2007, but may be terminated earlier by the Board of Directors. As of December 31, 2004, therewere options to purchase 16,827,269 shares of common stock outstanding under the 1997 plan. The Compensation Committee administersthe 1997 plan.

Options granted under the 1997 plan may be incentive stock options (“ISOs”) which are intended to qualify for favorable federal income taxtreatment under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified stock options (“NSOs”),which do not so qualify. The Compensation Committee selects the eligible persons to whom options will be granted and determines thegrant date, amounts, exercise prices, vesting periods and other relevant terms of the options, including whether the options will be ISOs orNSOs. The exercise price of ISOs granted under the 1997 plan may not be less than 100% of the fair market value of common stock on thegrant date, while the exercise price of NSOs can be determined by the Compensation Committee in its discretion. Options are generally nottransferable during the life of the optionee.

Options vest and become exercisable as determined by the Compensation Committee, generally over four years. Options may generally beexercised at any time after they vest and before their expiration date as determined by the Compensation Committee. However, no optionmay be exercised more than ten years after the grant date. Options will generally terminate (i) 12 months after the death or permanentdisability of an optionee and (ii) 90 days after termination of employment for any other reason. The aggregate fair market value of theshares of common stock represented by ISOs that become exercisable in any calendar year by any one option holder may not exceed$100,000. Options in excess of this limit are treated as NSOs.

In the event the Company is merged with or into another corporation, or all or substantially all of the Company’s assets are sold, eachoutstanding option will be assumed or an equivalent option or right will be substituted by the successor corporation or its parent orsubsidiary. If the successor corporation refuses to assume or substitute for the option or right, the option or right will automatically vest andbecome exercisable in full for a period of at least fifteen days, after which time the option or right will terminate.

Under the 1997 plan, the Company may grant stock purchase rights to eligible participants. Any shares purchased pursuant to stockpurchase rights will be subject to a restricted stock purchase agreement. Unless the Compensation Committee determines otherwise, thisagreement will grant the Company a right to repurchase the stock upon the voluntary or involuntary termination of the employee for anyreason, including death or disability. The purchase price for repurchased shares will be the original price paid and may be paid bycancellation of any indebtedness owed to the Company. The shares of stock subject to the right of repurchase lapse over time. There wereno stock purchase rights granted in 2004, 2003 or 2002.

2001 Director Option Plan:

On March 2, 2001, the Board of Directors adopted, and in May 2001, the Company’s stockholders approved, the Company’s 2001 DirectorOption Plan. Under the 2001 Director Option Plan, those directors who are not employees of the Company (“Outside Directors”) areeligible to receive options to



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purchase shares of common stock. As of December 31, 2004, Directors Horner, Atkins, and Toy were Outside Directors. All grants ofoptions to Outside Directors are automatic and nondiscretionary. In July 2001, the Board of Directors amended the 2001 Director OptionPlan. As of December 31, 2004, the Company is authorized to issue up to 1,200,000 shares pursuant to options under the 2001 DirectorOption Plan. The plan terminates in May 2011, but may be terminated earlier by the Board of Directors. As of December 31, 2004, therewere options to purchase 312,000 shares of common stock outstanding under the 2001 Director Option Plan. The Compensation Committeeadministers the 2001 Director Plan.

Pursuant to the terms of the 2001 Director Option Plan, each Outside Director is automatically granted an option to purchase eightythousand shares of common stock (the “First Option”) on the date on which such person first becomes an Outside Director (the“Anniversary Date”). A director who is an employee of the Company and ceases employment with the Company to become an OutsideDirector receives an option to purchase twenty thousand shares of common stock (a “Subsequent Option”) at the Company’s first annualmeeting of stockholders following such conversion to an Outside Director and at each subsequent annual stockholder meeting thereafter,provided he or she is serving as an Outside Director on each such date. As such time as each Outside Director’s First Option is fully vested,each Outside Director is automatically granted a Subsequent Option on the Anniversary Date of each year provided he or she is then anOutside Director.

Under the terms of the 2001 Director Option Plan, the exercise price of each option granted is equal to the market value of the commonstock on the date of grant. Such options have terms of ten years, but terminate earlier if the individual ceases to serve as a director. The FirstOption grants vest as to 25% of shares subject to the First Option on each of the first four anniversaries of its date of grant. The SubsequentOption grants vest as to 100% of the shares subject to the Subsequent Option on the first anniversary of its date of grant.

Issanni Communications, Inc. Incentive Program:

The Issanni plan was established for the issuance of up to a total of 39,876 shares of UTStarcom’s common stock to specified formeremployees of Issanni Communications, Inc. (“Issanni”) who became UTStarcom’s employees in connection with UTStarcom’s acquisitionof Issanni. The Issanni plan is administered by the Board of Directors or a committee appointed by the Board. A participant in the Issanniplan is eligible to earn and vest in a designated number of shares that are subject to the award of shares made to a participant under the plan,based upon the attainment of one of six milestones related to the amount of revenue generated from Issanni products in 2002 and 2003 andsubject to the participant’s continued employment with Issanni, the Company or one of their subsidiaries through the day of thedetermination that the applicable milestone has been satisfied. In addition, each participant is entitled to receive the unearned shares, if any,on the fifth anniversary of the acquisition of Issanni if the employee continues to be employed with Issanni, the Company or any of theirsubsidiaries on such date regardless of whether any milestone is attained. The shares subject to an award will in any event become issuable,whether or not the milestones were achieved and whether or not the five-year vesting schedule has elapsed, upon (i) the sale or thediscontinuation of the Company or UTStarcom International Products Inc., (ii) the sale of substantially all or any of the technology acquiredby UTStarcom International Products Inc. in connection with the acquisition of Issanni, or (iii) the employment termination of certainIssanni principals.

If, prior to the date on which all of a participant’s shares are earned, the participant’s service with Issanni, the Company or one of theirsubsidiaries is terminated (i) voluntarily or for cause, the Company may exercise its repurchase option with respect to any of theparticipant’s unearned shares, (ii) other than voluntarily or for cause, death or disability, the participant will be entitled to receive the sharesthat the participant would have otherwise earned with respect to milestones achieved within 24 months of the

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participant’s termination, or (iii) as a result of death or disability, the participant (or his estate) will be entitled to receive the unearnedportion of his shares with respect to all milestones.

Advanced Communication Devices Corporation Incentive Program:

The ACD Plan provides for the issuance of an additional 49,030 shares of UTStarcom’s common stock pursuant to awards of shares grantedto designated former employees of Advanced Communication Devices Corporation (“ACD”) who became UTStarcom’s employees inconnection with UTStarcom’s merger with ACD. The ACD plan is administered by the Board of Directors. The Company did not grant anyshares under the plan in 2004 and 2003, and 31,275 shares were granted in 2002.

A participant in the ACD plan is entitled to earn and vest in a designated number of shares subject to the award made to the participant uponthe attainment of one of five milestones and subject to the participant’s continued employment with ACD, the Company or any of their



subsidiaries through the day of the determination that the applicable milestone has been satisfied. In addition, each participant is entitled toreceive the unearned shares, if any, subject to the award on the fifth anniversary of the merger if the participant has continued to performservices for ACD, the Company or any of their subsidiaries on such date regardless of whether any milestone is obtained.

If a participant’s service with ACD, the Company or any of their subsidiaries is terminated for cause by the applicable employer, voluntarilyby the participant or as a result of death or disability, the participant will forfeit all of the shares subject to the award that were not yetearned and distributed. If the participant’s service is terminated for any other reason, the participant will be entitled to receive the sharessubject to the award with respect to any milestones achieved within 12 months following the participant’s termination and will forfeit allother shares that were unearned as of the date of termination.

The 2003 Non-Statutory Stock Option Plan:

On April 15, 2003, the Board of Directors adopted the Company’s 2003 Non-Statutory Stock Option Plan. Under the 2003 plan, directors,officers, employees and consultants of the Company are eligible to be granted options to purchase shares of the Company’s common stock.Only non-statutory stock options, which do not qualify for favorable federal income tax treatment under the provisions of Section 422 of theInternal Revenue Code of 1986, as amended, may be granted under the 2003 plan. As of December 31, 2004, the Company was authorizedto issue up to 1,500,000 shares pursuant to options granted under the 2003 plan, subject to adjustment in certain instances (including stocksplits, stock dividends, business combinations or other changes in capitalization). As of December 31, 2004, options to purchase 1,274,287shares of common stock were outstanding under the 2003 plan.

The 2003 plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee is charged withselecting the eligible persons to whom options will be granted and determines the number of shares subject to the option, exercise prices,vesting periods and other terms applicable to each option.

Options granted under the 2003 plan generally vest and become exercisable over four years, and may be exercised at any time after theyvest but before their expiration date. Options will generally terminate (i) 12 months after the death or employment termination due todisability of an option holder and (ii) 90 days after termination of an option holder’s service for any other reason other than for disability ordue to the option holder’s death. However, no option may be exercised more than ten years after the grant date.

In the event the Company is merged with or into another corporation, or all or substantially all of the Company’s assets are sold, the 2003plan provides for each outstanding option to be assumed or an equivalent option or right to be substituted by the successor corporation or itsparent or subsidiary. If the successor corporation refuses to assume or substitute for the option, the option will automatically vest and

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become exercisable in full for a period determined by the compensation committee, after which time the option will terminate.

A summary of activity under the Plans follows:

Shares Availablefor Grant

Numberof shares

Weighted averageexercise price

Options Outstanding, December 31, 2001 2,450,501 12,578,417 $ 12.22 Options Authorized in 2002 4,372,167 — Options Granted (4,977,723 ) 4,977,723 $ 19.46 Options Exercised — (1,717,899 ) $ 5.38 Options Forfeited or Expired 915,326 (915,326 ) $ 18.40 Options Outstanding, December 31, 2002 2,760,271 14,922,915 $ 15.05 Options Authorized in 2003 5,887,041 — Options Granted (4,866,309 ) 4,866,309 $ 25.03 Options Exercised — (4,490,195 ) $ 12.27 Options Forfeited or Expired 681,900 (681,900 ) $ 20.55 Options Outstanding, December 31, 2003 4,462,903 14,617,129 $ 18.97 Options Authorized in 2004 4,178,874 — Options Granted (5,875,197 ) 5,875,197 $ 27.48 Options Exercised — (1,191,877 ) $ 15.54 Options Forfeited or Expired 811,503 (811,503 ) $ 24.75 Options Outstanding, December 31, 2004 3,578,083 18,488,946 $ 21.62



The following table summarizes information with respect to stock options outstanding and exercisable as of December 31, 2004: Options Outstanding Weighted Options Exercisable

Range of Exercise Price

OutstandingatDecember 31,2004

WeightedAverageExercisePrice

AverageRemainingContractualLife

ExercisableatDecember 31,2004

WeightedAverageExercisePrice

(in years) (in thousands) $ 0.06 - $ 0.06 28,821 $ 0.06 3.9 28,821 $ 0.06 $ 0.25 - $ 0.25 25,189 $ 0.25 4.1 25,189 $ 0.25 $ 0.85 - $ 0.85 55,357 $ 0.85 0.8 55,357 $ 0.85 $ 1.57 - $ 2.28 170,545 $ 2.23 3.1 169,272 $ 2.23 $ 2.50 - $ 3.64 151,519 $ 3.45 4.5 151,519 $ 3.45 $ 4.00 - $ 5.65 712,283 $ 4.48 4.3 712,283 $ 4.48 $ 9.38 - $13.61 1,439,080 $ 11.80 5.5 1,416,997 $ 11.78 $14.23 - $21.31 7,335,552 $ 18.24 7.5 4,155,007 $ 18.12 $21.53 - $32.05 6,901,353 $ 26.33 8.3 6,799,530 $ 26.39 $32.60 - $45.21 1,669,247 $ 37.72 8.9 1,669,247 $ 37.72 $ 0.06 - $45.21 18,488,946 $ 21.61 7.6 15,183,222 $ 22.30

2000 Employee Stock Purchase Plan:

In February 2000, the Company’s stockholders approved the 2000 Employee Stock Purchase Plan. The purchase plan is intended to qualifyas an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

The Company has reserved 2.8 million shares of common stock for sale under the stock purchase plan at December 31, 2004. The numberof shares reserved for sale under the plan will be increased annually on

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the first day of each fiscal year beginning in 2001 by an amount equal 2.0 million shares, or 2% of the outstanding shares of the Company’scommon stock on that date, or a lesser amount determined by the Board of Directors. The stock purchase plan will be administered by theBoard or a committee appointed by the Board.

The stock purchase plan is implemented by offering periods, the duration of which may not exceed 24 months. Offering periods maycontain interim purchase periods. Shares purchased under the stock purchase plan will be held in separate accounts for each participant. Thefirst offering period began in March 2000 and ended on the last trading day before April 30, 2002. Subsequent consecutive overlappingoffering periods begin on May 1 and November 1 annually. These offering periods end twenty-four months thereafter.

Employees will be eligible to participate in the stock purchase plan if they are employed by the Company for more than 20 hours per weekand more than five months in a calendar year. The stock purchase plan permits eligible employees to purchase the Company’s commonstock through payroll deductions, which may not exceed 15% of the employee’s total compensation. Stock may be purchased under the planat a price equal to 85% of the fair market value of the Company’s stock on either the date of purchase or the first day of the offering period,whichever is lower. However, the Board of Directors may in its discretion provide that the price at which shares of common stock arepurchased under the plan shall be 85% of the fair market value of the Company’s shares on the date of purchase. Participants may notpurchase shares of common stock having a value greater than $25,000 during any calendar year.

Participants may increase or decrease their payroll deductions at any time during an offering period, subject to limits imposed by the Boardof Directors. If a participant withdraws from the stock purchase plan, any contributions that have not been used to purchase shares shall berefunded. A participant who has withdrawn may not participate in the stock purchase plan again until the next offering period. In the eventof retirement or cessation of employment for any reason, any contributions that have not yet been used to purchase shares will be refundedto the participant, or to the participant’s designated beneficiary in the case of death, and a certificate will be issued for the full shares in theparticipant’s account.

The Board of Directors may terminate or amend the stock purchase plan, subject to stockholder approval in some circumstances. Unlessterminated earlier by the Board, the stock purchase plan will have a term of ten years.

Total shares purchased under the plan were 445,844, 261,103, and 182,437 in 2004, 2003, and 2002, respectively. At December 31, 2004,there were 2,826,910 shares available for purchase under the plan.



NOTE 16—DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options and restricted common stock to employees, non-employees and members of the Boardof Directors and in connection with certain acquisitions (see Note 5), the Company recorded net deferred stock compensation of$0.3 million, and $8.7 million for the years ended 2003 and 2002, respectively, representing the fair value of restricted stock and thedifference between the fair value of common stock and the option exercise price of options at the date of grant. The Company did not recordany net deferred stock compensation for the year ended December 31, 2004. Deferred compensation is presented as a reduction ofstockholders’ equity, with amortization recorded over the vesting period of the related restricted stock and options. The Company recordedstock compensation expense of $0.5 million, $4.3 million, and $3.1 million for the year ended December 31, 2004, 2003, and 2002,respectively. At December 31, 2004, approximately $6.1 million remained to be amortized over the corresponding vesting period of eachrespective option or restricted share, generally four to five years.

In November 2001, the Company completed the purchase of Advanced Communication Devices Corporation (“ACD”). The Companyadopted an incentive plan providing for the issuance of shares of

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common stock valued at $5 million to ACD employees who will continue to perform services for the Company.

Stock granted as part of incentive programs related to certain acquisitions (see Note 5), as well as the ACD acquisition noted above, vestover five years through 2007, with accelerated vesting upon the achievement of specified milestones.

NOTE 17—401(K) PLAN

On January 1, 2000, the Company adopted the UTStarcom, Inc. 401(k) Savings Plan (the “401(k) Plan”), a cash-or-deferred arrangement,which covers the Company’s eligible employees who have attained the age of 21. The 401(k) Plan is intended to qualify under Sections401(a), 401(m) and 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and the 401(k) Plan trust is intended to qualifyunder Section 501(a) of the Code. All contributions to the 401(k) Plan by eligible employees or by the Company, and the investmentearnings thereon, are not taxable to such employees until withdrawn, and any contributions the Company may make are expected to bedeductible by the Company. The Company’s eligible employees may elect to reduce their current eligible compensation by one percent(1%) up to fifty percent (50%), subject to the maximum statutorily prescribed annual limit of $13,000 for participants under age 50 and$16,000 for participants age 50 and over for the year ended December 31, 2004 and $12,000 for participants under age 50 and $14,000 forparticipants age 50 and over for the year ended December 31, 2003, and to have such salary reductions contributed on their behalf to the401(k) Plan. The 401(k) Plan permits, but does not require, the Company to make matching contributions on behalf of all eligibleemployees who make salary reduction contributions to the 401(k) Plan. Commencing with the plan year beginning January 1, 2001, theCompany elected to begin making matching contributions on behalf of qualified employees who participate in the 401(k) Plan. TheCompany will contribute $0.50 for each dollar contributed by qualified employees to the 401(k) Plan, to a maximum of $5,500 for the 2004and 2003 plan years, respectively. The Company’s matching contributions are subject to a five-year vesting schedule based upon longevityof employee service with the Company. Matching contributions were $2.7 million, $2.1 million, and $0.7 million for 2004, 2003, and 2002,respectively.

NOTE 18—COMMITMENTS AND CONTINGENCIES

Leases:

The Company leases certain facilities under non-cancelable operating leases that expire at various dates through 2023. The minimum futurelease payments under the leases at December 31, 2004 are as follows: (in thousands) Years ending December 31: 2005 $19,750 2006 15,137 2007 8,775 2008 2,510 2009 and after 2,742 Total minimum lease payments $ 48,914

Rent expense for the years ended December 31, 2004, 2003 and 2002 was $17.3 million, $11.5 million and $6.5 million, respectively.



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Investment Commitments:

As of December 31, 2004, the Company had invested a total of $2.0 million in Global Asia Partners L.P. The fund size is anticipated to be$100 million and the fund was formed to make private equity investments in private or pre-IPO technology and telecommunicationscompanies in Asia. The Company has a commitment to invest up to a maximum of $5.0 million. The remaining amount is due at such timesand in such amounts as shall be specified in one or more future capital calls to be issued by the general partner.

Purchase Commitments:

The Company is obligated to purchase raw materials and work-in-process inventory under various orders from one supplier, all of which areexpected to be fulfilled with no adverse consequences material to the operations or financial condition of the Company. As of December 31,2004, total open commitments under these purchase orders due within a year are approximately $578.3 million.

The Company has also entered into various earnout agreements related to certain acquisitions, which are subject to the completion ofperformance miletstones (see Note 5).

Contractual obligations and commercial commitments

Our obligations under contractual obligations and commercial commitments are as follows:

December 31, 2004Payments Due by Period

Total Less than1 year

1-3years

3-5years

More than5 years

(in thousands) Notes payable $ 1,183 $ 1,183 $ — $ — $ — Bank loans $ 358,155 $ 350,000 $ 8,155 $ — $ — Convertible subordinated notes $ 402,500 $ — $ — $ 402,500 $ — Interest payable on convertible notes $ 12,327 $ 3,522 8,805 $ — $ — Standby letters of credit $ 35,160 $ 32,920 $ 2,240 $ — $ —


Litigation:

Securities Class Action Litigation

On October 26, 2004, an alleged former shareholder of the Company filed a class action complaint in the United States District Court forthe District of Idaho against the Company and two of the Company’s directors and/or officers, purporting to assert claims under the federalsecurities laws on behalf of a class of purchasers of the Company’s publicly traded securities in the period from April 16, 2003 throughSeptember 20, 2004. Among other things, the complaint refers to the Company’s disclosures as to “significant control deficiencies” relatedto revenue recognition and as to the deferral of revenue recognition on a particular transaction and the related lowering of the Company’sfinancial guidance. The complaint further alleges that the defendants previously made positive statements regarding the Company’sbusiness and financial performance that were false and misleading because such statements, among other things, failed to disclose problemswith the Company’s internal controls and revenue

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recognition policies and procedures and failed to disclose that the revenue on the transaction at issue would need to be deferred, whichallegedly caused the price of the Company’s publicly traded securities to be artificially inflated. The complaint claims that the plaintiff andother class members were damaged as a result thereof, and seeks monetary recovery in their favor in an unspecified amount.

Four similar class action complaints were later filed in the United States District Court for the Northern District of California against the



Company and several of the Company’s directors and officers. In both the Idaho court and the California court, competing motions werefiled for appointment of lead plaintiff and approval of lead plaintiffs’ counsel, and in the California court various motions for consolidationof actions were filed as well. On March 15 and 16, 2005, the California court entered orders consolidating the cases pending in that court,appointing the lead plaintiff, and approving the lead plaintiff’s counsel. Pursuant to those orders, a consolidated complaint is to be filed inthat court within 60 days thereafter. On April 6, 2005, the Idaho court entered an order appointing the lead plaintiff and approving the leadplaintiff’s counsel.

This class action litigation is in its preliminary stages, and the Company cannot predict its outcome, as the litigation process is inherentlyuncertain. However, the Company believes that the allegations and claims in this litigation are without merit and that the Company has validdefenses, and intends to contest such allegations and claims and defend itself vigorously. As of December 31, 2004, no loss amount hasbeen accrued because a loss is not considered probable or estimable.

Shareholder Derivative Litigation

On August 31 and September 2, 2004, respectively, two shareholder derivative actions were filed in the Superior Court of California,Alameda County, by alleged shareholders of the Company purporting to assert, on its behalf, claims of breach of fiduciary duty againstcertain of its current and former directors and officers, and also naming the Company as a nominal defendant. The complaints in theseactions refer to the Company’s disclosures as to an Audit Committee investigation into revenue recognition issues and as to “significantcontrol deficiencies” related to revenue recognition. The complaints further allege that the individual defendants ignored problems with theCompany’s accounting and internal control practices and procedures and breached their fiduciary duties by failing to maintain adequateinternal accounting controls or to make good faith efforts to do so. Plaintiffs claim that such alleged breaches damaged the Company, andthey seek monetary recovery against the individual defendants and in favor of the Company, as well as equitable relief. In addition,plaintiffs claim that they should be excused from pre-suit demand requirements based on allegations that the Company’s Board of Directorscould not have fairly evaluated such pre-suit demand, and thus that such demand would have been futile. On November 22, 2004, the Courtentered an order consolidating the two actions and appointing lead plaintiffs’ counsel.

On November 23 and December 2, 2004, two related shareholder derivative actions were filed in the same court. On January 13, 2005, theCourt consolidated these two newer cases with the previously consolidated actions, and directed plaintiffs to prepare and file an amendedconsolidated complaint, which plaintiffs filed on January 31, 2005. On March 17, 2005, the Company filed a motion, joined by otherdefendants’, seeking dismissal of the consolidated complaint for failure to adequately plead futility of the pre-suit demand.

This derivative litigation is in its preliminary stages, and the Company cannot predict its outcome, as the litigation process is inherentlyuncertain. However, the Company believes that plaintiffs’ allegations of “demand futility” are without merit, and the Company intends tocontest those allegations vigorously. As of December 31, 2004, no loss amount has been accrued because a loss is not considered probableor estimable.

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IPO Allocation

On October 31, 2001, a complaint was filed in United States District Court for the Southern District of New York against the Company,some of its directors and officers and various underwriters for the Company’s initial public offering. Substantially similar actions were filedconcerning the initial public offerings for more than 300 different issuers, and the cases were coordinated as In re Initial Public OfferingSecurities Litigation, 21 MC 92. In April 2002, a consolidated amended complaint was filed in the matter against the Company, captionedIn re UTStarcom, Initial Public Offering Securities Litigation, Civil Action No. 01-CV-9604. Plaintiffs allege violations of the SecuritiesAct of 1933 and the Securities Exchange Act of 1934 through undisclosed improper underwriting practices concerning the allocation of IPOshares in exchange for excessive brokerage commissions, agreements to purchase shares at higher prices in the aftermarket and misleadinganalyst reports. Plaintiffs seek unspecified damages on behalf of a purported class of purchasers of the Company’s common stock betweenMarch 2, 2000 and December 6, 2000. The Company’s directors and officers have been dismissed without prejudice pursuant to astipulation. On February 19, 2003, the Court granted in part and denied in part a motion to dismiss brought by defendants including theCompany. The order dismisses all claims against the Company except for a claim brought under Section 11 of the Securities Act of 1933,which alleges that the registration statement filed in accordance with the IPO was misleading. In June 2004, a stipulation of settlement andrelease of claims against the issuer defendants, including the Company, was submitted to the court for approval. The terms of the settlement,if approved, would dismiss and release all claims against the participating defendants (including the Company). In exchange for thisdismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants mayhave against the underwriters. The settlement is subject to a number of conditions, including court approval. If the settlement does notoccur, and litigation against the Company continues, the Company believes it has valid defenses and intends to defend the case vigorously.The total amount of the loss associated with the above litigation is not determinable at this time. Therefore the Company is unable tocurrently estimate the loss, if any, associated with the litigation.

Starent Patent Infringement Litigation



The Company has sued Starent Networks Corporation (“Starent”) for patent infringement in the U.S. District Court for the Northern Districtof California. On March 22, 2004, the Company filed its Complaint. On June 3, 2004, the Company served its Complaint on Starent. OnJuly 30, 2004, Starent filed and served its answer and counterclaims. On August 30, 2004, the Company served and filed its AmendedComplaint. In the Company’s Amended Complaint, the Company asserts that Starent infringes a Company’s patent through themanufacture, use, offer for sale, and sale of Starent’s ST-16 Intelligent Mobile Gateway. The Company seeks, inter alia, compensatorydamages and injunctive relief. Starent filed its answer to the Amended Complaint and counterclaims on September 17, 2004. In its answerand counterclaims, Starent denies the Company’s allegations and seeks a declaration that the patent-in-suit is not infringed, is invalid and isunenforceable. The Court held an initial case management conference on November 2, 2004 and scheduled a hearing to construe the claimsof the patent-in-suit for June 30, 2005. At that time the Court will hold an additional case management conference to schedule a date fortrial. On February 17, 2005, the Company filed a motion for a preliminary injunction against Starent’s use, sale, and offer for sale ofproducts having the infringing feature. A hearing on the Company’s motion is set for May 11, 2005. The Company cannot reliably predictthe outcome of this litigation.

Fenner Investments Patent Infringement Litigation

On January 6, 2005, Fenner Investments, Ltd. filed suit against the Company and co-defendants Juniper Networks, Inc., Nokia, Inc., NortelNetworks Corp., Lucent Technologies, Inc., and

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Cisco Systems, Inc. in the U.S. District Court for the Eastern District of Texas. The suit alleges that unspecified products and servicesinfringe two Fenner patents and seeks compensatory and injunctive relief. On March 1, 2005, the Company filed a motion to dismiss thecomplaint due to improper venue; no hearing is yet scheduled for this motion. This lawsuit is in its initial stage and it is not possible toreliably predict the outcome or any relief that could be awarded, as the litigation process is inherently uncertain. Therefore, the Company isunable to currently estimate the loss, if any, associated with the litigation. The Company intends to contest the allegations and claims anddefend itself vigorously.

Other

On August 19, 2004, the Company received a letter from the new management team of Hyundai Syscomm, Inc. (“HSI”) stating that theyconsider the Asset Purchase Agreement, dated as of February 26, 2004, among HSI, UTSI, Dr. Seong-Ik Jang and 3R Inc. (the “APA”), andthe various ancillary agreements entered into in connection with the closing related to the APA on April 27, 2004, to be null and void due tounfulfillment of condition precedents and material breach of terms of such agreements. Such condition precedents and material breach ofterms were not specified in such letter from HSI. In addition, HSI has made allegations and arguments before Korean governmentalagencies and to the Korean press alleging that the technology that was purchased by the Company pursuant to the APA has been exportedoutside of Korea. The Company believes none of such technology has been exported by the Company from Korea to any foreign country. Inaddition, the Company believes that the Company has materially complied with all provisions of the APA and the ancillary agreements andHSI cannot void or nullify such agreements. The Company has taken, and will continue to take, appropriate legal actions to fully enforce itsrights under the APA and the ancillary agreements.

The Company is a party to other litigation matters and claims that are normal in the course of operations, and while the results of suchlitigation matters and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have amaterial adverse impact on its financial position or results of operations.

NOTE 19—HEDGING

The Company uses derivative financial instruments to manage its exposures to foreign currency exchange rate changes. The derivativeinstruments are accounted for pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended bySFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” (“SFAS 133”). As amended, SFAS 133requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet, measure those instruments at fair value andrecognize changes in the fair value of derivatives in earnings in the period of change unless the derivative qualifies as an effective hedgethat offsets certain exposures. Such contracts are designated at inception to the related foreign currency exposures being hedged. Beginningin the first quarter of 2004, the Company hedges certain of its Japanese Yen-denominated balance sheet exposures against futuremovements in foreign currency exchange rates by using foreign currency forward contracts. Hedged transactions are denominated in U.S.dollars on behalf of these transactions denominated in Japanese Yen. Pursuant to its foreign currency exchange hedging policy, theCompany may hedge anticipated transactions and the related payables denominated in foreign currencies using forward foreign currencyexchange rate contracts. The Company has not hedged any such transactions. Gains and losses on these fair value hedges are intended tooffset gains and losses from the revaluation of Japanese Yen-denominated recognized liabilities. The net result of these gains and losses oncontracts and revaluation included in interest and other income (expense) was insignificant for the year ended December 31, 2004. TheCompany’s foreign currency forward contracts generally mature within three months. These derivative financial instruments are not held forspeculative



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trading purposes. There were no foreign currency forward contracts open as of December 31, 2004, 2003 or 2002.

NOTE 20—OPERATING RISKS

Financial Risks:

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents,short-term investments and accounts and notes receivable. The Company places its temporary cash and short-term investments with severalfinancial institutions. Approximately $589.8 million and $350.0 million of the Company’s cash and short-term investments was on depositin foreign accounts at December 31, 2004 and 2003, respectively. The Company invests excess cash in highly liquid investments withoriginal maturities of twelve months or less, such as certificates of deposit, government sponsored entities notes, commercial paper, floatingrate corporate bonds, fixed income corporate bonds, and money market funds, which the Company believes have limited exposure to risk.

Concentration of Credit Risk and Major Customers:

The table below outlines the Company’s sales to and the accounts receivable balances with respect to the Company’s customers:

For the year ended December 31, % ofNet Sales

% ofAccounts Receivable

2004 Customer A 12 % 5 % Customer B 10 % 9 % Customer C 5 % 15 % 2003 Customer D 11 % 3 % 2002 Customer E 18 % 6 % Customer F 13 % 0 %

Approximately 73%, 76%, and 84% of the Company’s net sales during 2004, 2003, and 2002, respectively, were to entities affiliated withthe government of China. Accounts receivable balances from these China government affiliated entities or state owned enterprises were$582.3 million and $304.0 million, respectively, as of December 31, 2004 and 2003. The Company extends credit to its customers in Chinagenerally without requiring collateral. In global sales outside of China, the Company often requires letters of credit from its customers. TheCompany monitors its exposure for credit losses and maintains allowances for doubtful accounts.

Country Risks:

Approximately 79%, 86%, and 84% of the Company’s sales for the year ended December 31, 2004, 2003, and 2002, respectively, weremade in China. Accordingly, the political, economic and legal environment, as well as the general state of China’s economy may influencethe Company’s business, financial condition and results of operations. The Company’s operations in China are subject to specialconsiderations and significant risks not typically associated with companies in the United States. These include risks associated with, amongothers, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affectedby, among other things, changes in the political, economic and social conditions in China, and by changes in governmental policies with

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respect to laws and regulations, changes in China’s telecommunications industry and regulatory rules and policies, anti-inflationarymeasures, currency conversion and remittance abroad, and rates and methods of taxation.

Approximately 6%, 10%, and 13% of the Company’s sales for the year ended December 31, 2004, 2003, and 2002, respectively, were madein Japan. Accordingly, the political, economic and legal environment and the general state of Japan’s economy may influence theCompany’s business, financial condition and results of operations.

NOTE 21—SEGMENT REPORTING



As of December 31, 2004, the Company was organized around three operating segments: China, International and PCD. For the year endedDecember 31, 2003 and for the first three quarters of 2004, the Company managed its business as a single operating segment. During 2004,the Company continued to expand its focus on markets and operations outside of China. Effective with the fourth quarter of 2004, it wasdetermined that the Company’s chief operating decision makers in accordance with SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information,” were evaluating performance, making operating decisions and allocating resources based on twooperating segments, namely China and all other regions referred to as International (“International”).

The China operating segment was comprised of discrete administrative, research and development, manufacturing, and sales and supportinfrastructure. It remained the largest market for the Company and derived the majority of its revenue from voice products such as PAS andiPAS. The segment was managed by the CEO and COO of UTStarcom China. The International segment was comprised of operations of allother geographic areas including non-China Asia, Europe, the Middle East, Africa, and North and South America. Revenues are attributedto various countries based on the location of the respective country’s principal offices.

On November 1, 2004, the Company acquired selected assets of Audiovox Communication Corporation, the wireless handset division ofAudiovox Corporation. The acquired business was integrated into the Company as a separate and distinct operating division referred to asthe Personal Communications Division (“PCD”) and was managed by the President of PCD. As the Company determined to also evaluatethe performance and allocate resources to this division as a separate unit, it was considered a third operating segment. PCD primarilyderived its revenue from the design and sales of a variety of handsets, which primarily support the CDMA markets in North and SouthAmerica.

The Company evaluates the performance of and allocates resources to the operating segments based on segment gross profit. Theaccounting policies used in measuring segment assets and operating performance are the same as those described in Note 2. Certainoperating expenses of the Company’s corporate headquarters, are not allocated but are included in the International segment. In addition,none of the non-operating items are allocated.

The following table sets forth certain financial information to each of our operating segments described above: Year Ended December 31, 2004 China International PCD Adjustments(1) Consolidated Revenues from external customers $2,133,292 $292,879 $277,410 $— $2,703,581 Inter-segment revenues 233,345 573,014 — (806,359 ) — Gross profit 490,868 98,847 11,886 — 601,601 Depreciation and amortization 34,962 38,955 2,286 — 76,203

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Year Ended December 31, 2003 China International PCD Adjustments(1) Consolidated Revenues from external customers $1,680,821 $284,366 $— $— $1,965,187 Inter-segment revenues 47,271 724,708 — (771,979 ) — Gross profit 460,408 163,977 — — 624,385 Depreciation and amortization 16,972 27,736 — — 44,708

Year Ended December 31, 2002 China International PCD Adjustments(1) Consolidated Revenues from external customers $822,299 $159,507 $— $— $981,806 Inter-segment revenues 42,223 307,862 — (350,085 ) — Gross profit 301,813 43,659 — — 345,472 Depreciation and amortization 9,173 13,262 — — 22,435

Year Ended December 31, 2004 China International PCD Adjustments(1) Consolidated Capital expenditures $111,442 $23,505 $628 $— $135,575 Total long-lived assets 229,469 37,960 1,330 — 268,759 Total assets 1,857,281 1,271,909 363,301 (176,486 ) 3,316,005

Year Ended December 31, 2003



China International PCD Adjustments(1) Consolidated Capital expenditures $91,947 $31,267 $— $— $123,214 Total long-lived assets 153,653 33,386 — — 187,039 Total assets 1,495,782 906,759 — (158,491 ) 2,244,050

(1) Adjustments reflect elimination of inter-segment transactions and investments in subsidiaries.

Geographical area and product sales data are as follows (in thousands): Years ended December 31, 2004 2003 2002 (in thousands) Sales by region: China $ 2,133,292 79 % $ 1,680,821 86 % $ 822,299 84 %North America 341,751 13 % 31,908 2 % 2,436 0 %Japan 156,416 6 % 194,894 10 % 130,104 13 %Other 72,122 2 % 57,564 2 % 26,967 3 %TOTAL NET SALES $ 2,703,581 100 % $ 1,965,187 100 % $ 981,806 100 %Sales by product line: Wireless infrastructure $ 1,395,521 52 % $ 720,555 37 % $ 447,096 46 %Handsets and customer premise equipment 1,026,483 38 % 983,392 50 % 376,805 38 %Broadband infrastructure 281,577 10 % 261,240 13 % 157,905 16 %TOTAL NET SALES $ 2,703,581 100 % $ 1,965,187 100 % $ 981,806 100 %

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As of December 31, 2004 and 2003, inventory balances by segment are as follows (in thousands): December 31, 2004 2003 China $ 372,457 $ 241,452 International 62,352 15,613 PCD 156,023 — $ 590,832 $ 257,065

Long-lived assets by geographical area are as follows (in thousands):

December 31,2004

December 31,2003

U.S. $ 24,958 $ 32,807 China 229,469 $ 153,653 Other 14,332 579 Total long-lived assets $ 268,759 $ 187,039

NOTE 22—RELATED PARTY TRANSACTIONS

Softbank

The Company recognized revenue of $143.7 million, $184.4 million and $123.0 million during the years ended December 31, 2004, 2003and 2002, respectively, with respect to sales of telecommunications equipment to SBBC, an affiliate of SOFTBANK CORP. andSOFTBANK America Inc., which is a significant stockholder of the Company. SBBC offers asynchronous digital subscriber line (“ADSL”)coverage throughout Japan, which is marketed under the name “YAHOO! BB.” In addition, the Company supports SBBC’s newfiber-to-the-home service through sales of its carrier class Gigabit Ethernet Passive Optical Network (“GEPON”) product as well as its



multi-service optical transport product (“NetRing™”). Revenue recognized for the GEPON and NetRing™ products for the twelve monthsended December 31, 2004 was $93.4 million.

Included in accounts receivable at December 31, 2004 and December 31, 2003 were $86.8 million and $43.9 million, respectively, relatedto these agreements. There were insignificant amounts included in deferred revenue with respect of these agreements at December 31, 2004and no amounts included in deferred revenue with respect of these agreements at December 31, 2003.

During August 2004, the Company entered several agreements with Japan Telecom Co., Ltd (“JT”), a wholly owned subsidiary ofSOFTBANK Corp., related to the sale of telecommunication equipment and promotional services. The nature of these agreementscontemplate the sale of iAN-8000 equipment with specified value and delivery dates, as well as an oral agreement which subsequentlyconverted into specific service contracts to manage a sales promotional program for JT. The Company has determined that the serviceactivities revenue should be recorded net of expected promotional spending. Because the Company has not provided these activities in thepast and cannot estimate the fair value of these services, the Company has determined under guidance of SAB 104, that all revenue relatedto these agreements will be deferred and included in customer advance until the above-mentioned promotional activities are complete. TheCompany delivered the majority of the equipment during the third and fourth quarters of 2004.

The promotional services discussed above involve contracting with third party promotional vendors, who in turn, facilitate the marketingand subscriber recruitment for the JT fiber-to-the-home program. During the fourth quarter of 2004, the Company determined that it wouldend its involvement with the JT promotional program after completion of the contract discussed above. Accordingly, late in the fourthquarter of 2004 and the first quarter of 2005, the Company has either cancelled or assigned to another

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party, all third party contracts with promotional vendors related to the JT contract. The Company now expects to satisfy all its equipmentand promotional obligations by the end of the first quarter of 2005.

The terms of these agreements specify that JT was to remit 50 percent of the contract value in cash to the Company within one month of theexecution of the contract, which was August 20, 2004. The remaining 50 percent is due shortly after delivery of the equipment. All cashreceived from JT in advance of revenue recognition has been accounted for as a customer advance. As the Company spends cash forpromotional activities, such spending is accounted for as a reduction of customer advance. As of December 31, 2004, there was $217.5million included in customer advance related to these agreements.

The Company also entered into an agreement during the third quarter with JT to supply chassis equipment with an approximate value of $75million. Although some of the equipment was shipped to the customer during the third quarter, it is considered linked to the iAN-8000 salenoted above and as such, the revenue from this contract will be deferred until the completion of the above-mentioned promotional activities.

The Company has invested in Softbank China and Restructuring Fund No. 1, which are investment vehicles established by SOFTBANKCORP. and its affiliates. See Note 9.

On July 17, 2003, the Company entered into a Mezzanine Loan Agreement with BB Modem Rental PLC (“BB Modem”), an affiliate ofSOFTBANK CORP. Under the terms of the agreement, the Company loaned BB Modem $10.1 million at an effective interest rate of12.01% per annum, for the purpose of investing in a portfolio of ADSL modems and associated modem rental agreements, from SBBC.SBBC will continue to service such modems and modem rental agreements. The Company’s loan is subordinated to certain senior lendersof BB Modem, and repayments are payable to the Company over a 42-month period through January 31, 2007, with a substantial portion ofthe principal amount of the loan schedule to be repaid during the last 16 months of this period. The Company’s recourse for nonpayment ofthe loan is limited to the assets of BB Modem, the account into which subscriber payments are made and its rights under the securitizationtransaction documents. The value of BB Modem’s modems that serve as collateral for the loan may decrease over time and may not besufficient upon sale to pay the outstanding amounts on the loans. The Company assesses the loan for impairment whenever events orchanges in circumstances indicate that the carrying amount may not be recoverable. The Company periodically reviews the underlyingquality of the asset pool securing the loan to assess whether impairment has incurred and needs to be recorded. During 2004 and 2003, theCompany recorded $1.3 million and $0.5 million, respectively, in interest income in respect to this loan. The loan receivable atDecember 31, 2004 and 2003 was approximately $11.8 and $11.2 million, respectively and is included in other long-term assets.

On April 5, 2003, the Company repurchased 8.0 million shares of common stock beneficially owned by SOFTBANK America Inc., at apurchase price of $17.385 per share. The total cost of the repurchase was $139.6 million including transaction fees. In connection with thisrepurchase transaction, SOFTBANK America Inc. entered into an agreement with the Company not to offer, sell or otherwise dispose of theCompany’s common stock for a period of one year, subject to a number of exceptions. As of December 31, 2004, SOFTBANKAmerica Inc. beneficially owned approximately 12.8% of the Company’s outstanding stock.

On August 29, 2002, the Company completed the repurchase of 6.0 million shares of our common stock for $72.9 million fromSOFTBANK America, Inc.



Cellon

In October 2002, the Company entered into a license and a royalty agreement with Cellon International Holding Corporation (“Cellon”), inwhich the Company has a 9% ownership interest. The Company paid $0.8 million to license certain technology for the development ofcertain handset products in China. Per the terms of the royalty agreement, the Company is required to pay Cellon $3 per unit

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shipped for a minimum of 0.1 million units. This agreement is not material to the overall financial results of Cellon. The Company hasevaluated its relationship with Cellon under FIN 46, and determined that consolidation is not necessary.

Fiberxon

The Company has an outstanding purchase commitment with Fiberxon, in which the Company has an 11% ownership interest, to purchasecomponent parts for optical networking products. In addition, the Company provided a letter of credit for $5.0 million to purchase rawmaterials for the manufacture of these component parts. This commitment should be fulfilled without adverse consequences material to theoperations or financial condition of the Company. Purchases from Fiberxon totaled $15.1 million in 2004 and the Company has $13.3million in accounts payable to Fiberxon at December 31, 2004.

Mitsubishi

The Company recognized revenue of $1.0 million for the year ending December 31, 2004 with MELCO, an affiliated member ofMitsubishi, which owns insignificant shares of the Company. In addition, the Company also made purchases from Mitsubishi ofapproximately $97.4 million of parts and inventory in 2004, $363.1 million in 2003, and $157.2 million in 2002. At December 31, 2004 and2003, the Company had $6.4 million and $12.7 million, respectively, in accounts payable to Mitsubishi.

Starcom Products, Inc.

The Company obtains engineering consulting and employee placement services from Starcom Products, Inc. (“Starcom”), which is 31%owned by an individual related to a member of the Company’s Board of Directors. The Company paid to Starcom $1.1 million in 2004, $1.4million in 2003, and $0.7 million in 2002 for engineering consulting and employee placement services provided by Starcom.

NOTE 23—VARIABLE INTEREST ENTITY

The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, (“FIN 46”). FIN 46 requires that if an entity isthe primary beneficiary of a variable interest entity, (“VIE”), the assets, liabilities, and results of operations of the VIE should be included inthe consolidated financial statements of the entity. The Company has consolidated a related party deemed a VIE and with whom theCompany is the primary beneficiary. Beijing MDC Telecom Co., Ltd. (“MDC BJ”) was formed in 2001. In 2002, a venture capital fundwith affiliation to a shareholder of the Company made an additional capital investment and established MDC Holding Limited (“MDCHolding”) and its affiliated entities (MDC Holding and such affiliated entities, including MDC BJ, are referred to, collectively, as “MDC”).MDC is in the business of providing value-added services, such as short message, voicemail or ring-tone services for PAS telecomnetworks. The Company has consolidated MDC, a VIE, for whom the Company is the primary beneficiary. At December 31, 2004, theconsolidation resulted in a $4.2 million increase in both total assets and total liabilities and equity. There was no effect on net income as aresult of this consolidation. No assets were provided as collateral for MDC’s obligations. MDC’s creditors have no recourse to the generalcredit of the Company.

NOTE 24—SUBSEQUENT EVENTS

Pursuant to the Asset Purchase Agreement entered into on October 29, 2004, between UTStarcom CDMA Technologies Korea Limited, alimited liability company organized under the laws of Korea and a wholly owned subsidiary of the Company, and Giga Telecom, Inc.,(“Giga”), a Korean corporation that develops and manufactures wireless handsets, the Company completed the acquisition on January 4,2005. At the closing, $13.0 million in cash was paid, and an additional $2.0 million was paid into an escrow account held by the Companyfor six months.

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On January 20, 2005, the Company, formed a joint venture with two other parties to provide mobile communication, broadband and IPrelated value added services in Mongolia. According to the joint venture agreement, the joint venture will be capitalized with $20 million incash and equipment. On February 25, 2005, the Company contributed $1.8 million of capital. The Company presently expects to



consolidate the operations of the joint venture beginning in the first quarter of 2005.

On March 31, 2005, the Company filed a current report on Form 8-K with the Securities and Exchange Commission disclosing that theCompany would delay the filing of its Annual Report on Form 10-K for the year ended December 31, 2004. The delay results in a technicaldefault of the Company’s 7 ⁄ 8 % Convertible Subordinated Notes due 2008. The default would not become an event ofdefault unless the Company failed to file the 2004 Form 10-K within 60 days of written notice of the default beingprovided to the Company by either the trustee under the indenture or the holders of at least 25% in aggregate principalamount of the notes then outstanding. If an event of default were to occur and be continuing, the trustee or the holdersof at least 25% in aggregate principal amount of the notes then outstanding could declare all unpaid principal andaccrued interest on the Notes then outstanding to be immediately due and payable. The Company believes that thistechnical default will be remediated with the filing of this 2004 Form 10-K.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Quarterly financial data for the periods indicated are as follows: Quarter ended

Dec. 31,2004(1)(2)

Sept. 30,2004

June 30,2004

March 31,2004

Dec. 31,2003(4)

Sept. 30,2003(4)

June 30,2003(3)(4)

March 31,2003(4)

(In thousands, except per share amounts) Revenues $ 746,645 $ 645,016 $ 689,628 $ 622,292 $ 644,451 $ 584,382 $ 405,834 $ 330,520 Gross profit $ 112,163 $ 137,134 $ 176,270 $ 176,034 $ 188,094 $ 186,102 $ 137,504 $ 112,685 Net income (loss) $ (30,201 ) $ 4,987 $ 43,863 $ 54,766 $ 65,710 $ 65,204 $ 43,450 $ 41,168 Net earnings (loss) pershare:* Basic $ (0.26 ) $ 0.04 $ 0.39 $ 0.48 $ 0.63 $ 0.63 $ 0.43 $ 0.38 Diluted $ (0.26 ) $ 0.04 $ 0.33 $ 0.40 $ 0.51 $ 0.50 $ 0.36 $ 0.37

(1) On November 1, 2004, the Company completed its acquisition of Audiovox Communication Corporation.Revenue for the two months ended December 31, 2004 from this acquisition was $277.4 million.

(2) Net income for the quarter ended December 31, 2004 included an $7.5 million charge associated with theimpairment of various assets, including $7.0 million of goodwill, related to the substantial abandonment of operationsof Hyundai Syscomm, Inc. See Note 10 to the Consolidated Financial Statements.

(3) Net income for the quarter ended June 30, 2003 included a charge of $7.0 million for in-process research anddevelopment associated with various acquisitions.

(4) The Company filed an Amendment to its Annual Report on Form 10-K for the year ended December 31, 2003 to reflect the restatementof its consolidated financial statements for the year ended December 31, 2003. See Note 2 to the Consolidated Financial Statements.

* Net earnings (loss) per share is computed independently for each of the quarters presented and, therefore, thesum of the quarterly net earnings per share may not equal the annual earnings per share.

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ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE

Not applicable.

ITEM 9A—CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

UTStarcom, Inc. (the “Company”) maintains disclosure controls and procedures that are designed to ensure that information required to bedisclosed in the reports the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), isrecorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and



forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.

In connection with the preparation of this Annual Report on Form 10-K, the Company carried out an evaluation under the supervision andwith the participation of the Company’s management, including the CEO and CFO, as of December 31, 2004 of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act. Based upon this evaluation, the CEO and CFO concluded that as of December 31, 2004 the Company’s disclosurecontrols and procedures were not effective because of the material weaknesses described below under “Management’s Report on InternalControl Over Financial Reporting.”

To address the material weaknesses described below, the Company performed additional analyses and other procedures (as furtherdescribed below under the subheadings “Interim Measures” under “Management’s Remediation Initiatives and Interim Measures”) toensure that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles inthe United States. Accordingly, the Company’s management believes that the consolidated financial statements included in this AnnualReport on Form 10-K fairly present in all material respects the Company’s financial condition, results of operations and cash flows for theperiods presented and that this Annual Report on Form 10-K does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external reporting purposes in accordance with generally accepted accounting principles in the United States. Internal control overfinancial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; andprovide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’sassets that could have a material effect on the consolidated financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has conducted an assessment, including testing, of the effectiveness of the Company’s internal control over financial reportingas of December 31, 2004. In making its assessment of internal control over financial reporting, management used the criteria in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Management has excluded Audiovox Communication Corporation (“Audiovox”) from its assessment of the Company’s internal controlover financial reporting as of December 31, 2004 because Audiovox was acquired by the Company through a purchase businesscombination in November 2004. Audiovox’s total assets and total revenue represent approximately 11.0% and approximately 10.3%,respectively, of the Company’s related consolidated financial statement amounts as of and for the year ended December 31, 2004.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2004,management identified the following material weaknesses in its assessment of the effectiveness of the Company’s internal control overfinancial reporting:

1. As of December 31, 2004, the Company did not maintain effective controls over the financial reporting process due to an insufficientcomplement of personnel with a level of accounting knowledge, experience and training in the application of generally accepted accountingprinciples commensurate with the Company’s financial reporting requirements. This material weakness contributed to the followingcontrol deficiencies relating to the preparation of the Company’s financial statements which are individually considered to be materialweaknesses:

(a) The Company did not maintain effective controls over its revenue and deferred revenue accounts and associated cost of sales.Specifically, the Company’s controls over its processes and procedures related to the recording and review of its revenue and deferredrevenue accounts were not adequate to ensure that such accounts were completely and accurately recorded. In particular, the followingexceptions were identified in which revenue recognition criteria were not properly assessed: treatment of upgrade protection in a multiple



element arrangement, non-standard contractual terms and conditions, exceptions to final acceptance confirmations received from customers,tracking of proof of delivery and timing of execution of final acceptance confirmations, and the identification of the appropriate costsassociated with selected sales transactions. This control deficiency resulted in adjustments to the second quarter 2004 financial statementsand audit adjustments to the fourth quarter 2004 financial statements to properly recognize revenue and cost of sales.

(b) The Company did not maintain effective controls over its inventory, deferred costs, inventory reserve accounts and cost of sales.Specifically, the Company’s controls failed to adequately identify, document and analyze the conditions that should have been consideredrelative to the existence and expected recoverability of inventory and deferred costs. Principally in Japan, controls were not adequate toproperly track and confirm inventory movements or ensure the timely recognition of cost of goods sold. In addition, certain inventorypurchases were approved locally but were not in accordance with the Company’s usual procurement polices and procedures. This controldeficiency resulted in certain audit adjustments to the fourth quarter 2004 financial statements to correct cost of goods sold and the relatedinventory and deferred costs accounts.

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(c) The Company did not maintain effective controls over its processes for accounting for goodwill. Specifically, the Company’s controlsover its processes and procedures related to its assessment of the impairment of its goodwill account were not sufficiently detailed toidentify instances of impairment as required under generally accepted accounting principles. This control deficiency resulted in an auditadjustment to the fourth quarter 2004 financial statements to recognize the impairment of the Company’s goodwill associated with theoperations of an entity acquired and substantially abandoned in 2004.

(d) The Company did not maintain effective controls over the process for the translation of its accounts and transactions denominated in acurrency other than U.S. dollars. Specifically, the Company’s controls over its processes and procedures related to the translation oftransactions and account balances denominated in a currency other than U.S. dollars failed to identify and utilize the appropriate foreignexchange rates, primarily related to the cash, accounts receivable, accounts payable, and other comprehensive income accounts. This controldeficiency resulted in certain audit adjustments to the fourth quarter 2004 financial statements to properly record unrealized foreignexchange gains.

(e) The Company did not maintain effective controls over the recording of accrued expenses, primarily in China and Japan. Specifically,the Company’s controls over its processes and procedures related to accrued expenses failed to completely and accurately record expensesin the proper period. The review of open purchase orders and invoices received as part of the close process was insufficient to ensure thatthe 2004 year-end accrued expense balances were completely and accurately recorded in the proper period. This control deficiency resultedin certain audit adjustments to the fourth quarter 2004 financial statements to properly record certain accrued expense and related incomestatement accounts.

(f) The Company did not maintain effective controls over the financial reporting process to ensure the accurate preparation and review ofits financial statements. Specifically, the Company’s controls over the completeness, accuracy and review of its documentation of closeprocesses relating to reconciliations, journal entries, spreadsheets, international reporting packages and review and preparation of monthlyexpenditure reports were ineffective in their design and execution. In addition, the Company did not have effective controls over the processfor identifying and accumulating all required supporting information to ensure the completeness of its footnote disclosures, including thesupport for the accounting positions taken on non-routine transactions, goodwill impairment, purchase accounting, segment reporting,accounting for potential variable interest entities, intercompany profit eliminations and income tax accounting and proper classification ofinventory and deferred costs, deferred revenue and accounts receivable, and revenue and cost of goods sold. These control deficienciesresulted in certain audit adjustments to and additional disclosures made in the 2003 and 2004 financial statements.

(g) The Company did not maintain effective controls over the completeness and accuracy of its income tax provision and related balancesheet accounts. Specifically, as part of its 2004 year-end close process, certain errors related to income taxes payable, deferred income taxassets and liabilities, other long-term assets, prepaids and other current assets were identified in the calculation of the Company’s 2003income tax provision. This control deficiency resulted in the restatement of the Company’s financial statements for the quarters and fullyear of 2003 as well as audit adjustments to the fourth quarter 2004 financial statements to adjust the provision for income taxes,stockholders’ equity, income taxes payable, other long-term assets, prepaids and other current assets.

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(h) The Company did not maintain effective controls in relation to segregation of duties and user access to certain Oracle business processapplications nor were there effective controls in place to monitor user access. There were instances in which either information technologyor finance personnel maintained access to specific applications within the Oracle environment beyond that needed to perform theirindividual job responsibilities. This deficiency related to financial reporting, inventory and purchasing applications in China and financial



reporting applications in the United States.

As discussed above, certain of these control deficiencies resulted in either the restatement of the Company’s financial statements for each ofthe quarters in 2003 and the year ended December 31, 2003, and/or audit adjustments to the second or fourth quarter 2004 financialstatements. Additionally, these control deficiencies could individually or in the aggregate result in a material misstatement to the annual orinterim financial statements that would not be prevented or detected. Accordingly, management has determined that these controldeficiencies constitute material weaknesses.

2. As of December 31, 2004, the Company did not maintain effective controls over the identification of and accounting for related partyrelationships and related party transactions. Specifically, the Company’s controls over its policies and procedures were ineffective inidentifying all significant related party relationships and transactions on a timely basis in order for such relationships and transactions to beappropriately reflected in the Company’s financial statements in accordance with generally accepted accounting principles. Specifically, apreviously undisclosed significant related party relationship was identified during the 2004 financial close process. This related party wasalso determined to be a variable interest entity in which the Company was determined to be the primary beneficiary. This control deficiencyresulted in a restatement of the Company’s financial statements for the year ended December 31, 2003, as well as an audit adjustment to the2004 financial statements. Additionally, this control deficiency could result in a material misstatement to annual or interim financialstatements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes amaterial weakness.

3. As of December 31, 2004, the Company did not maintain effective controls over the monitoring of its accounting functions locatedoutside of the U.S. The Company’s policies and procedures with respect to the review and supervision of its accounting operations inforeign locations, principally Japan and China, were inadequate. Specifically, corporate senior financial management did not provideadequate oversight of the accounting functions based principally in Japan and China nor was there sufficient and accurate information formonitoring the financial results of non-U.S. operations. Reviews of local financial results were inadequate in either their design or operationto detect errors to the Company’s financial statements as described in items 1 and 2 above. Additionally, this control deficiency could resultin a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management hasdetermined that this control deficiency constitutes a material weakness.

4. As of December 31, 2004, the Company did not maintain an effective control environment. The financial reporting organizationalstructure was not adequate to support the size, complexity, operating activities or locations of the Company. Deficiencies in localaccounting operations, such as the lack of a senior finance director in China with sufficient depth and skill in the application of U.S.generally accepted accounting principles and inadequate understanding of U.S. generally accepted accounting principles by local accountingstaff resulted in the adjustments to the financial statements as discussed in items 1 - 3 above. In addition, in some cases, certain key financepositions were staffed with individuals who did not have the appropriate skills, training and experience to meet the objectives as outlined intheir job descriptions or that should be expected of these roles. Further, the following specific areas are examples of some of the corporatedepartments in the Company where additional

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skilled resources are required: tax, external financial reporting, revenue recognition, treasury, financial planning and analysis and corporateaccounting. This control deficiency, together with the material weaknesses described in items 1 - 3 above, indicate that the Company did notmaintain an effective control environment. These control deficiencies could result in a material misstatement to annual or interim financialstatements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes amaterial weakness.

Because of the material weaknesses described above, management has concluded that the Company did not maintain effective internalcontrol over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issuedby the COSO.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has beenaudited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears underItem 8 of this Annual Report on Form 10-K.

Management’s Remediation Initiatives and Interim Measures

In response to the matters discussed in “Management’s Report on Internal Control Over Financial Reporting” above, the Company plans tocontinue to review and make necessary changes to the overall design of its control environment, including the roles and responsibilities ofeach functional group within the organization and reporting structure, as well as policies and procedures to improve the overall internalcontrol over financial reporting. In particular, the Company has implemented and/or plans to implement during 2005 the specific measuresdescribed below to remediate the material weaknesses described above in “Management’s Report on Internal Control Over FinancialReporting.” In addition, in the absence of full implementation of these remediation measures as of December 31, 2004, subsequent to thisdate and in connection with the 2004 year-end reporting process, the Company has undertaken the additional measures described under the



subheadings “—Interim Measures” below to provide reasonable assurance regarding the reliability of financial reporting and the preparationof the Company’s financial statements included in this Annual Report on Form 10-K and to ensure that material information relating to theCompany and its consolidated subsidiaries was made known to management in connection with the preparation of this Annual Report onForm 10-K.

Material weaknesses described in item 1 of “Management’s Report on Internal Control Over Financial Reporting”

Remediation Initiatives . The Company’s failure to have a sufficient complement of personnel with a level of accountingknowledge, experience and training in the application of generally accepted accounting principles commensurate withthe Company’s financial reporting requirements contributed to the Company’s failure to maintain effective controlsover the financial reporting process. To remediate the material weaknesses described in item 1 of “Management’sReport on Internal Control Over Financial Reporting” above, the Company has implemented or plans to implement themeasures described below, and will continue to evaluate and may in the future implement additional measures.

1. General plan for hiring and training of personnel—The Company’s planned remediation measures are intended to generally addressthis material weakness by ensuring that the Company will have sufficient personnel with knowledge, experience and training in theapplication of generally accepted accounting principles commensurate with the Company’s financial reporting requirements. Thesemeasures include the following:

(a) The Company’s chief financial officer, with assistance from senior financial staff and outside consultants, other than the Company’sindependent registered public accounting firm, has reviewed and will continue to review and adapt the overall design of the Company’sfinancial

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reporting structure, including the roles and responsibilities of each functional group within the Company;

(b) The Company hired regional controllers with relevant accounting experience, skills and knowledge for each of the Asia-Pacific region,the Central America and Latin America region, the Europe, Middle East and Africa region and Japan in late 2004 and early 2005;

(c) The Company hired a consolidation manager in China with relevant accounting experience, skills and knowledge in February 2005;

(d) The Company hired a senior manager for SEC reporting with relevant accounting experience, skills and knowledge in February 2005;

(e) The Company promoted an individual within the Company with relevant accounting experience, skills and knowledge to become thecontroller of China operations in April 2005;

(f) The Company retained and intends to continue to retain the services of outside consultants, other than the Company’s independentregistered public accounting firm, with relevant accounting experience, skills and knowledge, working under the supervision and directionof the Company’s management, to supplement the Company’s existing accounting personnel;

(g) The Company plans to hire and is actively recruiting a vice president of finance for the Company’s China operations with extensiverelevant accounting experience, skills and knowledge;

(h) The Company plans to continue to hire, and has allocated resources to hire, additional accounting personnel in the U.S., China andJapan, in the areas of tax, external financial reporting, revenue recognition, treasury, financial planning and analysis and corporateaccounting with relevant accounting experience, skills and knowledge; and

(i) The Company in February 2005 implemented an enhanced formal training process for the training of financial staff and plans tocontinue this process to ensure that personnel have the necessary competency, training and supervision for their assigned level ofresponsibility and the nature and complexity of the Company’s business.

2. Revenue Recognition—The Company’s planned remediation measures are intended to address material weaknesses related to revenueand deferred revenue accounts and associated cost of sales. These material weaknesses were evidenced by the identification of six separatetransactions aggregating approximately $5 million in which revenue was initially included in the Company’s fourth quarter 2004 financialstatements before all criteria for revenue recognition were met. In addition, there were other transactions for which there was insufficientinitial documentation for revenue recognition purposes, but which did not result in any adjustments to the Company’s fourth quarter 2004financial statements. If unremediated, these material weaknesses have the potential of misstating revenue in future financial periods. TheCompany’s planned remediation measures include the following:

(a) The Company plans to design a contract review process in China requiring financial and legal staff to provide input during the contract



negotiation process to ensure timely identification and accurate accounting treatment of non-standard contracts;

(b) In March 2005, the Company conducted a training seminar regarding revenue recognition, including identification of non-standardcontracts, in the U.S., and, in April 2005, the Company conducted a similar seminar in China. Starting in May 2005, the Company plans toconduct additional training seminars in various international locations regarding revenue recognition and the identification of non-standardcontracts; and

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(c) At the end of 2004, the Company began requiring centralized retention of documentation evidencing proof of delivery and finalacceptance for revenue recognition purposes.

3. Inventory Management—The Company’s planned remediation measures are intended to address material weaknesses related toinventory, deferred costs, inventory reserve accounts and cost of sales that have the potential of misstating inventory and deferred costs andexpected recoverability of inventory in future financial periods. The Company’s planned remediation measures include the following:

(a) The Company is in the process of continuing to upgrade and implement additional Oracle modules to more effectively track inventoryand evaluate deferred costs;

(b) The Company implemented in late 2004, and plans to improve during 2005, its process to confirm the existence of off-site inventory bysystematically obtaining customer confirmations, investigating discrepancies in the confirmed results, and properly recording and reportingthe results of the investigation;

(c) During the fourth quarter of 2004, the Company initiated a process to accumulate information necessary to evaluate inventory anddeferred cost contracts for impairment. The Company plans to continue to enhance this process in 2005 by better coordinating theaccumulation of such information from non-U.S. locations;

(d) The Company plans to implement in 2005 more robust controls over the release of costs to the income statement by better utilizing theOracle system;

(e) The Company is in the process of selecting a service provider with expertise and systems to more effectively manage and track theCompany’s inventory in Japan, to whom the Company plans to outsource this function in 2005; and

(f) The Company plans to deploy the Oracle system in Japan by the third quarter of 2005.

4. Accounting for Goodwill—The Company’s planned remediation measures are intended to address a material weakness related to theCompany’s accounting for goodwill that has the potential of misstating goodwill amounts and the impairment of the Company’s goodwill infuture financial periods. The Company’s planned remediation measures include the following:

(a) In the first quarter of 2005, the Company implemented a process of reallocating goodwill to the Company’s five reporting units in amanner reflective of the Company’s new organization; and

(b) As part of the process described in (a) above, the Company retained an outside consultant, working under the supervision and directionof the Company’s management, to assist in a valuation analysis that was used in the allocation process. The Company plans to use theconsultant on at least an annual basis to assist in a valuation and impairment analysis with respect to goodwill.

5. Foreign Exchange Translations—The Company’s planned remediation measures are intended to address a material weakness relatedto the Company’s controls over its processes and procedures related to the translation of its accounts and transactions denominated in acurrency other than U.S. dollars that has the potential of misstating various accounts in future financial periods. The Company’s plannedremediation measures include the implementation in the first quarter of 2005 of an enhanced foreign exchange accounting process utilizingthe actual month-end exchange rates.

6. Recording of Accrued Expenses and Open Purchase Orders—The Company’s planned remediation measures are intended to address amaterial weakness related to the Company’s

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recording of accrued expenses, primarily in China and Japan, that has the potential of misstating accrued expenses and related incomestatement accounts in future financial periods. The Company’s planned remediation measures include the implementation in the first quarter



of 2005 of a process of enhanced review of open purchase orders and review of invoices and receipts after the end of each quarter to ensureproper recording of accrued expenses and open purchase order commitments.

7. Accurate Preparation and Review of Financial Statements, Reconciliations, Journal Entries and Segment Reporting—TheCompany’s planned remediation measures are intended to address material weaknesses related to the financial close and reporting processthat have the potential of preventing the accurate preparation and review of the Company’s consolidated financial statements in futurefinancial periods. The Company’s planned remediation measures include the following:

(a) During the first quarter of 2005, the Company began to implement, and plans to continue to improve, new and enhanced procedures toensure that non-routine transactions are identified and escalated to senior financial management during the close process to help ensureproper accounting treatment. Specific steps include training and ongoing monitoring of financial staff, expansion of the officersubcertifications and active review of contracts by knowledgeable financial and legal staff, from the contract negotiation process throughrecognition of revenue for such contracts;

(b) During the fourth quarter of 2004, the Company implemented, and plans to continue to enhance, its month-end closing procedures,including reconciliations and controls over spreadsheets, and standardized checklists to ensure such procedures are consistently andeffectively applied throughout the organization; and

(c) The Company plans to enhance in 2005 the communication and distribution of its accounting policies and procedures and developmentof a process to more effectively accumulate and analyze information required for financial statement footnote disclosures.

8. Income Tax Analysis—The Company’s planned remediation measures are intended to address material weaknesses related to thecalculation of its provision for income taxes that have the potential of misstating the provision for income taxes and related balance sheetaccounts in future financial periods. The Company’s planned remediation measures include the following:

(a) The Company plans to hire and train additional experienced tax managers and supporting staff in 2005 to closely monitor reportingfrom China and Japan, to assist in managing audits and to monitor tax compliance in China and Japan;

(b) During the first quarter of 2005, the Company utilized outside consultants, other than the Company’s independent registered publicaccounting firm, to assist the Company’s management, working under its supervision and direction, in its analysis and calculation of itsincome tax provision, and the Company plans to continue to utilize outside consultants, other than the Company’s independent registeredpublic accounting firm, to assist the Company’s management, working under its supervision and direction, in its analysis of such matters infuture periods; and

(c) The Company plans to develop a comprehensive process to accumulate and organize financial and tax data used inconnection with income tax calculation and reporting.

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9. Utilization of Automated Controls—The Company’s planned remediation measures are intended to address a material weaknessrelated to the segregation of duties and user access to certain Oracle business process applications that have the potential of misstating ofvarious accounts in future financial periods. The Company’s planned remediation measures include the following:

(a) During the first quarter of 2005, the Company outsourced to a third-party expert the position of chief security officer to, among otherduties, monitor access rights with respect to the Oracle system and manage ongoing provisioning and changes;

(b) The Company plans to improve utilization of current functionality and continue to upgrade and expand functionality of the Oraclefinancial reporting system through utilization of additional modules to reduce manual procedures and the utilization of spreadsheets;

(c) The Company plans to deploy the Oracle system in Japan by the third quarter of 2005;

(d) The Company is in the process of continuing to upgrade and implement additional Oracle modules to more effectively track inventoryand evaluate deferred costs; and

(e) The Company plans to implement in 2005 more robust controls over the release of costs to the income statement by better utilizing theOracle system.

Interim Measures . Management has not yet implemented all of the measures described in items 1 through 9 above and/ortested them. Nevertheless, management believes those measures identified above as having been implemented, togetherwith the other measures undertaken by the Company described below, all of which were undertaken subsequent toDecember 31, 2004 and in connection with the 2004 year-end reporting process, address the material weaknesses



described in item 1 of “Management’s Report on Internal Control Over Financial Reporting.” These other measuresinclude the following:

• € The 2004 year-end reporting process was extended significantly, allowing the Company to conduct additionalanalysis and make additional adjustments as necessary to ensure the accuracy of financial reporting.

• € Senior corporate finance staff traveled to China and Japan subsequent to the close process and prior to the reportingof 2004 year-end financial results to conduct a review of the reporting process in those jurisdictions and to causeadditional measures relating to the reporting process to be undertaken as necessary to ensure the accuracy of financialreporting.

• € The Company retained on an interim basis outside consultants, other than the Company’s independent registeredpublic accounting firm, with relevant accounting experience, skills and knowledge, working under the supervision anddirection of the Company’s management, to assist with the 2004 year-end reporting process.

• € The Company conducted an additional review of a substantial majority of its revenue-generating contracts forcompliance with revenue recognition criteria. As part of this review, the Company gathered and analyzed evidence ofdelivery and final acceptance.

• € The Company performed the following reviews of inventory-related matters: it reviewed consolidated revenueschedules from the fourth quarter of 2004 to determine the proper recording of cost of goods sold; it conducted areconciliation of inventories at customer sites to outstanding contracts as of the year end and analyzed inventory forrecovery and potential impairment; it conducted physical inventory counts; it verified inventory at customer locationswith customer confirmations; and it conducted an analysis of inventory relating to purchase orders to identifyunder-recorded inventory.

• € The Company conducted a review of the processes to record inventory reserves and a review of the manualprocedures by which the Company tracks the cost of its products.

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• € The Company conducted a variety of manual review procedures, such as an extensive review of journal entrypostings into the Oracle system and an extensive review of account reconciliations.

• € The Company conducted a detailed and extensive review of the following matters: all non-routine transactions andinternal representations; financial statements, as well as certifications from decentralized locations, for accuracy;spreadsheets; and journal entries.

• € The Company reviewed its reserves and related schedules and reported its findings to the Audit Committee.

• € The Company processed an adjustment relating to foreign exchange accounting using the enhanced foreignexchange accounting process implemented in the first quarter of 2005 described above.

Material weakness described in item 2 of “Management’s Report on Internal Control Over Financial Reporting”

Remediation Initiatives . The Company’s failure to ensure that key management fully understood the nature and potentialsignificance of related parties and to ensure that a robust process for the identification of related party transactionscontributed to the Company’s failure to maintain effective controls over the identification of and accounting for relatedparty relationships and related party transactions with the Company. To remediate the material weakness described initem 2 of “Management’s Report on Internal Control Over Financial Reporting,” the Company has implemented orplans to implement the measures described below, and will continue to evaluate and may in the future implementadditional measures.

1. The Company conducted an educational seminar with the Company’s key management in March 2005 in which the Company’s



internal and outside legal counsel and members of the Audit Committee reviewed certain key objectives of the Company’s Code ofConduct, including the identification, recognition and disclosure of related party transactions.

2. In the first quarter of 2005, the Company expanded the number of Company personnel required to certify to senior management withrespect to identification, recognition and disclosure of related party transactions for SEC reporting purposes, and revised the Company’sinternal certification process concerning identification, recognition and disclosure of related party transactions.

3. The Company plans to continue to evaluate the Company’s procedures to ensure the identification, recognition and disclosure ofrelated party transactions.

4. The Company plans to conduct periodic training sessions with key managers and senior executives regarding the Code of Conduct,including the identification, recognition and disclosure of related party transactions.

5. The Company plans to provide key managers and senior executives with access to legal and accounting personnel to enable suchmanagers and executives to more accurately and comprehensively comply with the Company’s internal certification process for SECreporting purposes.

Interim Measures . Management has not yet implemented all of the measures described above and/or tested them.Nevertheless, management believes those measures identified above as having been implemented, together with theother measures undertaken by the Company described below, all of which were undertaken subsequent to December 31,2004 and in connection with the 2004 year-end reporting process are sufficient to address the material weaknessdescribed in item 2 of “Management’s Report on Internal Control Over Financial Reporting.” These other measuresinclude the following:

• € Management directly interviewed senior executives regarding related party transactions.

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• € After receiving additional training on related party transactions, all key managers and senior executives providednew certifications regarding related party transactions.


Remediation Initiatives . Lack of clarity in roles and responsibilities in certain areas affecting the Company’s financialreporting structure contributed to a material weakness relating to the monitoring of non-U.S. operations. To remediatethis material weakness, described in item 3 of “Management’s Report on Internal Control Over Financial Reporting,”the Company has implemented or plans to implement the measures described under “—Material weaknesses describedin item 1 of ‘Management’s Report on Internal Control Over Financial Reporting’—Remediation Measures—1. Generalplan for hiring and training of personnel,” as well as those described below. The Company will continue to evaluate andmay in the future implement additional measures.

1. The Company streamlined the reporting structure between all non-U.S. accounting functions and the comparable groups in thecorporate headquarters, including tax, treasury and financial planning and analysis groups, in early 2005 to provide for direct reporting to,and oversight by, the U.S. corporate headquarters.

2. The Company plans to expand the size of the internal audit group and the scope of the internal audit group’s responsibilities tomonitor non-U.S. operations through reviews and audits of such locations.

3. The Company’s chief financial officer, with assistance from senior financial staff and outside consultants, other than the Company’sindependent registered public accounting firm, has reviewed and will continue to review and adapt the overall design of the Company’sfinancial reporting structure, including the roles and responsibilities of each functional group within the Company.

4. The Company has implemented, and plans to continue to improve, a closing checklist to standardize its procedures for financialreview to ensure that U.S. reviewers monitor financial information from non-U.S. locations in a consistent manner, through such measuresas use of standardized reporting packages and review procedures.

Interim Measures . Management has not yet implemented all of the measures described above and/or tested them.Nevertheless, management believes those measures identified above as having been implemented, together with the



other measures undertaken by the Company described below, all of which were undertaken subsequent to December 31,2004 and in connection with the 2004 year-end reporting process, address the material weakness described in item 3 of“Management’s Report on Internal Control Over Financial Reporting.” These other measures include the following:

• € Senior corporate finance staff traveled to China and Japan subsequent to the close process and prior to the reportingof 2004 year-end financial results to conduct a review of the reporting process in those jurisdictions, to supervise aphysical inventory count and to cause additional measures relating to the reporting process to be undertaken asnecessary to ensure the accuracy of financial reporting.

• € Senior financial staff performed additional review of invoices and cash disbursements in Japan.

• € Senior financial staff in the Company’s U.S. headquarters did a thorough review of trial balances issued fromnon-U.S. locations.

• € The Company utilized outside consultants, other than the Company’s independent registered public accountingfirm, to assist the Company’s management, working under its supervision and direction, with the year-end review ofChina operations.

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• € All non-routine transactions in non-U.S. locations were documented by staff in such non-U.S. locations andreviewed by senior financial staff in the Company’s U.S. headquarters.


Remediation Initiatives . The Company’s failure to have sufficient personnel with knowledge, experience and training inthe application of generally accepted accounting principles commensurate with the Company’s financial reportingrequirements contributed to a material weakness relating to the Company’s control environment. To remediate thismaterial weakness, described in item 4 of “Management’s Report on Internal Control Over Financial Reporting,” theCompany has implemented or plans to implement the measures described under “—Material weaknesses described initem 1 of ‘Management’s Report on Internal Control Over Financial Reporting’—Remediation Measures—1. Generalplan for hiring and training of personnel,” as well as those described below. The Company will continue to evaluate andmay in the future implement additional measures.

1. The Company streamlined the reporting structure between all non-U.S. accounting functions and the comparable groups in thecorporate headquarters, including tax, treasury and financial planning and analysis groups, in early 2005 to provide for direct reporting to,and oversight by, the U.S. corporate headquarters.

2. The Company plans to expand the size of the internal audit group and the scope of the internal audit group’s responsibilities tomonitor non-U.S. operations through reviews and audits of such locations.

3. The Company’s chief financial officer, with assistance from senior financial staff and outside consultants, other than the Company’sindependent registered public accounting firm, has reviewed and will continue to review and adapt the overall design of the Company’sfinancial reporting structure, including the roles and responsibilities of each functional group within the Company.

4. The Company has implemented, and plans to continue to improve, a closing checklist to standardize its procedures for financialreview to ensure that U.S. reviewers monitor financial information from non-U.S. locations in a consistent manner, through such measuresas use of standardized reporting packages and review procedures.

Interim Measures . Management has not yet implemented all of the measures described above and/or tested them.Nevertheless, management believes those measures identified above as having been implemented, together with theother measures undertaken by the Company described below, all of which were undertaken subsequent to December 31,2004 and in connection with the 2004 year-end reporting process, address the material weaknesses described in item 4of “Management’s Report on Internal Control Over Financial Reporting.” These other measures include the following:

• € Senior corporate finance staff traveled to China and Japan subsequent to the close process and prior to the reporting



of 2004 year-end financial results to conduct a review of the reporting process in those jurisdictions, to supervise aphysical inventory count and to cause additional measures relating to the reporting process to be undertaken asnecessary to ensure the accuracy of financial reporting.

• € Senior financial staff performed additional review of invoices and cash disbursements in Japan.

• € Senior financial staff in the Company’s U.S. headquarters did a thorough review of trial balances issued fromnon-U.S. locations.

• € The Company utilized outside consultants, other than the Company’s independent registered public accountingfirm, to assist the Company’s management, working under its supervision and direction, with the year-end review ofChina operations.

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• € All non-routine transactions in non-U.S. locations were documented by staff in such non-U.S. locations andreviewed by senior financial staff in the Company’s U.S. headquarters.

Control deficiencies not constituting material weaknesses

In addition to the material weaknesses described in “Management’s Report on Internal Control Over Financial Reporting,” management hasidentified other deficiencies in internal control over financial reporting that did not constitute material weaknesses as of December 31, 2004.The Company has implemented and/or plans to implement during 2005 various measures to remediate these control deficiencies and hasundertaken other interim measures to address these control deficiencies.

Management’s Conclusions

Management believes the remediation measures described under “Management’s Remediation Initiatives and Interim Measures” above willstrengthen the Company’s internal control over financial reporting and remediate the material weaknesses identified in “Management’sReport on Internal Control Over Financial Reporting.” However, management has not yet implemented all of these measures and/or testedthem. Management has concluded that the interim measures described under “Management’s Remediation Initiatives and InterimMeasures” above provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’sfinancial statements included in this Annual Report on Form 10-K and has discussed its conclusions with the Company’s Audit Committee.

The Company is committed to continuing to improve its internal control processes and will continue to diligently and vigorously review itsdisclosure controls and procedures and its internal control over financial reporting in order to ensure compliance with the requirements ofSection 404 of the Sarbanes-Oxley Act. However, any control system, regardless of how well designed, operated and evaluated, can provideonly reasonable, not absolute, assurance that its objectives will be met. As management continues to evaluate and work to improve theCompany’s internal control over financial reporting, it may determine to take additional measures to address control deficiencies, and it maydetermine not to complete certain of the measures described under “Management’s Remediation Initiatives and Interim Measures” above.

Changes in Internal Control over Financial Reporting

The discussion above under “Management’s Remediation Initiatives and Interim Measures” describes the material planned and actualchanges to the Company’s internal control over financial reporting during the fourth quarter of 2004 and subsequent to December 31, 2004that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B—OTHER INFORMATION

(a) On April 12, 2005, a committee of the Board consisting solely of disinterested directors determined to extend from three months totwelve months the post-termination period of exercisability of options to purchase 25,000 shares of common stock of the Company whichwere granted in August 2004 to each of the non-employee directors at such date pursuant to the Company’s 1997 Stock Option Plan.Directors Betsy Atkins, Larry Horner and Thomas Toy are the non-employee directors affected by such extension.

(b) On April 11, 2005, Betsy Atkins notified us that she will not seek re-election to our Board of Directors at ourAnnual Stockholder Meeting to be held on May 13, 2005. Ms. Atkins will continue to serve as a Director and as amember of our Audit Committee and Compensation Committee until May 13, 2005 and has advised us that her decisionto leave was not due to any disagreement with the Company.



150

PART III

ITEM 10—DIRECTORS AND EXECUTIVE OFFICERS OF UTSTARCOM, INC.

The information required by Item 401 of Regulation S-K concerning our directors is incorporated by reference from the information in thesection entitled “Proposal One—Election of Directors” in the Proxy Statement for the Annual Meeting of Stockholders to be held onMay 13, 2005 (the “Proxy Statement”). The required information concerning our executive officers is contained in the section entitled“Management—Executive Officers.”

Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of theExchange Act. This disclosure is contained in the section entitled “Management—Section 16(a) Beneficial Ownership ReportingCompliance” in the Proxy Statement and is incorporated herein by reference.

We have adopted a code of ethics that applies to our principal executive officer and all members of our finance department, including theprincipal financial officer and principal accounting officer. Such code of ethics is available, free of charge, to any stockholder who sends arequest for a paper copy to: UTStarcom, Inc., 1275 Harbor Bay Parkway, Alameda, California 94502, Attn: Legal Department.

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

ITEM 11—EXECUTIVE COMPENSATION

The information required by this section is incorporated by reference from the information in the sections entitled “Board ofDirectors—Directors’ Compensation,” “Management—Executive Compensation,” “Management—Employment Contracts and Change ofControl Arrangements” and “Management—Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS

The information required by this section is incorporated by reference from the information in the section entitled “Security Ownership ofCertain Beneficial Owners and Management” in the Proxy Statement. The required information concerning our equity compensation plansis contained in the section entitled “Item 5—Market for UTStarcom, Inc.’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities” in Part II of this Form 10-K.

ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this section is incorporated by reference from the information in the section entitled “Certain Relationships andRelated Transactions” in the Proxy Statement.

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information appearing under the heading “PricewaterhouseCoopers LLP Fees for the Fiscal Year Ended December 31, 2004” in theProxy Statement is incorporated by reference.

151

PART IV

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements—See Index to Consolidated Financial Statements and Financial Statement Schedulesat page 78 of this Form 10-K.

(2) Financial Statement Schedule—See Index to Consolidated Financial Statements and Financial StatementSchedules at page 78 of this Form 10-K.



(3) Exhibit Number Description

3.1(14) Thirteenth Amended and Restated Certificate of Incorporation of UTStarcom, Inc., as amended.3.2(18) First Amended and Restated Bylaws of UTStarcom, Inc., as amended.4.1

See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining therights of holders of Common Stock.

4.2(1) Specimen Common Stock Certificate.4.3(1) Third Amended and Restated Registration Rights Agreement dated December 14, 1999.4.4(9)

Convertible Subordinated Notes Indenture dated as of March 12, 2003 between UTStarcom, Inc.and U.S. Bank National Association, including the form of the 7 ⁄ 8 % ConvertibleSubordinated Notes due 2008.

4.6(16)

Registration Rights Agreement, dated as of June 30, 2003, by and among UTStarcom, Inc. and theshareholders of RollingStreams Systems, Ltd.

4.7

Underwriting Agreement, dated January 8, 2004 between the Company and Bank of AmericaSecurities LLC as amended on January 14, 2004.

10.1(1) Form of Indemnification Agreement.10.3(1) 1995 Stock Plan and forms of related agreements.10.4(1) 1997 Stock Plan, as amended, and forms of related agreements.10.5(1) 2000 Employee Stock Purchase Plan and forms of related agreements.10.22(1) Lease dated December 23, 1997 between UTStarcom, Inc. and Tech Center Partners.10.23(1)

Lease Agreement dated April 1995, as amended, between UTStarcom, Inc. and Metro ParkAssociates.

10.24(1)

Lease Agreements dated December 31, 1997 and May 14, 1998 between Guangdong UTStarcomTelecom Co., Ltd. and Guangdong Southern Telecom Group Huizhou Company.

10.25(1)

Lease Contract dated December 15, 1996 between UTStarcom (Hangzhou) TelecommunicationsCo., Ltd. and Yile Village, Gudang Township.

10.28(1)

Payment Agent Contract dated June 11, 1998 among UTStarcom, UTStarcom (China) Ltd,Softbank Corporation and Jitong Communication Co., Ltd.

10.29(1)

Agreement on Termination of Contract dated August 30, 1999 among UTStarcom, Inc., UTStarcom(China) Ltd., Softbank Corporation and Jitong Communication Co., Ltd.

10.30(1) Exchange Agreement dated October 15, 1997 between UTStarcom, Inc. and certain investors.10.31(1) Exchange Agreement dated October 15, 1997 between UTStarcom, Inc. and certain investors.10.41(2)*

Joint Venture Agreement between SOFTBANK Corporation and UTStarcom, Inc. dated May 29,2000.

10.42(2)*

Land Use Right Assignment Agreement between the Administration Committee of HangzhouHi-Tech Industry Development Zone of Zhejiang Province of the People’s Republic of China andUTStarcom, Inc. dated May 18, 2000.

152

10.54(5)*

Software License Agreement between UTStarcom, Inc. and DDI Corporation, Inc. dated October 4,2000.

10.66(3) Amended 2001 Director Option Plan.10.67(4) Purchase Contract between UTStarcom Inc. and Softbank BB Corporation, dated October 9, 2001.10.71(6) Lease Agreement between UTStarcom, Inc. and Legend Tech., dated September 12, 2001.10.75(7)

Change of Control Severance Agreement between Michael J. Sophie and UTStarcom, Inc. datedApril 12, 2002.

10.80(8)*

Joint Venture Contract between UTStarcom Telecom Co., Ltd., Matsushita Electric Industrial Co.,Ltd. and Matsushita Communication Industrial Co., Ltd. dated as of July 5, 2002.

10.83(11)*

Broadband Access Network General Terms and Conditions between Reliance Infocomm Limited andUTStarcom, Inc. dated as of October 1, 2002.

10.84(11)*

Broadband Access Equipment Contract between Reliance Infocomm Limited and UTStarcom, Inc.dated as of October 1, 2002.



10.85(11)*

Broadband Access Services Contract between Reliance Infocomm Limited and UTStarcom, Inc.dated as of October 1, 2002.

10.86(11)*

Broadband Access Software Contract between Reliance Infocomm Limited and UTStarcom, Inc.dated as of October 1, 2002.

10.87(10)*

Equipment Purchase Agreement, dated as of February 4, 2003, by and between Tata TeleservicesLimited and UTStarcom, Inc.

10.88(12) UTStarcom, Inc. 2003 Nonstatutory Stock Option Plan10.89(13)

Change of Control Severance Agreement, dated as of January 17, 2003, by and between Hong LiangLu and UTStarcom, Inc.

10.90(13)

Change of Control Severance Agreement, dated as of January 31, 2003, by and between Ying Wuand UTStarcom, Inc.

10.91(13)

Change of Control Severance Agreement, dated as of January 31, 2003, by and between Shao-NingChou and UTStarcom, Inc.

10.92(13)

Change of Control Severance Agreement, dated as of January 31, 2003, by and between William X.Huang and UTStarcom, Inc.

10.93(13)*

Distributor Agreement, dated as of October 21, 2003, by and between UTStarcom, Inc. andMultidata.

10.94(13)*

Amendment #1 to Distributor Agreement, dated as of December 17, 2003, by and betweenUTStarcom, Inc. and Multidata.

10.95(13)*

Revenue Sharing Purchase Agreement, dated as of October 21, 2003 by and betweenUTStarcom, Inc. and Multidata.

10.96(13)*

Amendment #1 to Revenue Sharing Purchase Agreement, dated as of December 17, 2003, by andbetween UTStarcom, Inc. and Multidata.

10.97(15)*

Infrastructure Equipment License Agreement between Qualcomm Inc. and UTStarcom, Inc., datedJanuary 30, 2004.

10.98(15)*

Subscriber Unit License Agreement between Qualcomm Inc. and UTStarcom, Inc., dated January 30,2004.

10.99(15)*

Asset Purchase Agreement among Hyundai Syscomm, Inc., 3R Inc., Dr. Seong IK Jang andUTStarcom, Inc., dated February 26, 2004.

10.100(16)

Asset Purchase Agreement among UTStarcom, Inc., Telos Technology, Inc., Telos Technology(Canada), Inc., Telos Technology (Bermuda) Ltd. and Telos Engineering Limited, dated April 21,2004.

153

10.101(16)

Asset Purchase Agreement by and among Audiovox Communications Corp., Quintex MobileCommunications Corporation, Audiovox Communications Canada Co., UTStarcom, Inc., UTStarcomCanada Company and Audiovox Corporation, dated as of June 11, 2004.

10.102(17)*

Continuous Basic Sale and Purchase Agreement between Japan Telecom Co., Ltd. and Telecom Salesand Marketing K.K., dated August 20, 2004.

10.103(17)*

Sale and Purchase Agreement between Japan Telecom Co., Ltd. and Telecom Sales and MarketingK.K., dated August 20, 2004.

10.104**

Distributor Agreement, dated as of December 20, 2004, by and between CuritelCommunications, Inc. and UTStarcom Personal Communications LLC.

10.105**

Asset Purchase Agreement by and between UTStarcom CDMA Technologies Korea Limited andGiga Telecom, Inc., dated October 29, 2004.

21.1 Subsidiaries of UTStarcom.23.1 Consent of Independent Registered Public Accounting Firm24.1 Power of Attorney (included on signature page).31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of theSarbanes-Oxley Act of 2002.

* Portions of the exhibit have been omitted pursuant to an order granted by the Securities and ExchangeCommission for confidential treatment.

** Portions of the exhibit have been omitted pursuant to a request for confidential treatment filed with the SEC



concurrently with the filing of this Annual Report on Form 10-K.

(1) Incorporated by reference to the registrant’s Registration Statement on Form S-1 (No. 333-93069), whichbecame effective March 2, 2000.

(2) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.


(4) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30,2001.

(5) Incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended December 31,2000.

(6) Incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended December 31,2001.

(7) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,2002.


(9) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,2003.

(10) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q/A (Amendment No. 1) for the quarterended March 31, 2003.

154

(11) Incorporated by reference to the registrant’s Annual Report on Form 10-K/A (Amendment No. 1) for the yearended December 31, 2002.

(12) Incorporated by reference to the registrant’s Registration Statement on Form S-8, which was filed onSeptember 15, 2003.

(13) Incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2003.

(14) Incorporated by reference to the registrant’s Current Report on Form 8-K, which was filed on December 12, 2003.

(15) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.



(18) Incorporated by reference to the registrant’s Current Report on Form 8-K, which was filed on March 16, 2005.

155

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

UTSTARCOM, INC.Date: April 15, 2005 By: /s/ MICHAEL J. SOPHIE Name: Michael J. Sophie Title: Senior Vice President of Finance and

Chief Financial Officer

156

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Hong Liang Luand Michael J. Sophie, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him in any and allcapacities, to sign any amendments to this report on Form 10-K, and to file the same, with exhibits thereto and other documents inconnection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact,or his substitute or substitutes may do or cause to be done by virtue hereof.

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

Signature Title Date

/s/ HONG LIANG LU President and Chief Executive Officer (principal April 15, 2005Hong Liang Lu executive officer), Chairman of the Board of Directors

/s/ MICHAEL J. SOPHIE Senior Vice President of Finance and Chief Financial April 15, 2005Michael J. Sophie Officer (principal financial and accounting officer)

/s/ BETSY S. ATKINS Director April 15, 2005Betsy S. Atkins

/s/ JEFF CLARKE Director April 15, 2005Jeff Clarke

/s/ LARRY D. HORNER Director April 15, 2005Larry D. Horner

/s/ ALLEN LENZMEIER Director April 15, 2005Allen Lenzmeier

/s/ THOMAS J. TOY Director April 15, 2005Thomas J. Toy /s/ YING WU Director April 15, 2005

Ying Wu

157

SCHEDULE I

UTSTARCOM, INC. (UNCONSOLIDATED—PARENT COMPANY BASIS)REGISTRANT BALANCE SHEETS(in thousands, except share and per share data) December 31, 2004 2003

ASSETS Current assets:



Cash and cash equivalents $ 169,924 $ 71,230 Short-term investments 8,342 9,139 Accounts receivable—unrelated party, net of allowances for doubtful accounts 20,537 35,843 Accounts receivable—related party 84,754 43,944 Accounts receivable—intercompany 666,228 442,480 Inventories 27,723 15,427 Deferred costs/Inventories at customer sites under contracts 66,878 38,308 Income tax receivable — 10,677 Prepaids 55,146 19,599 Short-term restricted cash and investments 32,920 20,461 Deferred tax assets 13,109 7,432 Other current assets 4,832 962 Total current assets 1,150,393 715,502 Property, plant and equipment, net 27,237 32,031 Note receivable 9,630 11,222 Investment in affiliated companies 554,364 493,163 Goodwill 105,234 98,015 Intangible assets, net 52,625 44,949 Deferred tax assets 12,100 11,070 Other long-term assets 23,984 19,226 Total assets $ 1,935,567 $ 1,425,178

LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable—unrelated party $ 83,398 $ 56,256 Accounts payable—intercompany 1,221 — Income taxes payable 13,391 — Customer advances 19,890 13,940 Deferred revenue 14,841 24,966 Other 38,389 36,196 Total current liabilities 171,130 131,358 Long-term debt 402,500 402,500 Stockholders’ equity: Common stock: $.00125 par value; authorized: 750,000,000 shares; issued and outstanding: 114,486,632 and 104,272,477 atDecember 31, 2004 and 2003, respectively 144 131 Additional paid-in capital 1,123,065 654,483 Deferred stock compensation (6,102 ) (7,761 )Retained earnings 243,652 243,058 Accumulated other comprehensive income 1,178 1,409 Total stockholders’ equity 1,361,937 891,320 Total liabilities and stockholders’ equity $ 1,935,567 $ 1,425,178

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

158

SCHEDULE I

UTSTARCOM, INC. (UNCONSOLIDATED—PARENT COMPANY BASIS)

CONDENSED INFORMATION AS TO THERESULTS OF OPERATIONSOF THE REGISTRANT

(in thousands) Years ended December 31, 2004 2003 2002 Net sales: Unrelated party $ 120,010 $ 100,115 $ 35,365 Related party 143,164 184,436 16,038 Intercompany 571,001 724,708 307,862 834,175 1,009,259 359,265 Cost of net sales:



Unrelated party 81,961 50,157 24,306 Related party 91,409 79,518 8,635 Intercompany 449,199 646,016 276,603 Gross profit 211,606 233,568 49,721 Operating expenses: Selling, general and administrative 103,706 57,666 38,793 Research and development 39,687 46,588 9,146 In-process research and development costs 1,400 10,686 670 Amortization of intangible assets 12,668 8,370 2,395 Total operating expenses 157,461 123,310 51,004 Operating income 54,145 110,258 (1,283 )Interest income 12,349 2,709 4,454 Interest expense (4,819 ) (4,142 ) (16 )Other income (expense), net (29,943 ) (18,404 ) 18,964 Equity in net income of affiliated companies 14,950 144,520 98,396 Income before income taxes 46,682 234,941 120,515 Income tax expense (benefit) (26,733 ) 19,409 12,653 Net income $ 73,415 $ 215,532 $ 107,862


159

SCHEDULE I

UTSTARCOM, INC. (UNCONSOLIDATED—PARENT COMPANY BASIS)

CONDENSED INFORMATION AS TO THE CASH FLOWS OF THE REGISTRANT

(In thousands) Years ended December 31, 2004 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 73,415 $ 215,532 $ 107,862 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 34,219 25,235 13,202 In-process research and development costs 1,400 10,686 670 Impairment of long-term investments 1,608 75 4,442 Loss on sale of assets 1,672 620 449 Warrants adjustment to fair value (46 ) (424 ) — (Gain)/Loss on sale of investment (1,912 ) 73 — Amortization of debt issuance costs 2,332 1,953 — Deferred income taxes (11,725 ) 4,471 (6,980 )Provision for doubtful accounts 3,045 813 124 Provision for inventory 7,640 3,328 5,446 Stock compensation expense 519 4,302 3,100 Equity in net income of affiliated companies (12,659 ) (145,375 ) (95,608 )Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (244,983 ) (288,163 ) (120,122 )Inventories (18,960 ) (2,742 ) (9,626 )Deferred costs/Inventories at customer sites under contracts (28,570 ) (10,012 ) (18,815 )Other current and non-current assets (32,427 ) (15,611 ) (680 )Accounts payable 27,738 (56,924 ) 98,947 Income taxes payable 20,109 (9,265 ) (5,182 )Customer advances 5,595 (3,201 ) 14,511 Deferred revenue (10,167 ) 13,505 (4,451 )Other current liabilities 3,085 10,637 4,649 Net cash used in operating activities (179,072 ) (221,957 ) (2,302 )



CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (13,710 ) (29,745 ) (980 )Investment in affiliates, net of cash acquired (57,150 ) (8,920 ) (27,447 )Acquisition of business, net of cash acquired (33,185 ) (111,720 ) (17,705 )Purchase of intangible assets (4,158 ) (2,340 ) — Issuance of note receivable to related party — (10,071 ) — Change in restricted cash (12,459 ) (10,682 ) (9,779 )Purchase of short-term investments (55,379 ) (10,775 ) (85,688 )Sales of short-term investments 61,086 93,246 89,916 Net cash used in investing activities (114,955 ) (91,007 ) (51,683 )CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of stock, net of expenses 25,736 58,878 40,928 Repurchase of stock (107,569 ) (139,609 ) (72,929 )Proceeds (payments) from borrowing, net — 391,431 — Proceeds from equity offering 474,554 — — Purchase of convertible bond hedge and call option — (43,792 ) — Proceeds from stockholder notes — 282 99 Net cash provided by (used in) financing activities 392,721 267,190 (31,902 )Effects of exchange rates on cash — 1 1 Net increase (decrease) in cash and cash equivalents 98,694 (45,773 ) (81,282 )Cash and cash equivalents at beginning of period 71,230 117,003 198,285 Cash and cash equivalents at end of period $ 169,924 $ 71,230 $ 117,003


160

SCHEDULE I

UTSTARCOM, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1—BASIS OF PRESENTATION

UTStarcom, Inc., a Delaware corporation, is the parent company of all UTStarcom, Inc. subsidiaries. The accompanying condensedfinancial statements reflect the financial position, results of operations and cash flows of UTStarcom, Inc. on a separate basis. Allsubsidiaries of UTStarcom, Inc. are reflected as investments accounted for using the equity method. Accordingly, inter-companytransactions have not been eliminated. Inventory balances at December 31, 2004 and 2003 include intercompany profit of $9.9 million and$2.3 million, respectively. No cash dividends were paid to UTStarcom, Inc. by its subsidiaries during the three years ended December 31,2004. For accounting policies and other information, see the Notes to Consolidated Financial Statements included elsewhere herein.

The Company filed an Amendment to its Annual Report on Form 10-K for the year ended December 31, 2003 to reflect the restatement ofits consolidated financial statements for the year ended December 31, 2003. See Note 2 to the Consolidated Financial Statements.

NOTE 2—LONG TERM OBLIGATIONS

On March 12, 2003, UTStarcom, Inc. completed an offering of $402.5 million of convertible subordinated notes due March 1, 2008 toqualified buyers pursuant to Rule 144A under the Securities Act of 1933. The notes bear interest at a rate of 7 ⁄ 8 % per annum and areconvertible into common stock of UTStarcom Inc. at a conversion price of $23.79 per share and are subordinated to allpresent and future senior debt of UTStarcom Inc. See Note 11 to the Consolidated Financial Statements.

161

SCHEDULE II

UTSTARCOM, INC.Valuation and Qualifying Accounts and Reserves



For the Years Ended December 31, 2004, 2003, and 2002

Description

Balance atbeginning ofthe period

Additions charged tocosts andexpenses

Obligationsassumed upon acquisition Deductions

Balance atend of the period

Year ended December 31, 2004 Provision for inventory $ 29,560 $ 20,723 $ 3,534 $ 4,039 $ 49,778 Provision for deferred cost $ 7,608 $ 18,277 $ — $ 2,210 $ 23,675 Provision for doubtful accounts $ 31,172 $ 21,284 $ — $ 1,249 $ 51,207 Accrued product warranty costs $ 26,267 $ 53,777 $ 6,964 $ 40,412 $ 46,596 Tax valuation allowance $ 328 $ 4,564 $ — $ — $ 4,892 Year ended December 31, 2003 Provision for inventory $ 18,287 $ 14,626 $ 6,345 $ 9,698 $ 29,560 Provision for deferred cost $ 14,453 $ — $ — $ 6,845 $ 7,608 Provision for doubtful accounts $ 26,250 $ 5,025 $ — $ 103 $ 31,172 Accrued product warranty costs $ 13,297 $ 36,523 $ 1,381 $ 24,934 $ 26,267 Tax valuation allowance $ 4,964 $ — $ — $ 4,636 $ 328 Year ended December 31, 2002 Provision for inventory $ 17,744 $ 7,084 $ — $ 6,541 $ 18,287 Provision for deferred cost $ 2,600 $ 11,853 $ — $ — $ 14,453 Provision for doubtful accounts $ 19,053 $ 7,434 $ — $ 237 $ 26,250 Accrued product warranty costs $ 6,271 $ 15,156 $ — $ 8,130 $ 13,297 Tax valuation allowance $ 4,787 $ 177 $ — $ — $ 4,964

162

Exhibit 4.7

UTSTARCOM, INC.(a Delaware corporation)

Shares of Common Stock

UNDERWRITINGAGREEMENT

Dated:



TABLE OF CONTENTS

Section 1. Representations and Warranties Section 2. Sale and Delivery to Underwriters; Closing Section 3. Covenants of the Company Section 4. Payment and Expenses Section 5. Conditions of Underwriters’ Obligations Section 6. Indemnification Section 7. Contribution Section 8. Representations, Warranties and Agreements to Survive Delivery Section 9. Termination of Agreement Section 10. Default by One or More of the Underwriters Section 11. Default by the Company Section 12. Notices Section 13. Parties Section 14. Governing Law and Time Section 15. The Headings Section 16. Counterparts SCHEDULES Schedule AUnderwriters Schedule BCompany Schedule CList of Significant Subsidiaries Schedule DPricing Information Schedule EList of Directors and Executive Officers EXHIBITS Exhibit A Form of Opinion of Counsel for the Company Exhibit B Form of Lockup Agreement for Directors and Executive Officers Exhibit C Form of Lockup Agreement for SOFTBANK America, Inc

i

UTSTARCOM, INC.

(a Delaware corporation)

12,100,000 Shares of Common Stock

(Par Value $.00125 Per Share)

UNDERWRITING AGREEMENT

BANC OF AMERICA SECURITIES LLC January 8, 2004

600 Montgomery StreetSan Francisco, California 94111



As Representative of the several Underwriters

Ladies and Gentlemen:

UTStarcom, Inc., a Delaware corporation (the “ Company ”), confirms its agreement with Banc of America Securities LLC and each of theother Underwriters named in Schedule A hereto (collectively, the “ Underwriters ,” which term shall also include any underwritersubstituted as hereinafter provided in Section 10 hereof), for whom Banc of America Securities LLC is acting as representative (in suchcapacity, the “ Representative ”), with respect to the (i) issuance and sale by the Company and the purchase by the Underwriters, actingseverally and not jointly, of the 12,100,000 shares of Common Stock, par value $.00125 per share, of the Company (“ Common Stock ”)and (ii) the grant by the Company to the Underwriters of the option described in Section 2(b) hereof to purchase, acting severally and notjointly, all or any part of 1,815,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 12,100,000 shares ofCommon Stock (the “ Initial Securities ”) to be purchased by the Underwriters and all or any part of the 1,815,000 shares of CommonStock subject to the option described in Section 2(b) hereof (the “ Option Securities ”) are hereinafter called, collectively, the “ Securities.”

The Company understands that the Underwriters propose to make a public offering of the Securities as soon as the Representative deemsadvisable after this Agreement has been executed and delivered.

The Company has filed with the Securities and Exchange Commission (the “ Commission ”) a registration statement on Form S-3 (No.333-107723) covering the registration of the Securities under the Securities Act of 1933, as amended (the “ 1933 Act ”), including aprospectus relating to the Common Stock (the “ Basic Prospectus ”). Promptly after execution and delivery of this Agreement, theCompany will prepare and file a prospectus supplement in accordance with the provisions of paragraph (b) of Rule 424 of the rules andregulations of the Commission under the 1933 Act (the “ 1933 Act Regulations ”). Such registration statement, including the exhibitsthereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act,as amended as of the date of this Agreement, and, in the event any post-effective amendment thereto becomes effective prior to the ClosingTime (as defined in Section 2(c) hereof), is herein called the “ Registration Statement .” Any registration statement filed pursuant to Rule462(b) of the 1933 Act Regulations is herein referred to as the “ Rule 462(b) Registration Statement ,” and after such filing the term “Registration Statement ” shall include the Rule 462(b) Registration Statement.

As used herein, the term “ Final Prospectus ” means the final prospectus supplement to the Basic Prospectus relating to the Securities inthe form first used to confirm sales of the Securities, together with the Basic Prospectus and including the documents incorporated byreference therein pursuant to Item 12 of Form S-3 under the 1933 Act . For purposes of this Agreement, all references to the RegistrationStatement, the Basic Prospectus, the Final Prospectus or any amendment or supplement to any of the foregoing shall be deemed to includethe copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system (“ EDGAR ”).

All references in this Agreement to financial statements and schedules and other information which is “contained,” “included,” “stated,”“disclosed,” “set forth,” or “described” in the Registration Statement or the Final Prospectus (or other references of like import) shall bedeemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in theRegistration Statement as of the effective date of the Registration Statement or the date of the Basic Prospectus or the Final Prospectus, asthe case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, the Basic Prospectus orthe Final Prospectus shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the “ 1934Act ”) which is incorporated by reference in the Registration Statement, the Basic Prospectus or the Final Prospectus, as the case may be.

Section 1 . Representations and Warranties. The Company represents and warrants to each Underwriter as of the datehereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to inSection 2(b) hereof, and agrees with each Underwriter, as follows:



(i) Compliance with Registration Requirements . The Company meets the requirements for use of FormS-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has becomeeffective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have beeninstituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any requeston the part of the Commission for additional information has been complied with.

At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments theretobecame effective and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), the Registration Statement,the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respectswith the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material factor omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither the FinalProspectus nor any amendments or supplements thereto, at the time the Final Prospectus or any amendments or supplements were issuedand at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), included or will include an untrue statementof a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of thecircumstances under

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which they were made, not misleading. The representations and warranties in this subsection shall not apply to statements in or omissionsfrom the Registration Statement or the Final Prospectus made in reliance upon and in conformity with information furnished to theCompany in writing by any Underwriter through the Representative expressly for use in the Registration Statement or the Final Prospectus.

The prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule424 under the 1933 Act, complied when so filed in all material respects with the requirements of the 1933 Act and the 1933 Act Regulationsand the Final Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmittedcopies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(ii) Incorporated Documents . The documents incorporated or deemed to be incorporated by reference inthe Registration Statement and the Final Prospectus, at the time they were or hereafter are filed with the Commission,complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations ofthe Commission thereunder (the “ 1934 Act Regulations ”), and, when read together with the other information in theFinal Prospectus, at the time the Registration Statement became effective, at the time the Final Prospectus was issuedand at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), did not and will notcontain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary tomake the statements therein not misleading.

(iii) Independent Accountants . The accountants who certified the financial statements and supportingschedules included in the Registration Statement are independent public accountants as required by the 1933 Act andthe 1933 Act Regulations; each of the Company and its subsidiaries maintains a system of internal accounting controlssufficient to provide reasonable assurance that (A) transactions are executed in accordance with management’s generalor specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements inconformity with generally accepted accounting principles (“ GAAP ”) in China with a reconciliation to GAAP in theUnited States; (C) access to assets is permitted only in accordance with management’s general or specific authorization;



(D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriateactions taken with respect to any differences; and (E) each of the Company and its subsidiaries has made and keptbooks, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions ofassets of such entity and provide a sufficient basis for the preparation of combined financial statements in accordancewith Chinese GAAP, with a reconciliation thereof to U.S. GAAP.

(iv) Financial Statements . The financial statements included in the Registration Statement and the FinalProspectus, together with the related schedules and notes present fairly the financial position of the Company and itsconsolidated subsidiaries at the dates indicated and the statement of operations, stockholders’ equity and cash flows ofthe Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared inconformity with U.S. GAAP

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applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. The supportingschedules, if any, included in the Registration Statement present fairly in accordance with U.S. GAAP the information required to be statedtherein. The selected financial data, the summary financial information and all other financial data or information included in the FinalProspectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financialstatements included in the Registration Statement. The consolidated statements of net assets of CommWorks, an operating segment of3Com Corporation (“ CommWorks ”), as of February 28, 2003 and May 31, 2002 and the related consolidated statements of revenues anddirect expenses for the nine months ended February 28, 2003 and the years ended May 31, 2002 and June 1, 2001, present fairly the netassets of CommWorks at the dates indicated and the related revenues and direct expenses of CommonWorks for the periods specified, inconformity with U.S. GAAP. The pro forma financial statements and the related notes thereto included in the Registration Statement andthe Final Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission’s rules andguidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and theassumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactionsand circumstances referred to therein.

(v) No Material Adverse Change in Business . Since the respective dates as of which information is givenin the Registration Statement and the Final Prospectus, except as otherwise stated therein, (A) there has been nomaterial adverse change in the condition, financial or otherwise, or in the earnings, business affairs or businessprospects of the Company and its subsidiaries, taken as a whole, whether or not arising in the ordinary course ofbusiness (a “ Material Adverse Effect ”), (B) there have been no transactions entered into by the Company, or any ofits subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company andits subsidiaries, considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared,paid or made by the Company on any class of its capital stock at any time.

(vi) Good Standing of the Company . The Company has been duly organized and is validly existing as acorporation in good standing under the laws of the State of Delaware and has corporate power and authority to own,lease and operate its properties and to conduct its business as described in the Final Prospectus and to enter into andperform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transactbusiness and is in good standing in each other jurisdiction in which such qualification is required, whether by reason ofthe ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in goodstanding would not result in a Material Adverse Effect.

(vii) Good Standing of Subsidiaries . The entities listed on Schedule C hereto (each, a “ Subsidiary ” and



collectively, the “ Subsidiaries ”) are the only significant subsidiaries (as defined in Rule 1-02 of Regulation S-X) ofthe Company, and each Subsidiary has been duly organized and is validly existing as a corporation in good standingunder the laws of the jurisdiction of its incorporation, has corporate power and

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authority to own, lease and operate its properties and to conduct its business as described in the Final Prospectus and is duly qualified as aforeign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether byreason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standingwould not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstandingcapital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non–assessable and is owned by theCompany, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity;with respect to each Subsidiary, none of the outstanding shares of capital stock of the Subsidiary was issued in violation of the preemptiverights of any securityholder of the Subsidiary pursuant to the Subsidiary’s charter documents or applicable law or any agreement orinstrument to which the Subsidiary is a party or by which the Subsidiary is bound which has not otherwise been waived by suchsecurityholder.

(viii) Capitalization . The authorized, issued and outstanding capital stock of the Company, as ofSeptember 30, 2003, is as set forth in the Final Prospectus under the caption “Capitalization” (except for subsequentissuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans disclosedor incorporated by reference in the Final Prospectus or pursuant to the exercise of convertible securities, warrants oroptions disclosed or incorporated by reference in the Final Prospectus). The shares of issued and outstanding capitalstock have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding sharesof capital stock was issued in violation of any preemptive rights of any securityholder of the Company pursuant to theCompany’s Certificate of Incorporation or Bylaws or applicable law or any agreement or instrument to which theCompany is a party or by which the Company is bound which has not otherwise been waived by such securityholder.

(ix) Authorization of Agreement and Registration Statement . This Agreement has been duly authorized,executed and delivered by the Company. The Registration Statement and the Final Prospectus and the filing of theRegistration Statement and the Final Prospectus with the Commission have been duly authorized by and on behalf ofthe Company, and the Registration Statement has been duly signed by and on behalf of the Company pursuant to suchauthorization.

(x) Authorization and Description of Securities . Any Option Securities purchased by the Underwritersfrom the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and,when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forthherein, will be validly issued, fully paid and non-assessable; the Common Stock conforms in all material respects to allstatements relating thereto contained in the Final Prospectus and such description conforms in all material respects tothe rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liabilityby reason of being such a holder; and the issuance of the Securities is not subject to any preemptive rights of anysecurityholder of the Company pursuant to the Company’s Certificate of Incorporation or Bylaws or applicable law orany agreement or

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instrument to which the Company is a party or by which the Company is bound which has not otherwise been waived by suchsecurityholder.

(xi) Absence of Defaults and Conflicts . Neither the Company nor any of its subsidiaries is in violation ofits articles, charter, by laws or similar organizational document or in default in the performance or observance of anyobligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or creditagreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or bywhich it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary issubject (collectively, “ Agreements and Instruments ”), except for such defaults that would not result in a MaterialAdverse Effect; and the execution, delivery and performance of this Agreement and the consummation of thetransactions contemplated herein and in the Registration Statement (including the issuance and sale of the Securities andthe use of the proceeds from the sale of the Securities as described in the Final Prospectus under the caption “ Use ofProceeds ”) and compliance by the Company with its obligations hereunder have been duly authorized by all necessarycorporate action and do not and will not, whether with or without the giving of notice or passage of time or both,conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creationor imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiarypursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges orencumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of theprovisions of the articles, charter, by-laws, as applicable, of the Company or any subsidiary or any applicable law,statute, rule, regulation, judgment, order, writ or decree, known to the Company of any government, governmentinstrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of theirassets, properties or operations. As used herein, a “ Repayment Event ” means any event or condition which gives theholder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the rightto require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or anysubsidiary.

(xii) Absence of Labor Dispute . No labor dispute with the employees of the Company or any subsidiaryexists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminentlabor disturbance by the employees of any of its or any subsidiary’s principal suppliers, manufacturers, customers orcontractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect.

(xiii) Absence of Proceedings . Other than as set forth in the Final Prospectus, there is no action, suit,proceeding, inquiry or investigation before or brought by any company or governmental agency or body, domestic orforeign, now pending, or, to the knowledge of the Company, threatened, against the Company or any subsidiary, whichis required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably beexpected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adverselyaffect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the

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performance by the Company of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which theCompany or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the



Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in aMaterial Adverse Effect.

(xiv) Accuracy of Exhibits . There are no contracts or documents which are required to be described in theRegistration Statement, the Final Prospectus or the documents incorporated by reference therein or to be filed asexhibits thereto which have not been so described and filed as required.

(xv) Possession of Intellectual Property . The Company and its subsidiaries own or possess, or can acquireon reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secretsand other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks,service marks, trade names or other intellectual property (collectively, “ Intellectual Property ”) necessary to carry onthe business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or isotherwise aware of any infringement of or conflict with asserted rights of others with respect to any IntellectualProperty or of any existing facts or circumstances which would render any Intellectual Property invalid or inadequate toprotect the interest of the Company or any of its subsidiaries therein, and which infringement or, conflict (if the subjectof any unfavorable decision, ruling or finding) or invalidity or inadequacy singly or in the aggregate, would result in aMaterial Adverse Effect.

(xvi) Absence of Further Requirements . No filing with, or authorization, approval, consent, license, order,registration, qualification or decree of, any court or governmental authority or agency is necessary or required for theperformance by the Company of its obligations hereunder in connection with the offering, issuance or sale of theSecurities or the consummation of the transactions contemplated herein, except such as have been already obtained or asmay be required under the 1933 Act or the 1933 Act Regulations or state securities laws.

(xvii) Possession of Licenses and Permits . Except as otherwise stated in the Final Prospectus and theRegistration Statement, the Company and its subsidiaries possess such permits, licenses, approvals, consents and otherauthorizations (collectively, “ Governmental Licenses ”) issued by the appropriate federal, state, local or foreignregulatory agencies or bodies (including the People’s Republic of China (“ PRC ”) State Council, the PRC Ministry ofInformation Industry, the State Development Planning Commission, the State Economic Trade Commission, the ChinaSecurities Regulatory Commission (the “ CSRC ”), the Ministry of Foreign Commerce (“ MOC ”), the Ministry ofLand and Resources, the State Administration of Foreign Exchange (“ SAFE ”), the General Administration ofCustoms, the relevant Posts and Telecommunications Administrations (“ PTA ”) and the relevant Commodity PricingAdministration Bureau) necessary to conduct the business now operated by them; the Company and its subsidiaries arein compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to complywould not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and infull

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force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full forceand effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice ofproceedings relating to the revocation, suspension or modification of any such Governmental Licenses which, singly or in the aggregate, ifthe subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.



(xviii) Title to Property . The Company and its subsidiaries have good and marketable title to all real propertyowned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free andclear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as(a) are described in the Final Prospectus or (b) do not, singly or in the aggregate, materially affect the value of suchproperty and do not interfere with the use made and proposed to be made of such property by the Company or any of itssubsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, consideredas one enterprise, and under which the Company or any of its subsidiaries holds properties described in the FinalProspectus, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claimof any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of theleases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to thecontinued possession of the leased or subleased premises under any such lease or sublease.

(xix) Repatriation of Dividends and Other Distributions . All dividends and other distributions declared andpayable on the equity or other interests in each of the Subsidiaries may, under the laws and regulations of the PRC, bepaid to the Company and may be converted into foreign currency that may be freely transferred out of the PRC, andexcept as disclosed in the Registration Statement and the Final Prospectus, all such dividends and distributions will notbe subject to withholding or other taxes under the laws and regulations of the PRC and are otherwise free and clear ofany other tax, withholding or deduction in the PRC and may be so paid without the necessity of obtaining anygovernmental authorization, whether local, provincial or national, in the PRC.

(xx) PRC Taxes . Other than as described in the Final Prospectus, no stamp or other issuance or transfertaxes or duties and no capital gains, income, withholding or other taxes are payable by or on behalf of the Company tothe PRC or any political subdivision or taxing authority thereof or therein in connection with the issuance, sale anddelivery of the Securities or the execution, delivery and performance of this Agreement. No stamp or other issuance ortransfer taxes or duties and no capital gains, income or withholding other taxes are payable by or on behalf of theUnderwriters to the PRC or any political subdivision or taxing authority thereof or therein in connection with the saleand delivery of the Securities to the Underwriters or by the Underwriters to the initial purchasers thereof, or theexecution, delivery and performance of this Agreement.

(xxi) Taxes . Each of the Company and its subsidiaries has filed all reports or filings required thereof fortaxation purposes, including those required by the PRC or any political subdivision thereof, and has paid all taxesrequired to be paid by it and any other

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assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fineor penalty that is currently being contested in good faith or would not have a Material Adverse Effect.

(xxii) Sovereign Immunity . Under the laws of the PRC, neither the Company nor any of its subsidiaries, or anyof their properties, assets or revenues are entitled to any right of immunity on the grounds of sovereignty from any legalaction, suit or proceeding, from set off or counterclaim, from the jurisdiction of any court, from service of process, fromattachment to or in aid of execution of judgment or from other legal process or proceeding for the giving of any relief orfor the enforcement of any judgment.



(xxiii) Choice of Law . Under the laws of the PRC, the courts of the PRC recognize and give effect to the choiceof law provisions set forth herein and enforce judgments of U.S. courts obtained against the Company to enforce thisAgreement, provided that the judgment (A) was not obtained by fraud; (B) was final and conclusive; (C) in the opinionof the relevant PRC court after the review of such judgment pursuant to international treaties concluded or acceded toby the PRC government or in accordance with the principle of reciprocity, or otherwise in accordance with the CivilProcedure Law of the PRC, did not contradict the basic principles of PRC law; and (D) in the opinion of the relevantPRC court after its review of such judgment pursuant to international treaties concluded or agreed to by the PRCgovernment or in accordance with the principle of reciprocity, or otherwise in accordance with the Civil Procedure Lawof the PRC, did not violate state sovereignty, security or public interest.

(xxiv) Investment Company Act . The Company is not, and upon the issuance and sale of the Securities as hereincontemplated and the application of the net proceeds therefrom as described in the Final Prospectus will not be, requiredto be registered as an “ investment company ” under the Investment Company Act of 1940, as amended (the “ 1940Act ”).

(xxv) Environmental Laws . Except as described in the Registration Statement and except as would not, singlyor in the aggregate, reasonably be expected to result in a Material Adverse Effect, (A) neither the Company nor any ofits subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policyor rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrativeorder, consent decree or judgment, relating to pollution or protection of human health, the environment (including,without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including,without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants,contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, “Hazardous Materials ”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport orhandling of Hazardous Materials (collectively, “ Environmental Laws ”), (B) the Company and its subsidiaries haveall permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliancewith their requirements, (C) there are no pending or, to the Company’s knowledge, threatened administrative, regulatoryor judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation orproceedings relating

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to any Environmental Law against the Company or any of its subsidiaries and (D) the Company is not aware of any events or circumstancesthat might reasonably be expected to form the basis of an order for clean up or remediation, or an action, suit or proceeding by any privateof or governmental body or agency, against the Company or any of its subsidiaries relating to Hazardous Materials or any EnvironmentalLaws.

(xxvi) Foreign Corrupt Practices Act . Neither the Company, any of its subsidiaries, nor any officer, director,employee or agent thereof or any stockholder thereof acting on behalf of the Company or any of its subsidiaries, hasdone any act or authorized, directed or participated in any act, in violation of any provision of the United States ForeignCorrupt Practices Act of 1977, as amended, applied to such entity or person.



(xxvii) Registration Rights . Except as described in the Registration Statement or as have been waived in writing,there are no persons with registration rights or other similar rights to have any securities registered pursuant to theRegistration Statement or otherwise registered by the Company under the 1933 Act.

Section 2 . Sale and Delivery to Underwriters; Closing.

(a) Initial Securities . On the basis of the representations and warranties herein contained and subject to theterms and conditions herein set forth, the Company agrees to issue and sell to each Underwriter, severally and notjointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per share setforth in Schedule D, that proportion of the number of Initial Securities set forth in Schedule B opposite the name of theCompany which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plusany additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to theprovisions of Section 10 hereof, bears to the total number of Initial Securities, subject, in each case, to such adjustmentsamong the Underwriters as the Representative in their sole discretion shall make to eliminate any sales or purchases offractional securities.

(b) Option Securities . In addition, on the basis of the representations, warranties and agreements hereincontained and subject to the terms and conditions herein set forth, the Company hereby grants an option to theUnderwriters, severally and not jointly, to purchase up to an additional 1,815,000 shares of Common Stock at the priceper share set forth in Schedule D, less an amount per share equal to any dividends or distributions declared by theCompany and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted willexpire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose ofcovering over-allotments which may be made in connection with the offering and distribution of the Initial Securitiesupon notice by the Representative to the Company setting forth the number of Option Securities as to which the severalUnderwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a “ Date of Delivery ”) shall be determined by the Representative, but shall not belater than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, ashereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters,acting severally and not jointly, will purchase that proportion of the total number

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of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of suchUnderwriter bears to the total number of Initial Securities, subject in each case to such adjustments as the Representative in their discretionshall make to eliminate any sales or purchases of fractional shares.

(c) Payment . Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall bemade at the offices of Shearman & Sterling LLP, 1080 Marsh Road, Menlo Park, CA 94025, or at such other place asshall be agreed upon by the Representative and the Company at 6:00 A.M. (California time) on the third (fourth, if thepricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed inaccordance with the provisions of Section 10), or such other time not later than ten business days after such date as shallbe agreed upon by the Representative and the Company (such time and date of payment and delivery being hereincalled “ Closing Time ”).



In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, anddelivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreedupon by the Representative and the Company, on each Date of Delivery as specified in the notice from the Representative to the Company.

Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Companyagainst delivery to the Representative for the respective accounts of the Underwriters of certificates for the Securities to be purchased bythem. It is understood that each Underwriter has authorized the Representative, for its account, to accept delivery of, receipt for, and makepayment of the purchase price for, the Initial Securities and/or the Option Securities, if any, which it has agreed to purchase. Banc ofAmerica Securities LLC, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment ofthe purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not beenreceived by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriterfrom its obligations hereunder.

(d) Denominations; Registration . Certificates for the Initial Securities and the Option Securities, if any, shallbe in such denominations and registered in such names as the Representative may request in writing at least two fullbusiness days before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for theInitial Securities and the Option Securities, if any, will be made available for examination and packaging by theRepresentative in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to theClosing Time or the relevant Date of Delivery, as the case may be.

Section 3 . Covenants of the Company. The Company covenants with each Underwriter as follows:

(a) Compliance with Securities Regulations and Commission Requests . The Company, subject toSection 3(b), will notify the Representative immediately, and confirm the notice in writing, (i) when any post-effectiveamendment to the Registration Statement shall become effective, or any supplement to the Basic Prospectus or anyamended Final Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of anyrequest by the

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Commission for any amendment to the Registration Statement or any amendment or supplement to the Final Prospectus or any documentincorporated by reference therein or for additional information, and (iv) of the issuance by the Commission of any stop order suspending theeffectiveness of the Registration Statement, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction,or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly file the Final Prospectus withthe Commission within the time periods specified by Rule 424(b) and will take such steps as it deems necessary to ascertain promptlywhether the form of Final Prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the eventthat it was not, it will promptly file such Final Prospectus. The Company will make every reasonable effort to prevent the issuance of anystop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. The Company will prepare and filewith the Commission the Rule 462(b) Registration Statement, if necessary, in a form approved by the Representative (which approval shallnot be unreasonably withheld or delayed) in order for the Underwriters to exercise the over-allotment option granted to them pursuant toSection 2(b) hereof.

(b) Filing of Amendments . The Company will give the Representative notice of its intention to file or prepareany amendment to the Registration Statement (including any filing under Rule 462(b)) or any amendment, supplement



or revision to either the Basic Prospectus included in the Registration Statement at the time it became effective or to theFinal Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Representative withcopies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, andwill not file or use any such document to which the Representative or counsel for the Underwriters shall object.

(c) Delivery of Registration Statements . The Company has furnished or will deliver to the Representative andcounsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of eachamendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporatedor deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and willalso deliver to the Representative, without charge, a conformed copy of the Registration Statement as originally filedand of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the RegistrationStatement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmittedcopies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(d) Delivery of Prospectuses . The Company will furnish to each Underwriter, without charge, during theperiod when the Final Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copiesof the Final Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The FinalProspectus and any amendments or supplements thereto furnished to the Underwriters will be identical to theelectronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permittedby Regulation S-T.

(e) Continued Compliance with Securities Laws . The Company will comply with the 1933 Act and the 1933Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of theSecurities as contemplated in this Agreement and

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in the Final Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of theSecurities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters orfor the Company, to amend the Registration Statement or amend or supplement the Final Prospectus in order that the Final Prospectus willnot include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein notmisleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion ofsuch counsel, at any such time to amend the Registration Statement or amend or supplement the Final Prospectus in order to comply withthe requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject toSection 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the RegistrationStatement or the Final Prospectus comply with such requirements, and the Company will furnish to the Underwriters such number of copiesof such amendment or supplement as the Underwriters may reasonably request.

(f) Blue Sky Qualifications . The Company will use its best efforts, in cooperation with the Underwriters, toqualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions(domestic or foreign) as the Representative may designate and to maintain such qualifications in effect for a period ofnot less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) RegistrationStatement; provided, however, that the Company shall not be obligated to file any general consent to service of processor to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or tosubject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.



(g) Rule 158 . The Company will timely file such reports pursuant to the 1934 Act as are necessary in order tomake generally available to its security holders as soon as practicable an earnings statement for the purposes of, and toprovide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.

(h) Use of Proceeds . The Company will use the net proceeds received by it from the sale of the Securities inthe manner specified in the Final Prospectus under “ Use of Proceeds .”

(i) Listing . The Company will use its best efforts to effect and maintain the quotation of the Securities on theNasdaq National Market and will file with the Nasdaq National Market all documents and notices required by theNasdaq National Market of companies that have securities that are traded in the over-the-counter market and quotationsfor which are reported by the Nasdaq National Market.

(j) Restriction on Sale of Securities . During a period of 90 days from the date of the Final Prospectus (the “Lockup Period ”), the Company will not, without the prior written consent of Banc of America Securities LLC, (i)directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option orcontract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of CommonStock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registrationstatement under the 1933 Act with respect to any of the foregoing or publicly disclose the intention to do any of theforegoing, (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directlyor indirectly, the economic

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consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settledby delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities tobe sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion ofa security outstanding on the date hereof and referred to in the Final Prospectus, (C) any shares of Common Stock issued or options topurchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Final Prospectus, (D) anyshares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan, (E) any shares ofCommon Stock or securities convertible into or exchangeable for Common Stock issued in connection with acquisitions (by purchase,merger or otherwise) of other entities (or substantially all of the assets or operations of other entities) if the recipients of such securities eachexecutes a lockup agreement with Banc of America Securities LLC in form and substance substantially similar to the lockup set forth in thisSection 3(i), or (F) any filing of any registration statement on Form S-8 under the 1933 Act.

(k) Reporting Requirements . The Company, during the period when Final Prospectuses are required to bedelivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuantto the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations.

(l) No Amendment of 10b5-1 Plans . During the Lockup Period, the Company will not permit the amendmentof any 10b5-1 Plan unless such amendment does not become effective until after the expiration of Lockup Period. Forpurposes of this Agreement, a “ 10b5-1 Plan ” is a contract adopted prior to the date hereof under Rule 10b5-1 underthe Exchange Act between the Company and any of its executive officers or directors, a copy of which has been



provided to Banc of America Securities LLC.

Section 4 . Payment and Expenses.

(a) Expenses . The Company will pay or cause to be paid all expenses incident to the performance of theCompany’s obligations under this Agreement, including (i) the preparation, printing and filing of the RegistrationStatement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) thepreparation, printing and delivery to the Underwriters of this Agreement and such other documents as may be requiredin connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance anddelivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and anystamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees anddisbursements of the Company’s counsel, accountants and other advisors, (v) the qualification of the Securities undersecurities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable feesand disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of theBlue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of the FinalProspectus and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwritersof copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent orregistrar for the Securities, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to theUnderwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the “ NASD ”) ofthe terms of the sale of the Securities,

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(x) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities to the Underwriters and theirtransfer between the Underwriters pursuant to an agreement between such Underwriters and (xi) the fees and expenses incurred inconnection with the inclusion of the Securities in the Nasdaq National Market.

(b) Termination of Agreement . If this Agreement is terminated by the Representative in accordance with theprovisions of Section 5, Section 9(a)(i) or Section 11 hereof, the Company shall reimburse the Underwriters for all oftheir out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters.

Section 5 . Conditions of Underwriters’ Obligations. The obligations of the several Underwriters hereunder are subjectto the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates ofany officer of the Company or any subsidiary of the Company delivered pursuant to the provisions hereof, to theperformance by the Company of its covenants and other obligations hereunder, and to the following further conditions:

(a) Effectiveness of Registration Statement . The Registration Statement, including any Rule 462(b)Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of theRegistration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by theCommission, and any request on the part of the Commission for additional information shall have been complied withto the reasonable satisfaction of counsel to the Underwriters. The Final Prospectus shall have been filed with theCommission in accordance with Rule 424(b).



(b) Opinion of Counsel for the Company . At Closing Time, the Representative shall have received thefavorable opinion, dated as of Closing Time, of Shearman & Sterling LLP, counsel for the Company substantially in theform attached hereto as Exhibit A.

(c) Opinion of PRC Counsel for the Company . At Closing Time, the Representative shall have received thefavorable opinion, dated as of Closing Time, of Jun He Law Offices, PRC counsel for the Company, in form andsubstance satisfactory to the Representative and counsel for the Underwriters, together with signed or reproduced copiesof such letter for each of the other Underwriters to the effect that:

(i) Each of UTStarcom China, Ltd. and UTStarcom Telecom Co., Ltd. (each, a “ PRC Subsidiary ” andcollectively the “ PRC Subsidiaries ”) has been duly organized and is validly existing and duly qualified as a foreigninvestment enterprise with limited liability under PRC law, and its business license is in full force and effect; each hasfull power and authority (corporate and other) and has all consents, approvals, authorizations, orders, registrations,clearances and qualifications of or with any court, governmental agency or body having jurisdiction over it or any of itsproperties required for the ownership or lease of property by it and the conduct of its business, and has the legal rightand authority to own, use, lease and operate its assets and to conduct its business as described in the Final Prospectus;each of the Company and the PRC Subsidiaries can sue and be sued in its own name under the laws of the PRC;

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(ii) The Company, as a foreign corporation for transaction of business in the PRC, has all necessarylicenses, consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarationsand filings with all governmental agencies to own, use or lease its properties and conduct business as described in theFinal Prospectus;

(iii) The equity interests of the Company in each of the PRC Subsidiaries have been duly and validlyauthorized and issued, are fully paid and nonassessable and are legally owned directly or indirectly by the Company,free and clear of all liens, encumbrances, equities or claims; no additional governmental approval or authorization of orfiling with any governmental agency is required under PRC law for the ownership by the Company of its equityinterests in each of the PRC Subsidiaries, except the approval from or registration with the relevant governmentalauthorities, including, without limitation, the relevant local branches of the Ministry of Commerce (“ MOC ”), the StateAdministration of Industry and Commerce (“ SAIC ”), the State Administration for Foreign Exchange (“ SAFE ”), theState Administration of Taxation and the General Administration of Customs, which has been obtained and is in fullforce and effect; the liability of the Company in respect of its equity interests in each of the PRC Subsidiaries is limitedto its investment therein;

(iv) Based on our general review of the title documents and without independent check or verificationthereof, the PRC Subsidiaries have valid title to, or valid leasehold interests in, all of their material real and personalproperty owned by them, in each case free and clear of all liens, encumbrances, third party rights or interests, defects orany other restrictions except such as do not materially affect the value of such property and do not interfere with the usemade and proposed to be made of such property by them; and any real property and buildings held under lease by thePRC Subsidiaries are held by them under valid and enforceable leases in full force and effect, with such exceptions as



are not material and do not interfere with the use made and proposed to be made of such property and buildings bythem;

(v) To the best of our knowledge and other than as set forth in the Final Prospectus, there are no pendingactions, suits or proceedings by or before any court or governmental agency, authority or body or any arbitrator in thePRC to which any of the Company, the PRC Subsidiaries is a party or of which any property of the Company, the PRCSubsidiaries is subject which, if determined adversely to the Company, the PRC Subsidiaries, would individually or inthe aggregate result in any material adverse change or any event involving a prospective material adverse change, in oraffecting the general affairs, management, financial position, stockholders’ equity or results of operations of theCompany and its subsidiaries, taken as a whole; and, to the best of our knowledge, no such actions, suits or proceedingsare threatened or contemplated;

(vi) The issue and sale of the Securities to be sold by the Company and the execution, delivery andperformance by the Company of this Agreement and the consummation of the transactions herein contemplated will notconflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, anyindenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to us to which any of thePRC Subsidiaries is a party or by which any of the PRC

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Subsidiaries is bound or to which any of the property or assets of the PRC Subsidiaries is subject, nor will such action result in any violationof the provisions of articles of association or business licenses of any of the PRC Subsidiaries or any law or statute or any order, rule orregulation known to us of any governmental agency having jurisdiction over the PRC Subsidiaries or any of their properties;

(vii) No governmental authorization, approval or consent of or filing with any governmental agency isrequired under PRC law for the consummation by the Company of the transactions contemplated by this Agreement;

(viii) Except as described in the Registration Statement or the Final Prospectus or as incorporated by referencetherein, the PRC Subsidiaries have all necessary licenses, consents, authorizations, approvals, orders, certificates andpermits of and from, and have made all declarations and filings with all governmental agencies to own, lease, licenseand use their properties and assets and conduct their business as described in the Final Prospectus. Except as describedin the Final Prospectus, neither the Company nor any of the PRC Subsidiaries has any reason to believe that theMinistry of Information Industry or any other regulatory body is considering modifying, suspending or revoking anysuch licenses, consents, authorizations, approvals, orders, certificates or permits and each of the Company, the PRCSubsidiaries is in compliance with the provisions of all such licenses, consents, authorizations, approvals, orders,certificates or permits in all material respects;

(ix) To the best of our knowledge, none of the PRC Subsidiaries is in violation of its constituent documents(including, without limitation, articles of association) or in default in the performance or observance of any materialobligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan, lease or otheragreement or instrument to which it is a party or by which it or any of its properties may be bound; the business andoperations conducted by the PRC Subsidiaries are in compliance with any PRC laws and regulations applicable to thePRC Subsidiaries;



(x) Current PRC laws and regulations permit foreign investment in the telecommunications servicesindustry, subject to certain ownership and geographic restrictions. After due inquiry, we have no legal basis to form anopinion that any of the Subsidiaries invests in, operates, or participates in the operation of, any telecommunicationsservices in the PRC as restricted by current PRC laws and regulations;

(xi) All necessary licenses, approvals, certificates or permits for the connection of products totelecommunications networks within the PRC have been duly obtained for each of the products of the Company and thePRC Subsidiaries sold, distributed and marketed in the PRC for which such licenses, approvals, certificates or permitsare required, except such as described in the Final Prospectus;

(xii) The statements set forth in the Final Prospectus under the captions “Risk Factors” to the extent suchstatements relate to matters of PRC law or regulation or to the provisions of documents therein described, are fairsummaries of such matters and are correct in all material respects;

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(xiii) No stamp or other issuance or transfer taxes or duties and no capital gains, income, withholding or othertaxes are payable by or on behalf of the Underwriters to the PRC or to any political subdivision or taxing authoritythereof or therein in connection with (i) the issuance, sale and delivery by the Company of the Securities to or for therespective accounts of the Underwriters or (ii) the sale and delivery outside the PRC by the Underwriters of theSecurities to the initial purchasers thereof in the manner contemplated in this Agreement;

(xiv) The entering into, performance and enforcement of this Agreement in accordance with its terms andconditions will not subject the Underwriters to a requirement to be licensed or otherwise qualified to do business in thePRC, nor will any Underwriter be deemed to be resident, domiciled, carrying on business through an establishment orplace in the PRC or in breach of any laws or regulations of the PRC by reason of entering into, performance orenforcement of this Agreement;

(xv) All dividends and other distributions declared and payable upon the equity interests in the PRCSubsidiaries to the Company may be converted into foreign currency that may be freely transferred out of the PRC, andall such dividends and other distributions are not and, except as disclosed in the Registration Statement and the FinalProspectus, will not be subject to withholding or other taxes under the laws and regulations of the PRC and, except asdisclosed in the Registration Statement and the Final Prospectus, are otherwise free and clear of any other tax,withholding or deduction under PRC law, in each case without the necessity of obtaining any governmental approval orauthorization in the PRC, except such as have been obtained;

(xvi) The Company’s stock option, stock purchase and other similar plans (including the plans of theCompany’s subsidiaries and acquired Companies) and the sale, issuance and grant of any securities under any of theaforementioned plans to the date hereof, to the extent applicable to employees of any of the PRC Subsidiaries, do notviolate any provisions of the foreign exchange laws and regulations of the PRC or any other applicable PRC laws and



regulations, provided that any payment made under any of the aforementioned plans by any PRC citizen has beenaccepted in a cashless manner;

(xvii) Under the applicable PRC tax law, UTStarcom (China), Ltd. is entitled to reduced taxes at the rate of 10%in 2003. UTStarcom Telecom Co., Ltd. is entitled to reduced taxes at the rate of 15% in 2003; to the best of ourknowledge, we are not aware of any event or circumstance which may result in such rates being invalid or ineffectiveor capable of being revoked;

(xviii) Insofar as matters of the law of the PRC are concerned, the Registration Statement and the filing of theRegistration Statement with the Commission has been duly authorized by and on behalf of the Company, and theRegistration Statement has been executed pursuant to such authorization by or on behalf of the Company;

(xix) Although we do not assume any responsibility for the accuracy, completeness or fairness of thestatements contained in the Registration Statement or the Final Prospectus, except for those referred to in the opinion insubsection (xii) of this opinion, nothing has come to our attention that led us to believe that, as of its effective

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date, the Registration Statement or any further amendment thereto made by the Company prior to the later date of the Closing Time and thelast Date of Delivery (other than the financial statements, as to which we need express no opinion) contained an untrue statement of amaterial fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, insofar as theyrelate to matters of PRC laws and regulations and the provisions of the documents entered into by each of the Company and the PRCSubsidiaries in connection with the business conducted by each of them in the PRC, not misleading or that, as of its date, the FinalProspectus or any further amendment or supplement thereto made by the Company prior to the later date of the Closing Time and the lastDate of Delivery (other than the financial statements and related schedules therein, as to which we need express no opinion) contained anuntrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, insofar as they relate tomatters of PRC laws and regulations and the provisions of the documents entered into by each of the Company and the PRC Subsidiaries inconnection with the business conducted by each of them in the PRC, in the light of the circumstances under which they were made, notmisleading or that, as of the later date of the Closing Time and the last Date of Delivery, the Registration Statement, the Final Prospectus orany further amendment or supplement thereto made by the Company prior to such date (other than the financial statements and relatedschedules therein as to which we need express no opinion) contains an untrue statement of a material fact or omits to state a material factnecessary to make the statements therein, insofar as they relate to matters of PRC laws and regulations and the provisions of the documentsentered into by each of the Company and the PRC Subsidiaries in connection with the business conducted by each of them in the PRC, inthe light of the circumstances under which they were made, not misleading;

(xx) Except as described in the Final Prospectus, insofar as matters of PRC laws and regulations areconcerned, each of the Company and the PRC Subsidiaries owns, possesses, or otherwise has the right to use, and hasmade all necessary registration and applications with all governmental agencies to own, possess and use, the IntellectualProperty necessary to carry on the business currently operated by it and as described in the Final Prospectus, and to thebest of our knowledge, has not received any notice of infringement or conflict with asserted rights of others with respectto any such intellectual property rights that, if determined adversely to the Company or any of the PRC Subsidiaries,would individually or in the aggregate have a Material Adverse Effect.

(d) Opinion of Counsel for the Underwriters. At Closing Time, the Representative shall have received thefavorable opinion, dated as of Closing Time, of Davis Polk & Wardwell, counsel for the Underwriters, in form and



substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of theother Underwriters, and such counsel shall have received or been permitted access to such papers and information asthey may reasonably request to enable them to give such opinion.

(e) Officers’ Certificate. At Closing Time, there shall not have been, since the date hereof or since therespective dates as of which information is given in the Final Prospectus, any material adverse change in the condition,financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiariestaken as a whole, whether or not arising in ordinary course of business, and the Representative shall have received acertificate

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of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as ofClosing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a)hereof are true and correct in all material respects with the same force and effect as though expressly made at and as of Closing Time, (iii)the Company has complied in all material respects with all agreements and satisfied in all material respects all conditions on its part to beperformed or satisfied at or prior to Closing Time and (iv) to the knowledge of such officers, based on due inquiry, no stop order suspendingthe effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted by the Commission.

(f) Accountant’s Comfort Letter. At the time of the execution of this Agreement, the Representative shallhave received from PricewaterhouseCoopers LLP a letter dated such date, in form and substance satisfactory to theRepresentative, together with signed or reproduced copies of such letter for each of the other Underwriters containingstatements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respectto the financial statements and certain financial information contained in the Registration Statement and the FinalProspectus.

(g) Bring-down Comfort Letter. At Closing Time, the Representative shall have received fromPricewaterhouseCoopers LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made inthe letter furnished pursuant to subsection (h) of this Section, except that the specified date referred to shall be a date notmore than three business days prior to Closing Time.

(h) Lockup Agreements. At Closing Time, the Representative shall have received an agreement substantially inthe form of Exhibit B hereto from each of the Company’s directors and executive officers, each of whom is listed inSchedule E, and an agreement substantially in the form of Exhibit C hereto from SOFTBANK America, Inc.

(i) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their optionprovided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations andwarranties of the Company contained herein and the statements in any certificates furnished by the Company or anysubsidiary of the Company hereunder shall be true and correct in all material respects as of each Date of Delivery and,at the relevant Date of Delivery, the Representative shall have received:

(i) Officers’ Certificate . A certificate, dated such Date of Delivery, of the President or a Vice President



of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificatedelivered at the Closing Time pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery;

(ii) Opinion of Counsel for the Company . The favorable opinion of Shearman & Sterling LLP, counsel forthe Company, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Deliveryand otherwise to the same effect as the opinion required by Section 5(b) hereof.

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(iii) Opinion of PRC Counsel for the Company . The favorable opinion of Jun He Law Offices, PRCcounsel for the Company, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date ofDelivery and otherwise to the same effect as the opinion required by Section 5(c) hereof.

(iv) Opinion of Counsel for the Underwriters . The favorable opinion of Davis Polk & Wardwell, counselfor the Underwriters, dated such Date of Delivery, relating to the Option Securities to be proposed on such Date ofDelivery and otherwise to the same effect as the opinion required Section 5(d) hereof.

(v) Bring-down Comfort Letter . A letter from PricewaterhouseCoopers LLP, in form and substancesatisfactory to the Representative and dated such Date of Delivery, substantially in the same form and substance as theletter furnished to the Representative pursuant to Section 5(f) hereof, except that the “specified date” in the letterfurnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery.

(j) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the Underwriters shallhave been furnished with such documents and opinions as they may require for the purpose of enabling them to passupon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of therepresentations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken bythe Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory inform and substance to the Representative and counsel for the Underwriters.

(k) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when andas required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities, on aDate of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevantOption Securities, may be terminated by the Representative by notice to the Company at any time at or prior to ClosingTime or such date of Delivery, as the case may be, and such termination shall be without liability of any party to anyother party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination andremain in full force and effect.

Section 6 . Indemnification.

(a) Indemnification of the Underwriters by the Company . The Company agrees to indemnify and hold



harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 ofthe 1933 Act or Section 20 of the 1934 Act as follows:

(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out ofany untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or anyamendment thereto) or the omission or alleged omission therefrom of a material fact required to be stated therein ornecessary to make the statements therein not misleading or arising out of any untrue statement or alleged untruestatement of a material fact included in the Final Prospectus (or any

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amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make thestatements therein, in the light of the circumstances under which they were made, not misleading;

(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent ofthe aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmentalagency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement oromission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any suchsettlement is effected with the written consent of the Company; and

(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of a singlecounsel chosen by Banc of America Securities LLC), reasonably incurred in investigating, preparing or defendingagainst any litigation, or any investigation or proceeding by any governmental agency or body, commenced orthreatened, or any claim whatsoever based upon any such untrue statement or omission or any such alleged untruestatement or omission, to the extent that any such expense is not paid under (i) or (ii) above;

provided, however , that the indemnity agreement contained in this Section 6(a) shall not apply to any loss, liability, claim,damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omissionmade in reliance upon and in conformity with written information furnished to the Company by any Underwriterthrough the Representative expressly for use in the Registration Statement (or any amendment thereto), or the FinalProspectus.

(b) Indemnification of the Company, Directors and Officers . Each Underwriter severally agrees to indemnifyand hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and eachperson, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a)of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements oromissions made in the Registration Statement (or any amendment thereto) or the Final Prospectus in reliance upon andin conformity with written information furnished to the Company by such Underwriter through the Representativeexpressly for use in the Registration Statement (or any amendment thereto) or the Final Prospectus.



(c) Actions Against Parties . Notification. Each indemnified party shall give notice as promptly as reasonablypracticable to each indemnifying party of any action commenced against it in respect of which indemnity may be soughthereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liabilityhereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from anyliability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnifiedpursuant to subsection (a) above, counsel to the indemnified parties shall be selected by Banc of America SecuritiesLLC, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall beselected by the Company. An indemnifying party may participate at its own expense in the defense of any such

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action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also becounsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (inaddition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate butsimilar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall,without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect toany litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoeverin respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnifiedparties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of eachindemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement asto or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.

(d) Settlement Without Consent If Failure to Reimburse . If at any time an indemnified party shall haverequested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, suchindemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Sections 6(a)(ii) and6(b)(ii) above effected without its written consent if (i) such settlement is entered into more than 45 days after receipt bysuch indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms ofsuch settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall nothave reimbursed such indemnified party in accordance with such request prior to the date of such settlement.

Section 7 . Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to orinsufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expensesreferred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities,claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriateto reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand fromthe offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permittedby applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i)above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand inconnection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, aswell as any other relevant equitable considerations.

The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering ofthe Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from theoffering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwritingdiscount received by the Underwriters, in each case as set forth on the cover of the Final Prospectus, bear to the aggregate initial publicoffering price of the Securities as set forth on such cover.



23

The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among otherthings, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relatesto information supplied by the Company or by the Underwriters and the parties’ relative intent, knowledge, access to information andopportunity to correct or prevent such statement or omission.

The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determinedby pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which doesnot take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims,damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or otherexpenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigationor proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue oralleged untrue statement or omission or alleged omission.

Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount bywhich the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount ofany damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement oromission or alleged omission.

No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution fromany person who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act orSection 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer ofthe Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company, as the case may be. TheUnderwriters’ respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities setforth opposite their respective names in Schedule A hereto and not joint.

Section 8 . Representations, Warranties and Agreements to Survive Delivery. All representations, warranties andagreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submittedpursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalfof any Underwriter or controlling person, or by or an behalf of the Company, and shall survive delivery of the Securitiesto the Underwriters.

24

Section 9 . Termination of Agreement.



(a) Termination; General . The Representative may terminate this Agreement, by notice to the Company, atany time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since therespective dates as of which information is given in the Final Prospectus (exclusive of any supplement thereto), anymaterial adverse change in the condition, financial or otherwise, or in the earnings, business affairs or businessprospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary courseof business, or (ii) if there has occurred any material adverse change in the financial markets in the United States, Chinaor in the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis orany change or development involving a prospective change in national or international political, financial or economicconditions, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable orinadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in anysecurities of the Company has been suspended or materially limited by the Commission or the Nasdaq National Market,or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq NationalMarket has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, ormaximum ranges for prices have been required, by any of said exchanges or by such system or by order of theCommission, the National Association of Securities Dealers, Inc. or any governmental authority, or a materialdisruption has occurred in commercial banking or securities settlement or clearance services in the United States, (iv) ifa banking moratorium has been declared by Federal or New York or PRC authorities, (v) if a change or developmentinvolving a prospective change in United States or PRC taxation affecting the Company or the Securities or the transferthereof or the imposition of exchange controls by the United States or any change or development involving aprospective change in the PRC exchange controls would materially and adversely affect the financial markets or themarket for the Securities and other equity securities, or (vi) if the outbreak or escalation of hostilities involving theUnited States or the PRC or the declaration by the United States or the PRC of a national emergency or war makes itimpracticable or inadvisable to proceed with the public offering or the delivery of the Securities being delivered at suchDate of Delivery on the terms and in the manner contemplated in this Agreement and the Final Prospectus.

(b) Liabilities . If this Agreement is terminated pursuant to this Section, such termination shall be withoutliability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7and 8 shall survive such termination and remain in full force and effect.

Section 10 . Default by One or More of the Underwriters. If one or more of the Underwriters shall fail at Closing Timeor a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the “Defaulted Securities ”), the Representative shall, within 24 hours thereafter, make arrangements for one or more of thenon-defaulting Underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may beagreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed sucharrangements within such 24 hour period, then:

(a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased onsuch date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the fullamount thereof in the proportions that

25

their respective underwriting obligations hereunder bear to the underwriting obligations of all non defaulting Underwriters, or



(b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on suchdate, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time. The non-defaultingUnderwriters shall have the right to purchase all, but shall not be under any obligation to purchase any , of theSecurities, and if such non-defaulting Underwriters do not purchase all the Securities at the Delivery Date, theobligation of the Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold onsuch Date of Delivery shall terminate without liability on the part of any non defaulting Underwriter.

No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default.

In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is afterthe Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell therelevant Option Securities, as the case may be, either (i) the Representative or (ii) the Company together shall have the right to postponeClosing Time and the Company shall have the right to postpone the relevant Date of Delivery, as the case may be, for a period notexceeding seven days in order to effect any required changes in the Registration Statement or Final Prospectus or in any other documents orarrangements. As used herein, the term “Underwriter” includes any person substituted for an Underwriter under this Section 10.

Section 11 . Default by the Company.

(a) If the Company shall fail at Closing Time to sell the number of Securities that it is obligated to sellhereunder, then this Agreement shall terminate without any liability on the part of any nondefaulting party; provided,however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuantto this Section 11(a) shall relieve the Company from liability, if any, in respect of such default.

(b) If the Company shall fail at a Date of Delivery to sell the number of Option Securities that it is obligated tosell hereunder, then this Agreement shall terminate without any liability on the part of any nondefaulting party;provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action takenpursuant to this Section 11(b) shall relieve the Company from liability, if any, in respect of such default.

Section 12 . Notices. All notices and other communications hereunder shall be in writing and shall be deemed to havebeen duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shallbe directed to the Representative at Banc of America Securities LLC, 9 West 57 th Street, New York, New York 10019,attention Nicholas Ganz, with a copy to Davis Polk & Wardwell, 1600 El Camino Real, Menlo Park, California 94025,attention of Alan Denenberg; and notices to the Company shall be directed to it at UTStarcom, Inc., 1275 Harbor BayParkway, Suite 100, Alameda, California 94502, attention of Hong Lu, with a copy to Shearman & Sterling LLP, 1080Marsh Road, Menlo Park, California 94025, attention of Carmen Chang.

26

Section 13 . Parties. This Agreement shall each inure to the benefit of and be binding upon the Underwriters and theCompany and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall beconstrued to give any person, firm or corporation, other than the Underwriters and the Company and their respectivesuccessors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal



representatives any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisionherein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusivebenefit of the Underwriters and the Company and their respective successors, and said controlling persons and officersand directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. Nopurchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.

Section 14 . Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED INACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTHHEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.

Section 15 . The Headings. The Article and Section headings herein and the Table of Contents are for convenience onlyand shall not affect the construction hereof.

Section 16 . Counterparts. This Agreement may be executed by any one or more of the parties hereto in any number ofcounterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and thesame instrument.

Section 17. No Other Agreements . The parties hereto acknowledge that this agreement represents the sole understanding and agreementbetween the parties with respect to the subject matter hereof and supersedes any prior understandings or agreements that may have existed.

27

If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company, a counterpart hereof,whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriters and the Company inaccordance with its terms.

Very truly yours, UTSTARCOM, INC. By: /s/ Michael Sophie Name: Michael Sophie Title: Senior Vice President of Finance &

Chief Financial Officer

CONFIRMED AND ACCEPTED, as of the date first above written: BANC OF AMERICA SECURITIES LLC



By: By: /s/ Authorized Signatory

For themselves and as Representative of the other Underwriters named in Schedule A hereto.

SCHEDULE A

Name of Underwriter Number of Initial

Securities Banc of America Securities LLC 12,100,000 Total 12,100,000

Sch A-1

SCHEDULE B

Number ofInitial

Securities to beSold

MaximumNumber of

Option Securitiesto be Sold

Company 12,100,000 1,815,000

Sch B-1

SCHEDULE C

List of Significant Subsidiaries

Name Jurisdiction of Incorporation %

Ownership UTStarcom (China) Co., Ltd. China 100%UTStarcom Telecom Co., Ltd. China 100%



Hangzhou Starcom Telecom Co., Ltd. China 100%Universal Communication Technology (Hangzhou) Co., Ltd. China 49%UTStarcom Hong Kong, Ltd. Hong Kong 100%UTStarcom Japan KK Japan 100%

Sch C-1

SCHEDULE D

UTSTARCOM, INC.

Shares of Common Stock

(Par Value $.00125 Per Share)

The purchase price per share for the Securities to be paid by the several Underwriters shall be $39.25; provided that the purchase price pershare for any Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by anamount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable onthe Option Securities.

Sch D-1

SCHEDULE E

List of Directors and Executive Officers

Directors:

Hong Liang Lu ChairmanYing Wu DirectorMasayoshi Son DirectorThomas J. Toy DirectorBetsy Atkins DirectorLarry Horner Director

Executive Officers:



Hong Liang Lu President, Chief Executive Officer and Chairman of the BoardMichael Sophie Senior Vice President of Finance, Chief Financial Officer and Assistant SecretaryYing Wu Vice Chairman, Chairman and Chief Executive Officer of China OperationsJohnny Chou Executive Vice President and President and Chief Operating Officer of China OperationsGerald Soloway Senior Vice President, EngineeringWilliam Huang Senior Vice President and Chief Technology OfficerHoward Kwock Vice President, Engineering

Other:

David Robison

Sch E-1

EXHIBIT A

Form of Opinion of Counsel for the Company

(i) The Company is validly existing as a corporation in good standing under the laws of the State ofDelaware with corporate power and authority to own, lease and operate its properties and to conduct its business asdescribed in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement.

(ii) The Company is qualified as a foreign corporation to transact business and is in good standing inCalifornia.

(iii) The authorized capital stock of the Company is as set forth in the Prospectus under the caption“Capitalization” and the Company’s Common Stock conforms as to legal matters to the description thereof contained inthe Prospectus.

(iv) The Shares have been duly authorized for issuance and sale to the Underwriters pursuant to theUnderwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreementagainst payment of the consideration set forth in the Underwriting Agreement, will be validly issued, fully paid andnon-assessable and the issuance of the Shares will not be subject to any preemptive rights under the Company’sCertificate of Incorporation or Bylaws, the General Corporation Law of the State of Delaware or, to our knowledge, anyagreement or instrument described in or referred to in the Registration Statement.

(v) The Underwriting Agreement has been duly authorized, executed and delivered by the Company.

(vi) To our knowledge, and without inquiring into dockets of any court, commission, regulatory body,administrative agency or other governmental body, and other than as set forth in, or incorporated by reference into, the



Prospectus, in the United States, there is not pending or threatened any legal or governmental proceedings to which theCompany or any subsidiary is a party, or to which the property of the Company or any subsidiary is subject, before orbrought by any U.S. court or governmental agency or body, which could reasonably be expected to materially andadversely affect the consummation of the transactions contemplated in the Underwriting Agreement or the performanceby the Company of its obligations thereunder.

(vii) To our knowledge, no consent, approval, authorization or order of or qualification with any United Statesfederal, New York State court or California State court, governmental agency or body is required for the performanceby the Company of its obligations under the Underwriting Agreement, except such consents, approvals, authorizations,orders or qualifications as have been obtained under the Securities Act and the Securities Exchange Act of 1934, asamended, and as may be required under state securities or Blue Sky laws in connection with the purchase anddistribution of the Shares by the Underwriters (as to which we express no opinion).

(viii) The execution, delivery and performance by the Company of the Underwriting Agreement, the issuanceand sale of the Shares pursuant to the Underwriting Agreement and the performance by the Company of the terms andprovisions thereof will not result in a breach or

A-1

violation of any of the terms and provisions of, or constitute a default under, (A) the Certificate of Incorporation or Bylaws of the Company,(B) to our knowledge, any material U.S. law, statute, rule, regulation or order customarily applicable to transactions of this nature or anyjudgment, order, writ or decree known to us of any governmental agency or body or any court having jurisdiction over the Company or anyof its properties, or (C) any agreement or instrument to which the Company or its subsidiaries is a party or by which the Company or itssubsidiaries is bound or to which any of the properties of the Company or its subsidiaries is subject, and which agreement or instrument isincluded as an exhibit filed pursuant to Item 601(b)(4) and 601(b)(10) of Regulation S-K to the Registration Statement, or which is listed onExhibit A hereto.

(ix) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings known to usbetween the Company and any person granting such person the right to require the Company to include such securitiesin the securities registered pursuant to the Registration Statement.

(x) The statements set forth in the Prospectus under the captions “Description of Common Stock” and“Underwriting” (except for such statements provided in such section by the Underwriters) insofar as such statementsconstitute a summary of matters of legal matters or documents referred to therein, fairly summarize such information inall material respects.

(xi) The Company is not required to be registered as an investment company under the InvestmentCompany Act of 1940, as amended.

(xii) Subject to certain limitations set forth in this opinion, we advise you that, on the basis of the informationwe gained in the course of performing the services referred to above, in our opinion, (a) each of the documentsincorporated by reference in the Prospectus (other than the financial statements and other financial data contained or



incorporated by reference therein or omitted therefrom, as to which we express no opinion), at the time it was filed withthe Commission, appears on its face to have been appropriately responsive in all material respects to the requirements ofthe Securities Exchange Act of 1934, as amended, and the applicable rules and regulations of the Commissionthereunder and (b) each of the Registration Statement and the Prospectus (other than the financial statements and otherfinancial data contained or incorporated by reference therein or omitted therefrom, as to which we express no opinion)appears on its face to be appropriately responsive in all material respects to the requirements of the Securities Act andthe applicable rules and regulations of the Commission thereunder.

(xiii) We further advise you that subject to the limitations set forth in this opinion, on the basis of theinformation we gained in the course of performing the services referred to above no facts came to our attention whichgave us reason to believe that (i) the Registration Statement (other than the financial statements and other financial datacontained or incorporated by reference therein or omitted therefrom, as to which we have not been requested tocomment), as of the date of the Prospectus Supplement, contained an untrue statement of a material fact or omitted tostate a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) theProspectus (other than the financial statements and other financial data contained or incorporated by reference therein oromitted therefrom, as to which we have not been requested to comment), as of the date of the Prospectus Supplement orthe date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a

A-2

material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, notmisleading.

A-3

EXHIBIT B

Form of Lockup Agreement for Directors and Executive Officers

B-1

EXHIBIT C

Form of Lockup Agreement for SOFTBANK America, Inc.

C-1



EXECUTION COPY

CONFIDENTIAL

UTSTARCOM, INC.

(a Delaware corporation)

12,100,000 Shares of Common Stock

AMENDMENT NO. 1 TO


Dated: January 14, 2004

AMENDMENT NO. 1 TO


This Amendment No. 1 (this “ Amendment ”) to the Underwriting Agreement dated January 8, 2004 (the “ Original Agreement ”) by andbetween UTStarcom, Inc. (the “ Company ”) and Banc of America Securities LLC (the “ Representative ” or the “ Underwriter ”) ismade and entered into as of January 14, 2004 by and between the Company and the Underwriter.

WHEREAS, pursuant to the Original Agreement, the Representative proposed to make a public offering of the Securities as soon as theRepresentative deemed advisable;

WHEREAS, as of the Closing Time, the Representative has not made a public offering of the Securities or determined a public offeringprice (or method of such determination) for the Securities;



WHEREAS, in accordance with the foregoing, the Company and the Representative wish to amend the Original Agreement (as amendedpursuant to this Amendment, the “ Amended Agreement ”) in accordance with this Amendment.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and for good and valuable consideration,the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree to amend theOriginal Agreement as follows:

Section 1. Definitions . (a) Capitalized terms used but not defined herein shall have the meanings assigned to such terms in theOriginal Agreement. Capitalized terms defined in the preamble to this Amendment or in the recitals hereto shall have the meaningsassigned to such terms in such preamble or recitals.

(b) For purpose of the Amended Agreement, (i) the term “ Final Prospectus ”, to the extent such term isused in the Original Agreement in Section 1, in paragraph (j) of Section 3 and in paragraphs (b), (c), (d), (e), (f), (g) and(1) of Section 5, in each case shall be deemed as of, or at, the Closing Time (but not as of the Bring-down Date or anyDate of Delivery) to be the form of Final Prospectus attached hereto as Exhibit A as delivered by the Company to theUnderwriter on the date hereof, together with the Basic Prospectus and including the documents that would beincorporated by reference pursuant to Item 12 of Form S-3 under the 1933 Act therein if such Final Prospectus werefirst used to confirm sales of Securities on the date hereof, and (ii) at all other times (including the Bring-down Date andany Date of Delivery), the term “Final Prospectus” shall have the meaning ascribed to such term in the OriginalAgreement.

(c) “ Bring-down Date ” shall mean a date to be mutually agreed between the Underwriter and theCompany, provided that such date (i) shall not be later than the third business day following the receipt of the noticefrom the Underwriter specified in Section 7 of this Amendment and (ii) shall not occur after July 14, 2004.

Section 2. Representations and Warranties . (a) Reference is made to the following language at the beginning ofSection 1 of the Original Agreement:

“The Company represents and warrants to each Underwriter, as of the Closing Time referred to in Section 2(c) hereof and as of each Date ofDelivery (if any) referred to in Section 2(b) hereof, and agrees with the Underwriter, as follows:”

The foregoing language shall be deleted from the Original Agreement and replaced in its entirety with the following language:

“The Company represents and warrants to the Underwriter, as of the Closing Time referred to in Section 2(c) hereof, as of the Bring-downDate and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with the Underwriter, as follows:”

(b) Paragraphs (i) and (ii) of Section 1 shall be deleted from the Original Agreement and replaced in theirentirety as follows:



“(i) Compliance with Registration Requirements . The Company meets the requirements for use ofForm S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement hasbecome effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement orany Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose havebeen instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and anyrequest on the part of the Commission for additional information has been complied with.

At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments theretobecame effective, at the Closing Time, at January 8, 2004, at the issue date of the Final Prospectus and at the Bring-down Date (and, if anyOption Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement andamendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and 1933 ActRegulations (other than, at the Closing Time, the omission of pricing-related information) and did not and will not contain an untruestatement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein notmisleading (other than, at the Closing Time, the omission of pricing-related information). Neither the Final Prospectus nor any amendmentsor supplements thereto, at the time the Final Prospectus or any amendments or supplements are issued, at the Closing Time, at January 8,2004 and at the Bring-down Date (and, if any Option Securities are purchased, at the Date of Delivery), included or will include an untruestatement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light ofthe circumstances under which they were made, not misleading (other than, at the Closing Time, the omission of pricing-relatedinformation). The representations and warranties in this subsection shall not

2

apply to statements in or omissions from the Registration Statement or the Final Prospectus made in reliance upon and in conformity withinformation furnished to the Company in writing by any Underwriter through the Representative expressly for use in the RegistrationStatement or the Final Prospectus.

The prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or to be filed pursuant toRule 424 under the 1933 Act, complied, or will comply, when so filed in all material respects with the requirements of the 1933 Act the1933 Act Regulations and the Final Prospectus to be delivered to the Underwriters for use in connection with this offering will be identicalto the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by RegulationS-T.

(ii) Incorporated Documents . The documents incorporated or deemed to be incorporated by reference inthe Registration Statement and Final Prospectus, at the time they were or hereafter are filed with the Commission,complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations ofthe Commission thereunder (the “ 1934 Act Regulations ”), and, when read together with the other information in theFinal Prospectus, at the time of Registration Statement became effective, at the time the Final Prospectus was issued, atthe Closing Time, at January 8, 2004 and at the Bring-down Date (and, if any Option Securities are purchased, at theDate of Delivery), did not and will not contain an untrue statement of a material fact or omit to state a material factrequired to be stated therein or necessary to make the statements therein not misleading.”

(c) All other paragraphs of Section 1 of the Original Agreement, except as aforesaid, shall otherwiseremain unchanged in the Original Agreement.

Section 3. Covenants of the Company . (a) Paragraph (a) of Section 3 of the Original Agreement is deleted and replaced in its entiretywith the following:



“(a) Compliance with Securities Regulations and Commission Request . The Company, subject toSection 3(b), will notify the Representative immediately, and confirm the notice in writing, (i) when any post-effectiveamendment to the Registration Statement shall become effective, or any supplement to the Basic Prospectus or anyamended Final Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of anyrequest by the Commission for any amendment to the Registration Statement or any amendment or supplement to theFinal Prospectus or any document incorporated by reference therein or for additional information, and (iv) of theissuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, or of thesuspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threateningof any proceedings for any of such purposes. Upon notice from the Representative of the Representative’sdetermination of a public offering price of the Securities (or a method for determining the same) or the Representative’sfirst use of the Final Prospectus

3

after effectiveness in connection with a public offering or sale of the Securities, the Company will promptly file the Final Prospectus withthe Commission within the time periods specified by Rule 424(b) and will take such steps as it deems necessary to ascertain promptlywhether the form of Final Prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the eventthat it was not, it will promptly file such Final Prospectus. The Final Prospectus filed pursuant to Rule 424(b) shall reflect the pricingrelated information and plan of distribution as advised to the Company by the Representative. The Company will make every reasonableeffort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. The Company has prepared and filed with the Commission the Rule 462(b) Registration Statement in order for the Underwriters to exercisethe over-allotment option granted to them pursuant to Section 2(b) hereof.”

(b) Paragraph (e) of Section 3 of the Original Agreement is deleted and replaced in its entirety with thefollowing:

“(e) Continued Compliance with Securities Laws . The Company will comply with the 1933 Act and the1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distributionof the Securities as contemplated in this Agreement and in the Final Prospectus. If at any time when a prospectus isrequired by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or conditionshall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, toamend the Registration Statement or amend or supplement the Final Prospectus in order that the Final Prospectus willnot include any untrue statements of a material fact or omit to state a material fact necessary in order to make thestatements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or ifit shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend orsupplement the Final Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations,the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment orsupplement as may be necessary to correct such statement or omission or to make the Registration Statement or theFinal Prospectus comply with such requirements, and the Company will furnish to the Underwriters such number ofcopies of such amendment or supplement as the Underwriters may reasonably request; provided however that theCompany may suspend such obligation to comply with the 1933 Act and the 1933 Act Regulations and the 1934 Actand the 1934 Act Regulations and to prepare and file any such amendment or supplement for a period not to exceed anaggregate of 45 days in any 90-day period or an aggregate of 60 days in any 180-day period if the Board of Directors ofthe Company, or the Chief Executive Officer or the Chief Financial Officer of the Company, shall have determined ingood faith that because of valid business reasons (not including avoidance of the Company’s obligations hereunder),



including, without limitation, the acquisition or divestiture of assets, pending corporate developments and similarevents, it is in the best

4

interest of the Company to suspend such obligation, and prior to suspending such obligation the Company provides the Representative withwritten notice at least two hours in advance of such suspension, which notice need not specify the nature of the event giving rise to suchsuspension; provided further, however , that the Company may not suspend such obligation until after February 13, 2004. The Companyagrees to use its reasonable best efforts to end the suspension period referred to in this Section 3(e) as promptly as practicable.”

(c) Paragraph (j) of Section 3 of the Original Agreement is deleted and replaced in its entirely with thefollowing:

“(j)” Restriction on Sale of Securities . During the period from (and including) January 8, 2004 through (andincluding) April 7, 2004 (the “ Lockup Period ”), the Company will not, without the prior written consent of Banc ofAmerica Securities LLC, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract topurchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer ordispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for CommonStock or file any registration statement under the 1933 Act with respect to any of the foregoing or publicly disclose theintention to do any of the foregoing, (ii) enter into any swap or any other agreement or any transaction that transfers, inwhole or in part, directly or indirectly, the economic consequence or ownership of the Common Stock, whether anysuch swap or transaction described in clause (i) or (ii) above is to be settled by delivered of Common Stock or suchother securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder,(B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion ofsecurity outstanding on the date hereof and referred to in the Final Prospectus, (C) any shares of Common Stock issuedor options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred toin the Final Prospectus, (D) any shares of Common Stock issued pursuant to any non-employee director stock plan ordividend reinvestment plan, (E) any shares of Common Stock or securities convertible into or exchangeable forCommon Stock issued in connection with acquisitions (by purchase, merger or otherwise) of other entities (orsubstantially all of the assets or operations of other entities) if the recipients of such securities each executes a lockupagreement with Banc of America Securities LLC in form and substance substantially similar to the lockup set forth inthis Section 3(i), or (F) any filing of any registration statement on Form S-8 under the 1933 Act.”

Section 4. Conditions . (a) The Underwriter hereby waives, as of the date of this Amendment, the conditionscontained in (i) the last sentence of paragraph (a) of Section 5 of the Original Agreement and (ii) the second sentence ofthe third paragraph of the Original Agreement. The foregoing waivers shall have no effect on the Company’sobligation, pursuant to the Amended Agreement, to file the Final Prospectus pursuant to Rule 424(b) of the 1933 ActRegulations in accordance with the terms of the Amended Agreement.

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(b) Paragraphs (f) and (g) of Section 5 of the Original Agreement are deleted and placed in their entiretywith the following:

“(f) Accountants’ Comfort Letters . At January 8, 2004, the Representative shall have received from each ofPricewaterhouseCoopers LLP and Deloitte & Touche LLP a letter dated such date, in form and substance satisfactory tothe Representative, together with signed or reproduced copies of such letter for each of the other Underwriterscontaining statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriterswith respect to the financial statements and certain financial information contained in the Registration Statement and theFinal Prospectus.

(g) Bring-down Comfort Letters . At Closing Time, the Representative shall have received from each ofPricewaterhouseCoopers LLP and Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect that theyreaffirm the statements made in the letter furnished pursuant to subsection (f) of this Section, except that the specifieddate referred to shall be a date not more than three business days prior to Closing Time.”

(c) The following paragraph shall be inserted at the end of Section 5 of the Original Agreement asparagraph (l):

“ Opinion of General Counsel of the Company . At Closing Time, the Representative shall have received the favorable opinion, dated as ofClosing Time, of Russell L. Boltwood, General Counsel of the Company, substantially in the form attached hereto as Exhibit D.”

The form of opinion of Mr. Boltwood referred to in Section 5(l) of the Amended Agreement is attached to this amendment as Schedule l.

Section 5. Additional Covenants of the Company . In addition of the covenants in the Original Agreement, as amended by thisAmendment, the Company covenants with the Underwriter as follows:

On the Bring-down Date (provided that the Bring-down Date occurs on or before July 14, 2004), the representations and warranties of theCompany contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereundershall be true and correct in all material respects as of the Bring-down Date and, at the Bring-down Date, the Company shall cause theRepresentative to receive:

(a) Officers’ Certificate. A certificate, dated the Bring-down Date, of the President or a Vice President ofthe Company and of the chief financial or chief accounting officer of the Company confirming that the certificatedelivered at the Closing Time pursuant to Section 5(e) of the Original Agreement remains true and correct as of theBring-down Date.

(b) Opinion of Counsel for the Company. The favorable opinion of Shearman & Sterling LLP, counsel forthe Company, dated the Bring-down Date to the same effect as the opinion required by Section 5(b) of the OriginalAgreement.

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(c) Opinion of PRC Counsel for the Company. The favorable opinion of Jun He Law Offices, PRCcounsel for the Company, dated the Bring-down Date to the same effect as the opinion required by Section 5(c) of theOriginal Agreement.

(d) Opinion of Counsel for the Underwriters. The favorable opinion of Davis Polk & Wardwell, counselfor the Underwriters, dated the Bring-down Date to the same effect as the opinion required Section 5(d) of the OriginalAgreement.

(e) Bring-down Comfort Letter. A letter form each of PricewaterhouseCoopers LLP and Deloitte &Touche LLP, in form and substance satisfactory to the Representative and dated the Bring-down Date, substantially inthe same form and substance as the letter furnished to the Representative pursuant to Section 5(f) of the OriginalAgreement, except that the “specified date” in the letter furnished pursuant to this paragraph shall be a date not morethan five days prior to the Bring-down Date.

(f) Opinion of General Counsel of the Company. The favorable opinion, dated the Bring-down Date, orRussell L. Boltwood, General Counsel of the Company to the same effect as the opinion required by Section 5(1) of theOriginal Agreement, as amended by this Amendment.

(g) Additional Documents. At the Bring-down Date, counsel for the Underwriter shall have been furnishedwith such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance andsale of the Securities as contemplated in the Original Agreement, or in order to evidence the accuracy of any of therepresentations or warranties, or the fulfillment of any of the conditions, contained in the Original Agreement; and allproceedings taken by the Company in connection with the issuance and sale of the Securities as contemplated in theOriginal Agreement shall be satisfactory in form and substance to the Representative and counsel for the Underwriters.

(h) References to the Final Prospectus. For purposes of the certificates, opinions and comfort letters to beprovided on the Bring-down Date, “Final Prospectus”, when such term is used with respect to the Bring-down Date,shall have the meaning ascribed to such term in Section 1(b)(ii) of this Amendment.

Section 6. Representations Warranties and Agreements to Survive Delivery . All representations, warranties and agreements contained inthis Amendment, the Original Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto orthereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter orcontrolling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Underwriter.

Section 7. Representations and Warranties and Agreements of the Underwriter . The Underwriter represents and warrants to the Companythat through the date of this Amendment, neither the Underwriter nor any of its affiliates has made any offer or sale of the Securities and theoffering price in connection with the Securities has not been determined. The Representative covenants with the Company that it willpromptly notify the Company in writing following any offer or sale of the Securities or the determination of the offering price of theSecurities.

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Section 8. Confidentiality . The Company agrees that (i) this Amendment and all the information contained therein (together, the “Confidential Information ”) will be kept confidential and shall not be disclosed, in whole or in part, to any person other than to its counsel,its independent auditors and any party that is required to deliver documentation in connection with any closing pursuant to the AmendedAgreement (each, a “ Company Representative ”), (ii) the Company will require each Company Representative to keep the ConfidentialInformation confidential and not to disclose the Confidential Information to any person and (iii) the Company shall be responsible for anybreach of Section 8 by each Company Representative.

In the event the Company is requested or required to disclose any of the Confidential Information, (i) the Company will provide theUnderwriter with prompt notice of such request or requirement, (ii) the Company will furnish only that portion of the ConfidentialInformation which is legally required, in the opinion of its counsel, and (iii) the Company will exercise its reasonable best efforts to obtain aprotective order, confidential treatment or other reliable assurance that confidential treatment will be accorded such portion of theConfidential Information furnished pursuant to clause (ii) unless such portion of the Confidential Information is required, in the opinion ofits counsel, to be disclosed to the public.

Section 9. Governing Law and Time . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCEWITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OFDAY REFER TO NEW YORK CITY TIME.

Section 10. The Headings . The Article and Section headings herein and the Table of Contents are for convenience only and shall notaffect the construction hereof.

Section 11. Counterparts . This Amendment may be executed by any one or more of the parties hereto in any number of counterparts, eachof which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument.

Section 12. No Other Agreements . The parties hereto acknowledge that the Original Agreement, as amended by this Amendment,represents the sole understanding and agreement between the parties with respect to the subject matter hereof and supersedes any priorunderstandings or agreements that may have existed.

Section 13. Original Agreement Effectiveness . Other than the modifications of the Original Agreement contemplated herein, all otherterms and provisions of the Original Agreement shall remain in full force and effect.

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If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company, a counterpart hereof,whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriter and the Company inaccordance with its terms.

Very truly yours, UTSTARCOM, INC.



By: /s/ Michael Sophie Name: Michael Sophie Title: Senior Vice President of Finance & Chief Financial Officer

CONFIRMED AND ACCEPTED, as of the date first above written: BANC OF AMERICA SECURITIES LLC By: Paul A. Phillips, Managing Director By: /s/ Paul A. Phillips Authorized Signatory

Exhibit A

[ The Final Prospectus, as defined in Section 1(a)(i) of the Amendment, is attached hereto as Exhibit A. ]

Exhibit 10.104

[***]. Confidential Treatment Requested – Certain information in this exhibit has been omitted and filed separately with theCommission. Confidential treatment has been requested with respect to the omitted portions.

AGREEMENT

December 20th, 2004

Curitel Communications, Inc. (hereinafter called “Curitel”) and UTStarcom Personal Communications LLC (hereinafter called“UTStarcom”) enter into this Agreement as of December 20th, 2004 according to the following terms and conditions:

1. Exclusivity.



1.1 Curitel appoints UTStarcom its exclusivedistributor for the sale of Curitel’s [***] terminal productsset forth in the Exhibit A designed, engineered orproduced by Curitel in [***] (the “Territory”).

1.2 Curitel will not provide any of its products to [***]for selling them within the UTStarcom’s exclusive territory.

1.3 UTStarcom will consider Curitel as its preferred[***] supplier.

2. Product.

Product models specified in Exhibit A are Subject to carrier approval and competitive prices from Curitel. Product model not specified inExhibit A could be sold through UTStarcom provided there is a pre-arranged agreement with carrier and price, delivery term and othermajor issues mutually agreed by Curitel.

3. Quantity.

3.1 UTStarcom shall purchase from Curitel the totalquantity exceeding [***] units subject to (a) the acceptableperformance of product during trial by carriers and theirapproval of user interface and to compliance with alltechnical issues; and (b) competitive pricing, timelydelivery and satisfactory quality.

4. Price.



4.1 The price for terminals on the attachment isbased on one handset, one Standard Battery, one Chargerand Manual.

4.2 Price by model for 4th Quarter in Year 2004 isspecified in Exhibit A.

4.3 Prices for 1st Quarter in Year 2005 and thereaftershall be discussed and mutually agreed.

4.4 UTStarcom’s final prices to the carriers(hereinafter referred to the “Net Prices”) shall be theamount equal to [***]. All other Net Prices shall bemutually agreed by both parties.

5. Payment Terms.

5.1 UTStarcom shall make payment to Curitel forproduct model purchased under this Agreement bytelegraphic transfer. Every first day of the month, Curitelwill send the invoice for that month’s total scheduledshipment and UTStarcom will make payment of [***] of theinvoiced amount on that day. At the time of everyindividual shipment, UTStarcom will also make paymentfor the [***] of its invoice amount of the shipped productswithin (3) days after receiving bill of landing thereof in US



dollars. Every last day of the month, the balance of theprepaid [***] amount will be settled in a way thatUTStarcom makes payment for the differences ifUTStarcom’s total payments in that month falls short tothe total shipped amount in that month. Or UTStarcom willdeduct the amount from following month’s [***] amount ifthere is any over paid amount in the previous month.

6. Forecast / Order Placement.

6.1 UTStarcom will provide Curitel with [***] firmpurchase order and [***] rolling forecast of its estimatedrequirements for products.

6.2 The above purchase order and the rolling forecastshall be provided by the 10th of each month.

6.3 UTStarcom will update forecasts on a monthlybasis or more frequently.

6.4 The purchase order shall be deemed to beconfirmed in case Curitel fails to notify UTStarcom ofobjection to such purchase order within 5 business daysafter receipt of it.



6.5 Both parties will discuss and share risk for thelong lead and unique components to be ordered by Curitelbefore approval of the products from the carriers model bymodel. Curitel will provide the unique parts and long-leadcomponents list. This list will include the quantity and theunit price and the total amounts to be purchased to meetthe mass production requirement.

6.6 Subject to section 3.1, with respect to any surpluscomponents or finished goods already ordered and/ormanufactured under the purchase orders of UTStarcomand for which Curitel is liable resulting from cancellationof firm purchase orders, UTStarcom will take responsibilityas long as UTStarcom issued the purchase order. Thisresponsibility will include the purchase of above quantityat the price of P/O sheet. Curitel, however, will use its bestefforts to (1) reduce its liability to its vendors by cancelingorders for surplus components and (2) utilize such itemsin manufacturing elsewhere.

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7. Delivery.

7.1 UTStarcom and Curitel will work together toensure maximum flexibility in order delivery. Productmodel will be shipped at CIP (IncoTerms 2000) to any portby air or sea freight, at UTStarcom’s option.



7.2 Curitel will be responsible for air freight chargesin case that Curitel delivers the product after [***] fromagreed delivery date on the confirmed purchase order.

7.3 In the event delivery is delayed more than [***]from agreed delivery date on the confirmed purchaseorder, UTStarcom will have the option to cancel or revisepurchase order for the delayed product model.

8. Marketing.

8.1 UTStarcom shall provide marketing informationper [***] to Curitel [***]. UTStarcom shall cause Curitel tobuild up marketing channel with carriers directly anddiscuss for all the product planning related issues.

9. [***]

10. Fulfillment Fee.

10.1 Curitel agrees to pay a fulfillment fee toUTStarcom to be mutually negotiated based on prior feescharged for the after sales service to be rendered toCuritel’s products sold in the Territories.



10.2 The fulfillment fee to cover any and all theexpenses, which will occur in connection withUTStarcom’s sales activity, is included in the Net Prices(Net Price includes fulfillment fee).

10.3 The fulfillment fee is paid only for the complete setof [***] terminal product, which consists of handset, abattery and a desktop charger.

11. Brand Name.

11.1 The products purchased by UTStarcom under thisAgreement shall be sold under the co-brand name such asAudiovox-Pantech, provided, however, that if the carriersdo not accept such co-branding, UTStarcom will make bestefforts for such co-brand name to be displayed on giftboxes, labels or other materials than handsets.

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12. Parts Allowance.

12.1 Curitel shall provide [***] spare part of the productto UTStarcom in lieu of the warranty service for theproduct. Curitel shall not be responsible for any otherwarranty service (except any Epidemic Failure) for theproduct other than the supply of [***] spare part set forth inthe preceding sentence.



12.2 Except for the Section 12.1, Curitel shall quarterlyinvoice any spare parts provided to UTStarcom inaccordance with market price at that time. Curitel willcontinue to provide spare parts for such warranty serviceby UTStarcom after expiration of this Agreement.

13. Warranty Service.

13.1 UTStarcom shall be responsible for the warrantyservices with respect to the product except any EpidemicFailure. Epidemic Failure shall mean the situation thatwould exist if [***] or more of the total units of the Productsdelivered to Buyer hereunder during the consecutive [***]period demonstrates a defect in material workmanshipand/or design, or fails to conform to this specificationbecause of a identical cause except fault or negligence ofthe user, or shipper, or improper use of the Product,Curitel’s responsibility for the Epidemic Failure is effectivefor [***] after shipment of the products. Curitel will beresponsible for all costs and expenses in connection withhe Epidemic Failure.

13.2 If Curitel establishes its own warranty servicefacilities in UTStarcom’s exclusive territories for itsproduct after expiration of this Agreement, UTStarcom willcooperate and assist Curitel in this endeavor, providedCuritel continues to provide spare parts to UTStarcom.



14. Agreement Term and Termination.

14.1 This Agreement shall be valid for a period of [***]from the signature of this agreement.

14.2 UTStarcom shall support Curitel to establish adirect sales operation for its products in the Territory. Such support shall include, but not limited to [***]. IfUTStarcom fails to do this or delays to provide suchsupports, Curitel shall be entitled to claim againstUTStarcom. This will include to make null and void for theexclusivity above clause 1.

14.3 For the avoidance of doubt, Curitel shall beentitled to sell or distribute, during the term of thisAgreement, in the Territory any terminals that shall not bespecified in Exhibit A attached hereto and described inArticle 2.

15. Limitation of Liability; Governing Law.

15.1 Limitation of Liability . NEITHER PARTY SHALLHAVE ANY LIABILITY FOR ANY LOSS OF PROFIT OROTHER COMMERCIAL DAMAGE, INCLUDING, WITHOUTLIMITATION: INCIDENTAL, CONSEQUENTIAL, INDIRECT,SPECIAL OR PUNITIVE DAMAGES OF ANY KIND; LOSSOF, OR DAMAGE TO, UTSTARCOM’S OR ANY ENDUSER’S RECORDS OR DATA; OR LOSS OF REVENUE,



4

LOSS OF BUSINESS OR OTHER FINANCIAL LOSS ARISING OUT OF OR IN CONNECTION WITH ANY PRODUCTSSOLD OR LICENSED BY CURTAIL TO UTSTARCOM OR TO ANY END USER OF PRODUCTS, EVEN IF CURTAIL HASBEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

15.2 WITHOUT LIMITING THE FOREGOING, EACHPARTY’S TOTAL LIABILITY TO THE OTHER PARTYUNDER THIS AGREEMENT WILL BE LIMITED TO THEPAYMENTS MADE BY UTSTARCOM UNDER THISAGREEMENT IN THE [***] IMMEDIATELY PRECEDING THEEVENT WHICH GAVE RISE TO SUCH DAMAGES.

15.3 Governing Law . This Agreement shall begoverned by and construed in accordance with the laws,other than choice of law rules, of the State of California. All disputes which may arise between the parties, out of orin relation to or in connection with this Agreement shall befinally settled by arbitration in Los Angeles, CA inaccordance with arbitration rules of ICC.

Curitel Communications, Inc. UTSTARCOM By: /s/ Moon Song By: /s/ Philip Christopher Dr. Moon Song Philip Christopher President and CEO President and CEO UTStarcom Personal Communication LLC

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Exhibit A - AudioVox Year 2004 / 2005

[***]

Exhibit 10.105

[***]. Confidential Treatment Requested – Certain information in this exhibit has been omitted and filed separately with theCommission. Confidential treatment has been requested with respect to the omitted portions.

ASSET PURCHASE AGREEMENT

This is an ASSET PURCHASE AGREEMENT (this ”Agreement”), dated October 29, 2004 by and between UTStarcom CDMATechnologies Korea Limited, a limited liability company (yuhan hoesa) organized under the laws of Korea (“Purchaser”) and GigaTelecom, Inc., a corporation organized under the laws of Korea (“Seller”). Purchaser and Seller shall sometimes each be referred to as a“Party” and collectively as the ”Parties”.

RECITALS:

WHEREAS, Seller is the owner of certain assets relating to the research and development of CDMA wireless products;

WHEREAS, Purchaser wishes to establish a research and development center in Korea to provide certain design servicesfor its overseas subsidiaries and Affiliates to manufacture and sell CDMA wireless products;

WHEREAS, Seller desires to sell, and Purchaser desires to purchase, the Transferred Assets (as defined below) uponterms and conditions set forth herein (“Asset Transfer”);

WHEREAS, as a separate arrangement, Seller and UTStarcom Inc. (“UTSI”) have entered into an agreement datedMarch 8, 2004 whereby UTSI has engaged Seller to design three (3) products (i.e., C2000, C3000 and C5000)(“Existing Projects”) for which UTSI has fully paid the amount of the contract price of United States Dollars [***]. The amount and timing of the payment by Purchaser of a portion of the purchase price for the Asset Transfer shalldepend upon the completion of the Existing Projects as set forth herein;

WHEREAS, as a separate arrangement, Seller and UTSI have entered into certain agreements dated August 6, 2004whereby UTSI has engaged Seller to design certain entry-level handsets using [***] for which UTSI has fully paid theamount of the contract price of United States Dollars [***].

WHEREAS, as a separate arrangement, Seller and UTSI have entered into certain agreements dated September 17, 2004



whereby UTSI has engaged Seller to design three (3) products (i.e., C12000, C1200B and CI 100B) for which UTSI haspaid the amount of US$800,000 out of the total amount of US$[***].

NOW THEREFORE, in consideration of the mutual agreements, covenants, representations and warranties containedherein, and in reliance thereon, Purchaser and Seller hereby agree as follows:

DEFINITIONS:

“Affiliate” or “Affiliates” means any Person(s) directly or indirectly controlling, controlled by or under common control with such Person.As used in this definition, “controlling” (including, with its

1

correlative meanings, “controlled by” and “under common control with”) means possession, directly or indirectly, of power to direct orcause the direction of management or policies, whether through ownership of securities, partnership or other ownership interests, bycontract or otherwise.

“Asset List” has the meaning as described in Section 1.1.

“Asset Transfer” has the meaning as described in the Recitals Section.

“Authority” means any national or local or foreign governmental or regulatory entity, or any department, agency, authority or politicalsubdivision thereof.

“Balance Sheet” has the meaning as described in Section 2.4. “Balance Sheet Date” has the meaning as described in Section 2.4.

“Business Day” shall mean Monday through Friday, except those days on which commercial banks are authorized or required by law toclose in either the United States of America or Korea.

“Calendar Day” shall mean all days of the week, including national holidays. “CDMA” shall mean Code Division Multiple Access digitalwireless technology. “Closing” and “Closing Date” have the meanings as described in Section 1.12.

“Complete”, “Completed” and “Completion” mean results satisfactory to Purchaser with respect to (i) CDG approval fro Stages 1, 2 and 3,(ii) customer acceptance by at least one carrier, (iii) manufacturing engineering acceptance test and (iv) qualification test.

“Confidential Information” has the meaning as described in Section 1.14(g).



“C2000” means the tri-mode (CDMA 1x / AMPS / GPS) handsets with features of [***] which Seller has agreed to develop for Purchaserpursuant to an agreement therefor dated March 8, 2004.

“C3000” means the tri-mode (CDMA lx / AMPS / GPS) handsets with features of [***] which Seller has agreed to develop for Purchaserpursuant to an agreement therefor dated March 8, 2004.

“C5000” means the tri-mode (CDMA Ix / AMPS / GPS) handsets with features of [***] which Seller has agreed to develop for Purchaserpursuant to an agreement therefor dated March 8, 2004.

“Damages” means the aggregate amount of all damages, claims, losses, obligations, liabilities (including any governmental penalty, fines orpunitive damages), deficiencies, interest, costs and expenses arising out of or relating to a matter and any actions, judgments, costs andexpenses (including reasonable attorneys’ fees and all other expenses incurred in investigating, preparing or defending any litigation orproceeding, commenced or threatened) incident to such matter or to the enforcement of this Agreement and any ancillary agreementsthereto, including, but not limited to, reasonable legal fees incurred by the Party entitled to indemnification under this Agreement and anyancillary agreements thereto.

“Employee Releases” has the meaning as described in Section 1.11(f). “Environmental Laws” has the meaning as described inSection 2.12(a).

“Environmental Liabilities” means any liabilities (including costs of re-mediation) known or unknown, foreseen or unforeseen, whethercontingent or otherwise, fixed or absolute, present or future, asserted against or incurred by Purchaser arising out of or relating to(i) environmental conditions first occurring or existing prior to the Closing (whether disclosed or undisclosed) including, without limitation,the presence, Release, threat of Release, Management or exposure of or to Hazardous Substances (each as defined herein) at, on, in or underany property relating to or connected with the R&D now or previously owned, operated or leased by Seller or any of its Affiliates orpredecessors (whether into the air, soil, ground or surface waters on-site or off-site); (ii) the off site transportation, storage, treatment,recycling or

2

disposal of Hazardous Substances Managed, Released or generated related to or connected with the R&D prior to the, Closing by Seller orany of its Affiliates or predecessors or generated in connection with any of their operations; or (iii) any violation of any Environmental Lawin relation to or connected with the R&D first occurring or existing prior to the Closing (including, without limitation, costs and expensesfor pollution control equipment required to bring the R&D into compliance with Environmental Laws and fines, penalties and defense costsincurred for such reasonable time after the Closing as it takes Purchaser to come into compliance).

“Environmental Permits” has the meaning as described in Section 2.12(b). “Excluded Assets” has the meaning as described in Section 1.2.

“Existing Projects” has the meaning as described in the Recitals Section.

“Financial Institution” has the same meaning as ascribed to “creditor financial institution” in Article 2, Item 1 of the CorporateRestructuring Promotion Act (Act No. 6991, established on August 14, 2001 as last amended as of December 11, 2003).

“Financial Statements” has the meaning as described in Section 2.4.



“Hazardous Substances” means any hazardous, toxic or polluting materials, substances, wastes, pollutants or contaminants (including,without limitation, petroleum and petroleum products, PCBs, radioactive materials, asbestos or asbestos-containing materials).

“Holdback Amount” has the meaning as described in Section 1.4(a).

“Indemnified Party” and “Indemnifying Party” have the meanings as described in Section 4.5(b)(iv).

“Initial Payment” has the meaning as described in Section 1.4(a). “Installments” has the meaning as described inSection 1.4(c).

“Intellectual Property” means any or all of the following and all rights relating to or otherwise necessary to the operation of the R&D,whether owned by, licensed to or otherwise used by Seller, in, arising out of, or associated therewith: (i) all United States, Korean andforeign patents and utility models and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations andcontinuations-in-part thereof, and equivalent or similar rights anywhere in the world in inventions and discoveries; (ii) all inventions(whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technicaldata, tools and product designs, and all documentation embodying or evidencing any of the foregoing; (iii) all copyrights, copyrightsregistrations and applications therefor and all other rights corresponding thereto throughout the world; (iv) all industrial designs and anyregistrations and applications therefor throughout the world; (v) all databases and data collections and all rights therein throughout theworld; (vi) all computer software including all source code, object code, firmware, development tools, files, records and data, all media onwhich any of the foregoing is recorded; and (vii) any similar, corresponding or equivalent rights to any of the foregoing anywhere in theworld.

[***] has the meaning as described in the Recitals Section.

[***] has the meaning as described in the Recitals Section.

“Key Employees” has the meaning as described in Section 1.1(g).

“Knowledge” and words of similar import mean, with respect to any Party, actual knowledge of a particular fact or other matter beingpossessed by any officer or other individual now or formerly having principal responsibility for a business or administrative function ofsuch Party,

3

including individuals servicing in such a capacity in or for the R&D, and the knowledge that reasonably could be expected to be obtained inthe course of conducting a reasonably comprehensive investigation concerning the subject matter.

“Korea” means the Republic of Korea.



“Labor Standards Act” means the Labor Standards Act of Korea.

“Law” means all laws, statutes, ordinances, regulations, and other pronouncements having the effect of law of the Republic of Korea or anyother country or territory, commonwealth, city, county, municipality, protectorate, possession, court, tribunal, agency, government,department, commission, arbitrator, board, bureau, or instrumentality thereof.

“Liability” means all debt, liabilities, losses, claims, damages, costs, expenses and obligations of every kind, whether fixed or contingent,mature or unmatured, or liquidated or unliquidated, including, without limitation, those arising under any law and those arising under anycontract, commitment or undertaking.

“Licensed Intellectual Property” has the meanings as described in Section 2.16(d).

“Lien” or “Liens” means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement,lease, tenancy, ground rent, license, mortgage, security agreement, covenant, condition, restriction, right-of-way, easement, encroachment,option, judgment or of other encumbrance of matter of title.

“Loss” or “losses” means any and all deficiencies, judgments, settlements, demands, claims, actions, assessments, liabilities, losses,damages (other than consequential damages), interest, fines, penalties, costs and expenses, including without limitation, reasonable legal,accounting and other costs and expenses incurred in connection with investigating, defending, settling or satisfying any and all demands,claims, actions, causes of action, suit, proceedings, assessment, judgments or appeals.

“Management” has the meaning as described in Section 2.12(d). “Managed” has a similar meaning appropriate for the context.

“Material Adverse Effect” means an effect that is materially adverse (i) to the properties, business, operations, earnings, assets, liabilities orfinancial condition, or prospects of Seller taken as a whole, (ii) the ability of Seller to perform its obligations under this Agreement, or(iii) the enforceability of this Agreement, as the case may be.

“National Tax Basic Law” means the statute (Act No. 2679), established on December 27, 1974, as last amended by Act No. 7008 onDecember 30, 2003.

“Person” means any individual, a corporation, a partnership, an association, a trust or other entity or organization, including an Authority.

“Personal Property Permitted Encumbrances” has the meaning as described in Section 2.14. “Purchase Price” has the meaning as describedin Section 1.3. “Purchase Price Balance” has the meaning as described in Section 1.4(c). “Purchase Price Escrow Agreement” has themeaning as described in the Section 1.8.

“Raw Materials” means the raw materials being used for or which are substantially related to the R&D for development of all the modelsthat are under development as of the Closing Date, including but not limited to the following models: C2000, C3000, C5000, C1 100A,C1100B; C1200B, C12000 and GSH-810. Those raw materials will include, but will not be limited to, parts, PCBs, moldings, assemblies,tools, and samples that are mobilized for and/or resulted from R&D activities for each stage of

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development for mock-up samples, prototype samples, engineering samples, mechanical samples, pre-production samples, and massproduction samples.

“R&D” means the research and development activities of Seller in respect of CDMA wireless products, including but not limited to allregistered rights, copyrights, trade secrets, and manufacturing processes related thereto.

“R&D Employees” has the meaning as described in Section 1.1(g).

“Released” means released, spilled, leaked, pumped, poured, emitted, emptied, discharged, injected, escaped, leached, disposed, or dumpedand other similar terms. “Release” when used as a verb, has the same meaning, but in the present tense, and when used as a noun, has asimilar meaning appropriate for the context.

“Schedules to be-Prepared” has the meaning of such schedules to this Agreement which have not yet been attached hereto as of the date ofthis Agreement, but which shall be prepared to Purchaser’s satisfaction and delivered by Seller within a reasonable time after the datehereof.

“Taxes” and “Tax” have the meanings as described in Section 2.7. “Third Party Claim” has the meaning as described in Section 4.5(b)(i).“Transferred Assets” has the meaning as described in Section 1.1.

“United States Dollars” and “US$” means the official currency of the United States of America.

“Walk Away Date” has the meaning as described in Section 5.12(b). “Won” means the official currency of the Republic of Korea.

SECTION 1

THE TRANSACTION

1.1 Sale and Purchase of Assets . Subject to the terms and conditions hereof, at Closing referred to inSection 1.12 below, Seller will sell, transfer, convey and assign to Purchaser, free and clear of all Liens of every kind,nature and description, except for the Excluded Assets (as defined in Section 1.2) or as otherwise disclosed and agreedin this Agreement, and Purchaser will purchase from Seller, all of the assets as shall be listed onSchedule 1.1(a) through (g) (the ”Asset List”) and any other assets that are being used for or are substantially relatedto the R&D on the date hereof or as of Closing, wherever such assets are located and whether real, personal or mixed,tangible or intangible, and whether or not any of such assets have any value for accounting purposes or are carried orreflected on or specifically referred to in its books or Financial Statement (collectively, the ”Transferred Assets”). TheTransferred Assets shall include, without limitation, all of Seller’s right, title and interest in and to the following, as thesame may exist on the Closing Date (as defined in Section 1.12):



(a) all of the Seller’s right, title and interest in, to and under the IntellectualProperty related to the R&D including without limitation the IntellectualProperty listed on Schedule (a) to the Asset List, copies and tangibleembodiments thereof in whatever form or medium, and all rights to sue andrecover damages for past, present and future infringements, dilution,misappropriate, violation, unlawful imitation or breach thereof;

(b) the Raw Materials and all of Seller’s machinery, equipment, and toolsbeing used for or substantially related to the R&D, including without limitation,the items listed on Schedule 1.1(b) to the Asset List;

(c) all of Seller’s other tangible assets being used for or substantially relatedto the R&D, including office equipment and supplies, computer hardware andsoftware, including without

5

limitation, the items listed on Schedule (c) to the Asset List;

(d) all literature and graphical or written expressions, in whatever form,related to the Intellectual Property, including technical documentation, usermanuals and development documents;

(e) the rights and interest to the lease agreements with respect to certainequipment as listed onSchedule 1.1(e) to the Asset List;

(f) all of Seller’s interest in governmental permits, licenses, registrations,orders and approval substantially relating to the R&D and Transferred Assetsto the extent such permits, licenses, registrations, orders and approvals areseparately transferable to Purchaser; and



(g) the relevant employees of the Seller listed on Schedule (g) to the AssetList (which list maybe modified one (1) week prior to Closing as providedunder Section 4.2), who have been identified as working for the R&D and maybe hired by Purchaser as of Closing (“R&D Employees”), including thoseemployees who are identified as key employees to the R&D (“KeyEmployees”).

To the extent that there are any tangible or intangible assets used by Seller in connection with or otherwise necessary to the operation of theR&D that are not included in this Section 1.1 and are not specifically designated as Excluded Assets in Section 1.2, the Transferred Assetsshall include an irrevocable, nonexclusive, perpetual, paid-up, royalty-free, transferable license, contract or lease to utilize such assets inconnection with the operation of the R&D after the Closing Date, To the extent that any such assets may not be licensed, contracted orleased, Seller shall take all steps required to assure that Purchaser obtains the benefit of such assets.

For the avoidance of doubt, any and all rights and interest in the products relating to the Existing Projects, [***] , whether or not suchproducts have been fully Completed, shall be part of the Transferred Assets and transferred to Purchaser.

1.2 Excluded Assets . Notwithstanding any other provision of this Agreement, Seller shall retain allproperty of any nature, kind and description other than the Transferred Assets and for the avoidance of doubt, theTransferred Assets shall not include the following assets of the R&D (collectively, the ”Excluded Assets”):

(a) all of Seller’s existing agreements with third parties (including itscustomers and venders) (other than license agreements of the LicensedIntellectual Property included as part of the Transferred Assets) for the designand production of CDMA wireless products specific to certain customerswhich were entered into prior to Closing;

(b) all inventory or other raw materials relating to the R&D in existence priorto Closing except for certain raw materials as set forth in Section 1.1(c) hereof;

(c) all notes and accounts receivables owing to Seller on the Closing Date;

(d) all key money deposits for the lease of the building occupied by Seller asof the date hereof;



(e) any account payables and third party claims related to the R&D;

(f) all trademarks and trade names of Seller; and

(g) all assets listed in Schedule 1.2 .

1.3 Purchase Price . The total aggregate purchase price for the Transferred Assets, exclusive of VAT, shallbe US$18,600,000 (the ”Purchase Price”).

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1.4 Payment of Purchase Price . The Purchase Price shall be paid by Purchaser to Seller as follows:

(a) The amount of US$13,000,000 shall be paid by Purchaser at Closing bywire transfer in accordance with the instructions of Seller (the ”InitialPayment”), provided that, the amount of US$2,000,000 out of US$13,000,000above shall be held-back in escrow pursuant to Section 1.8 below(the ”Holdback Amount”) and, provided further that , the amount of thePurchase Price maybe reduced as set forth in Section 1.11(i) below;

(b) The amount of US$1,600,000 out of [***], which was paid by Purchaser inrespect of the [***] shall be applied against the Purchase Price; and

(c) The amount of US$4,000,000 (“Purchase Price Balance”) shall be paid inthree (3) separate installments (“Installments”), subject to adjustments, uponCompletion of each of the Existing Projects as provided in Section 1.6 below.



1.5 Allocation of Purchase Price . Purchaser and Seller agree that the Purchase Price shall be allocatedamong the Transferred Assets in accordance with the principles of allocation which shall be set forth in Schedule 1.5 ,provided that , the Parties shall, on or prior to Closing, update Schedule 1.5 to show the respective amounts allocated toeach asset and liabilities (if any). Purchaser and Seller agree that each will report all Tax consequences of the purchaseand sale contemplated hereby in a manner consistent with such allocation.

1.6 Payment and Adjustment to Purchase Price Balance . Each Installment of the Purchase Price Balancemay be reduced by [***] or [***] as the case may be, if the Existing Projects are not Completed to Purchaser’ssatisfaction as follows:

(a) First installment . If the C2000 MP is Completed by December 29, 2004,Purchaser shall pay Seller the amount of US$2,000,000 within two (2) BusinessDays after such Completion or at Closing, whichever is later. If the C2000 MPis Completed between December 30, 2004 to January 31, 2005 and the reasonfor such delay is due to causes primarily attributable to Seller, the amount ofthe First Installment shall be reduced by [***] and Purchaser shall pay theSeller the amount of [***] within two (2) Business Days after such Completionor at Closing, whichever is later. If the C2000 MP is Completed afterJanuary 31, 2005 and the reason for such delay is due to causes primarilyattributable to Seller, the amount of the First Installment shall be reduced by[***] and the Purchaser [***]. Notwithstanding the preceding sentences, if theC2000 MP is not Completed due to causes which are primarily attributable toPurchaser, Purchaser shall pay the appropriate amount on the relevantmilestone date as set forth in this Section.

(b) Second installment . If the C3000 MP is Completed by January 30, 2005,Purchaser shall pay Seller the amount of US$1,000,000 within two (2) BusinessDays after such Completion or at Closing, whichever is later. If the C3000 MPis Completed between January 31, 2005 to February 28, 2005 and the reasonfor such delay is due to causes primarily attributable to Seller, the amount ofthe Second Installment shall be reduced by [***] and the Purchaser shall paythe Seller the amount of [***] within two (2) Business Days after suchCompletion or at Closing, whichever is later. If the C3000 MP is Completedafter February 28, 2005 and the reason for such delay is due to causesprimarily attributable to Seller, the amount of the Second Installment shall bereduced by [***] and the Purchaser [***]. Notwithstanding the precedingsentences, if the C3000 MP is not Completed due to causes which areprimarily attributable to Purchaser, Purchaser shall pay the appropriate



amount on the relevant milestone date as set forth in this Section.

(c) Third installment . If the C5000 MP is Completed by February 24, 2005,Purchaser shall pay Seller the amount of US$1,000,000 within two (2) BusinessDays after such Completion or at Closing, whichever is later. If the C5000 MPis Completed between February 25, 2005 to March 25, 2005 and the reason forsuch delay is due to causes primarily attributable to Seller, the amount of theThird Installment shall be reduced by [***] and the Purchaser shall pay theSeller the amount of [***] within

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two (2) Business Days after such Completion or at Closing, whichever is later. If the C5000 MP is Completed after March 25, 2005 and thereason for such delay is due to causes primarily attributable to Seller, the amount of the Third Installment shall be reduced by [***] and thePurchaser [***]. Notwithstanding the preceding sentences, if the C5000 MP is not Completed due to causes which are primarily attributableto Purchaser, Purchaser shall pay the appropriate amount on the relevant milestone date as set forth in this Section.

1.7 Seller’s Liabilities . Purchaser is not assuming any liabilities of Seller in connection with or related tothe Transferred Assets (except for the obligations under the lease agreements that have been assigned to Purchaserunder Section 1.1(e)). Seller shall retain, and shall be responsible for paying, performing and discharging all of Seller’sliabilities when due, including without limitation, any obligation under existing agreements with Seller’s customers, anydebt or liability owed to creditors of Seller and any liability owed to the R&D Employees.

1.8 Purchase Price Escrow . Among the Purchase Price amount to be paid at the Closing, the amount ofUS$2,000,000 shall be placed into escrow by, and in the name of, Purchaser with a third party escrow agent mutuallyagreed by the Parties for a period of six (6) months after Closing to secure Seller’s obligations to indemnify Purchaserunder this Agreement. The escrow shall be established by execution of an escrow agreement substantially in the formattached hereto as Schedule 1.8 (“Purchase Price Escrow Agreement”).

1.9 Conditions to Each Party’s Obligations . The obligations of both Purchaser and Seller to consummatethe transactions contemplated hereby are subject to the fulfillment of each of the following conditions on or before theClosing Date.

(a) No provisions of any applicable law of Korea, and no judgment,injunction, writ, preliminary restraining order or any other order or decree ofany nature issued by a court of competent jurisdiction or any governmentalbody shall (i) prohibit the consummation of the transactions contemplated



hereby or (ii) restrain, prohibit or otherwise interfere with the effectiveoperation or enjoyment by Purchaser of all or any material portion of theTransferred Assets.

(b) Purchaser and Seller shall have each received all material consents,authorizations or approvals from their respective boards of directors,shareholders, governmental agencies (including but not limited to an approvalby the Fair Trade Commission of Korea), and third parties that are apre-requisite to the Closing as a matter of law, in form and substancesatisfactory to the other Party, and no such consent, authorization or approvalshall have been revoked.

(c) Purchaser, Seller and the relevant escrow agent shall have executed thePurchase Price Escrow Agreement on or prior to Closing.

1.10 Conditions to Seller’s Obligations . The obligations of Seller to consummate the transactioncontemplated hereby are subject to fulfillment of all of the following conditions on or prior to the Closing Date.

(a) Each and every representation and warranty made by Purchasercontained in this Agreement shall have been true in all material respects as ofthe date when made and shall be true in all material respects at and as of theClosing Date as if originally made on and as of the Closing Date.

(b) All obligations of Purchaser to be performed on or before the ClosingDate shall have been performed in all material respects.

(c) No action shall be threatened or pending before any court orgovernmental agency the probable outcome of which would result in therestraint or prohibition of the consummation of the

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transactions contemplated hereby.

(d) On the Closing Date, there shall be no injunction, writ, preliminaryrestraining order or any order of any nature in effect issued by a court ofcompetent jurisdiction directing that the transactions contemplated hereby, orany of them, not be consummated as herein provided and no suit, action,investigation, inquiry or other legal or administrative proceeding by anygovernmental body or other Person shall have been instituted whichquestions of validity or legality of the transactions contemplated hereby orwhich if successfully asserted might otherwise have a Material Adverse Effecton the Transferred Assets.

(e) Purchaser shall have obtained the approval from Purchaser’s board ofdirectors approving the purchase of the Transferred Assets on the terms ofthis Agreement and authorizing any one of its directors or officers to executethis Agreement for and on behalf of Purchaser.

(f) Purchaser shall have obtained the approvals and/or clearance for thetransactions contemplated hereby from the Fair Trade Commission of Korea.

(g) Seller shall have received to its satisfaction the favorable legal opinion ofthe counsel for Purchaser substantially in the form attached hereto asSchedule 1.10(g) .

1.11 Conditions to Purchaser’s Obligations . The obligations of Purchaser to consummate the transactionscontemplated hereby are subject to the fulfillment of all of the following conditions on or prior to the Closing Date (orother date as specified hereunder).

(a) Each and every representation and warranty made by Seller contained inthis Agreement and in any certificate or other writing delivered by Sellerpursuant hereto shall be true in all material respects as of the date when madeand shall be true in all material respects at and as of the Closing Date as iforiginally made on and as of the Closing Date.



(b) All obligations of Seller to be performed hereunder on or before theClosing Date shall have been performed in all material respects.

(c) No action shall be threatened or pending before any court orgovernmental agency as of the Closing Date the probable outcome of whichwould result in (i) the restraint or prohibition of the consummation of thetransactions contemplated hereby or (ii) the restraint or prohibition of, orinterference with, the effective operation of enjoyment by Purchaser of all orany material portion of the Transferred Assets. Among others, no creditor towhich Seller has a minimum indebtedness of three hundredmillion (300,000,000) Won shall have any claims against the assets orbusiness of Purchaser as a result of the Asset Transfer, and the AssetTransfer shall not be subject to the application of fraudulent conveyance bysuch creditors, avoidance principles and other similar laws.

(d) On the Closing Date, there shall be no injunction, writ, preliminaryrestraining order or any order of any nature in effect issued by a court ofcompetent .jurisdiction directing that the transactions contemplated hereby,or any of them, not be consummated as herein provided and no suit, action,investigation, inquiry or other legal or administrative proceeding by anygovernmental body or other Person shall have been instituted whichquestions of validity or legality of the transactions contemplated hereby orwhich if successfully asserted might otherwise have a Material Adverse Effecton the Transferred Assets.

(e) Between the date hereof and the Closing Date, there shall have been nochange which could have a Material Adverse Effect on the Transferred Assets.

(f) Any and all notices to R&D Employees, as required under applicableemployment laws, shall have been provided by Seller. At least (i) 77 engineersout of the total 105 R&D Employees and (ii) 100% of the Key Employees, shallhave accepted new employment with Purchaser and such employees



9

shall have confirmed in writing that all obligations of Seller have been fully satisfied or discharged at or prior to Closing in the formprovided in Schedule 1.11(f) (“Employee Release”), and Purchaser shall have entered into arrangements with Key Employees based onterms and conditions as set forth in Section 4.2(d) satisfactory to Purchaser in its sole discretion. If the number of R&D Employees is lessthan 105, Seller shall hire such additional personnel prior to Closing with sufficient experience and competence as may be approved byPurchaser in advance so that the number of R&D Employees shall be at least 105.

(g) Seller shall have obtained the approvals and/or clearances for thetransactions contemplated hereby from any governmental agencies (includingbut not limited to (i) the necessary approvals/clearances from the Ministry ofCommerce, Industry and Energy (“MOCIE”) aid the Ministry of Science andTechnology (“MOST”) under the Foreign Trade Law (Act No. 6977, establishedon December 31, 1986 as last amended as of September 29, 2003) and theTechnology Development Promotion Law (Act No. 715, established onDecember 28, 1972 as last amended as of January 29, 2004), respectively, fortransfer of the Transferred Assets overseas and (ii) the necessary filings withthe Financial Supervisory Commission and Korea Securities Dealers’Association), such that no further approval, clearance or filing with anygovernmental authority under applicable laws is required for the transfer ofthe Transferred Assets overseas as contemplated in Purchaser’s businessplan set forth in Schedule 1.11(g) , provided that , Seller shall obtain furtherapproval/clearance from the MOCIE and MOST with respect to the transfer ofthe project models GDB 570, GDM-100, GDM-101, GDM-530, GDM-550,GSD-551, GSD-560, GSD-556, GSD-570, GDB-558, Goias, G-PCS, GSP-556,GSD-430, GSD-456, GDB-M700, CM-800, GPM-200, GPM-3000 and CM-1900Aoverseas as contemplated in Purchaser’s business plan set forth inSchedule 1.11(g) prior to the Seller’s shareholders’ meeting to approve thetransaction contemplated herein. Seller hereby agrees not to convene theshareholders’ meeting until such further approval/clearance from the MOCIEand MOST as provided in the preceding sentence have been obtained, and theParties shall discuss in good faith whether such further approval/clearancefrom the MOCIE and MOST are satisfactory to the Purchaser, and if notsatisfactory to the Purchaser, whether Purchaser shall terminate thisAgreement pursuant to Section 5.12 below. The Purchaser shall determinewithin five (5) Business Days of receipt of the approval/clearance from MOCIEand MOST whether such approval/clearance are satisfactory to the Purchaser.Further, Purchaser shall have obtained assurance to its reasonablesatisfaction that any contemplated change of existing laws or adoption of newlaws in connection with the export and/or use of the concerned CDMA



technology will not have a Material Adverse Effect as of the Closing onPurchaser’s business in Korea as contemplated in Purchaser’s business planin respect of the Transferred Assets set forth in Schedule 1.11(g) ; providedthat Purchaser shall determine by five (5) days prior to the date of the Seller’sshareholders’ meeting whether Purchaser obtained such assurance. Inaddition, Seller shall have obtained its shareholders’ approval for thetransactions contemplated herein.

(h) Seller shall have obtained consent from its creditors, and suchconsenting creditors shall comprise (i) not less than 70% of the aggregatedebt amount of Seller (exclusive of the advance payment from Purchaser)prior to the shareholders’ meeting of Seller approving the Asset Transfer and(ii) not less than 80% of the aggregate debt amount, which amount shouldinclude not less than 100% of the aggregate debt amount of the FinancialInstitutions listed in Schedule 1.11(h)(3) , no later than two (2) Business Daysprior to Closing. Each of the consenting creditors shall submit to Seller andPurchaser the consent in the form provided in Schedule 1.11(h)(1) . Attachedhereto as Schedule 1.11(h)(2) is a complete list of all creditors of Seller andthe amounts owed to each creditor as of the date hereof. The list of creditorsand amount owed provided in Schedule 1.11(h)(2) shall be updated, asnecessary, as of Closing.

(i) Seller shall have obtained consent from any licensor or co-owners of anyIntellectual Property, or Licensed Intellectual Property, (excluding softwarerelating to non-developmental tools) in the form satisfactory to Purchaser withrespect to the assignment or transfer of such Intellectual Property or LicensedIntellectual Property from Seller to Purchaser. For those Licensed IntellectualProperty listed in Schedule 1.11(i) , Seller shall use its best efforts to obtainthe necessary consent from appropriate licensors or co-owners on or prior tothe Closing. In the event such consent is not obtained on or prior to theClosing, and the value of the relevant Intellectual Property, or LicensedIntellectual Property, (excluding software relating to non-developmental tools)for which consent has not been obtained exceeds US$400,000, the PurchasePrice shall be deducted by the amount equal to (a) the total value of therelevant Intellectual

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Property or Licensed Intellectual Property for which consent has not been obtained minus (b) US$400,000.

(j) Purchaser shall have received to its satisfaction the favorable legalopinion of the counsel for Seller substantially in the form attached hereto asSchedule 1.11(j) .

(k) Purchaser shall have completed all of its legal, accounting, financial,employee, and creditor due diligence with respect to Seller and shall in itsreasonable business judgment have decided that the results of such duediligence from the date hereof until Seller’s shareholders’ meeting for theAsset Transfer, together which such due diligence completed on or prior tothe date hereof, do not and will not lead to a frustration of its purposes of thetransactions contemplated in this Agreement.

(l) Purchaser shall have received from Seller, to its reasonable satisfaction,evidence that the investment agreements entered into with (i) Kibo Capital Co.,Ltd. dated September 11, 1999 and (ii) Saewon Telecom Co., Ltd., datedOctober 12,1999, February 23, 2000 and July 10, 2001 have been terminated.

(m) Seller shall have obtained a waiver from KTB Network Co., Ltd. (“KTB”)with respect to KTB’s rights under the investment agreement between Sellerand KTB, dated March 10, 2000, arising with respect to the restrictions undersuch investment agreement on the transfer of technologies to third parties bySeller and its guarantors. Such waiver shall be in a form substantially similarto the form provided in Schedule 1.11(m) .

(n) Seller shall have provided notice of the transactions to be performedunder this Agreement to each of its lenders and, if applicable, consulted witheach of such lenders, in each case that such notice or consultation is requiredunder the relevant loan or similar credit document with respect to anychanges in the Seller’s property or any sale or transfer of the business or anymaterial assets of Seller.



(o) Seller shall have given notice to Daehan Investment Trust Co., Ltd.(“Daehan”) under the subscription agreement entered into between Seller andDaehan on September 3, 2003 of the transactions to be performed under thisAgreement.

(p) Seller shall provide the updated Schedule 1.5 as set forth in Section 1.5 toPurchaser’s satisfaction.

(q) The board of directors of Purchaser shall have approved the transactioncontemplated under this Agreement.

1.12 Closing . The closing under this Agreement will take place twenty two (22) days after the shareholdersmeeting to approve the Asset Transfer at the time and place as the Parties shall mutually agree or at such other time,date or place as the Parties shall mutually agree (the ”Closing”), provided that, such date shall be no later thanJanuary 31, 2005, which date maybe extended by mutual agreement between the Parties. The date on which Closingoccurs is sometimes referred to herein as the ”Closing Date.”

1.13 Deliveries and Proceedings at Closing . At the Closing:

(a) Deliveries by Seller . Seller shall deliver or cause to be delivered toPurchaser:

(i) In case of Transferred Assets (including Intellectual Properties) that are owned bySeller and are subject to registration with the relevant governmental authorities, the duly executedapplications and documentation required to be filed by Seller to duly transfer title to suchTransferred Assets;

(ii) In case of Transferred Assets (including Intellectual Properties) that are

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owned by Seller and are not subject to registration, actual possession of such Transferred Assets (including title certificates and any otherdocuments necessary to effectively transfer title and ownership of such Transferred Assets to the Purchaser);

(iii) In case of Transferred Assets (including Licensed Intellectual Property, excludingsoftware relating to non-developmental tools) that are licensed or leased to Seller and are subject toregistration with the relevant governmental authorities, the duly executed applications anddocumentation required to be filed by Seller to duly transfer title to such Transferred Assets,together with any other documents necessary to effectively transfer such Transferred Assets to thePurchaser, including without limitations, the consent of assignment of such Transferred Assets toPurchaser from the relevant licensor, lessor, etc.;

(iv) In case of Transferred Assets (including Licensed Intellectual Property, excludingsoftware relating to non-developmental tools) that are licensed to Seller and are not subject toregistration, the consent of assignment of such Transferred Assets to Purchaser from the relevantlicensor, lessor, etc.;

(v) copies of the Employee Releases and the employment contracts with respect to theR&D Employees (including the Key Employees);

(vi) consent letters from creditors of Seller substantially in the form as provided inSchedule 1.11(h)(1) , which shall include a waiver by the creditor of any claim against the AssetTransfer with respect to the application of fraudulent conveyance, avoidance principles and othersimilar laws;

(vii) certified copies of resolutions of Seller’s board of directors and shareholders meeting,both approving the sale of the Transferred Assets and authorizing any one of its officers to executethis Agreement for and on behalf of Seller;

(viii) such other instruments of conveyance as shall be necessary to vest in Purchasergood, valid and marketable title to the Transferred Assets;

(ix) a certificate dated the Closing Date, from the Representative Director of Seller to theeffect that Seller has fulfilled the conditions set forth in Section 1.11;

(x) a certificate dated the Closing Date, from the Representative Director of Seller to theeffect that Seller has cleared all Liens or other types of encumbrances on the Transferred Assets,except as otherwise expressly provided herein;



(xi) a receipt for the Initial Payment less the Holdback Amount;

(xii) copies of the government approvals/clearances as set forth by Section 1.11(g); and

(xiii) a fairness opinion from a reputable accounting firm in Korea that the Purchase Priceagreed to herein by the Parties is no less than the fair value of the Transferred Assets.

(b) Deliveries by Purchaser . At the Closing, Purchaser will deliver to Seller:

(i) the Initial Payment less the Holdback Amount to the bank account designated bySeller three (3) days prior to Closing by wire transfer;

(ii) a certificate evidencing the deposit of the Holdback Amount with the Purchase PriceEscrow;

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(iii) a certified copy of a resolution of Purchaser’s board of directors approving thepurchase of the Transferred Assets on the terms of this Agreement and authorizing any one of itsdirectors or officers to execute this Agreement for and on behalf of Seller;

(iv) a certificate dated the Closing Date, from an authorized officer of Purchaser to theeffect that Purchaser has fulfilled the conditions set forth in Section 1.10; and

(v) a document evidencing approval and/or clearance for the transactions contemplatedhereby from the Fair Trade Commission of Korea,

(c) Other Deliveries . Any other documents or agreements required to beexecuted and/or delivered pursuant to this Agreement or otherwise necessaryfor the consummation of the transaction contemplated hereby will beexchanged.



1.14 Covenants of Seller . From and after the date hereof and until the Closing Date, Seller hereby covenantsand agrees that:

(a) Business in Ordinary Course . Seller will carry on the R&D in the ordinaryand normal . course and in substantially the same manner as heretofore,except as otherwise expressly provided herein, and shall notify Purchaserimmediately in writing of any changes or deviations from the ordinary andnormal course of business.

(b) Maintain Properties . Seller will maintain and keep the Transferred Assetsin as good repair, working order and condition as at present, except fordepreciation due to ordinary wear and tear.

(c) Insurance . Seller will keep in full force and effect insurance and bondscomparable in amount and scope of coverage to what is now covering theR&D and all assets related thereto.

(d) Perform Contracts . Seller will perform in all material respects theobligations to be performed under all the contracts and documents of orrelating to the R&D. Furthermore, Seller shall devote reasonable effort andresources towards the completion of the Existing Projects, [***] until theClosing. Seller shall place all output from the Existing Projects, [***] intoescrow in the name of Purchaser with a third-party escrow agent mutuallyagreed by the Parties for ultimate release to the Purchaser upon the earlier ofCompletion of each Project or the commencement of bankruptcy proceedingsin respect of the Seller. The escrow shall be established by execution of anescrow agreement substantially in the form attached hereto asSchedule 1.14(d)(1) . For the avoidance of doubt, if the Closing does not occurand this Agreement is thus terminated, Seller shall remain obligated tocomplete the Existing Projects, [***] as provided in their respectiveagreements. Seller shall provide a letter of guarantee to Purchaser whereby, inthe event Seller has failed to fulfill its obligations under the Existing Projects,[***], Seller shall transfer to Purchaser without consideration and with no costto the Purchaser all necessary intellectual property rights (the ”Designs”) soas to allow Purchaser to manufacture, use and sell CDMA 450Mhz products,



(Model Nos. GSD-430, GSD-456) and PCMCIA Card (Model No. GPM 200). Forthe purpose of this letter of guarantee, upon the execution of this Agreementor as soon as practicable but no later than five (5) Business Days from theexecution of this Agreement, Seller agrees to transfer the titles to the Designsto a third-party escrow agent chosen by Purchaser as collateral, andPurchaser shall then grant or shall cause the escrow agent to grant to Sellerwithout consideration and with no cost to Seller an exclusive, transferable(such transfer is subject to Purchaser’s consent which shall not beunreasonably withheld or delayed), and royalty-free license to use the Designswithout any restrictions unless and until Seller fails to Complete the ExistingProjects, [***] by the due date under the relevant agreement for each product,at which time, subject to the terms and conditions of the escrow agreement,the escrow agent shall transfer the titles to the Designs to Purchaser;provided, however, that Purchaser shall transfer or shall cause the escrowagent to transfer the title to the Designs back to Seller upon the Completion ofthe Existing Projects, [***]. The foregoing escrow shall be established byexecution of an escrow agreement mutually agreed upon by the Parties nolater than five (5) Business Days from the execution of this Agreement.

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(e) Approvals and Consents . As soon as practicable after the execution ofthis Agreement, Seller shall take all reasonable action required to obtain allwaivers, consents, approvals, including but not limited to (i) an approval fromthe shareholders meeting and Authorities and (ii) all consents and approvalsfrom co-owners and licensors of the Intellectual Property, and LicensedIntellectual Property (excluding software relating to non-developmental tools),respectively, as provided in Section 1.11(i); and promptly to give all notices,effect all registrations pursuant to and make all other filings with orsubmissions to, any third parties, including governmental authorities,necessary or advisable to authorize, approve or permit the transactionscontemplated hereby.

(f) Confidentiality . Seller hereby covenants and agrees that, except as maybe required by law, rule or regulation or court order, unless this Agreement isterminated, it will not at any time reveal, divulge or make known to any Person(other than (i) the creditors of Seller to the extent necessary to obtain such



creditor’s consent pursuant to Section 1.11(h), (ii) to KTB to the extentnecessary to obtain KTB’s waiver pursuant to Section 1.11(m), (iii) Seller’semployees, officers, directors and outside advisors who need to know theConfidential Information and (iv) Purchaser, their Affiliates or their agents) anyinformation that relates to this Agreement, the transactions contemplatedhereby or the R&D (whether now possessed by Seller or furnished byPurchaser after the Closing Date), including, but not limited to, customer listsor other customer information, trade secrets or formulae, marketing plans orproposals, financial information or any data, written material, records ordocuments used by or relating to the R&D that are of a confidential nature(collectively, the ”Confidential Information”).

(g) Advice of Changes . Seller hereby covenants and agrees that it will advisePurchaser promptly in writing of any fact that, if previously known, would havebeen required to be set forth or disclosed in or pursuant to this Agreement, orwhich would result in breach in any material respect by Seller of any of itsrepresentations and warranties, covenants or agreements hereunder or whichwould have a Material Adverse Effect on the Transferred Assets or thetransactions contemplated hereby.

(h) All Necessary Filings . Seller hereby covenants that it has made and willmake all necessary filings with the relevant government agencies which arerequired for the completion of the transactions contemplated in thisAgreement.

(i) Access to Information; Cooperation . Seller hereby covenants andagrees that it shall give Purchaser and their representatives, counsel,accountants and consultants reasonable access, during normal businesshours, to such of the properties, books, accounts, contracts and records ofSeller as Purchaser deem relevant to the Transferred Assets and the R&D, andfurnish or otherwise make available to Purchaser all such informationconcerning the Transferred Assets and the R&D as Purchaser may request.



(j) Intentional Misrepresentations . Without express written consent ofPurchaser, Seller shall not take or omit any action with the intention to causeany of its representations and warranties under this Agreement to beinaccurate in material respect at, or any time prior to, the Closing.

(k) Vacating Premises . On or prior to the Closing Date, Seller shall vacatethe office space currently used by Seller as of the date hereof and shall leavethe premises in the same condition as currently used by Seller as of the datehereof except for Removal of the Excluded Assets. Seller will take allnecessary action to effect the assignment of the current lease agreement withrespect to the office space to Purchaser including obtaining the consent fromthe lessor of the office space with respect to such assignment, provided that,Purchaser shall have paid the key money deposit for such assignment toSeller on the Closing Date; provided further that if the key money deposit withthe lessor of the office space above is not returned to Purchaser upon theexpiration/termination of such assignment agreement due to causes primarilyattributable to Seller prior to Closing, Seller shall refund such amount withinfive (5) Business Days from the date of Purchaser’s written notice thereof toSeller.

(l) Fair Value . Prior to the Closing Date Seller shall have obtained a fairnessopinion from a reputable accounting firm in Korea that the Purchase Priceagreed to herein by the Parties is no less than the fair value of the TransferredAssets.

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1.15 Covenants of Purchaser From and after the date hereof and until the Closing Date, Purchaser herebycovenants and agrees that it shall in good faith cooperate with Seller and provide Seller with reasonable resourcesnecessary for Completion of the Existing Projects, [***].

1.16 Adjustment and Apportionment . All utilities, service charges, fees and other expenses relating to theTransferred Assets for all periods up to but excluding the Closing Date shall be the obligation of Seller and for all otherperiods including and following the Closing Date shall be the obligation of Purchaser. All utilities, service charges, feesand other expenses relating to the Transferred Assets, whether prepaid or due after the Closing Date, shall be adjustedratably as of the Closing Date and, if and to the extent that it is not possible to do so at the Closing, Purchaser and Sellershall continue to work together in good faith and to make any remaining adjustments as soon as practicable after the



Closing Date. Any such prorated utilities, service charges, fees and other expenses shall be paid directly to a Partyentitled to such reimbursement by wire transfer in immediately available funds to the account designated by such Party,within five (5) days after the determination thereof in accordance with this Section.

SECTION 2

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller hereby represents and warrants to and with Purchaser as follows, which representation and warranties are, as of the date of thisAgreement, and will be, as of the Closing Date, true and correct, except for those representations and warranties which speak as to a certaindate (as far as any of the following representations and warranties are conditioned upon the preparation of the Schedules to - be Prepared,such representations and warranties shall be deemed to have been made as of the date when the relevant Schedules to be Prepared aredelivered to Purchaser, and obtained their written consents thereto):

2.1 Organization . Seller is a corporation duly incorporated and validly existing under the laws of Korea.Seller has all requisite corporate power and authority to own or lease its properties and assets as now owned or leased,to carry on its businesses as and where now being conducted and to enter into this Agreement, and perform itsobligations hereunder. The copies of Seller’s articles of incorporation and bylaws, as amended to date, which have beendelivered to Purchaser, are correct and complete and are in full force and effect.

2.2 Authorization and Enforceability . The execution, delivery and performance of this Agreement hasbeen, and all other agreements, documents and instruments to which Seller is a party or otherwise obligated which areto be executed, delivered or performed pursuant to this Agreement have been duly authorized by all necessary corporateaction on the part of Seller, including the approvals by the board of directors (other than the shareholders approvalwhich Seller shall obtain before the Closing). This Agreement has been, and at Closing any and all ancillary agreementsthereto shall have been duly executed and delivered by Seller, and this Agreement constitutes, and at Closing anyancillary agreements thereto will constitute, the legal, valid and binding obligations of Seller, enforceable in accordancewith their respective terms.

2.3 No Violation of Laws or Agreements . Except as set forth on Schedule 2.3 , the execution and deliveryof this Agreement do not, and the consummation of the transactions contemplated by this Agreement and thecompliance with the terms, conditions and provisions of this Agreement by Seller, will not (a) contravene any provisionof Seller’s articles of incorporation; (b) conflict with or result in a breach of or constitute a default (or an event whichmight, with the passage of time or the giving of notice or both, constitute a default) under any of the terms, conditionsor provisions of any indenture, mortgage, loan or credit agreement or any other agreement or instrument to which Selleris a party or by which it or any of its assets may be bound or affected, or any judgment or order of any court orgovernmental department, commission, board, agency or instrumentality, domestic or foreign, or any applicable law,rule or regulation, or (c) result in the termination of or loss of any right (or give others the right to cause such atermination or loss) under any contracts to be assigned to Purchaser.

2.4 Financial Statements . The books of account and related records of Seller fairly reflect in

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reasonable detail the assets, liabilities and transactions related to Seller and are in adequate condition for the preparation of the FinancialStatement (as defined below and which shall be limited only to a balance sheet and a statement of profits and losses) in accordance withKorean GAAP applied on a consistent basis. Seller has delivered to Purchaser its audited financial statements for the fiscal years as of2001, 2002, 2003, respectively, and shall provide the unaudited financial statements for the past three (3) quarters for the year 2004(the ”Financial Statements”). The Financial Statements: (a) fairly presents and will present the financial condition, assets and liabilities ofSeller as of the dates thereof; and (b) has been and will be prepared in accordance with Korean GAAP consistently applied. All referencesin this Agreement to the ”Balance Sheet” shall mean the balance sheet of Seller as of December 31, 2003 included in the FinancialStatement and all references to the ”Balance Sheet Date” shall mean December 31, 2003.

2.5 Undisclosed Liabilities . Seller has no liability or obligation of any nature, whether due or to becomedue, absolute, contingent or otherwise, including liabilities for or in respect of national, local or foreign Taxes, customsduties and any interest or penalties related hereto, except for liabilities that are (a) fully reflected on the Balance Sheetor (b) incurred in the ordinary course of business since the Balance Sheet Date and fully reflected as liabilities onSeller’s books of account, none of which individually or in the aggregate, has been materially adverse.

2.6 No Changes . Except as disclosed on Schedule 2.6 , since the Balance Sheet Date and until the Closing,Seller has conducted its business only in the ordinary course. Except as otherwise disclosed on Schedule 2.6 , there hasnot been:

(a) any change in the financial condition, assets, liabilities, net worth ofSeller, except changes in the ordinary course of business, none of which,individually or in the aggregate has been or could materially affect thePurchaser’s ability to fully utilize the Transferred Assets;

(b) any damage, destruction or loss, whether or not covered by insurance,which could materially affect the Purchaser’s ability to fully utilize theTransferred Assets;

(c) any mortgage, pledge or subjection to Lien, charge or encumbrance ofany kind on the Transferred Assets;

(d) any strike, walkout, labor trouble or any other new or continued event,development or condition of any character which has or could have a MaterialAdverse Effect;



(e) any increase in the salaries or other compensation (excluding increasesin the ordinary course of business and consistent with past practice) payableor to become payable to, or any advance (excluding advances for ordinarybusiness expenses) or loan to, any R&D Employees, or any increase in, or anyaddition to, other benefits (including without limitation any bonus,profit-sharing, pension or other plan) to which any of the R&D Employeesmaybe entitled, or. any payments to any pension, retirement, profit-sharing,bonus or similar plan except payments in the ordinary course of business andconsistent with past practice made pursuant to any employee benefit plan, orany other. payment of any kind to (or on behalf of) any such R&D Employeeother than payment of base compensation and reimbursement for reasonablebusiness expenses in the ordinary course of business;

(f) any making or authorization of any capital expenditures which are not inthe ordinary course of business or in excess of 10 million Won to the R&D;

(g) any cancellation or waiver of any right material to the operation of Seller’sbusiness or any cancellation or waiver of any debts or claims of substantialvalue or any cancellation or waiver of any debts or claims against any Affiliate;

(h) any sale, transfer or other disposition of any of the Transferred Assets,

(i) any payment, discharge or satisfaction of any liability or obligation(whether

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accrued, absolute, contingent or otherwise) by Seller other than the payment, discharge or satisfaction, in the ordinary course ofbusiness, of liabilities or obligations shown or reflected on the Balance Sheet or incurred in the ordinary course of business since theBalance Sheet Date;



(j) any adverse change or any threat of any adverse change in Seller’srelations with, or any loss or threat of loss of, Seller’s suppliers, clients orcustomers, which change or loss could have a Material Adverse Effect on theTransferred Assets;

(k) any write-offs as uncorrectable of any notes receivable of Seller orwrite-downs of the value of any of the Transferred Assets or other than inimmaterial amounts or in the ordinary course of business consistent with pastpractice and at a rate no greater than during the twelve months ended on theBalance Sheet Date;

(l) any change by Seller in any method of accounting or keeping its booksof account or accounting practices;

(m) any creation, incurrence, assumption or guarantee by Seller of anyobligations or liabilities that would have a Material Adverse Effect on theTransferred Assets (whether absolute, accrued, contingent or otherwise andwhether due or to become due), or any creation, incurrence, assumption orguarantee by Seller of any indebtedness for money borrowed;

(n) any payment, loan or advance of any amount to or in respect of, or thesale, transfer or lease of any properties or assets (whether real, personal ormixed, tangible or intangible) to, or entering into of any agreement,arrangement or transaction with, any Affiliate, except for (i) compensation toits officers and employees at rates not exceeding the rates of compensationdisclosed on Schedule 2.6(n) hereto, (ii) reimbursements of or advances forexpenses incurred for business-related purposes not exceeding 10 millionWon outstanding in the aggregate at any given time and (iii) payment, in theordinary course of business, of liabilities or obligations shown or reflected onthe Balance Sheet or incurred in the ordinary course of business since theBalance Sheet Date.



(o) any disposition of or failure to keep in effect any rights in, to or for theuse of Intellectual Property included in the Transferred Assets, or anydisclosure to any person not an employee or other disposal of any tradesecret, process or know-how relating to the R&D.

(p) any transaction, agreement or event to which Seller is a party or aparticipant outside the ordinary course of the R&D or inconsistent with pastpractice.

(q) Seller has become subject to any newly enacted or adopted law of Koreawhich may reasonably be expected to materially affect the Purchaser’s abilityto fully utilize the Transferred Assets.

2.7 Taxes . Seller has (a) timely filed all national or local, payroll, withholding, VAT, excise, sales, use,customs duties, personal property, use and occupancy, business and occupation, mercantile, real estate, capital stock andfranchise or other tax returns of any kind whatsoever (all the foregoing taxes, including interest and penalties thereonand including estimated taxes, being hereinafter collectively called “Taxes” and individually a “Tax”), (b) has paid allTaxes which are due pursuant to such returns and (c) paid all other Taxes for which a notice of assessment or demandfor payment has been received. All such returns have been prepared in accordance with all applicable laws andrequirements of Korea and accurately reflect the taxable income (or other measure of Tax) of the Party filing the same.The accruals for Taxes contained in the Balance Sheet are adequate to cover all liabilities for Taxes of Seller for allperiods ending on or before the Balance Sheet Date and nothing has occurred subsequent to that date to make any ofsuch accruals inadequate as of the Balance Sheet Date. All Taxes for periods beginning after the Balance Sheet Datehave been paid or are adequately reserved against on the books of Seller. Seller has timely filed all information returnsor reports which are required to be filed and has accurately reported all information required to be included on suchreturns or reports. To Seller’s Knowledge, there are no proposed assessments of Tax against Seller or proposedadjustments to any Tax returns filed, pending

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against Seller. Seller has not received notice that any Tax return is under examination by any taxing authority. Seller has not executed awaiver or consent extending any statute of limitation for any Tax liability which remains outstanding. Seller has not (a) joined in or beenrequired to join in filing a consolidated income Tax return, or (b) entered into a closing agreement with any taxing authority.

2.8 Lease Agreements . All lease agreements that are subject to the Asset Transfer pursuant toSection 1.1(c) are in full force and effect and no party to such lease agreement is in default under any of the terms



thereof; and no event has occurred that with the passage of time or the giving of notice or both would constitute adefault by any party under any provision thereof. Seller has obtain all necessary consents from the relevant lessors inrespect of assignment of the rights, interests and obligations under the lease agreement to the Purchaser pursuant to thisAgreement.

2.9 No Pending Litigation or Proceedings . Except as set forth on Schedule 2.9 hereto, there are no actions,suits, investigations, proceedings or claims pending or affecting, or to Seller’s Knowledge, threatened against Seller orSeller’s agents or their assets, by or before any court or governmental department, agency or instrumentality, and toSeller’s Knowledge, there is no basis for any such action, suit, investigation, proceeding or claim. There are presentlyno outstanding judgments, decrees or orders of any court or any governmental or administrative agency, against theSeller.

2.10 Contracts, Compliance . Schedule 2.10 hereto is a true, correct and complete list of all contracts orcommitments with the contract amount in excess of 100 million Won, oral or written, formal or informal. All suchcontracts and other commitments are in full force and effect; all parties to such contracts and other commitments havecomplied with the provisions thereof; no such party is in default under any of the terms thereof; and no event hasoccurred that with the passage of time or the giving of notice or both would constitute a default by any party under anyprovision thereof.

2.11 Compliance with Laws . Schedule 2.11 hereto sets forth a list of all material permits, certificates,licenses, orders, registrations, franchises, authorizations and other approvals from all national, local and foreigngovernmental and regulatory bodies held by Seller. Seller holds and is in compliance with all material permits,certificates, licenses, orders, approvals, registrations, franchises and authorizations required under all laws of Korea,and, to Seller’s Knowledge, all of such permits, certificates, licenses, orders, approvals, registrations, franchises andauthorizations are in full force and effect. Seller has complied with all applicable statutes, rules, and regulations ofKorea, and orders, national and local, which, if not complied with, would have a Material Adverse Effect on theTransferred Assets. No notice, citation, summons or order has been issued, no complaint has been filed, no penalty hasbeen assessed and, to Seller’s Knowledge, no investigation or review is pending or threatened by any governmental orother entity (a) with respect to any alleged violation by Seller of any law of Korea of any governmental entity or(b) with respect to any alleged failure by Seller to have any permit, certificate, license, approval, registration orauthorization required in connection with its business operation which have a Material Adverse Effect on theTransferred Assets.

2.12 Environmental Matters . Except where the failure of a representation contained herein would not have aMaterial Adverse Effect:

(a) Seller is in compliance with all applicable national or local statutory orregulation, rule, order, ordinance, guideline, direction, or notice, relating to theenvironment, public health and safety, and employee health and safety,including those relating to hazardous substances (“Environmental Laws”).



(b) Seller holds and is in compliance with all necessary or requiredenvironmental permits, certificates, consent or other settlement agreements,licenses, approvals, registrations and authorizations required under allEnvironmental Laws (“Environmental Permits”) as being used as of the date ofthis Agreement, and all of such Environmental Permits are valid and in fullforce and effect. All such Environmental Permits held by Seller are listed onSchedule 2.12 hereto and any that are not transferable are so designated.Seller has made or will make before the Closing timely application forrenewals of all such Environmental Permits for which Environmental Lawsrequire that applications must be filed on or before the Closing to maintain theEnvironmental Permits in full force and effect after the

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Closing Date. Purchaser shall bear any fees, cost or other expenses incurred in making such filings or applications to the extent towhich Purchaser receives a benefit from the Environmental Permit obtained as a result of such filing or application.

(c) No consent, approval or authorization of, or registration or filing with anyPerson, including any environmental governmental Authority or regulatoryagency, is required in connection with the execution and delivery of thisAgreement or the consummation of the transactions contemplated hereby.

(d) No notice, citation, summons or order has been issued or served upon,no complaint has been filed, no penalty has been assessed and noinvestigation or review is pending or to Seller’s Knowledge, threatened by anyAuthority or Person: (a) with respect to any alleged violation by Seller of anyEnvironmental Law; or (b) with respect to any alleged failure by Seller to haveany Environmental Permit; or (c) with respect to any use, possession,generation, treatment, storage, recycling, transportation or disposal(collectively “Management”) of any Hazardous Substances by or on behalf ofSeller or, to Seller’s Knowledge, its predecessors.



(e) Seller has not received any request for information, notice of claim,demand, order or notification for which it or any of its predecessors are ormay be potentially responsible with respect to any investigation or clean-up ofany threatened or actual Release of any Hazardous Substance.

(f) There are no environmental Liens on the Transferred Assets which wouldmaterially impair Purchaser’s ability to lawfully operate the R&D as such R&Dwas operated prior to the Closing Date and, to Seller’s Knowledge, nogovernment actions have been taken or are in process or pending which couldsubject any of such properties to such Liens.

(g) To Seller’s Knowledge, there are no facts or circumstances related toenvironmental matters concerning the Transferred Assets that couldreasonably be expected to lead to any future environmental claims againstSeller, or Purchaser under current law.

2.13 Consents . Except as set forth on Schedule 2.13 , no consent, approval or authorization of, or registrationor filing with, any Person, is required in connection with the execution and delivery of this Agreement or theconsummation of the transactions contemplated hereby.

2.14 Personal Property . Seller owns all of its tangible personal property and assets substantially relating to oraffecting the R&D, including the properties and assets reflected in the Balance Sheet (except those disposed of in theordinary course of business since the Balance Sheet Date); and at Closing none of such properties or assets will besubject to any mortgage, pledge, lien, restriction, encumbrance, claim, security interest, charge or any other matteraffecting title, except, (a) minor imperfections of title, none of which, individually or in the aggregate, materiallydetracts from the value of or impairs the use of the affected properties or impairs any operations of Seller, (b) liens forcurrent Taxes not yet due and payable, or (c) as disclosed on Schedule 2.14 hereto (the ”Personal Property PermittedEncumbrances”). All tangible personal property, assets, equipment or other personal property consigned or leased toSeller which are used in the operation of the R&D are listed on Schedule 1.14.

2.15 CDMA Handset Models . Schedule 2.15 sets forth all of the CDMA handset models and PCMCIAcards (including without limitation W-CDMA and CDMA 2000) that have been developed and sold by Seller for thepast three (3) years, including the identity of the customer(s), number of units sold to such customer(s) and the totalamount of sales.

2.16 Intellectual Properties



(a) Attached hereto as Schedule 2.16(a) is a correct and complete list of allIntellectual Property owned by or licensed to Seller. Schedule 2.16(a) includesall of the Intellectual Property used in the ordinary day-to-day operation of theR&D, and there are no other items of Intellectual Property that are regularlyused in the ordinary day-to-day operation of the R&D. Seller does not use anyIntellectual

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Property owned or licensed by any Affiliates of Seller.

(b) Except as set forth on Schedule 2.16(b) , neither the manufacture, sale,use of any products now or heretofore manufactured or sold by Seller nor theoperation of the R&D did and does infringe (nor has any claim been made thatany such action infringes) the patents or other Intellectual Property rights ofothers.

(c) With respect to the portion of the Intellectual Property that is owned bySeller (“Owned Intellectual Property”), except as disclosed in Schedule 2.16(c), Seller is the exclusive owner of the entire and unencumbered right, title andinterest in and to the Owned Intellectual Property, and to the Knowledge ofSeller, Seller has a valid right to use the Owned Intellectual Property asnecessary to conduct the R&D as now conducted or as contemplated to beconducted. Except as disclosed in Schedule 2.16(c) , Seller is the applicant orassignee of record in all applications and owner of record in all registrationsset forth in Schedule 2.16(a) , and no opposition, extension of time to oppose,interference, rejection, or refusal to register has been received by Seller inconnection with any such applications.

(d) With respect to the portion of the Intellectual Property that is not ownedby Seller (“Licensed Intellectual Property”), Seller owns or possessesadequate licenses or other rights to use the same as necessary to conduct theR&D as now conducted. Except as set forth on Schedule 2.16(d) , there is noagreement to which Seller is a party or to which Seller is legally bound and no



restriction or Liens, materially and adversely affecting the use by Seller and,after the Closing, the use by Purchaser, of any of the Licensed IntellectualProperties.

(e) There is no pending litigation or other legal action with respect to any ofthe Intellectual Properties, and no order, holding, decision or judgment hasbeen rendered by any Authority, and no agreement, consent or stipulationexists to which, in any such event, Seller is a party or of which Seller hasKnowledge, which would prevent Seller, or after the Closing, Purchaser, fromusing any of the Intellectual Properties. The Intellectual Property, to theKnowledge of Seller, are subsisting, valid and enforceable, and have not beenadjudged invalid or unenforceable in whole or part.

(f) The acquisition of the Transferred Assets by Purchaser will not result inPurchaser being required either (i) to pay any royalties, other payments orconsideration, or (ii) to grant any right, to any third parties, either directly orindirectly or through Seller, with respect to the Intellectual Property rights ofsuch third parties.

(g) Schedule 2.16(g) lists all actions that must be taken by Purchaser withinsixty (60) days of the Closing Date, including the payment of any registration,maintenance or renewal fees or the filing of any documents, applications orcertificates for the purposes of maintaining, perfecting or preserving orrenewing any of the Intellectual Property.

(h) To the Knowledge of Seller, no Person is engaging in any activity thatinfringes the Intellectual Property of Seller. Except as disclosed in Schedule 2.16(h) , Seller has not granted any license or other right to any third partywith respect to Intellectual Property.

(i) Seller has taken reasonable measures in accordance with normalindustry practice to maintain the confidentiality of the trade secrets and otherconfidential Intellectual Property.



(j) Each employee, contractor and consultant of Seller who contributed toor participated in the creation or development of any intellectual Property onbehalf of Seller: (i) is a party to a “work-for-hire” agreement under which theCompany is deemed to be the original owner/author of all property rightstherein; or (ii) has executed an assignment or an agreement to assign in favorof Seller (or such predecessor in interest, as applicable) of all right, title andinterest in such material. Each such agreement and assignment complies with,and is legally valid, effective and enforceable under, applicable Law, and suchemployee, contractor or consultant would not have any basis for any claimwith respect to such Intellectual Property.

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2.17 Transactions with Related Parties . Except as disclosed on Schedule 2.17 , no Affiliate has, in excess of10 million Won,:

(a) borrowed money or loaned money to Seller which remains outstandingagainst Seller;

(b) any contractual or other claims, express or implied, of any kindwhatsoever

(c) any interest in any property or assets used by Seller; or

(d) is engaged in any other transaction with Seller.

2.18 Condition of Assets . The Transferred Assets used in or related to or affecting the R&D, including thosereflected in the Balance Sheet, are adequate for the operation of the R&D as it has been previously conducted by Seller.

2.19 Compensation Arrangements . Schedule 2.19 hereto sets forth the following information:



(a) The names and current annual salary, including any bonus, if applicable,of all R&D Employees together with a statement of the full amount of allremuneration paid by Seller to each such person during the 12 month periodpreceding the date hereof.

(b) Schedule 2.19 hereto contains a true and complete list of all current R&DEmployees of Seller that Seller asserts are necessary to the operation of theR&D, together with their respective job titles and current annual compensationand bonuses or bonus eligibility (if any), as of the date hereof. Schedule 2.19shall have been updated as of the Closing, if necessary. Except for thoseindividuals identified on Schedule 2.19 , there are no employees hired by andcurrently working for Seller who has devoted a material part of his/her timewith the Seller in the operation of the R&D.

2.20 Labor Relations .

(a) Schedule 2.20 contains a list of all written employment policies,practices, manuals, handbooks, procedures, and terms and conditions ofemployment of Seller, including wages, pension benefit plan, an employeewelfare benefit plan or any bonus, incentive compensation, profit sharing,retirement, pension, group insurance, death benefit, health, cafeteria, flexiblebenefit, medical expense reimbursement, dependent care, stock option, stockpurchase, stock appreciation rights, savings, deferred compensation,consulting, severance pay or termination pay, vacation pay, life insurance,welfare or other employee benefit or fringe benefit plan, program orarrangement, or any other similar things that are applicable to employees ofSeller. Except as listed on Schedule 2.20 , there are no employment policies,practices, manuals, handbooks, procedures or terms or conditions ofemployment that are applicable to employees of Seller.

(b) Schedule 2.20 contains a list of all current, or if expired and not renewed,the most recent, employment, labor or collective bargaining agreements withany of the R&D Employees. Except as listed on Schedule 2.20 , there is noemployment, labor or collective bargaining agreement, or governmental oradministrative charges, affecting or concerning the R&D Employees, pending



or to Seller’s knowledge threatened against Seller.

(c) Except as set forth on Schedule 2.20 , there are no consulting,contracting or independent contracting agreements with any person retainedor employed in connection with the Transferred Assets.

(d) The overall relations of Seller with its employees are good. There are nounfair labor practice complaints against Seller pending or, to Seller’s bestKnowledge, threatened, There is no labor strike, dispute, slow down orstoppage actually pending or, to Seller’s best Knowledge, threatened against

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or involving Seller. No employee grievance which might to Seller’s Knowledge have an adverse effect on Seller is pending. Noprivate agreement restricts Seller from relocating, closing or terminating any of its operations or facilities. Except as disclosed inSchedule 2.20 , Seller has not in the past twelve (12) months experienced anywork stoppage or slow down or, to the best of Seller’s Knowledge committedany unfair labor practice.

(e) As of Closing, all actual or to Seller’s Knowledge, potential liabilities ofSeller in respect of the R&D Employees have been fully satisfied anddischarged, including any accrued severance obligations.

2.21 Products Liability . There are no (a) liabilities of Seller, fixed or contingent, asserted or, to Seller’sKnowledge, unasserted, with respect to any product liability or any similar claim that relates to any productmanufactured and sold by Seller to others, or (b) liabilities of Seller, fixed or contingent, asserted or, to Seller’sKnowledge, unasserted, with respect to any claim for the breach of any express or implied product warranty or anyother similar claim with respect to any product manufactured and sold by Seller to others other than standard warrantyobligations (to replace, repair or refund) made by Seller in the ordinary course of business to Purchasers of its products.

2.22 Insurance . Attached hereto as Schedule 2.22 is a complete and correct list of all policies of insurancerelating to the Transferred Assets of which Seller is the owner, insured or beneficiary, or covering any of theTransferred Assets, true, correct and complete copies of which have been delivered to Purchaser, indicating for eachpolicy the carrier, the insured, type of coverage, the amounts of coverage, deductible, premium rate, cash value if any,expiration date and any pending claims thereunder. All such policies are in full force and effect. The coverage provided



by such policies is reasonable and consistent with the CDMA industry standard in Korea. Seller has paid-in-full allpremiums due on such policies as of the Closing Date. There is no default with respect to any provision contained inany such policy, nor has there been any failure to give any notice or present any claim under any such policy in a timelyfashion or in the manner or detail required by the policy. There are no outstanding unpaid premiums or claims undersuch policies. No notice of cancellation or non-renewal with respect to, or disallowance of any claim under, any suchpolicy has been received by Seller. Seller has not been refused any insurance, nor has its coverage been limited by anyinsurance carrier to which it has applied for insurance or with which it has carried insurance during the last five years.

2.23 Brokerage . Except as disclosed in Schedule 2.23 , Seller has not made any agreement or taken any otheraction which might cause anyone to become entitled to a broker’s fee or commission as a result of the transactioncontemplated hereunder.

2.24 Disclosure . No representation or warranty by Seller in this Agreement, and no exhibit, certificate orschedule furnished or to be furnished to Purchaser pursuant hereto, or in connection with the transactions contemplatedhereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material factnecessary to make the statements or facts contained herein or therein not misleading or necessary to provide Purchaserwith proper information as to Seller and the Transferred Assets. Seller shall disclose to Purchaser at Closing anyinformation then in the possession of Seller that indicates that Purchaser is in breach of this Agreement or which mayprovide the basis for a claim by Seller that Purchaser has breached this Agreement.

2.25 Mitigation . The Parties acknowledge that the representations and warranties set forth above shall, in anycase not be interpreted as limiting or restricting Purchaser’s general obligation at law, if any, to prevent and/or mitigateany loss or damages which it may incur after the Closing in connection with or involving the transfer of the R&D or theTransferred Assets.

2.26 Solvency . Seller warrants and represents that, between the date of this Agreement and the Closing Datethat Seller has not been unable and is not unable to pay its debts as they become due.

2.27 Kibo Capital Co., Ltd. and Saewon Telecom Co., Ltd .Seller warrants and represents that the investmentagreements entered into with (i) Kibo Capital Co., Ltd. dated September 11, 1999 and

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(ii) Saewon Telecom Co., Ltd., dated October 12, 1999, February 23, 2000 and July 10, 2001 have been terminated by the Closing Date.

2.28 Financial Creditors of Seller . Schedule 2.28 is a complete list of all of the Financial Institutions towhich Seller is indebted.

SECTION 3



REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser represents and warrants to Seller as follows, which representations and warranties are, as of the date of this Agreement, and willbe, of the Closing Date, true and correct, except for those representations and warranties which speak as to a certain date:

3.1 Organization and Good Standing . Purchaser is a corporation duly incorporated, validly existing and ingood standing under the laws of Korea.

3.2 Corporate Power and Authority . Purchaser has all requisite corporate power and authority to make,execute, deliver and perform this Agreement and all other agreements, documents and instruments to which it is a partyor is otherwise obligated which are executed, delivered or performed pursuant to this Agreement.

3.3 Due Authorization . The execution, delivery and performance of this Agreement and all otheragreements, documents and instruments to which Purchaser is a party or is otherwise obligated which are to beexecuted, delivered or performed pursuant to this Agreement have been duly authorized by all necessary corporateaction on the part of Purchaser, and this Agreement constitutes and any other instruments to be delivered by Purchaserat Closing, when executed and delivered at Closing, will constitute, the legal, valid and binding obligations ofPurchaser, enforceable against it in accordance with their respective terms.

3.4 No Violations of Laws or Agreements . The execution, delivery and performance of this Agreementand the other agreements contemplated by this Agreement and the consummation of the transactions contemplated bythis Agreement do not and will not result in any breach or acceleration of any of the terms or conditions of its articles ofincorporation or bylaws, or of any mortgage, bond, indenture, contract, agreement, license or other instrument orobligation to which Purchaser is a party. The execution, delivery and performance of this Agreement or the otheragreements contemplated by this Agreement will not result in the material violation of any law, statute, regulation,judgment, writ, injunction or decree of any court, threatened or entered in a proceeding or action in which Purchaser is,was or may be bound.

3.5 Disclosure . No representation or warranty by Purchaser in this Agreement, and no exhibit, certificateor schedule furnished or to be furnished to Seller pursuant hereto, or in connection with the transactions contemplatedhereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material factnecessary to make the statements or facts contained herein or therein not misleading or necessary to provide Seller withproper information as to Purchaser and the Purchase Assets. Purchaser shall disclose to Seller at Closing anyinformation then in the possession of Purchaser that indicates that Seller is in breach of this Agreement or which mayprovide the basis for a claim by Purchaser that Seller has breached this Agreement.

3.6 Mitigatin . The Parties acknowledge that the representations and warranties set forth above shall, in anycase not be interpreted as limiting or restricting Seller’s general obligation at law, if any, to prevent and/or mitigate anyloss or damages which it may incur after the Closing in connection with or involving the transfer of the R&D or theTransferred Assets.

3.7 Brokerage . Except as set forth on Schedule 3.7 , Purchaser has not made any agreement or taken anyother action which might cause anyone to become entitled to a broker’s fee or commission as a result of the transaction



contemplated hereunder.

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SECTION 4

CERTAIN ADDITIONAL. COVENANTS

4.1 Costs, Expenses and Taxes Unless otherwise provided for herein, Purchaser and Seller will each pay alltheir own expenses incurred in connection with this Agreement and the transactions contemplated hereby, including(a) all costs, expenses and Taxes to the extent levied to each Party, and (b) all accounting, legal and appraisal fees andsettlement charges, provided that, Seller shall be liable for and shall hold Purchaser harmless against any Value AddedTax (“VAT”) which become payable in connection with the transactions contemplated by this Agreement, providedfurther that, Purchaser shall deliver to Seller by wire transfer to an account designated by Seller any amount receivedfrom any tax authorities in connection with payment of such VAT by the Seller within five (5) Business Days fromreceipt and if the amount returned to Seller by Purchaser is less than the amount of VAT actually paid by Seller to the’relevant tax authorities, Purchaser shall pay Seller the amount of such shortfall within five (5) Business Days fromreceipt of any payment from any tax authorities in connection with VAT. For the avoidance of doubt, Purchaser shallhave no obligation to deliver to Seller any amounts refunded by the tax authorities until such time as Seller has fullypaid the VAT to the relevant tax authorities. Purchaser and Seller shall each bear [***] of all costs and expensesassociated with the transfer and/or assignment of the Intellectual Property to Purchaser, including any registration feespayable in connection thereto.

4.2 R&D Employees . Not later than one (1) week prior to the Closing, the Parties shall finalize a list ofR&D Employees (including Key Employees) (as listed in the Asset List) to be hired by Purchaser. The hire byPurchaser of the R&D Employees shall be subject to the following basic principles:

(a) All of the R&D Employees shall elect to be formally terminated asemployees of Seller and commence new employment relation with Purchaser.Seller shall pay, in a timely manner in accordance with the requirements of theLabor Standards Act and current company practices, all salary, bonuses,allowances, severance, unused leave (including the pro rata portion ofaccrued but unused leave attributable to the portion of the 2004 calendar yearprior to the Closing) and any other monetary obligations or claims relating tothe R&D Employees’ employment with Seller that may have accrued to thosepersonnel prior to their separation. Seller represents and warrants that theamount paid by it to such personnel will be adequate to fully atisfy all of theirclaims relating to each of their terms of employment at Seller or any Affiliate ofSeller.



(b) Prior to the Closing, Seller shall obtain the Employee Releases from theR&D Employees confirming their election to terminate their employment withSeller to the effect that they will waive any right, if any, against Purchaserregarding any severance, unused leave and other obligations or claims arisingfrom their employment relation with Seller before the Closing

(c) Prior to or on the Closing, each the R&D Employees to be hired byPurchaser shall have executed an employment agreement with Purchaser, tothe satisfaction of Purchaser and effective as of the Closing Date, wherebysuch R&D Employee agrees to continue his/her employment with Purchaserfor a period of at least 1.5 years from his/her commencement of newemployment with Purchaser. Purchaser shall negotiate in good faith the termsand conditions of the employment agreement with each R&D Employee to behired by Purchaser and shall promptly commence such negotiations with eachR&D Employee as soon as practicable after the execution of this Agreement.

(d) Purchaser shall favorably consider the implementation of schemes toencourage the R&D Employees to remain with Purchaser following theClosing, such as [***].

(e) For a period of [***] after Closing, Seller shall not solicit the employmentof, or employ, any of the R&D Employees that have been hired by Purchaserpursuant to this Agreement or any other employees of Purchaser.

4.3 Non-Competition . For a period of [***] following the Closing, Seller shall not engage in R&D, exceptthat Seller may sell certain CDMA products which have been Completed prior to Closing in

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each of the following cases:



(a) With respect to the CDMA 450 products, in case of contractualobligations which were in existence at the time of signing of this Agreement,Seller may satisfy such obligations provided that such obligations will beCompleted no later than June 30, 2005;

(b) With respect to the CDMA 450 and CDMA 800/1900 products Completedprior to Closing, in case of contractual obligations with third parties enteredinto between signing of this Agreement and Closing and the aggregateamount of such contract(s) is equal to or less than [***], Seller may enter intosuch contractual obligations, provided that such products will be shipped nolater than June 30, 2005.

(c) With respect to the CDMA 450 and CDMA 800/1900 products Completedprior to Closing, in case of contractual obligations with third parties enteredinto between signing of this Agreement and Closing in excess of US$[***]Seller may only enter into such contractual obligations with the prior writtenconsent of Purchaser, which consent shall not be unreasonably withheld ordelayed by Purchaser, and so long as such products will be shipped no laterthan June 30, 2005.

(d) With respect to the PCMCIA card products to be sold, Seller may sellsuch products up to [***] provided that (i) the relevant agreement with the thirdparty is executed prior to the Closing and (ii) such products will be deliveredto the customer no later than June 30, 2005. Seller has no obligation toprovide technical support with respect to the PCMCIA products.

(e) With respect to existing contractual obligations with Inquam, Seller shallseek the termination of such obligations prior to Closing and allow Purchaserto discuss with Inquam the possibility of establishing a new businessrelationship.

4.4 Technical Support . Recognizing that Seller will not be able to provide technical support to its existingand past customers to whom it previously sold the CDMA products as a result of the Asset Transfer, Purchaser shallagree to provide technical support (limited to labor support) to Seller for a period of [***] following the earlier of(a) the last shipment with respect to CDMA 450 products only or (b) June 30, 2005, and Purchaser shall be reimbursedfor such support at [***]. For the avoidance of doubt, Purchaser shall have no obligation to provide materials or repair



services in connection with the foregoing technical support.

4.5 Indemnification .

(i) Indemnification by Seller . Seller hereby agrees to indemnify and hold harmlessPurchaser from and against:

(1) any and all Damages arising out of or resulting from any misrepresentation, breach of warranty ornon-fulfillment of any agreement on the part of Seller contained in this Agreement or in any certificate, instrument,agreement or other document furnished or to be furnished to Purchaser pursuant hereto or in connection with thetransactions contemplated hereby;

(2) any and all Damages arising out of or resulting from any liabilities of Seller of any nature, whether due or tobecome due, whether accrued, absolute, contingent or otherwise existing on the Closing Date or arising out of anytransactions entered into, or any state of facts existing, prior to such date;

(3) any and all Damages arising from claims brought by R&D Employees with respect to (x) the termination orresignation of their employment with Seller in relation to these employees’ terms of employment with Seller or anyAffiliate of Seller, including but not limited to claims resulting from the increase in any employee’s wage during his orher period of employment with Seller, (y) any unpaid compensation for work during overtime, days off and nighttime,and (z) any compensation for unused day(s) of annual and/or monthly leave; and

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(4) any secondary Tax liability of Purchaser under the National Tax Basic Law and the Local Tax Law for theTaxes of Seller that have accrued prior to the Closing Date.

(ii) Indemnification by Purchaser . Purchaser hereby agrees to indemnify and holdharmless Seller from and against any Damages arising out of or resulting from anymisrepresentation, breach of warranty or non-fulfillment of any agreement on the part of Purchasercontained in this Agreement or in any certificate, instrument, agreement or other document furnishedor to be furnished to Seller in connection with the transactions contemplated hereby.

(b) General Indemnification Procedures .



(i) Purchaser and Seller shall cooperate in the defense or prosecution of any claim,action, suit or proceeding asserted against either of them by a party other than a Party hereto or anAffiliate of any Party hereto in respect of which indemnity may be sought hereunder (a “Third PartyClaim”) and shall furnish such records, information and testimony, and attend such conferences,discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connectiontherewith.

(ii) Except as otherwise provided in this Agreement, no action or claim for Damagesresulting from breaches of the representations and warranties of Seller or Purchaser shall bebrought or made after one (1) year following the Closing, except that such time limitation shall notapply to (1) claims for misrepresentations or breaches of warranty relating to Section 2.7 (relating toTaxes) which may be asserted until 90 days after the running of the applicable statute of limitationswith respect to the taxable period to which the particular claims relates and Section 2.20 (relating toLabor Relations) which may be asserted until 90 days after the running of the applicable statute oflimitations with respect to any claims that may be brought by a R&D Employee, (2) claims relating toEnvironmental Liabilities that have been brought against Purchaser by third parties within five (5)years following the Closing Date and (3) any claims which have been the subject of a written noticefrom Purchaser to Seller prior to the expiration of the applicable period under this Section 4.5(b)(vi),which notice specifies in reasonable detail the nature of the claim.

(iii) Notwithstanding anything to the contrary in this Section 4.4, no limitation orcondition of liability provided in this Section shall apply to the breach of any of the representationsand warranties contained herein if such representation or warranty was made with actual knowledgethat it contained an untrue statement of a material fact or omitted to state a material fact necessary tomake the statements or facts contained therein not misleading.

(iv) If there shall be a judicial determination that any Party (the ”Indemnified Party”)seeking indemnification from another Party (the ”Indemnifying Party”) under this Agreement is notentitled to such indemnification in the amount originally claimed by a third party, then theIndemnifying Party shall be entitled to reimbursement from the Indemnified Party for its costs andexpenses, including reasonable attorneys’ fees, incurred in the defense of the claim for suchindemnity pro rata, to the extent that the amount awarded is less than the amount originally claimed.

(v) Following the receipt by either Party of a complaint initiating a lawsuit in respect of aThird Party Claim in respect of which indemnity may be sought from either Party hereunder, within areasonable time after such receipt, the receiving Party shall give the other Party notice of such ThirdParty Claim.

(vi) Purchaser shall notify Seller and Seller shall notify Purchaser of any claim forDamages. Such notice shall describe, to the extent reasonably available, the nature of the claim, theproposed remedy and the cost to remedy or to satisfy the claim. Purchaser and Seller shall, in goodfaith, consult with the other Party and give the other Party a reasonable opportunity to propose an



alternative method to remedy or satisfy the claim. Provided, however, that if the nature of the claim issuch that, in Purchaser and Seller’s judgment, the above notice and opportunity provisions couldreasonably be expected to cause further Damages or would otherwise not be appropriate under thecircumstances, then the prior notice and opportunity shall not be required. Neither Purchaser norSeller shall be required in any

26

event to adopt the method proposed by the other Party. Purchaser and Seller’s failure to give the other Party the prior notice andopportunity or to adopt the method proposed, shall not bar in any event either Party from asserting an indemnification claimagainst the other under and subject to the terms and conditions described in this Section 4.5, but, in any such claim, the failure ofeither Party to give prior notice and opportunity, or to adopt the method proposed shall be admissible evidence if either Party shallcontest the reasonableness of the amount of the Damages that it may recover from the other Party.

(vii) Any amounts due to Purchaser as a result of Seller’s indemnification obligationsunder this Agreement, arising from the transactions contemplated hereby, arising from any breach ofany representation or warranty of Seller or otherwise may be drawn by Purchaser from the PurchasePrice Escrow. If the amount of the Purchase Price Escrow is not sufficient to pay the amounts due toPurchaser, Purchaser may set off such amount from any amounts owed at any time to Seller or itsaffiliates to the extent permissible under Korean law.

4.6 Confidentiality . From and after the Closing, Seller shall, and shall cause its Affiliates andrepresentatives to, keep confidential and not disclose to any other Person or use for his or its own benefit or the benefitof any other Person any trade secrets or other confidential proprietary information in its possession or control relating tothe Transferred Assets. The obligations of Seller under this Section 4.6 shall not apply to information which (a) is orbecomes generally available to the public without breach of the commitment provided for in this Section; or (b) isrequired to be disclosed by law, order or regulation of a court or tribunal or governmental authority; provided, however,that, in any such case, Seller shall notify Purchaser as early as reasonably practicable prior to disclosure to allowPurchaser to take appropriate measures to preserve the confidentiality of such information.

4.7 Access

(a) Information . Seller and Purchaser shall reasonably cooperate witheach other after the Closing so that (subject to any limitations that arereasonably required to preserve any applicable attorney-client privilege) eachParty has access without causing excessive hardship to normal operations tothe business records, contracts and other information existing at the ClosingDate and relating to Seller (whether in the possession of Seller or Purchaser)(including copies thereof) as is reasonably necessary for the (i) preparation foror the prosecution or defense of any suit, action, litigation or administrative,



arbitration or other proceeding or investigation (other - than one by or onbehalf of a Party to this Agreement) by or against Purchaser or Seller(ii) preparation and filing of any Tax return or election relating to Seller andany audit by any taxing authority of any returns of Purchaser or Seller relatingthereto, (iii) preparation and filing of any other documents required bygovernmental or regulatory bodies, (iv) transfer of data to Purchaser relatingto Seller and (v) the preparation of any reports necessary for their financialreporting purposes including that required in connection with any registrationstatement or report filed by Purchaser with any governmental agency, TheParty requesting such information and assistance shall reimburse the otherParty for all out-of-pocket costs and expenses incurred by such Party inproviding such information and in rendering such assistance. The access tofiles, books and records contemplated by this Section 4.7 shall be duringnormal business hours and upon not less than two (2) Business Days priorwritten request, and shall identify the scope of the information to be reviewedand shall be subject to such further reasonable limitations as the Party havingcustody or control thereof may impose to preserve the confidentiality ofinformation contained therein, and shall not extend to material subject to aclaim of privilege unless expressly waived by the Party entitled to claim thesame. The Parties mutually agree to use their commercially reasonable effortsto cause their independent public accountants to provide each other with anynecessary or required consents in connection with audit of Seller.

(b) Facility . For Completion of the Existing Projects, [***] after theClosing, Seller shall be allowed to oversee the design and production of theExisting Projects, [***]. In this regard, Mr. Ho Young Kim, President of Seller orany one designated by him shall have reasonable access, during normalbusiness hours, to the research and development department of Purchaser,provided that, (i) such access shall be limited to only the work related to theExisting Projects, [***] and (ii) such access shall not interfere with the normalbusiness operation of Purchaser.

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4.8 Repayment of Debt . If any acceleration clause in any - of the agreements between Seller and FinancialInstitutions listed in Schedule 2.28 is triggered by the consummation of the transaction contemplated by the Partiesherein, Seller covenants to use that portion of the Purchase Price set forth in Section 1.3 hereto or any of its funds torepay in full such obligations unless such Financial Institution(s) that seeks acceleration and Seller enters into a new



agreement for the payment of the underlying debt, in which event Seller agrees to make payment based on the newagreement. Schedule 4.8 lists all payment due to creditors of Seller six (6) month after the Closing (assuming theClosing Date of December 7, 2004), which Schedule will be updated as of the Closing Date. Seller covenants to maketimely payment to those creditors listed in Schedule 4.8 , unless Seller and creditor(s) agree to change the paymentterm, in which event Seller covenants to make payment based on the new payment term.

4.9 Assignment . This Agreement may not be assigned by operation of law or otherwise without theexpress written consent of Seller and Purchaser (which consent may be granted or withheld in the sole discretion ofSeller or Purchaser), provided, however, that with a prior written notice to Seller, Purchaser may assign this Agreement(including any ancillary agreements thereto) or any of its rights and obligations hereunder to one or more Affiliates ofPurchaser without the consent of Seller. In the event of such consented or permitted assignment, Purchaser shallcontinue to remain liable under this Agreement.

4.10 Notices of Certain Events . Following the Closing, Seller shall promptly notify Purchaser of (a) anynotice or other communication from any person alleging that the consent of such person is or may be required inconnection with the transactions contemplated by this Agreement and any ancillary agreements thereto, (b) any noticeor other communication from any governmental agency in connection with the transactions contemplated by thisAgreement and any ancillary agreements thereto, and (c) any claims commenced or, to Seller’s best Knowledge,threatened against, relating to or involving or otherwise affecting the R&D or the Transferred Assets that, if pending onthe ‘date of this Agreement, would have been required to have been disclosed pursuant to this Agreement or that relateto the consummation of the transactions contemplated by this Agreement and any ancillary agreements thereto.

4.11 Further Action with respect to Transferred Assets . If, after the Closing Date, Seller becomes aware of,or the Purchaser brings to the attention of Seller, any assets of Seller that should have been transferred as of the ClosingDate but were not so transferred, then such assets shall be transferred, or caused to be transferred, to the Purchaser (or toone or more Affiliates of the Purchaser designated by the Purchaser) as soon as possible. This provision, however, shallnot limit, in any way, the rights and remedies of the Purchaser under this Agreement.

4.12 Good Faith Obligations . The Parties agree to use their best efforts to take, or cause to be taken,diligently and in good faith all actions, and to do, or cause to be done, all things necessary, proper or advisable toconsummate the contemplated transaction under this Agreement.

SECTION 5

MISCELLANEOUS

5.1 Further Assurances; Cooperation . At and after the Closing, Seller will execute and deliver such furtherinstruments of conveyance and transfer as Purchaser may reasonably request to convey and transfer effectively toPurchaser the Transferred Assets or to put Purchaser in actual possession and control of the R&D.

5.2 Nature- and Survival of Representations . The representations, warranties, covenants and agreements ofPurchaser and Seller contained in this Agreement, and all statements contained in this Agreement or any Exhibit orSchedule hereto or any certificate delivered pursuant to this Agreement or in connection with the transactions



contemplated hereby, shall be deemed to constitute representations, warranties, covenants and agreements of therespective Party delivering the same. Subject to Sections 4.2(e), 4.3 and 4.5, all such representations, warranties,covenants and agreements shall survive the Closing for [***]. Except for the representation and warranties expresslycontained in this Agreement, the Parties make no other representations or warranties and no additional representationsand warranties

28

may be implied.

5.3 Notices . All notices, requests, demands elections and other communications which either Party to thisAgreement may desire or be required to give hereunder shall be in writing and shall be deemed to have been duly givenif delivered personally, by a reputable courier service which requires a signature upon delivery, by mailing the same byregistered or certified first class mail, postage prepaid, return receipt requested, or by telecopying with receiptconfirmation (followed by a first class mailing of the same) to the Party to whom the same is so given or made. Suchnotice, request, demand, waiver, election or other communication will be deemed to have been given as of the date sodelivered or electronically transmitted or seven days after mailing thereof.

If to Seller, to: Giga Telecom, Inc.5th Floor, Sewha Building156-3 Samsung-Dong, Gangnam-GuSeoul, Korea 135-091Attn: H.Y. Kim, PresidentFacsimile: 822-558-3196

If to Purchaser, to: UTStarcom, Inc.1275 Harbor Bay ParkwayAlameda, CA 94502Telecopy: 510-864-8802Attn: Russell L Boltwood Esq., General CounselFacsimile: 510-864-8802

or to such other address as such Party shall have specified by notice to the other Party hereto.

5.4 Successors and Assigns . This Agreement, and all rights and powers granted hereby, will bind and inureto the benefit of the Parties hereto and their respective successors and assigns.

5.5 Governing Law . This Agreement shall be governed by and construed in accordance with the laws ofKorea, without regard to its conflict of law provisions.



5.6 Heading . The headings preceding the text of the sections and subsections hereof are inserted solely forconvenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning,construction or effect.

5.7 Amendment and Waiver . The Parties may by mutual agreement amend this Agreement in any respect,and any Party, as to such Party, may (a) extend the time for the performance of any of the obligations of any other Party,(b) waive any inaccuracies in representations by any other Party, (c) waive compliance by any other Party with any ofthe agreements contained herein and performance of any obligations by such other Party, and (d) waive the fulfillmentof any condition that is precedent to the performance by such Party of any of its obligations under this Agreement. Tobe effective, any such amendment or waiver must be in writing and be signed by the Party against whom enforcementof the same is sought.

5.8 Entire Agreement . This Agreement and the Schedules hereto, each of which is hereby incorporatedherein, set forth all of the promises, covenants, agreements, conditions and undertakings between the Parties hereto withrespect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings,inducements or conditions, express or implied, oral or written.

5.9 Counterparts . This Agreement may be executed (including by facsimile transmission) in two or morecounterparts, each of which shall be deemed an original, but which together shall constitute one and the sameinstrument.

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5.10 Governing Language . The English language text of the Agreement shall prevail over any translationthereof.

5.11 Dispute Resolution . For any dispute arising under this Agreement which is not settled after good faithattempts by the Parties to amicably resolve such dispute, Seoul Central District Court shall have exclusive jurisdictionover such matters.

5.12 Termination . This Agreement may be terminated upon the occurrence of any of the following events:

(a) The mutual agreement of all the Parties to terminate the Agreement;



(b) By Purchaser in its sole discretion at any time, with or without cause,from the date of this Agreement until [***] before Seller’s shareholders’meeting to approve the Asset Transfer (“Walk Away Date”). Immediatelyfollowing Seller’s board of directors meeting for convening the shareholders’meeting, Seller shall inform Purchaser of the scheduled date of theshareholders’ meeting. Prior to the Walk Away Date, Purchaser shall not incurany penalty for terminating the Agreement. For the avoidance of doubt, Selleragrees not to give to the shareholders the notice for convening theshareholders’ meeting until further approvals/clearance from the MOCIE andMOST (including project models GDB 570, GPM-3000, GDM-100, GDM-101 andGDM-530) have been obtained as provided under Section 1.11(g).

(c) By Purchaser in its sole discretion (i) at any time prior to the date of theSeller’s shareholders’ meeting to approve the Asset Transfer if Purchaserdetermines that the MOCIE and MOST approvals/clearance (as provided inSection 1.11(g) above) is not satisfactory or (ii) by [***] prior to the date of theSeller’s shareholders’ meeting if Purchaser determine that it has not obtainedassurance to its reasonable satisfaction that any contemplated change ofexisting laws or adoption of new laws in connection with the export and/or useof the concerned CDMA technology (as provided in Section 1.11(g) above).Such termination by Purchaser shall be deemed to be termination with cause,but shall not be deemed to be (i) a breach by Seller or Purchaser and (ii) causeattributable to Seller. Neither Purchaser nor Seller shall be obligated to payany amount or reimburse the other Party for any loss incurred by it as a resultof such termination. If Purchaser fails to notify Seller of the termination of theAgreement under this Section 5.12(c) prior to the date of such Seller’sshareholders’ meeting, Purchaser shall be deemed to have accepted theapprovals/clearance obtained from the MOCIE and MOST and shall notterminate this Agreement pursuant to this Section 5.12(c). Regardless ofwhether or not Purchaser exercises its right to terminate this Agreementpursuant to this Section 5.12(c), it shall not in any way affect its right toterminate this Agreement under any other provisions of this Section 5.12.

(d) By Purchaser, without cause, after the Walk Away Date until the date ofthe shareholders’ meeting for approving this transaction, provided that,Purchaser shall pay Seller reasonable costs and expenses incurred by Selleras a result of terminating the Agreement in an amount not to exceed [***] andprovided further that, if Purchaser terminates the Agreement with causeduring this period, Purchaser shall have no obligation to pay Seller the costs



and expenses.

(e) By Purchaser, without cause, after the date of the shareholder’s meetingfor approving this transaction until [***] prior to Closing, provided that,Purchaser shall pay Seller reasonable costs and expenses incurred by Selleras a result of terminating the Agreement in an amount not to exceed [***] andprovided further that, if Purchaser terminates the Agreement with causeduring this period, Purchaser shall have no obligation to pay Seller the costsand expenses. Purchaser may not terminate this Agreement without causeafter [***] prior to the Closing except where Closing does not occur byJanuary 31, 2005, in which case, Purchaser may at its discretion terminate thisAgreement as provided under Section 5.12(f) below unless the Partiesmutually agree to extend such date.

(f) Prior to the shareholders meeting to approve the Asset Transfer, Sellermay terminate this transaction without penalty in the event that [***] or more ofthe total outstanding shares of Seller notify Seller of its dissent to the AssetTransfer. Seller shall use its best efforts to minimize the number ofshareholders who dissent to the Asset Transfer. Except - as provided above,Seller has no right to terminate

30

this transaction prior to Closing except if Purchaser has failed to meet a condition precedent under Section 1.10 prior to theClosing. If this Agreement is terminated by Purchaser due to a material breach by Seller of this Agreement or if Closing does notoccur by January 31, 2005 due to causes primarily attributable to Seller (in which case, Purchaser may terminate this Agreement atits sole discretion), Seller shall pay Purchaser a break-up fee of [***].

5.13 Severability . If at anytime subsequent to the date hereof, any term or provision of this Agreement shallbe determined by any court of competent jurisdiction to be partially or wholly illegal, void or unenforceable, suchprovision shall be of no force and effect to the extent so determined, but the illegality or unenforceability of such termor provision shall have no effect upon and shall not impair the legality or enforceability of any other term or provisionof this Agreement.

5.14 Construction . The Parties acknowledge that each Party and its counsel have reviewed and revised thisAgreement and that any rule of construction to the effect that any ambiguities are to be resolved against the drafting



Party shall not be employed in the interpretation of this Agreement or any amendments, schedules or exhibits hereto.

5.15 Force Majeure . Neither Party shall be considered in default or liable for any delay or failure to performunder this Agreement due to causes beyond its reasonable control. Such causes may include, but not be limited to, anact of nature, acts of the public enemy, labor disputes, strikes, unusually severe weather conditions, insurrection, riot,war (whether an actual declaration is made or not), civil commotion and other causes beyond the Party’s reasonablecontrol. Without prejudice to Section 5.12, if force majeure prevents or delays the obligation under this Agreement, thenthe Party claiming force majeure shall promptly notify the other Party in writing and shall use reasonable efforts anddue diligence to resume performance of its obligations.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

31

IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed in their respective names by an officerthereof duly authorized as of the date first above written.

UTSTARCOM CDMA TECHNOLOGIES KOREA LIMITED By: Name:Title: GIGA TELECOM, INC. By:/s/ Hoyoung Kem Name:Hoyoung KemTitle: CEO and President

[SIGNATURE PAGE FOR ASSET PURCHASE AGREEMENT]

Exhibit 21.1

UTSTARCOM SUBSIDIARIESName Place of Incorporation or Organization U.S.AACD Labs Inc. U.S.AUTStarcom International Products, Inc. U.S.AUTStarcom International Services, Inc. ChinaUTStarcom (China), Co., Ltd. ChinaUniversal Communication Technology (Hangzhou) Company Limited. ChinaUTStarcom Telecom Co., Ltd. ChinaHangzhou Starcom Telecom Co., Ltd. ChinaUTStarcom (Chongqing) Telecom Co., Ltd. China



UTStarcom Hong Kong Ltd. Hong Kong SARUTStarcom Ltd. ThailandUTStarcom Japan KK JapanUTStarcom, S.A. de C.V. MexicoUTStarcom GmbH GermanyUTStarcom Canada Company CanadaUTStarcom Ireland Limited IrelandRollingStreams Systems, Ltd. Cayman IslandsUTStarcom Singapore PTE.LTD SingaporeUTS tarcom Taiwan Ltd. TaiwanUTStarcom Network Solutions—Redes de Nova Geração Ltda. BrazilUTStarcom Australia Pty Ltd. AustraliaUTStarcom France SARL FranceUTStarcom Korea Limited. KoreaUT Starcom Honduras, S. de R.L. HondurasUTStarcom Chile Soluciones De Redes Limitada ChileUTStarcom Argentina S.R.L. ArgentinaTelecom Sales and Marketing K.K. JapanUTStarcom India Telecom Pvt. IndiaUTStarcom UK Limited UKUTStarcom Personal Communication LLC U.S.AUTStarcom CDMA Technologies Korea Limited KoreaHangzhou Starcom CEC Telecom Company Limited China

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.: 333-108817, 333-92340,333-84710, 333-44548, 333-60150 and 333-120564) and the Registration Statements on Form S-3 (Nos.: 333-111791, 333-107723,333-106944, and 333-111150) of UTStarcom, Inc. of our report dated April 14, 2005, relating to the financial statements, financialstatement schedules, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness ofinternal control over financial reporting, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

San Jose, CaliforniaApril 15, 2005

Exhibit 31.1

CERTIFICATION

I, Hong Liang Lu, certify that :

1. I have reviewed this annual report on Form 10-K of UTStarcom, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure



controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report isbeing prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors(or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and reportfinancial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant rolein the registrant’s internal control over financial reporting.

Date: April 15, 2005 /s/ HONG LIANG LU Hong Liang Lu President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Michael J. Sophie, certify that:

1. I have reviewed this annual report on Form 10-K of UTStarcom, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure



controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report isbeing prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors(or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and reportfinancial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant rolein the registrant’s internal control over financial reporting.

Date: April 15, 2005 /s/ MICHAEL J. SOPHIE Michael J. Sophie Senior Vice President of Finance and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES OXLEY ACT 2002

This certification is not to be deemed filed pursuant to the Securities Exchange Act of 1934, as amended, and does not constitute a part ofthe Annual Report of UTStarcom, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”).

In connection with the Report, we, Hong Liang Lu and Michael J. Sophie, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and



results of operations of the Company.

Dated: April 15, 2005By: /s/ HONG LIANG LU Name: Hong Liang Lu Title: President and Chief Executive OfficerBy: /s/ MICHAEL J. SOPHIE Name: Michael J. Sophie Title: Senior Vice President of Finance and Chief Financial Officer

End of Filing

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