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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| ** ** | **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------|--------------------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended June 30, 2010**

** **

**OR**

** **
| ** ** | **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------|---------------------------------------------------------------------------------------------------------|

** **

**For the transition period from    to                        **

 

**COMMISSION FILE NUMBER 000-29661**

** **

**UTSTARCOM, INC.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                             | ** ** | **52-1782500**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **1275 HARBOR BAY PARKWAY**              | ** ** | ** **                           |
| **ALAMEDA, CALIFORNIA**                  | ** ** | **94502**                            |
| (Address of principal executive offices) |       | (zip code)                           |

 

Registrant’s telephonenumber, including area code: **(510) 864-8800**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant was requiredto submit and post such files).  Yes o   Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

| Large accelerated filer o                |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No x

 

Asof July 30, 2010 there were 131,905,838 shares of the registrant’s commonstock outstanding, par value $0.00125.

 

 

 

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**TABLE OFCONTENTS**

 
| PART I—FINANCIAL INFORMATION                                                                  | 3  |
|---------------------------------------------------------------------------------------------------------|----|
| ITEM 1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)                                    | 3  |
| ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS | 23 |
| ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                 | 38 |
| ITEM  4—CONTROLS AND PROCEDURES                                                                    | 39 |
| PART II—OTHER  INFORMATION                                                                    | 41 |
| ITEM  1—LEGAL PROCEEDINGS                                                                          | 41 |
| ITEM 1A—RISK FACTORS                                                                               | 41 |
| ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE  OF PROCEEDS                                | 41 |
| ITEM 3—DEFAULTS UPON SENIOR SECURITIES                                                             | 42 |
| ITEM  4—REMOVED AND RESERVED                                                                       | 42 |
| ITEM  5—OTHER INFORMATION                                                                          | 42 |
| ITEM 6—EXHIBITS                                                                                    | 42 |
| SIGNATURES                                                                                              | 44 |

 

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**PART I—FINANCIALINFORMATION**

 

**ITEM 1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                      | ** ** | **June  30,**              | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2010**                             | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                      | ** ** | **(In thousands, except par value)** | ** ** |
| **ASSETS**                                                                                                                                                                      |       |                                 |       |                  |       |
| Current  assets:                                                                                                                                                                |       |                                 |       | ** **            |       |
| Cash  and cash equivalents                                                                                                                                                      |       | $                                    | 306,841    |                  | $          | 265,843 |   |
| Short-term  investments                                                                                                                                                         |       | 1,155                                |       | 1,038                 |       |
| Accounts  receivable, net of allowances for doubtful accounts of $30,135 and $26,065,  respectively                                                                             |       | 44,274                               |       | 42,346                |       |
| Notes  receivable                                                                                                                                                               |       | 930                                  |       | 1,427                 |       |
| Inventories                                                                                                                                                                     |       | 59,090                               |       | 72,300                |       |
| Deferred  costs                                                                                                                                                                 |       | 102,231                              |       | 130,453               |       |
| Prepaids  and other current assets                                                                                                                                              |       | 56,970                               |       | 47,906                |       |
| Short-term  restricted cash                                                                                                                                                     |       | 22,162                               |       | 26,448                |       |
| Total  current assets                                                                                                                                                           |       | 593,653                              |       | 587,761               |       |
| Property,  plant and equipment, net                                                                                                                                             |       | 5,186                                |       | 130,612               |       |
| Long-term  investments                                                                                                                                                          |       | 9,062                                |       | 8,402                 |       |
| Long-term  deferred costs                                                                                                                                                       |       | 180,777                              |       | 184,978               |       |
| Long-term  deferred tax assets                                                                                                                                                  |       | 5,601                                |       | 4,822                 |       |
| Other  long-term assets                                                                                                                                                         |       | 19,016                               |       | 12,536                |       |
| Total  assets                                                                                                                                                                   |       | $                                    | 813,295    |                  | $          | 929,111 |   |
| **LIABILITIES AND EQUITY**                                                                                                                                                      |       |                                 |       | ** **            |       |
| Current  liabilities:                                                                                                                                                           |       |                                 |       |                  |       |
| Accounts  payable                                                                                                                                                               |       | $                                    | 30,159     |                  | $          | 54,115 |   |
| Income  taxes payable                                                                                                                                                           |       | —                               |       | 1,130                 |       |
| Customer  advances                                                                                                                                                              |       | 147,398                              |       | 120,364               |       |
| Deferred  revenue                                                                                                                                                               |       | 162,443                              |       | 170,777               |       |
| Deferred  tax liabilities                                                                                                                                                       |       | 3,890                                |       | 3,890                 |       |
| Other  current liabilities                                                                                                                                                      |       | 97,207                               |       | 142,894               |       |
| Total  current liabilities                                                                                                                                                      |       | 441,097                              |       | 493,170               |       |
| Long-term  deferred revenue                                                                                                                                                     |       | 108,232                              |       | 160,932               |       |
| Other  long-term liabilities                                                                                                                                                    |       | 26,927                               |       | 18,858                |       |
| Total  liabilities                                                                                                                                                              |       | 576,256                              |       | 672,960               |       |
| Commitments  and contingencies (Note 10)                                                                                                                                   |       |                                 |       |                  |       |
| Equity:                                                                                                                                                                         |       |                                 |       |                  |       |
| UTStarcom, Inc.  stockholders’ equity:                                                                                                                                |       |                                 |       |                  |       |
| Common  stock: $0.00125 par value; 750,000 authorized shares; 131,905 and 130,095  shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively |       | 154                                  |       | 153                   |       |
| Additional  paid-in capital                                                                                                                                                     |       | 1,256,049                            |       | 1,251,532             |       |
| Accumulated  deficit                                                                                                                                                            |       | (1,092,102                           | )          | (1,067,174            | )          |
| Accumulated  other comprehensive income                                                                                                                                         |       | 72,156                               |       | 70,848                |       |
| Total  UTStarcom, Inc. stockholders’ equity                                                                                                                           |       | 236,257                              |       | 255,359               |       |
| Noncontrolling  interests                                                                                                                                                       |       | 782                                  |       | 792                   |       |
| Total  equity                                                                                                                                                                   |       | 237,039                              |       | 256,151               |       |
| Total  liabilities and equity                                                                                                                                                   |       | $                                    | 813,295    |                  | $          | 929,111 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)**

 
| ** **                                                                     | ** ** | **Three months ended June 30,**                | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| Net  sales                                                                     |       |                                                               |       |                                              |       |   |   |   |   |
| Products                                                                       |       | $                                                                  | 62,615     |                                              | $          | 65,735 |   | $ | 131,795 |   | $ | 171,247 |   |
| Services                                                                       |       | 10,550                                                             |       | 14,428                                            |       | 22,217 |   | 28,256 |   |
|                                                                           |       | 73,165                                                             |       | 80,163                                            |       | 154,012 |   | 199,503 |   |
| Cost  of net sales                                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Products                                                                       |       | 43,507                                                             |       | 87,265                                            |       | 89,789 |   | 174,302 |   |
| Services                                                                       |       | 6,786                                                              |       | 8,736                                             |       | 14,142 |   | 19,387 |   |
| Gross  profit (loss)                                                           |       | 22,872                                                             |       | (15,838                                           | )          | 50,081 |   | 5,814 |   |
| *See Note 16 for net sales to related party and associated  cost of net sales* |       |                                                               |       |                                              |       |   |   |   |   |
| Operating  expenses:                                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Selling,  general and administrative                                           |       | 21,162                                                             |       | 26,971                                            |       | 51,352 |   | 81,151 |   |
| Research  and development                                                      |       | 9,078                                                              |       | 16,229                                            |       | 19,101 |   | 37,737 |   |
| Restructuring                                                                  |       | (216                                                               | )          | 27,757                                            |       | 7,291 |   | 32,576 |   |
| Net  gain on divestitures                                                      |       | (2,056                                                             | )          | (1,357                                            | )          | (3,808 | ) | (1,357 | ) |
| Total  net operating expenses                                                  |       | 27,968                                                             |       | 69,600                                            |       | 73,936 |   | 150,107 |   |
|                                                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Operating  loss                                                                |       | (5,096                                                             | )          | (85,438                                           | )          | (23,855 | ) | (144,293 | ) |
|                                                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Interest  income                                                               |       | 450                                                                |       | 599                                               |       | 798 |   | 1,348 |   |
| Interest  expense                                                              |       | (68                                                                | )          | (230                                              | )          | (138 | ) | (520 | ) |
| Other  income (expense), net                                                   |       | (4,767                                                             | )          | 5,429                                             |       | 100 |   | (1,785 | ) |
|                                                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Loss  before income taxes                                                      |       | (9,481                                                             | )          | (79,640                                           | )          | (23,095 | ) | (145,250 | ) |
| Income  tax benefit (expense)                                                  |       | 510                                                                |       | (4,659                                            | )          | (1,843 | ) | (6,483 | ) |
| Net  loss                                                                      |       | (8,971                                                             | )          | (84,299                                           | )          | (24,938 | ) | (151,733 | ) |
| Net  loss attributable to noncontrolling interests                             |       | 6                                                                  |       | 16                                                |       | 10 |   | 17 |   |
| Net  loss attributable to UTStarcom, Inc.                                 |       | $                                                                  | (8,965     | )                                                 | $          | (84,283 | ) | $ | (24,928 | ) | $ | (151,716 | ) |
|                                                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Net  loss per share attributable to UTStarcom, Inc.- Basic and Diluted    |       | $                                                                  | (0.07      | )                                                 | $          | (0.66 | ) | $ | (0.19 | ) | $ | (1.20 | ) |
|                                                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Weighted  average shares used in per-share calculation - Basic and Diluted     |       | 130,311                                                            |       | 127,160                                           |       | 129,866 |   | 126,450 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

 
| ** **                                                                   | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **                                                                   | ** ** | **(In thousands)**                           | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                       | ** ** | ** **                                        | ** ** |   | ** ** |
| Net  loss                                                                    |       | $                                                 | (24,938    | ) | $ | (151,733 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                              |       |   |   |
| Depreciation  and amortization                                               |       | 3,410                                             |       | 6,918 |   |
| Amortization  of deferred gain on sale-leaseback                             |       | (107                                              | )          | — |   |
| Provision  for (recovery of) doubtful accounts                               |       | 4,161                                             |       | (2,129 | ) |
| Deferred  income taxes                                                       |       | (712                                              | )          | 1,752 |   |
| Stock-based  compensation expense                                            |       | 4,547                                             |       | 6,427 |   |
| Other-than-temporary  impairment of equity investment                        |       | —                                            |       | 3,798 |   |
| Net  gain on divestitures                                                    |       | (3,808                                            | )          | (1,357 | ) |
| Gain  on settlement of an investment interest                                |       | (481                                              | )          | — |   |
| Other                                                                        |       | 42                                                |       | (503 | ) |
| Changes  in operating assets and liabilities, net of dispositions:           |       |                                              |       |   |   |
| Accounts  receivable                                                         |       | (9,928                                            | )          | 96,273 |   |
| Inventories  and deferred costs                                              |       | 44,111                                            |       | 30,024 |   |
| Other  assets                                                                |       | (9,468                                            | )          | 61,086 |   |
| Accounts  payable                                                            |       | (25,341                                           | )          | (119,405 | ) |
| Income  taxes payable                                                        |       | 207                                               |       | 2,182 |   |
| Customer  advances                                                           |       | 27,313                                            |       | 33,606 |   |
| Deferred  revenue                                                            |       | (53,489                                           | )          | (21,133 | ) |
| Other  liabilities                                                           |       | (40,483                                           | )          | 17,058 |   |
| Net  cash used in operating activities                                       |       | (84,964                                           | )          | (37,136 | ) |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                       |       |                                              |       |   |   |
| Additions  to property, plant and equipment                                  |       | (1,826                                            | )          | (1,337 | ) |
| Proceeds  from divestiture                                                   |       | 1,500                                             |       | — |   |
| Proceeds  from sale of building (net of tax payments)                        |       | 123,955                                           |       | — |   |
| Change  in restricted cash                                                   |       | 2,998                                             |       | 1,404 |   |
| Proceeds  from settlement of an investment interest                          |       | 481                                               |       | — |   |
| Purchase  of an investment interest                                          |       | (550                                              | )          | — |   |
| Purchase  of short-term investments                                          |       | (9,252                                            | )          | (5,613 | ) |
| Proceeds  from sale of short-term investments                                |       | 5,415                                             |       | 6,421 |   |
| Other                                                                        |       | 971                                               |       | 392 |   |
| Net  cash provided by investing activities                                   |       | 123,692                                           |       | 1,267 |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                       |       |                                              |       |   |   |
| Repurchase  of common stock                                                  |       | (30                                               | )          | — |   |
| Other                                                                        |       | —                                            |       | (389 | ) |
| Net  cash used in financing activities                                       |       | (30                                               | )          | (389 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                |       | 2,300                                             |       | (749 | ) |
| Net  increase (decrease) in cash and cash equivalents                        |       | 40,998                                            |       | (37,007 | ) |
| Cash  and cash equivalents at beginning of period                            |       | 265,843                                           |       | 309,603 |   |
| Cash  and cash equivalents at end of period                                  |       | $                                                 | 306,841    |   | $ | 272,596 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of UTStarcom, Inc. (“Company”) and its wholly and majority ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in the preparation of the condensed consolidated financialstatements. The noncontrolling interests in consolidated subsidiaries are shownseparately in the condensed consolidated financial statements.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by the Company pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles in the United States (“GAAP”)have been condensed or omitted pursuant to such rules and regulations. TheDecember 31, 2009 condensed consolidated balance sheet was derived fromaudited financial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States. However, theCompany believes that the disclosures are adequate to make the informationpresented not misleading. These condensed consolidated financial statementsshould be read in conjunction with the Company’s December 31, 2009financial statements, including the notes thereto, and the other informationset forth in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009. The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect theamounts reported in the consolidated financial statements and accompanyingnotes. Actual results may be different. See the Company’s 2009 Annual Reportfor discussion of the Company’s critical accounting policies and estimates.

 

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments (consisting of only normalrecurring adjustments) considered necessary for a fair statement of the Company’sfinancial condition, the results of its operations and its cash flows for theperiods indicated. The results of operations for the three and six months endedJune 30, 2010 are not necessarily indicative of the operating results forthe full year.

 

InDecember 2009, the Company entered into a Sales Leaseback Agreement forthe sale of its manufacturing, research and development, and administrativeoffices facility in Hangzhou, China to a third party for approximately$138.8 million with leaseback of approximately one-third of the facility.On May 31, 2010, the Company and the buyer agreed that all conditionsprecedent to the closing had been met, the sale was consummated and theleaseback commenced on June 1, 2010. As of May 31, 2010, the Companyhad received all of the sales proceeds. See Note 7 for additional informationon sale-leaseback transaction.

 

OnFebruary 1, 2010, the Company entered into agreements for a strategicrelationship with Beijing E-town International Investment andDevelopment Co., Ltd (“BEIID”) which includes an investment of$48.5 million in the Company’s common stock by BEIID, and two unrelatedinvestment funds, Elite Noble Limited and Shah Capital OpportunityFund LP. These investments are expected to close in the third quarter of2010.

 

Managementbelieves that both the Company’s China and non-China operations have sufficientliquidity to finance working capital and capital expenditure needs during thenext 12 months. There can be no assurance that additional financing, ifrequired, will be available on terms satisfactory to the Company or at all, andif funds are raised in the future through issuance of preferred stock or debt,these securities could have rights, privileges or preference senior to those ofthe Company’s common stock and newly issued debt could contain debt covenantsthat impose restrictions on the Company’s operations. Further, any sale ofnewly issued debt or equity securities could result in additional dilution tothe Company’s current shareholders.

 

**NOTE****2 - ACCOUNTING POLICIES AND RECENT ACCOUNTINGPRONOUNCEMENTS**

 

***Earnings Per Share***

 

Basic earnings per share (“EPS”)is computed by dividing net income (loss) available to common stockholders bythe weighted average number of shares of the Company’s common stock outstandingduring the period, which excludes nonvested restricted stock. Diluted EPSpresents the amount of net income (loss) available to each share of commonstock outstanding during the period plus each share of common stock that wouldhave been outstanding assuming the Company had issued shares of common stockfor all dilutive potential common shares outstanding during the period. TheCompany’s potentially dilutive common shares include 

 

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outstanding stock options,nonvested restricted stock, restricted stock units and Employee Stock PurchasePlan (“ESPP”) shares prior to termination of the ESPP effective May 15,2009, which are reflected in diluted net income per share by application of thetreasury stock method. Under the treasury stock method, the amount that theemployee must pay for exercising stock options, the amount of stock-basedcompensation cost for future services that the Company has not yet recognized,and the amount of tax benefit that would be recorded in additional paid-incapital upon exercise are assumed to be used to repurchase shares. For thethree and six months ended June 30, 2010 and 2009, no potential commonshares were dilutive because of the net loss in the periods. Potential sharesof common stock of approximately 8.5 million and 13.6 million were excludedfrom the diluted per share calculation for the three months ended June 30,2010 and 2009, respectively, while 8.9 million and 14.4 million were excludedfrom the diluted per share calculation for the six months ended June 30,2010 and 2009, respectively, because to include them would have beenanti-dilutive for the periods.

 

***Fair Value***

 

Pursuantto the accounting guidance for fair value measurements and its subsequentupdates, fair value is defined as the price that would be received from sellingan asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. As such, fair value is amarket-based measurement that should be determined based on assumptions thatmarket participants would use in pricing an asset or liability. Theaccounting guidance also establishes a three-tier fair value hierarchy whichrequires the Company to use observable market data, when available, and tominimize the use of unobservable inputs when determining fair value. The fairvalue hierarchy prioritizes the inputs into three levels that may be used inmeasuring fair value as follows:

 

Level1 - observable inputs such as quoted prices in active markets for identicalassets or liabilities.

 

Level2 - inputs other than the quoted prices in active markets for identical assetsor liabilities that are observable either directly or indirectly.

 

Level3 - unobservable inputs based on the Company’s assumptions.

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issuedamended standards that require additional fair value disclosures. Thesedisclosure requirements are effective in two phases. In the first quarter of2010, the Company adopted the requirements for disclosures about inputs andvaluation techniques used to measure fair value as well as disclosures aboutsignificant transfers between hierarchy levels. Beginning in the first quarterof 2011, these amended standards will require presentation of disaggregatedactivity within the reconciliation for fair value measurements usingsignificant unobservable inputs (Level 3). These amended standards do notsignificantly impact the Company’s consolidated financial statements.

 

AtJune 30, 2010, the Company had no assets and liabilities measured at fairvalue on a recurring basis. The Company’s money market funds, which are includedin cash and cash equivalents, are recorded at cost which approximates fairvalue, classified within Level 1 of the fair value hierarchy. The fairvalue of certain of the Company’s financial instruments that are not measuredat fair value, including accounts receivable, accounts payable, and othercurrent liabilities, approximates the carrying amount because of their shortmaturities.

 

Duringthe six months ended June 30, 2010, the Company had no assets andliabilities measured at fair value on a non-recurring basis. AtDecember 31, 2009, the Company determined as a result of the saleleaseback transaction entered into in December 2009 (see Note 7) that thenet book value of its Hangzhou facility was in excess of its fair value. Due tothe apparent decline in value, the Company conducted a recoverability test forthis entity-wide asset and determined the carrying value of the net assets ofthe Company exceeded the undiscounted cash flows expected to result from theuse and eventual disposition of the asset group. In the Company’s assessment offair value, management placed primary reliance on the market approach (thethird party offer). The result of this analysis reduced the Company’s overallassessment of fair value of the property by $33.3 million. Accordingly,the Company recorded a non-cash impairment charge of $33.3 million duringthe fourth quarter of 2009. The Company’s overall assessment of fair value ofthe property at December 31, 2009 was based on Level 2 inputs.

 

***Variable Interest Entities***

 

InJune 2009, the FASB issued authoritative guidance requiring an enterpriseto perform an analysis to determine whether the enterprise’s variable interestor interests give it a controlling financial interest in a variable interestentity. This analysis identifies the primary beneficiary of a variable interestentity as one with the power to direct the activities of a variable interestentity that most significantly impact the entity’s economic performance and theobligation to absorb losses of the entity that could potentially be significantto the variable interest. The Company adopted this new standard in the firstquarter of fiscal year 2010. See Note 17 for the impact of the adoption of theguidance on the Company’s consolidated financial statements.

 

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***Recent Accounting Pronouncements Not YetAdopted***

 

InSeptember 2009, the FASB issued new standards for revenue recognition withmultiple deliverables. These new standards impact the determination of when theindividual deliverables included in a multiple-element arrangement may betreated as separate units of accounting. Additionally, these new standardsmodify the manner in which the transaction consideration is allocated acrossthe separately identified deliverables by no longer permitting the residualmethod of allocating arrangement consideration. These new standards areeffective for the Company beginning in the first quarter of fiscal year 2011,however early adoption is permitted. The Company is currently assessing thepotential impact, if any, of the guidance on its consolidated financialstatements.

 

InSeptember 2009, the FASB issued new standards for the accounting forcertain revenue arrangements that include software elements. These newstandards amend the scope of pre-existing software revenue guidance by removingfrom the guidance non-software components of tangible products and certainsoftware components of tangible products. These new standards are effective forthe Company beginning in the first quarter of fiscal year 2011, however earlyadoption is permitted. The Company is currently assessing the potential impact,if any, of the guidance on its consolidated financial statements.

 

**NOTE 3—DIVESTITURES**

 

*IPMessaging and US PDSN Assets*

 

InJune 2010, the Company completed a sale of its non-core IP Messaging andUS PDSN Assets as part of its strategy to focus on core IP-based productofferings. The divested assets were located in North America, Caribbean, andLatin America regions and were part of the Multimedia Communications segment.Consideration for the approximately $1.7 million of net liabilities transferredincluded approximately $0.4 million cash proceeds plus potential additionalcontingent consideration of up to $1.6 million. A gain of $2.1 million, net oftaxes, was recognized in June 2010 as a reduction to operating expenses.The Company determined that the sale of these non-core product lines did notmeet the criteria for presentation as a discontinued operation as thesenon-core product lines did not meet the definition of a component of an entity.

 

*Sale of Remote Access Server product line*

 

InJanuary 2010, the Company completed a sale of certain assets andliabilities related to its Remote Access Server (“RAS”) product line andreceived total consideration of approximately $1.5 million. The primaryRAS product was the Total Control 1000 Transaction Gateway, which offers themarket a proven processing platform for carrier-class transaction networkservice providers and enterprises for dial-up connectivity. In the firstquarter of 2010, the Company transferred net liabilities of approximately $0.3million in connection with this transaction and recorded a net gain of$1.8 million as a reduction of operating expenses. The Company determinedthat the divestiture of the RAS product line did not meet the criteria forpresentation as a discontinued operation as the RAS product line did not meetthe definition of component of an entity.

 

*UTStarcom Personal Communications LLC (PCD)*

 

On July 1, 2008, the Company completed the sale of UTStarcomPersonal Communications LLC, a wholly-owned subsidiary of the Company (“PCD”),to Personal Communications Devices, LLC (“PCD LLC”). Concurrent withthe closing of the divestiture transaction, the Company entered into athree-year supply agreement with PCD LLC whereby the Company indicated itsintent to supply handset products to PCD LLC. In connection with the winddown of our Korea operations, in December 2008, we furnished PCD LLC with180-day’s notice of termination of the supply agreement.

 

OnJune 30, 2009, the Company entered into a Settlement Agreement and Release(the “Settlement Agreement”) with PCD LLC. Under the Settlement Agreement, theCompany waived its right to any earnout payments and granted a call option toPCD LLC for the Company’s $1.6 million investment in the equity securities ofPCD LLC.  The Company also agreed to payPCD LLC a total of $11.1 million which included warranty costs of approximately$8.4 million (see Note 8) and a reduction of revenue of approximately $2.7million. In addition to the $11.1 million claim settlement, the Companyrecorded an additional $17.6 million of costs for inventory write-downs to netrealizable value, write-downs of excess inventory and warranty reserves relatedto transactions with PCD LLC. The Company recorded these transactions in thesecond quarter of 2009, resulting in a decrease in revenue of approximately $2.7million and an increase in cost of net sales of $26.0 million.

 

*Korea operations*

 

OnJuly 31, 2009, the Company completed a sale of its Korea operations to anentity founded by a former employee and received total consideration ofapproximately $2.0 million. In connection with this transaction, theCompany recorded a net loss of $1.3 million during 2009. Included in thisamount was $2.2 million of foreign currency losses previously carried inaccumulated other 

 

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comprehensiveincome that were realized upon completion of sale and liquidation of thesubsidiary. The Company determined that the divestiture of Korea operations didnot meet the criteria for presentation as a discontinued operation as the Koreaoperations did not meet the definition of component of an entity.

 

*Sale of Assets to Marvell Technology Group Ltd*

 

InFebruary 2006, the Company sold substantially all of the assets andselected liabilities of its semiconductor design business division to MarvellTechnology Group Ltd. (“Marvell”). In connection with the sale of assets,the Company entered into a supply agreement with Marvell to purchase chipsetsfor the Company’s handset products over the next five years. The valueallocated to the supply agreement of $20.2 million has been amortized inproportion to the quantities of chipsets purchased under the supply agreement.During the first quarter of 2009, the Company revised its estimates of customerdemand for certain handset products and determined that future chipsetpurchases from Marvell would be negligible. As a result, the Company fullyamortized against cost of goods sold the remaining value of the supplyagreement of $8.5 million in the three months ended March 31, 2009.

 

**NOTE 4 - COMPREHENSIVE LOSS**

 

Totalcomprehensive loss for the three and six months ended June 30, 2010 and2009 consisted of the following:

 
| ** **                                                                            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**                             | ** ** |
|                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Net  loss                                                                             |       | $                                                   | (8,971     | )                                                 | $          | (84,299 | ) | $ | (24,938 | ) | $ | (151,733 | ) |
| Other  Comprehensive income                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Reclassification  for realization of previously unrealized (gains) losses, net of tax |       | —                                              |       | 4,011                                             |       | — |   | 3,313 |   |
| Foreign  currency translation                                                         |       | 3,609                                               |       | (2,657                                            | )          | 1,308 |   | (2,084 | ) |
| Comprehensive  loss                                                                   |       | (5,362                                              | )          | (82,945                                           | )          | (23,630 | ) | (150,504 | ) |
|                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Comprehensive  loss attributable to noncontrolling interests (1)                      |       | (6                                                  | )          | (16                                               | )          | (10 | ) | (17 | ) |
| Comprehensive  loss attributable to UTStarcom, Inc.                              |       | $                                                   | (5,356     | )                                                 | $          | (82,929 | ) | $ | (23,620 | ) | $ | (150,487 | ) |

 

----

(1)    Comprehensive lossattributable to noncontrolling interests consisted solely of net loss.

 

Thechanges in noncontrolling interests during the six months ended June 30,2010 and 2009 were as follows:

 
| ** **                                                   | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                           | ** ** |
| Balance at beginning of period                               |       | $                                                 | 792        |   | $ | 808 |   |
| Comprehensive loss attributable to noncontrolling  interests |       | (10                                               | )          | (17 | ) |
| Balance at end of period                                     |       | $                                                 | 782        |   | $ | 791 |   |

 

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**NOTE****5 — BALANCE SHEET DETAILS**

 

The following tables provide details of selectedbalance sheet items:

 
| ** **          | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|---------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **          | ** ** | **(in thousands)** | ** ** |
| **Inventories:**    | ** ** | ** **              | ** ** | ** **            | ** ** |
| Raw  materials      |       | $                       | 8,861      |                  | $          | 18,863 |   |
| Work  in process    |       | 21,715                  |       | 12,881                |       |
| Finished  goods (1) |       | 28,514                  |       | 40,556                |       |
| Total               |       | $                       | 59,090     |                  | $          | 72,300 |   |

 

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(1)                                  Includes finished goods atcustomer sites of approximately $21.8 million and $33.8 million atJune 30, 2010 and December 31, 2009, respectively, for which thecustomer has taken possession, but based on specific contractual terms, titlehas not yet passed to the customer.

 

Inventoriesof approximately $2.9 million held by the Company’s manufacturing outsourcepartner are recorded in prepaids and other current assets in the condensedconsolidated balance sheet at June 30, 2010.

 
| ** **                                     | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| **Property, plant and equipment, net:**        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Buildings                                      |       | $                  | 234        |                  | $          | 184,436 |   |
| Leasehold  improvements                        |       | 14,272             |       | 15,422                |       |
| Automobiles                                    |       | 4,126              |       | 4,243                 |       |
| Software                                       |       | 36,936             |       | 37,240                |       |
| Equipment  and Furniture                       |       | 145,914            |       | 172,214               |       |
| Others                                         |       | 2,716              |       | 1,690                 |       |
| Total                                          |       |               | 204,198    |                  | ** ** | 415,245 |   |
| Less:  accumulated depreciation and impairment |       | (199,012           | )          | (284,633              | )          |
| Total  (see Note 7)                            |       | $                  | 5,186      |                  | $          | 130,612 |   |

 
| ** **                             | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** |
| **Other current liabilities:**         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Accrued  contract costs                |       | $                  | 18,843     |                  | $          | 27,657 |   |
| Accrued  payroll and compensation      |       | 26,634             |       | 35,871                |       |
| Warranty  costs                        |       | 9,592              |       | 16,150                |       |
| Accrued  other taxes                   |       | 15,298             |       | 15,863                |       |
| Restructuring  costs                   |       | 9,903              |       | 21,707                |       |
| Deposit  received for sale of building |       | —             |       | 7,323                 |       |
| Others                                 |       | 16,937             |       | 18,323                |       |
| Total                                  |       | $                  | 97,207     |                  | $          | 142,894 |   |

 

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**NOTE 6 - CASH, CASH EQUIVALENTS, INVESTMENTS AND FAIRVALUE MEASUREMENTS**

 

Cashand cash equivalents, consisting primarily of bank deposits and money marketfunds, are recorded at cost which approximates fair value because of theshort-term nature of these instruments. At June 30, 2010 andDecember 31, 2009, there were no available-for-sale securities investmentssubject to fair value accounting included in cash and cash equivalents orlong-term investments.

 

Short-terminvestments, consisting of bank notes, were $1.2 million and $1.0 millionat June 30, 2010 and December 31, 2009, respectively. The Companyaccepts bank notes receivable with maturity dates of between three and sixmonths from its customers in China in the normal course of business. TheCompany may discount these bank notes with banking institutions in China.During the six months ended June 30, 2010, no bank notes were sold. Duringthe three months ended June 30, 2009, there were no bank notes sold.During the six months ended June 30, 2009, the Company sold $9.9 millionof bank notes and recorded immaterial costs as a result of discounting thenotes. All long-term investments are in privately-held companies and areaccounted for under the cost method. The Company recognizes an impairmentcharge when a decline in the fair value of its investments below the cost basisis judged to be other-than-temporary. In making this determination, the Companyreviews several factors to determine whether the losses areother-than-temporary, including but not limited to: (i) the length of timethe investment was in an unrealized loss position, (ii) the extent towhich fair value was less than cost, (iii) the financial condition andnear term prospects of the issuer and (iv) the Company’s intent andability to hold the investment for a period of time sufficient to allow for anyanticipated recovery in fair value.

 

Thefollowing table shows the break-down of the Company’s equity securitiesclassified as long-term investments at June 30, 2010 and December 31,2009:

 
| ** **                   | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                   | ** ** | **(in thousands)** | ** ** |
|                         |       |               |       |                  |       |
| Cortina                      |       | $                  | 3,348      |                  | $          | 3,348 |   |
| GCT SemiConductor, Inc. |       | 3,000              |       | 3,000                 |       |
| Xalted Networks              |       | 1,583              |       | 1,583                 |       |
| SBI                          |       | 1,131              |       | 471                   |       |
| Total equity securities      |       | $                  | 9,062      |                  | $          | 8,402 |   |

 

*SBI NEOTechnology A Investment LPS (“SBI”)*

 

In2008, the Company invested $0.5 million into SBI in exchange forapproximately 2% of the Partnership interest. The Partnership’s investmentobjective is to invest in unlisted or listed companies in Japan and overseasthat are engaged in high growth businesses, including businesses focused oninformation technology and the environment. In the first quarter of 2010, theCompany contributed an additional $0.6 million into SBI, and at June 30,2010 maintains an approximately 2% Partnership interest. The Company hasconcluded that it does not have a controlling interest in SBI as it does nothave the power to direct the activities of SBI that most significantly impactthe entity’s economic performance. Affiliates of a related party have acontrolling interest in SBI, see Note 16. The Company accounts for theinvestment in SBI using the cost method.

 

**NOTE 7 — SALE-LEASEBACK TRANSACTION**

 

InDecember 2009, the Company entered into a Property Transfer and LeasebackAgreement (the “Sale Leaseback Agreement”) for the sale of its manufacturing,research and development and administrative office facility in Hangzhou, China(the “Hangzhou facility”) to a third party for proceeds of approximately$138.8 million and the leaseback of approximately one-third of theproperty through 2016. As of May 31, 2010, the Company had received all ofthe sales proceeds and met all criteria for consummation of sale of the Hangzhoufacility. On May 31, 2010, the Company and the buyer agreed that allconditions precedent to the closing had been met and the leaseback commenced onJune 1, 2010.

 

Managementdetermined that the transaction qualified for sale-leaseback accounting as allof the risks and rewards of ownership were transferred to the buyer uponclosing of the transaction and the leaseback arrangement did not include anyform of continuing involvement, other than a normal leaseback. In the secondquarter of 2010, the Company recorded the sale of the Hangzhou facility andrecorded a deferred gain of $7.7 million at the time of sale. The deferred gainwas represented by the gross sales proceeds of $138.8 million, less $7.5million of transaction related taxes and other fees, and less the net bookvalue of the Hangzhou facility of $123.6 million. The gain on sale was deferredin accordance with the accounting guidance for sale-leaseback transactions, asthe Company has retained more than a minor portion of the use of the propertythrough the six-year leaseback. The deferred gain on the sale-leaseback isbeing amortized in proportion to the related gross rental charged to expenseover the leaseback term. At June 30, 2010, $1.2 million of deferred gainis included in other current liabilities and $6.5 million of deferred gain isincluded in other long-term liabilities in the condensed consolidated balancesheet.

 

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Inconnection with the Sale Leaseback Agreement, on February 1, 2010, theCompany entered into a Lease Contract (the “Lease”) with respect to theleaseback of a portion of the Hangzhou facility. Under the terms of the Lease,the Company will lease back 71,027 sqm gross floor area (“GFA”) aboveground and12,000 sqm GFA underground of the building for a period of 6 years at arate of approximately $0.37, $0.44 and $0.47, respectively, per sqm per day foryears 1-2, 3-4 and 5-6, respectively, of the lease period for the abovegroundspace; and approximately $3.66 per sqm per month for the underground space forthe full lease period. The Company was also required to pay a security depositin the amount of approximately $1.8 million and prepay part of the rentand fees for the last six months of the lease term in the amount ofapproximately $3.4 million upon lease inception on June 1, 2010. TheCompany may terminate all or part of the Lease by giving six months advancenotice; however, the Company would be required to pay penalties and additionalcompensation in the event of early termination. The Company has determined thatthe Lease qualifies as an operating lease. See Note 10 for future minimum lease payments under allnoncancelable operating leases.

 

**NOTE 8 - WARRANTY OBLIGATIONS AND OTHER GUARANTEES**

 

The Company provides a warranty on its equipment and handset sales fora period generally ranging from one to two years from the time of finalacceptance. At times, the Company has entered into arrangements to providelimited warranty services for periods longer than two years. The Companyprovides for the expected cost of product warranties at the time that revenueis recognized based on an assessment of past warranty experience and whenspecific circumstances dictate. The Company assesses the adequacy of itsrecorded warranty liability every quarter and makes adjustments to theliabilities if necessary. Specific warranty accruals are reversed upon theexpiration of the warranty period and are recorded as a reduction of cost ofnet sales. From time to time, the Company may be subject to additional costsrelated to non-standard warranty claims from its customers. If and when thisoccurs, the Company estimates additional accruals based on historicalexperience, communication with its customers and various assumptions that theCompany believes to be reasonable under the circumstances. Such additionalwarranty accruals are recorded in the period in which the additional costs areidentified.

 

Expirationsrecorded as a reduction of cost of net sales approximated $1.2 million and $1.8million for the three months ended June 30, 2010 and 2009, respectively,and $2.6 million and $2.3 million for the six months ended June 30, 2010and 2009, respectively and are included in the table below as benefit fromexpirations. The following table summarizes the activity related to warrantyobligations during the three and six months ended June 30, 2010 and 2009:

 
| ** **                                                                        | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                   | ** ** |
| Balance  at beginning of period                                                   |       | $                                    | 12,011     |                               | $          | 29,814 |   | $ | 16,150 |   | $ | 29,840 |   |
| Accruals  for warranties issued during the period (benefit from expirations), net |       | (1,324                               | )          | 7,251                              |       | (3,084 | ) | 10,833 |   |
| Settlements  made during the period                                               |       | (1,095                               | )          | (3,241                             | )          | (3,474 | ) | (6,849 | ) |
| Balance  at end of period                                                         |       | $                                    | 9,592      |                               | $          | 33,824 |   | $ | 9,592 |   | $ | 33,824 |   |

 

During the second quarter of 2009, the Company recorded a specialwarranty charge related to certain handsets sold to PCD LLC.  Under the Settlement Agreement with PCD LLC(see Note 3), the Company agreed to pay PCD LLC $8.4 million to settle certainPCD LLC customers’ warranty claims arising from the handsets sold to PCDLLC.  The $8.4 million claim settlementis included in the accruals for warranties issued during the three and sixmonths ended June 30, 2009 in the table above.

 

Certainof the Company’s sales contracts include provisions under which customers wouldbe indemnified by the Company in the event of, among other things, athird-party claim against the customer for intellectual property rightsinfringement related to the Company’s products. There are no limitations on the maximum potential future payments underthese guarantees.  The Company has notaccrued any amount in relation to these provisions as no such claims havedeveloped into assertable claims and the Company believes it has defensiblerights to the intellectual property embedded in its products.

 

**NOTE 9 - RESTRUCTURING COSTS**

 

***Restructuring Costs***

 

During the three months ended June 30, 2010,the Company recorded approximately $0.2 million net reversal of restructuringcharges recorded in previous periods. During the six months ended June 30,2010, the Company recorded approximately $7.3 million in restructuring charges.For the three and six months ended June 30, 2009, the Company recordedrestructuring charges of $27.8 million and $32.6 million, respectively. Thefollowing describes the Company’s restructuring initiatives.

 

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*2009 Restructuring Plan*

 

OnJune 9, 2009, the Board of Directors of the Company approved arestructuring plan (the “2009 Restructuring Plan”) designed to reduce theCompany’s operating costs. The 2009 Restructuring Plan includes a worldwidereduction in force of approximately 50% of the Company’s headcount, orapproximately 2,300 employees located primarily in China and the United Statesand, to a lesser degree, other international locations. During the three monthsended June 30, 2010, the Company recorded $1.4 million reversal ofrestructuring charges recorded in prior periods resulting from change inestimate. This change in estimate resulted from voluntary resignation ofemployees originally included in the restructuring plan as well as retention ofemployees originally identified in the plan to replace employees who voluntarilyresigned. Partially offsetting this reversal was approximately $0.9 millionadditional charges related to employees located in the United States and otherinternational locations as the Company continues to phase-out non-coreinternational operations. During the three months ended June 30, 2010, theCompany also recorded an additional $0.3 million of lease costs on exited facilities.During the six months ended June 30, 2010, the Company recordedrestructuring costs of approximately $6.9 million related to the 2009Restructuring Plan, net of approximately $1.7 million of reversal of chargesrecorded in prior periods. The restructuring costs for the six months ended June 30,2010 consist primarily of severance and benefits related to additionalemployees included in the Restructuring Plan in the first quarter of 2010,adjusted for change in estimate in the second quarter of 2010. During thesecond quarter of 2009, the Company recorded restructuring charges ofapproximately $25.9 million related to the 2009 Restructuring Plan, including$24.7 million for severance and benefits and $1.2 million related to theestimated loss on a lease obligation that expires in 2013. Total restructuringcosts recorded through June 30, 2010 related to the 2009 Restructuring**Plan approximated $46.8 million.

 

*2008 Restructuring Plan*

 

During fiscal 2008, the Company implemented a restructuring plan (the “2008Restructuring Plan”) primarily related to a global reduction in force acrossall functions and employee terminations at certain non-core operations whichthe Company was in the process of winding down. The total number of employeesaffected totaled approximately 750, including 350 in China, 200 in Korea and200 in other locations including the United States. During the three and sixmonths ended June 30, 2010, the Company recorded additional restructuringcosts related to the 2008 Restructuring Plan of approximately $0.1 millionand $0.4 million, respectively, for severance and benefit costs beingrecognized over the remaining service period for employees included in the 2008Restructuring Plan. During the three and six months ended June 30, 2009,the Company recorded $1.8 million and $6.4 million, respectively, inrestructuring charges related to the 2008 Restructuring Plan. Totalrestructuring costs recorded through June 30, 2010 related to the 2008 Restructuring**Plan approximated $19.8 million.

 

*2007 Restructuring Plan*

 

At June 30, 2010, the 2007 Restructuring Plan was complete.

 

The activity in the accrued restructuring balances related to the plansdescribed above was as follows for the six months ended June 30, 2010 and2009:

 
| ** **                             | ** ** | **Balance at  December 31,  2009** | ** ** | **Restructuring  Charges** | ** ** | **Cash Payments** | ** ** | **Non-cash  Settlement** | ** ** | **Balance at  June 30,  2010** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **(in thousands)**                      | ** ** |
| 2009  Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                                |       |
| Workforce  Reduction                   |       | $                                       | 16,939     |                       | $          | 6,480             |       | $                        | (14,710    | )                                   | $          | (1,613 | ) | $ | 7,096 |   |
| Lease  Costs                           |       | 1,516                                   |       | 375                        |       | (267              | )          | **—**               |       | 1,624                               |       |
| Other  Costs                           |       | 6                                       |       | —                     |       | —            |       | —                   |       | 6                                   |       |
| Total  2009 Restructuring Plan         |       | 18,461                                  |       | 6,855                      |       | (14,977           | )          | (1,613                   | )          | 8,726                               |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                                |       |
| 2008  Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                                |       |
| Workforce  Reduction                   |       | 2,526                                   |       | 466                        |       | (1,815            | )          | —                   |       | 1,177                               |       |
| Lease  Costs                           |       | 385                                     |       | —                     |       | (385              | )          | **—**               |       | —                              |       |
| Other  Costs                           |       | 30                                      |       | (30                        | )          | —            |       | —                   |       | —                              |       |
| Total  2008 Restructuring Plan         |       | 2,941                                   |       | 436                        |       | (2,200            | )          | —                   |       | 1,177                               |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                                |       |
| 2007  Restructuring Plan - Lease Costs |       | 305                                     |       | —                     |       | (305              | )          | —                   |       | —                              |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                                |       |
| Total                                  |       | $                                       | 21,707     |                       | $          | 7,291             |       | $                        | (17,482    | )                                   | $          | (1,613 | ) | $ | 9,903 |   |

 

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| ** **                             | ** ** | **Balance at  December 31,  2008** | ** ** | **Restructuring  Charges** | ** ** | **Cash Payments** | ** ** | **Non-cash  Settlement** | ** ** | **Balance at   June 30,  2009** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **(in thousands)**                      | ** ** |
| 2009  Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                            |       |
| Workforce  Reduction                   |       | $                                       | —     |                       | $          | 24,715            |       | $                        | (1,070     | )                               | $          | (417 | ) | $ | 23,228 |   |
| Lease  Costs                           |       | —                                  |       | 1,223                      |       | —            | ** ** | **—**               |       | 1,223                           |       |
| Other  Costs                           |       | —                                  |       | 7                          |       | (7                | )          | —                   |       | —                          |       |
| Total  2009 Restructuring Plan         |       | —                                  |       | 25,945                     |       | (1,077            | )          | (417                     | )          | 24,451                          |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                            |       |
| 2008  Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                            |       |
| Workforce  Reduction                   |       | 7,976                                   |       | 5,377                      |       | (7,569            | )          | (380                     | )          | 5,404                           |       |
| Lease  Costs                           |       | 249                                     |       | 1,114                      |       | (467              | )          | **—**               |       | 896                             |       |
| Other  Costs                           |       | 498                                     |       | (64                        | )          | (247              | )          | —                   |       | 187                             |       |
| Total  2008 Restructuring Plan         |       | 8,723                                   |       | 6,427                      |       | (8,283            | )          | (380                     | )          | 6,487                           |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                            |       |
| 2007  Restructuring Plan - Lease Costs |       | 788                                     |       | 204                        |       | (321              | )          | —                   |       | 671                             |       |
|                                   |       |                                    |       |                       |       |              |       |                     |       |                            |       |
| Total                                  |       | $                                       | 9,511      |                       | $          | 32,576            |       | $                        | (9,681     | )                               | $          | (797 | ) | $ | 31,609 |   |

 

Themajority of the remaining cash expenditures related to the 2009 and 2008Restructuring Plans are expected to be paid in 2010. The remaining liabilitiesrelated to lease obligations are expected to be settled over the remaininglease term. The Company expects to incur additional restructuring charges in2010 as it continues to execute the 2009 and 2008 Restructuring Plans.

 

**NOTE 10 - COMMITMENTS AND CONTINGENCIES**

 

***Leases***

 

The Company leases certain facilities undernoncancelable operating leases that expire at various dates through 2016.  In connection with the Sale LeasebackAgreement, the Company entered into a lease with respect to the leaseback of aportion of the Hangzhou facility, see Note 7. The leaseback commenced on June 1, 2010 and the contractualobligations related to the Hangzhou facility lease are included in the tablebelow. Future minimum lease payments under all noncancelable operating leaseswith an initial term in excess of one year as of June 30, 2010 are asfollows:

 

| **Twelve  months ending June 30:** | ** ** | **Amount**          | ** ** |
|-----------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **(in  thousands)** | ** ** |
| 2011                                    |       | $                   | 16,666     |   |
| 2012                                    |       | 14,246              |       |
| 2013                                    |       | 14,669              |       |
| 2014                                    |       | 13,861              |       |
| 2015                                    |       | 14,273              |       |
| Thereafter                              |       | 7,262               |       |
| Total                                   |       | $                   | 80,977     |   |

 

***Litigation***

 

*Securities Class Action Litigation*

 

Beginningin October 2004, several shareholder class action lawsuits allegingfederal securities violations were filed against the Company and variousofficers and directors of the Company. The actions have been consolidated inUnited States District Court for the Northern District of California under thecaption *In re UTStarcom, Inc.Securities Litigation*, Master File No. C-04-4908-JW (PVT). Thelead plaintiffs in the case filed a First Amended Consolidated Complaint onJuly 26, 2005. The First Amended Complaint 

 

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allegedviolations of the Securities Exchange Act of 1934, and was brought on behalf ofa putative class of shareholders who purchased the Company’s stock afterApril 16, 2003 and before September 20, 2004. On April 13, 2006,the lead plaintiffs filed a Second Amended Complaint adding new allegations andextending the end of the class period to October 6, 2005. In addition tothe Company defendants, the plaintiffs are also suing Softbank. Plaintiffs’complaint seeks recovery of damages in an unspecified amount.

 

OnJune 2, 2006, the Company and the individual defendants filed a motion todismiss the Second Amended Complaint. On March 21, 2007, the Court granteddefendants’ motion and dismissed plaintiffs’ Second Amended Complaint. TheCourt granted plaintiffs leave to file a Third Amended Complaint, whichplaintiffs filed on May 25, 2007. On July 13, 2007, the Company andthe individual defendants filed a motion to dismiss and a motion to strike theThird Amended Complaint. On March 14, 2008, the Court granted defendants’motion and dismissed plaintiffs’ Third Amended Complaint. The Court grantedplaintiffs leave to file a Fourth Amended Complaint, which plaintiffsfiled on May 14, 2008. On June 13, 2008, consistent with the Court’sMarch 14, 2008 dismissal order, the Company and the individual defendantsfiled objections to the form and content of the Fourth Amended Complaint. OnJuly 24, 2008, the Court overruled the objections. On September 8,2008, the Company and the individual defendants filed a motion to dismiss and amotion to strike certain allegations from the Fourth Amended Complaint. OnMarch 27, 2009, the Court denied defendants’ motion to dismiss and granteddefendants’ motion to strike.

 

Plaintiffs,the Company and the individual defendants have signed and filed a stipulationof settlement providing for the settlement of the case. Defendant Softbank isnot a party to the settlement. The settlement is contingent on approval by thecourt. Under the terms of the settlement, the Company’s and individualdefendants’ insurers would pay the full amount of the settlement. On May 13,2010, the Court granted preliminary approval of the settlement and scheduled afinal approval hearing for August 30, 2010.  There is no assurance that the settlementwill receive final approval. Moreover, because Defendant Softbank is not aparty to this settlement, discovery and motion practice are continuing.  No trial date has been set.  We have continued to incur costs with regardto discovery in connection with the ongoing litigation between the non-settlingparties.  Accordingly, the Company isunable at this time to estimate the effects of this lawsuit on the Company’sfinancial position, results of operations, or cash flows.

 

*Shareholder Derivative Litigation*

 

OnNovember 17, 2006, a shareholder derivative complaint captioned *Ernesto Espinoza v. Ying Wu et al.*, CaseNo. RG06298775, was filed against certain of the Company’s current andformer officers and directors in the Superior Court of the County of Alameda,California. The complaint alleges that the individual defendants, among otherthings, breached their duties, were unjustly enriched, and violated theCalifornia Corporations Code in connection with the timing of stock optiongrants. The complaint names the Company as a nominal defendant and seeksunspecified monetary damages against the individual defendants and variousforms of injunctive relief. On February 2, 2007, the Company and theindividual defendants filed demurrers against the complaint. On April 11,2007, the Court sustained the individual defendants’ demurrer, overruled theCompany’s demurrer, ordered the plaintiff to file an amended complaint, andordered the Company to answer the original complaint. The plaintiff filed anamended complaint and the Company has filed an answer to the amended complaint.On August 21, 2007, the individual defendants filed demurrers against theamended complaint. The Court sustained the individual defendants’ demurrers andordered the plaintiff to file a second amended complaint. OnSeptember 26, 2008, plaintiff filed his second amended complaint. On November 21,2008, the Company and the individual defendants filed demurrers against thesecond amended complaint. On February 27, 2009, the Court sustained theCompany’s demurrer and ordered the plaintiff to file a third amendedcomplaint. On March 20, 2009, plaintiff filed his third amended complaint.On May 5, 2009, the Company and the individual defendants filed demurrersagainst the third amended complaint. On August 11, 2009, the Courtsustained the Company’s demurrer without leave to amend. On October 13,2009, plaintiffs filed a notice of appeal.

 

Theparties have signed a binding Memorandum of Understanding providing for thesettlement of the case. The settlement requires completion of final settlementdocumentation. The settlement is contingent on approval by the court. Under theterms of the settlement, the individual defendants’ insurer would pay the fullamount of the monetary portion of the settlement. On April 15, 2010,plaintiff filed a Request for Dismissal without prejudice with the Court of Appeals.Pursuant to the Request, the appeal may be reinstated if the Superior Courtdoes not grant preliminary or final approval of the settlement. There is noassurance that the settlement will receive court approval. Accordingly, theCompany is unable at this time to estimate the effects of this lawsuit on theCompany’s financial position, results of operations, or cash flows.

 

*IPO Allocation*

 

On October 31, 2001, acomplaint was filed in United States District Court for the Southern Districtof New York against the Company, some of the Company’s directors and officersand various underwriters for the Company’s initial public offering.Substantially similar actions were filed concerning the initial publicofferings for more than 300 different issuers, and the cases were coordinatedas *In re Initial Public Offerings SecuritiesLitigation*, Civil Action No. 01-CV-9604. Plaintiffs allegeviolations of the Securities Act of 1933 and the Securities Exchange Act of1934 through undisclosed improper underwriting practices concerning the 

 

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allocation of IPO shares inexchange for excessive brokerage commissions, agreements to purchase shares athigher prices in the aftermarket and misleading analyst reports. Plaintiffsseek unspecified damages on behalf of a purported class of purchasers of theCompany’s common stock between March 2, 2000 and December 6, 2000.The Company’s directors and officers have been dismissed without prejudicepursuant to a stipulation. On February 19, 2003, the Court granted in partand denied in part a motion to dismiss the claims brought by defendants,including the Company. The order dismissed all claims against the Companyexcept for a claim brought under Section 11 of the Securities Act of 1933,which alleges that the registration statement filed in accordance with the IPOwas misleading.

 

The parties have reached aglobal settlement of the litigation. Under the settlement the insurers will paythe full amount of the settlement share allocated to the Company, and theCompany will bear no financial liability. The Company, as well as the officerand director defendants who were previously dismissed from the action pursuantto tolling agreements, will receive complete dismissals from the case. OnOctober 5, 2009, the Court entered an Opinion and Order granting finalapproval of the settlement. Certain objectors have filed appeals. If for anyreason the settlement does not become effective, the Company believes it hasmeritorious defenses to the claims and intends to defend the action vigorously.

 

*Other Litigation*

 

TheCompany is a party to other litigation matters and claims that are normal inthe course of operations, and while the results of such litigation matters andclaims cannot be predicted with certainty, management of the Company believesthat the final outcome of such matters will not have a material adverse impacton the Company’s financial position, results of operations or cash flows.

 

***Letters of credit***

 

TheCompany issues standby letters of credit primarily to support internationalsales activities outside of China and in support of purchase commitments. Whenthe Company submits a bid for a sale, often the potential customer will requirethat the Company issue a bid bond or a standby letter of credit to demonstrateits commitment through the bid process. In addition, the Company may berequired to issue standby letters of credit as guarantees for advance customerpayments upon contract signing or performance guarantees. The standby lettersof credit usually expire without being drawn by the beneficiary thereof.Finally, the Company may issue commercial letters of credit in support ofpurchase commitments. At June 30, 2010, the Company had short-termrestricted cash of $22.2 million, and had long-term restricted cash of $12.1million included in other long-term assets. The restricted cash amountsprimarily collateralize the Company’s outstanding letters of creditapproximating $25.4 million at June 30, 2010.

 

**NOTE 11 — STOCK INCENTIVE PLAN**

 

Duringthe six months ended June 30, 2010, the Company granted equity awardsprimarily consisting of restricted stock and restricted stock units (“RSUs”),and to a much lesser extent, option awards. Such awards generally vest over aperiod of one to four years from the date of grant. Restricted stock has thevoting rights of common stock and the shares underlying restricted stock areissued and outstanding. There were no option awards during the three monthsended June 30, 2010.

 

InFebruary 2008, the Compensation Committee granted 1,073,333performance-based awards to certain senior executive officers. During the thirdquarter of 2008, 233,333 of these contingently issuable shares were forfeitedas a result of employee terminations. On October 6, 2008, the performancerequirements with respect to 60,000 of these contingently issuable shares wereeliminated, these restricted stock units have a fair value of $2.69 per share,which equals the closing price of the Company’s common stock on the NASDAQStock Market on the measurement date of October 6, 2008. OnFebruary 18, 2009, the Committee determined, based on the Company’s andeach executive officer’s level of performance during the Company’s 2008 fiscalyear, that an additional 367,500 shares underlying the previously grantedperformance-based restricted stock units had been earned, each of theseperformance-based restricted stock units has a fair value of $1.27 per share,which equals the closing price of the Company’s common stock on the NASDAQStock Market on the measurement date of February 18, 2009. Theserestricted stock units vested 50% on February 27, 2009 and 50% vested onFebruary 26, 2010.

 

InFebruary 2009, the Compensation Committee also granted to senior executiveofficers 313,293 restricted stock units with a four-year vesting and anadditional 626,586 performance-based awards, subject to the attainment of goalsdetermined by the Compensation Committee. The Company may be subject tovariable levels of expense related primarily to the varying levels ofperformance, as well as for fluctuations in the Company’s stock price as theseawards are “marked to market” periodically until the earlier of i) the date ofthe Compensation Committee’s determination on performance or ii) the date theywere deemed fully vested as a result of involuntary termination. Of the 626,586performance-based awards granted in February 2009, 401,859 awards weredeemed fully vested during fiscal 2009 as a result of involuntary terminations,prior to the annual Compensation Committee’s evaluation of performance. At itsmeeting on February 18, 2010, the Compensation Committee evaluated theperformance against established objectives of the remaining 224,727performance-based awards and determined 148,769 RSUs were earned.

 

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InFebruary 2010, the Compensation Committee decided no annual grants ofstock-based awards would be made to existing senior executives for the 2010year in light of the Company’s previously announced planned changes inmanagement.

 

Toreduce the Company’s long term cost structure and manage shareholder dilution,the Company has elected to terminate the ESPP program effective May 15,2009. The cancellation has been accounted for as a settlement of shares for noconsideration. This resulted in an immediate expense recognition in the firstquarter of 2009 of $1.2 million associated with the unrecognized compensationfor canceled purchase periods of the 24-month offering.

 

Duringthe quarter ended June 30, 2009, an adjustment was made to increase theestimated forfeiture rate for equity awards of employees that are beingincluded in the 2009 Restructuring Plan as the awards are not expected toultimately vest.  The resulting neteffect of the forfeiture rate adjustment was a decrease to the Company’sstock-based compensation expense for the three months ended June 30, 2009by approximately $0.4 million.

 

Thetotal stock-based compensation expense, including the ESPP expense describedabove, recognized in the condensed consolidated statement of operations for thethree months and six months ended June 30, 2010 and 2009 was as follows:

 
| ** **                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                        | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                          | ** ** | **(in thousands)**                         | ** ** |
| Cost of net sales                   |       | $                                               | 36         |                                          | $          | 60 |   | $ | 93 |   | $ | 491 |   |
| Selling, general and administrative |       | 1,079                                           |       | 1,617                                         |       | 2,480 |   | 4,056 |   |
| Research and development            |       | 153                                             |       | 186                                           |       | 361 |   | 1,083 |   |
| Restructuring                       |       | 419                                             |       | 417                                           |       | 1,613 |   | 797 |   |
| Total                               |       | $                                               | 1,687      |                                          | $          | 2,280 |   | $ | 4,547 |   | $ | 6,427 |   |

 

Optionactivity as of June 30, 2010 and changes during the six months endedJune 30, 2010 were as follows:

 
| ** **                                  | ** ** | **Number of  shares  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**                 | ** ** | ** **                             | ** ** |
| Options outstanding, December 31, 2009 |       | 5,750                              |       | $                                      | 8.98       |   |
| Options granted                             |       | 100                                |       | $                                      | 2.18       |   |
| Options exercised                           |       | (2                                 | )          | $                                      | 2.82       |   |
| Options forfeited or expired                |       | (699                               | )          | $                                      | 11.05      |   |
| Options outstanding, June 30, 2010     |       | 5,149                              |       | $                                      | 8.57       |   |

 

Nonvestedrestricted stock and restricted stock units as of June 30, 2010, andchanges during the six months ended June 30, 2010, were as follows:

 
| ** **                            | ** ** | **Shares**         | ** ** | **Weighted  average grant  date fair value** | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **(in thousands)** | ** ** | ** **                                   | ** ** |
| Nonvested at December 31, 2009   |       | 4,030              |       | $                                            | 2.38       |   |
| Granted                               |       | 1,230              |       | $                                            | 2.28       |   |
| Vested                                |       | (1,593             | )          | $                                            | 2.35       |   |
| Forfeited                             |       | (430               | )          | $                                            | 2.16       |   |
| Total nonvested at June 30, 2010 |       | 3,237              |       | $                                            | 2.39       |   |

 

AtJune 30, 2010, there was approximately $5.8 million of total unrecognizedcompensation cost not including forfeitures, related to non-vested stockoptions, restricted stock and restricted stock units, as measured, which theCompany expects to recognize over a weighted-average period of 2.4 years. Foradditional information regarding the Company’s stock-based compensation plans,see the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009.

 

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**NOTE 12 - INCOME TAXES**

 

Asof December 31, 2009, the Company had gross unrecognized tax benefits ofapproximately $90.6 million and had certain deferred tax assets and thefederal tax benefit of state income tax items totaling $77.8 million. Ifrecognized, the portion of gross unrecognized tax benefits that would decreasethe provision for income taxes and decrease the Company’s net loss isapproximately $12.8 million.

 

Asof June 30, 2010, the Company had gross unrecognized tax benefits ofapproximately $92.4 million and had certain deferred tax assets and thefederal tax benefit of state income tax items totaling $78.4 million. Ifrecognized, the portion of gross unrecognized tax benefits that would decreasethe provision for income taxes and decrease the Company’s net loss isapproximately $14.0 million.

 

TheCompany recognizes interest expense and penalties related to the aboveunrecognized tax benefits within income tax expense. The Company had accruedinterest and penalties of approximately $3.1 million as of December 31,2009 and approximately $3.3 million as of June 30, 2010.

 

TheCompany is subject to taxation in the U.S. federal jurisdiction andvarious U.S. state and foreign jurisdictions. The Company is under auditby the taxing authorities in China on a recurring basis. The materialjurisdictions that the Company is subject to examination are in theUnited States and China. The Company’s tax years for 1999 through 2009 arestill open for examination in China. The Company’s tax years for 2006 through2009 are still open for examination in the United States. The Companybelieves that it is reasonably possible that the amount of gross unrecognizedtax benefits related to the resolution of income tax matters could be reducedby approximately $1.0 million during the next 12 months as income tax auditsare settled and statute of limitations expire. The portion of the $1.0 millionof gross unrecognized tax benefits that would decrease the provision for incometaxes and increase the Company’s net income is approximately $0.7 million.

 

FASBASC 740-10 establishes criteria for recognizing or continuing to recognize onlymore-likely-than-not tax positions, which may result in income tax expensevolatility in future periods. While the Company believes that it has adequatelyprovided for all tax positions, amounts asserted by taxing authorities could begreater than the Company’s accrued position. Accordingly, additional provisionson income tax related matters could be recorded in the future as revisedestimates are made or the underlying matters are settled or otherwise resolved.

 

Inestablishing its deferred income tax assets and liabilities, the Company makesjudgments and interpretations based on the enacted tax laws and published taxguidance applicable to its operations. The Company records deferred tax assetsand liabilities and evaluates the need for valuation allowances to reduce thedeferred tax assets to realizable amounts. The likelihood of a material changein the Company’s expected realization of these assets is dependent on futuretaxable income and its ability to use foreign tax credit carryforwardsand carrybacks.

 

Incometax benefit was $0.5 million for the three months ended June 30, 2010compared to income tax expense of $4.7 million for the three months ended June 30,2009.  In the second quarter of 2010, aone-time tax benefit of $0.9 million was recorded mainly related to the releaseof previously established valuation allowance on deferred tax assets in Taiwanwhich was offset by foreign tax expenses. Income tax expense was$1.8 million for the six months ended June 30, 2010 compared to $6.5million for the six months ended June 30, 2009. The decrease in income taxexpense in the six month ended June 30, 2010 compared with six month endedJune 30, 2009 was primarily due to the decreased ordinary income injurisdictions where the Company has been profitable and a one-time tax expenseof $1.4 million in the three month ended June 30, 2009 related to establishingof valuation allowance on net deferred tax assets in Korea.

 

For2010 and 2009, the Company has not provided any tax benefit on any forecastedlosses incurred and tax credits generated in the United States and othercountries, because management believes that it is more likely than not that thetax benefit associated with these losses will not be realized. Also, for 2010and 2009, the Company continues to accrue tax expense in jurisdictions wherethe Company has been historically profitable. Estimates of the annual effectivetax rate at the end of the interim periods are based on evaluations of possiblefuture events and transactions and may be subject to subsequent refinement orrevision.

 

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**NOTE 13 - OTHER INCOME (EXPENSE), NET**

 

Otherincome (expense), net for the three and six months ended June 30, 2010 and2009, respectively were comprised of the following:

 
| ** **                                            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                            | ** ** | ** **                           | ** ** | **(in thousands)**                 | ** ** | ** ** | ** ** |
| Other-than-temporary  impairment of equity investment |       | $                                    | —     |                               | $          | (3,798 | ) | $ | — |   | $ | (3,798 | ) |
| Foreign  exchange gains (losses)                      |       | (4,938                               | )          | 9,003                              |       | (851 | ) | 1,745 |   |
| Settlement  with MRV Communications (1)               |       | 58                                   |       | —                             |       | 481 |   | — |   |
| Other                                                 |       | 113                                  |       | 224                                |       | 470 |   | 268 |   |
| Total                                                 |       | $                                    | (4,767     | )                                  | $          | 5,429 |   | $ | 100 |   | $ | (1,785 | ) |

 

----

(1)          Previously, the Company held an 8% ownershipinterest in Fiberxon, which was acquired by MRV Communications (“MRV”) in 2007.In connection with the acquisition, Fiberxon shareholders received cash andstock as well as the right to potential deferred consideration. In December 2009,MRV entered into a settlement agreement for dismissal of legal proceedings betweenMRV and the former shareholders of Fiberxon regarding the amount of contingentconsideration owed related to its acquisition. Proceeds received in the firstquarter of 2010 represented the Company’s proportionate share of the settlementamounts.

 

**NOTE 14 - SEGMENT REPORTING**

 

Inthe fourth quarter of 2009, the Company substantially completed the wind-downof its handset business. Except for sales relating to inventory clearing, theCompany does not expect any significant handset revenue in 2010. Beginning onJanuary 1, 2010, the Company integrated its Services Segment into itsMultimedia Communications and Broadband Infrastructure segments based onproducts for which services are performed. Effective January 1, 2010, thenew reporting segments are as follows:

 

·                  MultimediaCommunications—Focused on development and market opportunities in IPTVsolutions and Wireless infrastructure technologies, including related servicesrevenue.

 

·                  BroadbandInfrastructure—Focused on our world class portfolio of broadband products,including related services revenue.

 

·                  Handsets—Focusedon mobile phone business including PAS and CDMA handset market, as well as datacards markets. Handset sales to PCD LLC, which commenced after theJuly 1, 2008 sale of PCD, are included in this segment.

 

TheCompany’s chief operating decision makers make financial decisions based oninformation it receives from its internal management system and currentlyevaluates the operating performance of and allocates resources to the reportingsegments based on segment revenue and gross profit. Cost of sales and directexpenses in relation to production are assigned to the reporting segments. Theaccounting policies used in measuring segment assets and operating performanceare the same as those used at the consolidated level.

 

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Summarizedbelow are the Company’s segment net sales, gross (loss) profit and segmentmargin for the three and six months ended June 30, 2010 and 2009 based onthe current reporting segment structure. The Company has reclassified itspreviously reported segment information for the three and six months ended June 30,2009 to conform to the current segment presentation.

 
| ** **                 | ** ** | **Three  months ended June 30,**   | ** ** | **Six  months ended June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2010**                                | ** ** | **% of  net  sales**                | ** ** | **2009** | ** ** | **% of  net  sales** | ** ** | **2010** | ** ** | **% of  net  sales** | ** ** | **2009** | ** ** | **% of  net  sales** | ** ** |
| *** ***               |       | **(in  thousands, except percentages)** |       |
| ***Net Sales by Segment*** |       |                                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia  Communications |       | $                                       | 46,986     |                                | 64         | % | $ | 47,993 |   | 60 | % | $ | 89,311 |   | 58 | % | $ | 90,476 |   | 45 | % |
| Broadband Infrastructure   |       | 24,681                                  |       | 34                                  | %          | 18,986 |   | 24 | % | 59,235 |   | 38 | % | 39,782 |   | 20 | % |
| Handsets                   |       | 1,498                                   |       | 2                                   | %          | 13,184 |   | 16 | % | 5,466 |   | 4 | % | 69,245 |   | 35 | % |
|                       |       | $                                       | 73,165     |                                | 100        | % | $ | 80,163 |   | 100 | % | $ | 154,012 |   | 100 | % | $ | 199,503 |   | 100 | % |

 
| *** ***                         |   | **Three  months ended June 30,**   |       | **Six  months ended June 30,** |       |
|--------------------------------------|--------|-----------------------------------------|------------|-------------------------------------|------------|
| *** ***                         |   | ** **                              | ** ** | **Gross**                           | ** ** | ** ** | ** ** | **Gross** |   |   |   | **Gross** |   |   |   | **Gross** |   |
| *** ***                         |   | **2010**                                | ** ** | **Profit  %**                       | ** ** | **2009** | ** ** | **Profit  %** |   | **2010** | ** ** | **Profit  %** | ** ** | **2009** | ** ** | **Profit  %** |   |
| *** ***                         |   | **(in  thousands, except percentages)** |       |
| ***Gross (loss) profit by Segment*** |   |                                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia  Communications           |   | $                                       | 12,551     |                                | 27         | % | $ | 15,835 |   | 33 | % | $ | 28,571 |   | 32 | % | $ | 28,703 |   | 32 | % |
| Broadband Infrastructure             |   | 8,222                                   |       | 33                                  | %          | 2,548 |   | 13 | % | 17,845 |   | 30 | % | 5,030 |   | 13 | % |
| Handsets                             |   | 2,099                                   |       | 140                                 | %          | (34,221 | ) | (260 | )% | 3,665 |   | 67 | % | (27,919 | ) | (40 | )% |
|                                 |   | $                                       | 22,872     |                                | 31         | % | $ | (15,838 | ) | (20 | )% | $ | 50,081 |   | 33 | % | $ | 5,814 |   | 3 | % |

 
| ** **                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(in thousands)**                   | ** ** |
| ***Segment Margin and Operating Loss*** |       |                                 |       |                               |       |   |   |   |   |
| Multimedia  Communications              |       | $                                    | 6,052      |                               | $          | 5,430 |   | $ | 14,253 |   | $ | 6,063 |   |
| Broadband  Infrastructure               |       | 4,964                                |       | (1,652                             | )          | 11,508 |   | (4,017 | ) |
| Handsets                                |       | 1,808                                |       | (38,702                            | )          | 2,999 |   | (38,466 | ) |
| Total  segment margin                   |       | 12,824                               |       | (34,924                            | )          | 28,760 |   | (36,420 | ) |
| General  and Corporate                  |       | (17,920                              | )          | (50,514                            | )          | (52,615 | ) | (107,873 | ) |
| Operating  Loss                         |       | $                                    | (5,096     | )                                  | $          | (85,438 | ) | $ | (23,855 | ) | $ | (144,293 | ) |

 

Salesare attributed to a geographical area based upon the location of the customer.Sales data by geographical area are as follows:

 
| *** ***              |   | **Three months ended June 30,**    | ** ** | **Six months ended June 30,** |       |
|---------------------------|--------|-----------------------------------------|------------|------------------------------------|------------|
| *** ***              |   | ** **                              | ** ** | **% of net**                       | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** |   |
| *** ***              |   | **2010**                                | ** ** | **sales**                          | ** ** | **2009** | ** ** | **sales** | ** ** | **2010** | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** |   |
| *** ***              |   | **(in  thousands, except percentages)** |       |
| ***Net Sales by region*** |   |                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| United  States            |   | $                                       | 2,450      |                               | 3          | % | $ | 1,731 |   | 2 | % | $ | 5,903 |   | 4 | % | $ | 42,990 |   | 22 | % |
| China                     |   | 43,211                                  |       | 59                                 | %          | 52,531 |   | 66 | % | 83,186 |   | 54 | % | 103,749 |   | 52 | % |
| Japan                     |   | 11,137                                  |       | 15                                 | %          | 6,505 |   | 8 | % | 22,233 |   | 14 | % | 13,042 |   | 7 | % |
| India                     |   | 6,555                                   |       | 9                                  | %          | 9,536 |   | 12 | % | 12,353 |   | 8 | % | 19,120 |   | 10 | % |
| Philippines               |   | 2,990                                   |       | 4                                  | %          | 2,091 |   | 3 | % | 15,674 |   | 10 | % | 2,896 |   | 1 | % |
| Other                     |   | 6,822                                   |       | 10                                 | %          | 7,769 |   | 9 | % | 14,663 |   | 10 | % | 17,706 |   | 8 | % |
| Total  net sales          |   | $                                       | 73,165     |                               | 100        | % | $ | 80,163 |   | 100 | % | $ | 154,012 |   | 100 | % | $ | 199,503 |   | 100 | % |

 

Long-livedassets, consisting of property, plant and equipment, by geographical area areas follows:

 
| ** **               | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **               | ** ** | **(in thousands)** | ** ** |
| United  States           |       | $                  | 123        |                  | $          | 170 |   |
| China                    |       | 4,434              |       | 129,746               |       |
| Other                    |       | 629                |       | 696                   |       |
| Total  long-lived assets |       | $                  | 5,186      |                  | $          | 130,612 |   |

 

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**NOTE 15 - CREDIT RISK AND CONCENTRATION**

 

AtJune 30, 2010, the Company’s accounts receivable balance included amountsdue from Philippine Long Distance Telephone Company representing approximately21%, of the Company’s total accounts receivable, net of allowances for doubtfulaccounts. At December 31, 2009, the Company’s accounts receivable balanceincluded amounts due from China Telecom, JiangSu Branch representingapproximately 11% of the Company’s total accounts receivable, net of allowancesfor doubtful accounts.

 

Thefollowing customers accounted for 10% or more of the Company’s net sales:

 
| ** **                                   | ** ** | **For the three**     | ** ** | **For the six**   | ** ** |
|----------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **months ended**      | ** ** | **months ended**  | ** ** |
| ** **                                   | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** |
| ** **                                   | ** ** | **(% of  net sales)** | ** ** |
| **2010**                                     | ** ** | ** **            | ** ** | ** **        | ** ** |
| Softbank  and affiliates                     |       | 10                    | %          | 12                | %          |
| Philippines  Long Distance Telephone Company |       | 4                     | %          | 10                | %          |
|                                         |       |                  |       |              |       |
| **2009**                                     | ** ** | ** **            | ** ** | ** **        | ** ** |
| PCD  LLC                                     |       | —                |       | 17                | %          |

 

Approximately55% and 37% of the Company’s net sales during the three months ended June 30,2010 and 2009, respectively, and approximately 49% and 29% of the Company’s netsales during the six months ended June 30, 2010 and 2009, respectively,were to entities affiliated with the government of China. Accounts receivablebalances from these China government affiliated entities or state ownedenterprises were $40.4 million and $45.7 million as of June 30, 2010 andDecember 31, 2009, respectively. The Company extends credit to itscustomers in China generally without requiring collateral. With respect toglobal sales outside of China, the Company may require letters of credit fromits customers. The Company monitors its exposure for credit losses andmaintains allowances for doubtful accounts.

 

Approximately59% and 66% of the Company’s sales for the three months ended June 30,2010 and 2009, respectively, and approximately 54% and 52% of the Company’s netsales during the six months ended June 30, 2010 and 2009, respectivelywere made in China. Accordingly, the political, economic and legal environment,as well as the general state of China’s economy may influence the Company’sbusiness, financial condition and results of operations. The Company’soperations in China are subject to special considerations and significant risksnot typically associated with companies in the United States. These includerisks associated with, among others, the political, economic and legalenvironments and foreign currency exchange. The Company’s results may beadversely affected by, among other things, changes in the political, economicand social conditions in China, and by changes in governmental policies withrespect to laws and regulations, changes in China’s telecommunications industryand regulatory rules and policies, anti-inflationary measures, currencyconversion and remittance abroad, and rates and methods of taxation.

 

**NOTE 16 - RELATED PARTY TRANSACTIONS**

 

*Softbank and affiliates*

 

TheCompany recognizes revenue with respect to sales of telecommunicationsequipment to affiliates of Softbank, a significant stockholder of the Company.Softbank offers ADSL coverage throughout Japan, which is marketed under thename “YAHOO! BB.” The Company supports Softbank’s fiber-to-the-home servicethrough sales of its carrier class GEPON product as well as its NetRingÔ product. Inaddition, the Company supports Softbank’s new internet protocol television (“IPTV”),through sales of its RollingStreamÔ product. During the threeand six months ended June 30, 2010 and 2009, the Company recognizedrevenue and related cost of net sales for sales of telecommunications equipmentand services to affiliates of Softbank as follows:

 
| ** **         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|               |       | **(in  thousands)**                  |       |
|               |       | ** **                           |       |
| Net  sales         |       | $                                    | 10,838     |                               | $          | 5,033 |   | $ | 21,512 |   | $ | 11,198 |   |
| Cost  of net sales |       | 3,874                                |       | 2,841                              |       | 8,968 |   | 6,758 |   |
| Gross  profit      |       | $                                    | 6,964      |                               | $          | 2,192 |   | $ | 12,544 |   | $ | 4,440 |   |

 

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Grossprofit as a percentage of net sales fluctuations are expected and generallyresult from changes in product mix. In the three and six months ended June 30,2010, gross profit as a percentage of net sales also benefited approximately $2.4million from the release of previously deferred revenue carve-out for potentialpenalty and cancellation penalties. Included in accounts receivable at June 30,2010 and December 31, 2009 were $7.6 million and $5.5 million,respectively, related to these transactions.

 

Salesto Softbank include a three year service period and a penalty clause if productfailure rates exceed a certain level over a seven year period. As of June 30,2010 and December 31, 2009, the Company’s customer advance balance relatedto Softbank agreements was $0.2 million and $0.2 million, respectively. Thecurrent deferred revenue balance related to Softbank was $1.2 million and $1.4million as of June 30, 2010 and December 31, 2009, respectively. Asof June 30, 2010, the Company’s noncurrent deferred revenue balancerelated to Softbank was $7.8 million compared to $8.8 million as ofDecember 31, 2009.

 

Asdiscussed in Note 6, the Company has a $1.1 million investment in SBI.Affiliates of Softbank have a controlling interest in SBI.

 

Asof June 30, 2010, Softbank beneficially owned approximately 11% of theCompany’s outstanding stock.

 

**NOTE 17—VARIABLE INTEREST ENTITIES**

 

InOctober 2008, the Company made an investment in Turnstone EnvironmentTechnologies LLC (“TET”), a Delaware limited liability company formed forthe purpose of licensing and developing energy efficient renewable coolingsolutions for cell towers in the telecommunications industry. In exchange for5,180,788 Series A Preferred units representing approximately 22% ofvoting interest in TET and 500,000 Series A Preferred warrants at anexercise price of $0.9265 per unit and with an expiration term of 5 years,the Company contributed $4.8 million in cash. The Company currently doesnot have any representation on TET’s board of directors nor the ability tocontrol the management and operation decisions of TET. The operations of TETare in the development stage and the entity is actively seeking additionalinvestors. The Company does not intend to and has no obligation to fund futurelosses or make additional contributions other than its initial investment. Asof December 31, 2009 and 2008, TET was in effect entirely funded by theCompany’s initial investment as the capital contributions of the other currentinvestors were not substantive. The Company determined that the venture was avariable interest entity and the Company was the primary beneficiary because itwas exposed to the majority of the variable interest entity’s expected losses.Therefore, the Company was required to consolidate TET’s financial statementsunder ASC 810-10-15, Variable Interest Entities**Subsections.Beginning January 1, 2009, the assets, liabilities and operating resultsof TET were consolidated into the Company’s balance sheet and statement ofoperations. TET had no revenues and $3.9 million in expenses for the year endedDecember 31, 2009, of which $3.1 million relates to amortization of anacquired exclusive license to utilize solar cooling technology. The Companyinitially determined the appropriate amortization period for the exclusivelicense was to match the estimated revenue generation period from sale ofproducts utilizing the licensed technology. In the third quarter of 2009, as aresult of the delay in revenue generation, the Company changed its estimate toa systematic and rational allocation of straight-line amortization expensebased on the term of the technology license. TET’s operations are notconsidered to be integral to the Company’s major operating activities. As such,all income and expenses from TET’s operations, which are includable in theCompany’s income statement as a result of the application of ASC 810-10-15,Variable Interest Entities**Subsections,have been classified within operating expense.

 

In the fourth quarter of2009, the Company evaluated several fourth quarter events, including thecontinued unsuccessful efforts of TET to secure additional funding; thecontinued unsuccessful efforts of TET to locate a suitable local manufacturingpartner, TET’s continued need to amend and extend payment due dates of theacquired exclusive license to utilize solar cooling technology and thedeparture of a key employee of TET. The Company determined that the combinedeffect of these events, as well as others, was a triggering event for animpairment analysis of TET’s long-lived assets. The Company furthereddetermined that the estimated cash flows from TET were not sufficient torecover the carrying value of TET’s net assets. As a result, the Companyrecorded a $0.9 million impairment charge, included within operating expense,equal to its initial cost of investment of $4.8 million less the cumulativeabsorbed losses to date. As of December 31, 2009, the effect ofconsolidating TET resulted in an immaterial impact on the consolidated balancesheet.

 

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In June 2009, the FASBissued authoritative guidance which revised the approach to identifying primarybeneficiaries from a quantitative-based risks-and rewards calculation to aqualitative approach when assessing whether an entity has a controllingfinancial interest in a variable interest entity. This analysis identifies theprimary beneficiary of a variable interest entity as one with the power todirect the activities of a variable interest entity that most significantlyimpact the entity’s economic performance and the obligation to absorb losses ofthe entity that could potentially be significant to the variable interest. TheCompany adopted this new guidance in the first quarter of fiscal year 2010.Under the new guidance, the Company concluded that it does not have the powerto direct the activities of TET that most significantly impact the entity’seconomic performance, and therefore, is not TET’s primary beneficiary whichwould require consolidation. The Company further concluded that under the newguidance it would have accounted for its initial investment under the costmethod. The new guidance also requires an enterprise upon initial adoption todetermine the carrying amount of an investment in an entity that is no longerconsolidated, as if it always had applied the provisions of the new guidance.Because under either the consolidation model or the cost method, thebalance(s) of the assets/liabilities (investment) would be zero in thefinancial statements of the Company at December 31, 2009 orJanuary 1, 2010, respectively, the adoption of the new guidance in thefirst quarter of 2010 has no financial statement impact to the Company.

 

**ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**FORWARD-LOOKING STATEMENTS**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statementsregarding future events and our future results that are subject to the safeharbors created under the Securities Act of 1933 and the Securities ExchangeAct of 1934. Forward-looking statements are based on current expectations,estimates, forecasts and projections about us, our future performance and theindustries in which we operate as well as on our management’s assumptions andbeliefs. Statements that contain words like “expects,” “anticipates,” “may,” “will,”“targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” orvariations of such words and similar expressions are forward-lookingstatements. In addition, any statements that refer to trends in our businesses,future financial results, and our liquidity and business plans areforward-looking statements. Readers are cautioned that these forward-lookingstatements are only predictions and are subject to risks and uncertainties,including those discussed in “Part II, Item 1A-Risk Factors” of thisForm 10-Q.  Therefore, actualresults may differ materially and adversely from those expressed in anyforward-looking statements. We do not guarantee future results, and actualresults, developments and business decisions may differ from those contemplatedby those forward-looking statements.  Weundertake no obligation to update these forward-looking statements to reflectevents or circumstances occurring after the date of this Form 10-Q.

 

**EXECUTIVE SUMMARY**

 

Weare one of the leading global providers of Internet Protocol (“IP”)-basednetwork solutions including the integration and support services sold totelecommunications operators in both emerging and established markets aroundthe world. Our focus is to design and sell IP-based telecommunicationsinfrastructure products including our primary product suite of InternetProtocol TV (“IPTV”), and broadband solutions along with the ongoing servicesrelating to the installation, operation and maintenance of these products.Collectively our range of solutions is designed to expand and modernizetelecommunications networks through smooth network system integration, loweroperating costs and increased broadband access. We also provide the carrierswith increased revenue opportunities by enhancing their subscribers’ userexperience. The majority of our business is based in China, India andother Asia markets. We also continue to maintain a presence in selectivemarkets in Latin America and Europe.

 

Wedifferentiate ourselves with products designed to reduce network complexity,integrate high performance capabilities and allow a simple transition to nextgeneration networks. We design our products to facilitate cost-effective andefficient deployment, maintenance and upgrades.

 

Becauseour products are IP-based, our customers can more easily integrate our productswith other industry standard hardware and software. Additionally, we believe wecan introduce new features and enhancements that can be cost-effectively addedto our customers’ existing networks. IP-based devices can be changed orupgraded in modules, saving our customers the expense of replacing their entiresystem installation.

 

**Overview of Our Second Quarter 2010**

 

·                  In the secondquarter of 2010, we completed the sale of our manufacturing, research anddevelopment and administrative office facility in Hangzhou, China (the “Hangzhoufacility”) to a third party for proceeds of approximately $138.8 millionand the leaseback of approximately one-third of the property through 2016. Wederecognized the building from our balance sheet and recorded a deferred gainof $7.7 million at the time of sale. The deferred gain was represented by thegross sales

 

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proceedsof $138.8 million, less $7.5 million of transaction related taxes and otherfees, and less the net book value of the Hangzhou facility of $123.6 million.The deferred gain on the sale-leaseback is being amortized in proportion to therelated gross rental charged to expense over the leaseback term.

 

·                  In June 2010,we completed a sale of our non-core IP Messaging and US PDSN Assets as part ofour strategy to focus on core IP-based product offerings. The divested assetswere located in North America, Caribbean, and Latin America regions and werepart of the Multimedia Communications segment. Consideration for theapproximately $1.7 million of net liabilities transferred includedapproximately $0.4 million cash proceeds plus potential additional contingentconsideration of up to $1.6 million. A gain of $2.1 million, net of taxes, wasrecognized in June 2010 as a reduction to operating expenses.  The disposal of these product lines is notexpected to have a material impact on future operating results of theMultimedia Communications segment.

 

·                  Net sales decreased by $7.0 million to $73.2 million during the three months endedJune 30, 2010 compared to the same period in 2009. The decrease wasprimarily due to the wind-down of our handset business which resulted in adecrease of $11.7 million in revenue. This decrease was partially offset by the$5.7 million increase in sales of Broadband Infrastructure segment.  Accelerated amortization of $23.1 million ofPAS deferred product revenue offset the decrease in revenue of all other majorproduct lines of the Multimedia Communications segment.

 

·                  Gross profit was $22.9 million, or 31% of netsales in the second quarter of 2010 compared to negative $15.8 million, ornegative 20% of net sales in the corresponding period of 2009.  The overall gross profit increase both inabsolute dollars and percentage of net sales was primarily due to additionalinventory reserves and claim settlement recorded inthe second quarter of 2009 related tocertain handsets sold to PCD LLC for the Handsets segment.

 

·                  Selling, general andadministrative and research and development operating expenses decreased $13.0million primarily as a result of lower costs as a result of restructuring andother cost reduction initiatives, partially offset by a $0.3 million provisionfor doubtful accounts during the three months ended June 30, 2010 comparedto $10.5 million recovery of doubtful accounts in the same period of 2009.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations isbased upon our Consolidated Condensed Financial Statements, which we haveprepared in accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the amounts reported in our consolidated financialstatements and accompanying notes. Estimates are based on historicalexperience, knowledge of economic and market factors and various otherassumptions that management believes to be reasonable under the circumstances.Actual results may differ from those estimates.

 

Ona regular basis we evaluate our estimates, assumptions and judgments and makechanges accordingly. An accounting policy is deemed to be critical if itrequires an accounting estimate to be made based on assumptions about mattersthat are highly uncertain at the time the estimate is made, if differentestimates reasonably could have been used, or if changes in the estimate thatare reasonably likely to occur could materially impact the financialstatements. We believe that the estimates, assumptions and judgments involvedin revenue recognition, receivables and allowances for doubtful accounts,accruals including third party commissions payable, restructuring liabilities,litigation and other contingencies, stock-based compensation, product warranty,variable interest entities, inventories, deferred costs, research anddevelopment and capitalized software development costs, income taxes,impairment of intangible assets and long-lived assets, and valuation and impairmentof investments have the greatest potential impact on our condensed consolidatedfinancial statements, so we consider these to be our critical accountingpolicies. Management believes that there have been no significant changesduring the six months ended June 30, 2010 to the items that we disclosedas our critical accounting policies and estimates in Management’s Discussionand Analysis of Financial Condition and Results of Operations in our AnnualReport on Form 10-K for the year ended December 31, 2009.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

Fora description of the new accounting standards that affect us, see Note 2of Notes to our Condensed Consolidated Financial Statements included underPart I, Item 1 of this Quarterly Report on Form 10-Q.

 

**RESULTS OF OPERATIONS**

 

Inthe fourth quarter of 2009, we substantially completed the wind-down of ourhandset business. Except for sales relating to inventory clearing, we do notexpect any significant revenue from our handset segment in the remainder of2010. In addition, in order to optimize our resources and improve efficiency,beginning on January 1, 2010 we integrated our Services Segment into our

 

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MultimediaCommunications and Broadband Infrastructure segments based on products forwhich services are performed. Effective January 1, 2010, the new reportingsegments are as follows:

 

·                  MultimediaCommunications—Focused on development and market opportunities in IPTVsolutions and Wireless infrastructure technologies, including related servicesrevenue.

 

·                  BroadbandInfrastructure—Focused on our world class portfolio of broadband products,including related services revenue.

 

·                  Handsets—Focusedon mobile phone business including PAS and CDMA handset market, as well as datacards markets. Handset sales to PCD LLC, which commenced after theJuly 1, 2008 sale of PCD, are included in this segment.

 

Wehave reclassified our previously reported segment information for the three andsix months ended June 30, 2009 to conform to the current segmentpresentation.

 

**NETSALES**

 
| ** **                 | ** ** | **Three  months ended June 30,**                 | ** ** | **Six  months ended June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2010**                                              | ** ** | **%  of net  sales**                | ** ** | **2009** | ** ** | **%  of net  sales** | ** ** | **2010** | ** ** | **%  of  net  sales** | ** ** | **2009** | ** ** | **%  of  net sales** | ** ** |
| ** **                 | ** ** | **(in thousands, except percentages)** | ** ** |
| ***Net Sales by Segment*** |       |                                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia  Communications |       | $                                                     | 46,986     |                                | 64         | % | $ | 47,993 |   | 60 | % | $ | 89,311 |   | 58 | % | $ | 90,476 |   | 45 | % |
| Broadband  Infrastructure  |       | 24,681                                                |       | 34                                  | %          | 18,986 |   | 24 | % | 59,235 |   | 38 | % | 39,782 |   | 20 | % |
| Handsets                   |       | 1,498                                                 |       | 2                                   | %          | 13,184 |   | 16 | % | 5,466 |   | 4 | % | 69,245 |   | 35 | % |
|                       |       | $                                                     | 73,165     |                                | 100        | % | $ | 80,163 |   | 100 | % | $ | 154,012 |   | 100 | % | $ | 199,503 |   | 100 | % |

 
| ** **                | ** ** | **Three months ended June 30,**   | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | ** **                                            | ** ** | **% of net**                            | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of  net** | ** ** | ** ** | ** ** | **% of  net** | ** ** |
| ** **                | ** ** | **2010**                                              | ** ** | **sales**                                         | ** ** | **2009** | ** ** | **sales** | ** ** | **2010** | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** |
| ** **                | ** ** | **(in thousands, except percentages)** | ** ** |
| ***Net Sales by region*** |       |                                                  |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| United  States            |       | $                                                     | 2,450      |                                              | 3          | % | $ | 1,731 |   | 2 | % | $ | 5,903 |   | 4 | % | $ | 42,990 |   | 22 | % |
| China                     |       | 43,211                                                |       | 59                                                | %          | 52,531 |   | 66 | % | 83,186 |   | 54 | % | 103,749 |   | 52 | % |
| Japan                     |       | 11,137                                                |       | 15                                                | %          | 6,505 |   | 8 | % | 22,233 |   | 14 | % | 13,042 |   | 7 | % |
| India                     |       | 6,555                                                 |       | 9                                                 | %          | 9,536 |   | 12 | % | 12,353 |   | 8 | % | 19,120 |   | 10 | % |
| Philippines               |       | 2,990                                                 |       | 4                                                 | %          | 2,091 |   | 3 | % | 15,674 |   | 10 | % | 2,896 |   | 1 | % |
| Other                     |       | 6,822                                                 |       | 10                                                | %          | 7,769 |   | 9 | % | 14,663 |   | 10 | % | 17,706 |   | 8 | % |
| Total  net sales          |       | $                                                     | 73,165     |                                              | 100        | % | $ | 80,163 |   | 100 | % | $ | 154,012 |   | 100 | % | $ | 199,503 |   | 100 | % |

 

*Three months ended June 30, 2010 and 2009*

 

Netsales decreased by 9% to $73.2 million during the three months ended June 30,2010 compared to the same period in 2009. The decrease was primarily due to the wind-down of our handset businesswhich resulted in a decrease of $11.7 million in revenue. This decrease waspartially offset by the $5.7 million increase in sales of BroadbandInfrastructure segment.  MultimediaCommunications net sales was at $47.0 million for the three months ended June 30,2010 as compared to $48.0 million for the same period of 2009 mainly due to theaccelerated amortization of PAS deferred product revenue offsetting thedecrease in revenue of all other major product lines of the segment.

 

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*Six months ended June 30, 2010 and 2009*

 

Netsales decreased by 23% to $154.0 million during the six months ended June 30,2010 compared to the same period in 2009. The decrease was primarily due to the wind-down of our handset businesswhich resulted in a decrease of $63.8 million in revenue. This decrease waspartially offset by the $19.5 million increase in sales of BroadbandInfrastructure segment mainly due to $11.9 million MSAN product revenuerecognized from an international customer in the first quarter of 2010.Multimedia Communications net sales was at $89.3 million for the six monthsended June 30, 2010 as compared to $90.5 million for the same period of2009, mainly due to the accelerated amortization of PAS deferred productrevenue offsetting the decrease in revenue of all other major product lines ofthe segment.

 

Foradditional discussion, see the “Segment Reporting” section of this Item 2.

 

In2010 and beyond, we do not expect significant new contracts for our PAShandsets and infrastructure equipment. As of June 30, 2010, we haveapproximately $141.7 million of deferred revenue associated with PASinfrastructure sales to be recognized ratably over the expected period ofsupport. We review assumptions regarding the estimated post contract supportperiods on a regular basis. Due to the China telecommunication industryrestructuring and launching of 3G services in China, the Ministry of Industryand Information Technology of China announced that PAS services in China willbe phased out by January 1, 2012. In the fourth quarter of 2009, wedetermined the remaining expected period of support as 2 years and hencedeferred revenue associated with PAS infrastructure is being recognized ratablybeginning in the fourth quarter of 2009 through the fourth quarter of 2011. Asa result of this change, net sales and gross profit in the first 2 quarters of2010 were increased by approximately $25.3 million and $8.9 million,respectively compared to the same periods in 2009. In both fiscal 2010 and2011, total net sales and gross profit associated with the amortization of allPAS-related deferred revenue will approximate $93 million and $33 million,respectively.

 

Theeconomic uncertainty that we are operating in today could adversely impact ourbusiness. However, the majority of our business is based in China and India—twocountries that are still projected to have economic growth in 2010. Wecurrently offer and have initial market acceptance of our IPTV products inChina, India, Taiwan and other geographic regions. We believe that theIPTV market presents a meaningful growth opportunity in these regions as wellas other regions where we have targeted to expand our IPTV offerings. Ourgrowth in India, however, may be adversely impacted by recent changes in Indiarequiring all manufacturers to satisfy certain security and supply chainstandards to the satisfaction of Indian authorities. We are pursuingalternative long-term solutions and working with the carriers who use ourproducts to make sure we can satisfy these new requirements.

 

**GROSS (LOSS) PROFIT**

 
| ** **                           | ** ** | **Three months ended June 30,**   | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                            | ** ** | **Gross**                                         | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                           | ** ** | **2010**                                              | ** ** | **Profit %**                                 | ** ** | **2009** | ** ** | **Profit %** | ** ** | **2010** | ** ** | **Profit %** | ** ** | **2009** | ** ** | **Profit %** | ** ** |
| ** **                           | ** ** | **(in thousands, except percentages)** | ** ** |
| ***Gross (loss) profit by Segment*** |       |                                                  |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia  Communications           |       | $                                                     | 12,551     |                                              | 27         | % | $ | 15,835 |   | 33 | % | $ | 28,571 |   | 32 | % | $ | 28,703 |   | 32 | % |
| Broadband  Infrastructure            |       | 8,222                                                 |       | 33                                                | %          | 2,548 |   | 13 | % | 17,845 |   | 30 | % | 5,030 |   | 13 | % |
| Handsets                             |       | 2,099                                                 |       | 140                                               | %          | (34,221 | ) | (260 | )% | 3,665 |   | 67 | % | (27,919 | ) | (40 | )% |
|                                 |       | $                                                     | 22,872     |                                              | 31         | % | $ | (15,838 | ) | (20 | )% | $ | 50,081 |   | 33 | % | $ | 5,814 |   | 3 | % |

 

Costof sales consists primarily of material and labor costs, including stock-basedcompensation, associated with manufacturing, assembly and testing of products,costs associated with installation and customer training, warranty costs, feesto agents, inventory write-downs and overhead. Cost of sales also includesimport taxes and tariffs on components and assemblies. Some components andmaterials used in our products are purchased from a single supplier or a limitedgroup of suppliers and, in some cases, are subject to obtaining Chinese importpermits and approvals. Our global program to outsource our manufacturingoperations is still in progress.

 

Ourgross profit has been affected by average selling prices, material costs,product mix, the impact of warranty charges and contract loss provisions aswell as inventory reserves and release of deferred revenues and related costpertaining to prior years. Our gross profit, as a percentage of net sales,varies among our product families. We expect that our overall gross profit, asa percentage of net sales, will fluctuate in the future as a result of shiftsin product mix, stage of product life cycle, anticipated decreases in averageselling prices and our ability to reduce cost of sales.

 

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*Three months ended June 30, 2010 and 2009*

 

Grossprofit was $22.9 million, or 31% of net sales, in the three months ended June 30,2010 compared to negative $15.8 million, or negative 20% of net sales, inthe corresponding period of 2009. The overall gross profit increase both inabsolute dollars and percentage of net sales was primarily due to additionalinventory reserves and claim settlement recorded inthe second quarter of 2009 related tocertain handsets sold to PCD LLC for the Handsets segment.The increased sales of Broadband product with high margin contributed $5.7million gross margin in the second quarter of 2010, compared to the same periodin 2009. In addition, the decrease in sales of higher margin MultimediaCommunications products was partially offset by the acceleration of PASdeferred product revenue amortization.

 

*Six months ended June 30, 2010 and 2009*

 

Grossprofit was $50.1 million, or 33% of net sales, in the six months ended June 30,2010 compared to $5.8 million, or 3% of net sales, in the correspondingperiod of 2009. The overall gross profit increase both in absolute dollars andpercentage of net sales was primarily due to the accelerationof PAS deferred product revenue amortization of MultimediaCommunications segment, increased sales of higher margin TN products in theBroadband Infrastructure segment and less reserve in Handset segment, which waspartially offset by the loss in sales of other Multimedia Communicationsproducts. Compared to the six months ended June 30, 2009, BroadbandInfrastructure segment contributed $12.8 million increase in gross profit inthe same period of 2010. There was $31.6 million gross profit increase inHandset segment for the six months ended June 30, 2010 compared to thesame period in 2009 primarily due to additional inventory reserves and claimsettlement recorded in the second quarter of 2009 relatedto certain handsets sold to PCD LLC,  as well asadditional inventory reserves in the first quarter of 2009,  partially offset by an $8.5 million decreaseto cost of sales in the Handsets segment resulting from the amortization of theMarvell supply agreement during the first quarter of 2009 (See Note 3 of notesto our condensed consolidated financial statements included under Part I, Item1 of this Quarterly Report on Form 10-Q.)

 

Foradditional discussion, see the “Segment Reporting” section of this Item 2.

 

**OPERATING EXPENSES**

 

Thefollowing table summarizes our operating expenses:

 
| ** **                           | ** ** | **Three months ended June 30,**   | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                              | ** ** | **% of  net  sales**                         | ** ** | **2009** | ** ** | **% of  net  sales** | ** ** | **2010** | ** ** | **% of  net  sales** | ** ** | **2009** | ** ** | **% of  net  sales** | ** ** |
| ** **                           | ** ** | **(in thousands, except percentages)** | ** ** |
| Selling,  general and administrative |       | $                                                     | 21,162     |                                              | 29         | % | $ | 26,971 |   | 34 | % | $ | 51,352 |   | 33 | % | $ | 81,151 |   | 41 | % |
| Research  and development            |       | 9,078                                                 |       | 12                                                | %          | 16,229 |   | 20 | % | 19,101 |   | 12 | % | 37,737 |   | 19 | % |
| Restructuring                        |       | (216                                                  | )          | 0                                                 | %          | 27,757 |   | 35 | % | 7,291 |   | 5 | % | 32,576 |   | 16 | % |
| Net  gain on divestitures            |       | (2,056                                                | )          | (3                                                | )%         | (1,357 | ) | (2 | )% | (3,808 | ) | (2 | )% | (1,357 | ) | (1 | )% |
| Total  net operating expenses        |       | $                                                     | 27,968     |                                              | 38         | % | $ | 69,600 |   | 87 | % | $ | 73,936 |   | 48 | % | $ | 150,107 |   | 75 | % |

 

Selling,general and administrative expenses (“SG&A”) include compensation andbenefits, professional fees, sales commissions, provision for doubtful accountsreceivable and travel and entertainment costs. Research and development (“R&D”)expenses consist primarily of compensation and benefits of employees engaged inresearch, design and development activities, costs of parts for prototypes,equipment depreciation and third party development expenses. We believe thatcontinued and prudent investment in research and development is critical to ourlong-term success, and we will aggressively evaluate appropriate investmentlevels.  A portion of our costs are fixedand are difficult to quickly reduce in periods of lower sales.

 

*SELLING, GENERAL AND ADMINISTRATIVE*

 

*Threemonths ended June 30, 2010 and 2009*

 

SG&Aexpenses were $21.2 million forthe three months ended June 30, 2010, a decrease of $5.8 million as compared to $27.0 million forthe same period in 2009. The decrease in SG&A expense was primarily due toa $9.4 million decrease in personnel related expenses as a result of ourrestructuring plans and recent cost reduction measures, a $2.6 millionreduction in legal and accounting fees as a result of reduced activity ininvestigations and litigation, a $0.8 million reduction in advertising andmarketing, sales promotions, as well as shows and exhibits expenses due toreduced sales activities, and a $0.4 million decrease in travel relatedexpenses due to reduced travel activity and cost containment efforts, and a$1.0 million decrease in facility related expenses, a $0.7

 

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millionreduction in other taxes, fees, licenses, and a $0.3 million reduction ininsurance as a result of the reduced cost structure. These cost savings werepartially offset by a $0.3 million provision for doubtful accounts during thethree months ended June 30, 2010 compared to $10.5 million recovery ofdoubtful accounts in the same period of 2009.

 

*Six monthsended June 30, 2010 and 2009*

 

SG&Aexpenses were $51.4 million for thesix months ended June 30, 2010, a decrease of $29.8million as compared to $81.2 million forthe same period in 2009. The decrease in SG&A expense was primarily due toa $21.1 million decrease in personnel related expenses as a result of ourrestructuring plans and recent cost reduction measures, a $5.5 millionreduction in legal and accounting fees as a result of reduced activity ininvestigations and litigation, a $2.1 million reduction in advertising andmarketing, sales promotions, as well as shows and exhibits expenses due toreduced sales activities, a $0.8 million savings from reduction in the use ofoutside services, and a $1.2 million decrease in travel related expenses due toreduced travel activity and cost containment efforts and a $2.6 milliondecrease in facility related expenses, a $0.8 million reduction in other taxes,fees, licenses and a $0.7 million reduction in insurance as a result of thereduced cost structure. These cost savings were partially offset by a $4.3million provision for doubtful accounts compared to $2.1 million recovery ofdoubtful accounts in the same period of 2009.

 

*RESEARCH AND DEVELOPMENT*

 

*Three months ended June 30, 2010 and 2009*

 

R&D expenses decreased by $7.2million during the three months ended June 30, 2010 compared tothe same period in 2009.  The decreasewas mainly due to a $5.6 milliondecrease as a result of our restructuring plans, $0.2million savings from reduction in use of outside services, and a totalof $1.5 million decrease indepreciation, software license, parts and facilities related expenses as wecontinued to streamline our operations and wind down our handset business unit.

 

*Six months ended June 30, 2010 and 2009*

 

R&D expenses decreased by $18.6 millionduring the six months ended June 30, 2010 compared to the same period in2009.  The decrease was mainly due to a $13.4 million decrease as a result of our restructuringplans, $1.7 million savings fromreduction in use of outside services, and a total of $3.4 million decrease in depreciation, software license, parts andfacilities related expenses as we continued to streamline our operations andwind down our handset business unit.

 

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*RESTRUCTURING*

 

*Three and six months ended June 30, 2010*

 

During the three months ended June 30, 2010, werecorded approximately $0.2 million net reversal of restructuring chargesrecorded in previous periods. During the six months ended June 30, 2010,we recorded approximately $7.3 million in restructuring charges.

 

OnJune 9, 2009, our Board of Directors approved a restructuring plan (the “2009Restructuring Plan”) designed to reduce our operating costs. The 2009Restructuring Plan includes a worldwide reduction in force of approximately 50%of our headcount, or approximately 2,300 employees located primarily in Chinaand the United States and, to a lesser degree, other international locations.During the three months ended June 30, 2010, we recorded $1.4 millionreversal of restructuring charges recorded in prior periods resulting fromchange in estimate. This change in estimate resulted from voluntary resignationof employees originally included in the restructuring plan as well as retentionof employees originally identified in the plan and to replace employees whovoluntarily resigned. Partially offsetting this reversal was approximately $0.9million additional charges related to employees located in the United Statesand other international locations as we continue to phase-out non-coreinternational operations. During the three months ended June 30, 2010, wealso recorded an additional $0.3 million of lease costs on exited facilities.During the six months ended June 30, 2010, we recorded restructuring costsof approximately $6.9 million related to the 2009 Restructuring Plan, net ofapproximately $1.7 million of reversal of charges recorded in prior periods.The restructuring costs for the six months ended June 30, 2010 consistprimarily of severance and benefits related to additional employees included inthe Restructuring Plan in the first quarter of 2010, adjusted for change inestimate in the second quarter of 2010. Total restructuring costs recordedthrough June 30, 2010 related to the 2009 Restructuring**Planapproximated $46.8 million.

 

Duringfiscal 2008, we implemented a restructuring plan (the “2008 Restructuring Plan”)primarily related to a global reduction in force across all functions andemployee terminations at certain non-core operations which we were in theprocess of winding down. The number of employees affected totaled approximately750, including 350 in China, 200 in Korea and 200 in other locations includingthe United States. During the three and six months ended June 30, 2010, werecorded additional restructuring costs related to the 2008 Restructuring Planof approximately $0.1 million and $0.4 million, respectively, forseverance and benefit costs being recognized over the remaining service periodfor employees included in the 2008 Restructuring Plan. Total restructuringcosts recorded through June 30, 2010 related to the 2008 Restructuring**Plan approximated $19.8 million.

 

*Three and six months ended June 30, 2009*

 

Duringthe three and six months ended June 30, 2009, we recorded approximately$27.8 million and $32.6 million, respectively, in restructuring charges. Duringthe second quarter of 2009, we recorded restructuring charges of approximately$25.9 million related to the 2009 Restructuring Plan, including $24.7 millionfor severance and benefits and $1.2 million related to the estimated loss on alease obligation that expires in 2013. During the three and six months ended June 30,2009, the Company also recorded $1.8 million and $6.4 million, respectively, inrestructuring charges related to the 2008 Restructuring Plan. The $6.4 million restructuring charge forthe six months ended June 30, 2009 related to the 2008 Restructuring Planincluded $5.3 million for severance and benefits primarily related to thetransition of key functions to China and $1.1 million for lease terminationcosts. Approximately 60 employees are affected by the transition of these keyfunctions to China.

 

Themajority of the remaining cash expenditures related to the 2009 and 2008Restructuring Plans are expected to be paid in 2010. The remaining liabilitiesrelated to lease obligations are expected to be settled over the remaininglease term. We expect to incur additional restructuring charges in 2010 as wecontinue to execute the 2009 and 2008 Restructuring Plans.

 

*GAIN ONDIVESTITURES*

 

*Threeand six months ended June 30, 2010*

 

Gainon divestiture for the three months ended June 30, 2010 of $2.1 millionwas related to the sale of our non-core IP Messaging and US PDSN Assets in June 2010.The divested assets were located in North America, Caribbean, and Latin Americaregions and were part of the Multimedia Communications segment. Considerationfor the approximately $1.7 million of net liabilities transferred includedapproximately $0.4 million cash proceeds plus potential additional contingentconsideration of up to $1.6 million. Due to the uncertainty surrounding receiptof the contingent consideration, we have not included this amount in the gaincalculation.  If and when additionalconsideration is received, it will be recognized as additional gain ondivestiture. Gain on divestitures for the six months ended June 30, 2010of approximately $3.8 million was comprised of the $2.1 million gain on sale ofIP Messaging and US PDSN Assets and $1.8 million gain on sale of the RASproduct line in the first quarter of 2010.

 

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*Threeand six months ended June 30, 2009*

 

Gainon divestiture for the three and six months ended June 30, 2009 wascomprised of an additional $1.4 million gain on sale of PCD assets resulting fromand adjustment to reflect actual transaction-related costs.

 

*STOCK-BASED COMPENSATION EXPENSE*

 

AtJune 30, 2010, there was approximately $5.8 million of totalunrecognized compensation cost not including forfeitures, as measured, relatedto non-vested stock options and restricted stock and restricted stock units,which is expected to be recognized over a weighted-average period of 2.4 years.The following table summarizes the stock-based compensation expense in ourconsolidated statement of operations:

 
| ** **                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(in thousands)**                   | ** ** |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Cost  of net Sales                   |       | $                                    | 36         |                               | $          | 60 |   | $ | 93 |   | $ | 491 |   |
| Selling,  general and administrative |       | 1,079                                |       | 1,617                              |       | 2,480 |   | 4,056 |   |
| Research  and development            |       | 153                                  |       | 186                                |       | 361 |   | 1,083 |   |
| Restructuring                        |       | 419                                  |       | 417                                |       | 1,613 |   | 797 |   |
| Total                                |       | $                                    | 1,687      |                               | $          | 2,280 |   | $ | 4,547 |   | $ | 6,427 |   |

 

**OTHERINCOME (EXPENSE)**

 

*INTEREST INCOME*

 

*Three and six months ended June 30, 2010 and 2009*

 

Interestincome was $0.5 million and $0.6 million for the three months endedJune 30, 2010 and 2009, respectively. Interest income was$0.8 million and $1.3 million for the six months ended June 30, 2010and 2009, respectively. Interest income decreased for the six months endedJune 30, 2010 compared to the same period in 2009, primarily due to adecline in the average interest rate.

 

*INTEREST EXPENSE*

 

*Three and six months ended June 30, 2010 and 2009*

 

Interestexpense was $0.1 million and $0.2 million for the three months endedJune 30, 2010 and 2009, respectively. Interest expense was$0.1 million and $0.5 million for the six months ended June 30, 2010and 2009, respectively. The decrease in interest expense for the three and sixmonths ended June 30, 2010 compared to the same period in 2009 was primarilyattributable to the decreased use of credit facilities in 2010.

 

*OTHER INCOME (EXPENSE), NET*

 

*Three months ended June 30, 2010 and 2009*

 

Otherexpense, net was $4.8 million for the three months ended June 30,2010 as compared to other income, net of $5.4 million for the three monthsended June 30, 2009. Other expense, net of $4.8 million for the threemonths ended June 30, 2010 consisted primarily of $4.9 million of foreigncurrency losses.  Other income, net of $5.4million for the three months ended June 30, 2009 consisted primarily offoreign currency gains of $9.0 million, offset partially by a $3.8 millionother-than-temporary impairment of an equity investment.

 

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S*ix months ended June 30, 2010 and 2009*

 

Otherincome, net for the six months ended June 30, 2010 was $0.1 million ascompared to expense of $1.8 million for the six months ended June 30,2009. Other income, net for the six months ended June 30, 2010 consistedprimarily of $0.9 million of foreign currency losses, offset partially by $0.4million settlement proceeds with MRV Communications (“MRV”) related to our investmentin MRV which was sold in 2009, and $0.4 million of other immaterial items.Other expense, net for the six months ended June 30, 2009 consistedprimarily of a $3.8 million other-than-temporary impairment of an equityinvestment, offset partially by foreign currency gains of $1.7 million.

 

*INCOME TAX EXPENSE*

 

Incometax expense is based upon a blended effective tax rate based upon ourexpectation of the amount of income to be earned in each tax jurisdiction andis accounted under the liability method. Deferred income taxes are recognizedfor the differences between the tax bases of assets and liabilities and theirfinancial statement amounts based on enacted tax rates. Valuation allowancesare established when necessary to reduce deferred tax assets to the amountexpected to be realized. We expect to maintain a full valuation allowance onour remaining net deferred tax assets until an appropriate level ofprofitability that generates taxable income is sustained or until we are ableto develop tax strategies that would enable us to conclude that it is morelikely than not that a portion of our deferred tax assets will be realizable.Any reversal of valuation allowances will favorably impact our results ofoperations in the period of the reversal.

 

FASBASC 740-10 establishes criteria for recognizing or continuing to recognize onlymore-likely-than-not tax positions, which may result in income tax expensevolatility in future periods. While we believe that we have adequately providedfor all tax positions, amounts asserted by taxing authorities could be greaterthan our accrued position. Accordingly, additional provisions on income taxrelated matters could be recorded in the future as revised estimates are madeor the underlying matters are settled or otherwise resolved.

 

*Three months ended June 30, 2010 and 2009*

 

Incometax benefit was $0.5 million for the three months ended June 30, 2010compared to income tax expense of $4.7 million for the three months ended June 30,2009.  In the second quarter of 2010, aone-time tax benefit of $0.9 million was recorded mainly related to the releaseof previously established valuation allowance on deferred tax assets in Taiwanwhich was offset by foreign tax expenses. The decrease in income tax expense inthe three month ended June 30, 2010 compared with three month ended June 30,2009 was primarily due to the decreased ordinary income in jurisdictions wherethe Company has been profitable and a one-time tax expense of $1.4 million inthe three month ended June 30, 2009 related to establishing of valuationallowance on net deferred tax assets in Korea.

 

*Sixmonths ended June 30, 2010 and 2009*

 

Incometax expense was $1.8 million for the six months ended June 30, 2010compared to $6.5 million for the six months ended June 30, 2009.  The decrease in income tax expense in the sixmonth ended June 30, 2010 compared with six month ended June 30, 2009was primarily due to the decreased ordinary income in jurisdictions where theCompany has been profitable and a one-time tax expense of $1.4 million in thethree month ended June 30, 2009 related to establishing of valuationallowance on net deferred tax assets in Korea.

 

**SEGMENT REPORTING**

 

Summarizedbelow are our segment net sales and gross profit for the three and six monthsended June 30, 2010 and 2009, respectively.

 

***Multimedia Communications***

*** ***
| ** **                                | ** ** | **Three months ended June 30,**   | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2010**                               | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(in thousands, except percentages)** | ** ** |
| Net sales                                 |       | $                                      | 46,986     |                               | $          | 47,993 |   | $ | 89,311 |   | $ | 90,476 |   |
| Gross profit                              |       | $                                      | 12,551     |                               | $          | 15,835 |   | $ | 28,571 |   | $ | 28,703 |   |
| Gross profit as a percentage of net sales |       | 27                                     | %          | 33                                 | %          | 32 | % | 32 | % |

 

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Duringthe three months ended June 30, 2010, Multimedia Communications segment’ssales were $47.0 million as compared to $48.0 million for the same period in2009 as the accelerated PAS deferred product revenue amortization offset thedecrease in revenue of all other major product lines. Amortization of PASdeferred product revenue accounted for $23.2 million or 49% of Multimedia Communicationsales for the three months ended June 30, 2010, compared to $10.5 millionor 22% for the same period in 2009. Revenue from Set Top Box (“STB”) productaccounted for 20% and 9% of Multimedia Communications segments in the secondquarter of 2010 and 2009, respectively.

 

Duringthe six months ended June 30, 2010, sales of Multimedia Communicationssegment were $89.3 million as compared to $90.5 million for the same period in2009 as accelerated PAS deferred product revenue amortization offset the decreasein revenue of all other major product lines. Amortization of PAS deferredproduct revenue accounted for $46.3 million or 52% of Multimedia Communicationssales for the six months ended June 30, 2010, compared to $21.0 million or23% for the same period in 2009.

 

Thegross profit as a percentage of net sales decreased to 27% for the three monthsended June 30, 2010 from 33% for the corresponding period in 2009. Thedecrease in gross profit percentage was mainly due to loss order provision andinventory provision for STB and NGN products in the second quarter of 2010 aswell as an approximately $1.0 million benefit to gross profit in the secondquarter of 2009 from sales of product inventory which was previously fullyreserved. The gross profit as a percentage of net sales remained stable at 32%for the six months ended June 30, 2010 and 2009.

 

In2010 and beyond, we do not expect significant new contracts for our PAShandsets and infrastructure equipment.We plan to aggressively pursue opportunities forour IPTV product portfolios in multiple markets. We believe that the IPTVmarket presents a meaningful growth opportunity. We currently offer and haveinitial market acceptance of our IPTV products in China, India, Taiwan andother geographic regions.

 

***BroadbandInfrastructure***

 
| ** **                                | ** ** | **Three months ended June 30,**   | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2010**                               | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(in thousands, except percentages)** | ** ** |
| Net sales                                 |       | $                                      | 24,681     |                               | $          | 18,986 |   | $ | 59,235 |   | $ | 39,782 |   |
| Gross profit                              |       | $                                      | 8,222      |                               | $          | 2,548 |   | $ | 17,845 |   | $ | 5,030 |   |
| Gross profit as a percentage of net sales |       | 33                                     | %          | 13                                 | %          | 30 | % | 13 | % |

 

BroadbandInfrastructure sales increased by 30% and 49%, respectively, during the threeand six months ended June 30, 2010 as compared to the same periods in2009.  The increase in sales for thethree months ended June 30, 2010 was due to the increase in sales of allmajor product lines. The increase in sales for the six months ended June 30,2010 was mainly due to the increase in sales of MSAN products, including $11.9million revenue from an international customer. Also contributing to theincrease in sales for the six months ended June 30, 2010 was the increasein sales of most major product lines, offset partially by a decrease of MSTPsales.  TN product revenue comprised approximately 9% and1% of Broadband Infrastructure sales for the six months ended June 30,2010 and 2009, respectively. Softbank in Japan, one of our largestinfrastructure customers, represented approximately 44% and 27% of totalBroadband sales during the three months ended June 30, 2010 and 2009,respectively, and 36% and 28% during the six months ended June 30, 2010and 2009, respectively.

 

Duringthe fourth quarter of 2009, we began recognizing revenue ratably on asignificant customer contract over the seven year warranty period; for thethree and six months ended June 30, 2010, we recognized revenue of $3.2million and $6.1 million, respectively, and immaterial gross profit on thiscontract.

 

Grossprofit percentage increased to 33% for the three months ended June 30, 2010 from 13%for the corresponding period of 2009. The increase in gross profit percentage was primarily due to the increase in highmargin product sales to Softbank, including approximately $2.4million from the release of previously deferred revenue carve-out for potentialpenalty and cancellation penalties, and alsodue to lower provision for inventory and loss order in2010 compared to 2009.  Gross profitpercentage increased to 30% for the six months ended June 30, 2010 from 13% forthe corresponding period of 2009. The increase in gross profit percentage was primarily due to the increase in high marginproduct sales to Softbank, including approximately $2.4 million fromthe release of previously deferred revenue carve-out for potential penalty andcancellation penalties, and alsodue to lower provision for inventory in 2010 compared to2009, as well as the increase in sales of TN product with higher gross margin.

 

Wemay incur additional warranty expense and inventory reserves as we introducenew products and may be required to accrue additional contract losses forcertain fixed price contracts as these contracts progress. These factors willresult in negative impacts on our future gross margins, results of operationsand financial position.

 

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***Handsets***

*** ***
| ** **                                | ** ** | **Three months ended June 30,**   | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2010**                               | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(in thousands, except percentages)** | ** ** |
| Net sales                                 |       | $                                      | 1,498      |                               | $          | 13,184 |   | $ | 5,466 |   | $ | 69,245 |   |
| Gross profit                              |       | $                                      | 2,099      |                               | $          | (34,221 | ) | $ | 3,665 |   | $ | (27,919 | ) |
| Gross profit as a percentage of net sales |       | 140                                    | %          | (260                               | )%         | 67 | % | (40 | )% |

 

Netsales decreased by 89% and 92% for the three and six months ended June 30, 2010,respectively, compared to the same period in 2009.  The decrease wasprimarily due to the substantial wind-down of our worldwide handset business.Except for sales related to inventory clearing, we do not expect any significanthandset revenue in 2010.

 

Grossprofit as a percentage of net sales increased from negative 260% for the threemonths ended June 30, 2009 to 140% for the corresponding period in 2010.The increase was due to approximately $1.5 million inventory clearing sales ofPAS and CDMA handset which was previously fully reserved and also due toapproximately $0.5 million royalty reversal. In addition, gross loss in thesecond quarter of 2009 included approximately $28.7 million as a result oftransactions with PCD LLC consisting of a claim settlement of $11.1million for product-related liability disputes and product returns and $17.6million of costs for inventory write-downs to net realizable value, write-downsof excess inventory and warranty reserves.

 

Grossprofit as a percentage of net sales increased from negative 40% for the sixmonths ended June 30, 2009 to 67% for the corresponding period in 2010.The increase was mainly due to inventory clearing sales of PAS and CDMA handsetwhich was previously fully reserved. We incurred additional warranty reserverecorded during the first quarter of 2009 due to additional repairs for one ofour handset products, and additional inventory reserve for our PAS handsets aswe anticipated decrease in demand after China launched its 3G networks. Theadditional PAS handset inventory reserve was partially offset by a decrease tocost of sales from the amortization of the Marvell supply agreement. Inaddition, gross profit for the six months ended June 30, 2009 was alsoreduced by approximately $30.0 million as a result of transactions with PCD LLCconsisting of a claim settlement of $11.1 million for product-relatedliability disputes and product returns and $18.9 million of costs for inventorywrite-downs to net realizable value, write-downs of excess inventory andwarranty reserves.

 

**RELATED PARTY TRANSACTIONS**

 

*Softbank and affiliates*

 

Werecognize revenue with respect to sales of telecommunications equipment toaffiliates of Softbank, a significant stockholder of the Company. Softbankoffers ADSL coverage throughout Japan, which is marketed under the name “YAHOO!BB.” We support Softbank’s fiber-to-the-home service through sales of itscarrier class GEPON product as well as its NetRingÔ product. In addition, wesupport Softbank’s new internet protocol television (“IPTV”), through sales ofits RollingStreamÔ product.During the three and six months ended June 30, 2010 and 2009, werecognized revenue and related cost of net sales for sales of telecommunicationsequipment and services to affiliates of Softbank as follows.

 
| ** **         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in thousands)**                   | ** ** |
|               |       |                                 |       |                               |       |   |   |   |   |
| Net  sales         |       | $                                    | 10,838     |                               | $          | 5,033 |   | $ | 21,512 |   | $ | 11,198 |   |
| Cost  of net sales |       | 3,874                                |       | 2,841                              |       | 8,968 |   | 6,758 |   |
| Gross  profit      |       | $                                    | 6,964      |                               | $          | 2,192 |   | $ | 12,544 |   | $ | 4,440 |   |

 

Grossprofit as a percentage of net sales fluctuations are expected and generallyresult from changes in product mix. In the three and six months ended June 30,2010, gross profit as a percentage of net sales also benefited approximately $2.4million from the release of previously deferred revenue carve-out for potentialpenalty and cancellation penalties. Included in accounts receivable at June 30,2010 and December 31, 2009 were $7.6 million and $5.5 million,respectively, related to these transactions.

 

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Salesto Softbank include a three year service period and a penalty clause if productfailure rates exceed a certain level over a seven year period. As of June 30,2010 and December 31, 2009, our customer advance balance related toSoftbank agreements was $0.2 million and $0.2 million, respectively. Thecurrent deferred revenue balance related to Softbank was $1.2 million and $1.4million as of June 30, 2010 and December 31, 2009, respectively. Asof June 30, 2010, our noncurrent deferred revenue balance related toSoftbank was $7.8 million compared to $8.8 million as of December 31,2009.

 

Asdiscussed in Note 6 to our condensed consolidated financial statements includedunder Part 1, Item 1 of this Quarterly Report on Form 10-Q, wehave a $1.1 million investment in SBI. Affiliates of Softbank have acontrolling interest in SBI.

 

Asof June 30, 2010, Softbank beneficially owned approximately 11% of ouroutstanding stock.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**Liquidity and Capital Resources**

 

The following sections discuss the effects ofchanges in our balance sheet and cash flows, contractual obligations and othercommitments on our liquidity and capital resources.

 

***Balance Sheet and Cash Flows***

 

Cash and Cash Equivalents and Short-termInvestments

 
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|------------|------------|
| ** **                          | ** ** | **2010**          | ** ** | **2009**              | ** ** | **Change** | ** ** |
| ** **                          | ** ** | ** **        | ** ** | **(in thousands)**    | ** ** | ** ** | ** ** |
|                                |       |              |       |                  |       |       |       |
| Cash and cash equivalents           |       | $                 | 306,841    |                  | $          | 265,843    |       | $ | 40,998 |   |
| Short-term investments - Bank notes |       | 1,155             |       | 1,038                 |       | 117        |       |
| Total                               |       | $                 | 307,996    |                  | $          | 266,881    |       | $ | 41,115 |   |

 
| ** **                                                    | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                                | ** ** | **2009** | ** ** | **Change** | ** ** |
| ** **                                                    | ** ** | ** **                              | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Cash used in operating activities                             |       | $                                       | (84,964    | ) | $ | (37,136 | ) | $ | (47,828 | ) |
| Cash provided by investing activities                         |       | 123,692                                 |       | 1,267 |   | 122,425 |   |
| Cash used in financing activities                             |       | (30                                     | )          | (389 | ) | 359 |   |
| Effect of exchange rate changes on cash and cash  equivalents |       | 2,300                                   |       | (749 | ) | 3,049 |   |
|                                                          |       |                                    |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents         |       | $                                       | 40,998     |   | $ | (37,007 | ) | $ | 78,005 |   |

 

Cash and cash equivalents, consistingprimarily of bank deposits and money market funds, are recorded at cost whichapproximates fair value because of the short-term nature of theseinstruments. At June 30,2010, cash and cash equivalents approximating $213 million was held by oursubsidiaries in China.

 

Cash used in operating activities during the sixmonths ended June 30, 2010 of $85.0 million resulted primarily from thenet loss of $24.9 million, adjusted for $3.8 million gains from investingactivities, and by changes in net operating assets and liabilities using netcash of $67.1 million, partially offset by non-cash charges including $3.4million of depreciation and amortization, $4.5 million stock-based compensationand $4.2 million provision for doubtful accounts. Changes in net operatingassets and liabilities using net cash during the six months ended June 30,2010 included $25.3 million for settlement of accounts payable and $40.5million for settlement of other liabilities as the Company continues tostreamline operations. Changes in deferred revenue of $53.5 million during thesix months ended June 30, 2010 resulted primarily from amortization of PASdeferred product revenue. Cash used in operating activities during the sixmonths ended June 30, 2009 of $37.1 million resulted primarily from the net loss of $151.7 million offsetby non-cash charges including $6.9 million of depreciation and amortization,$6.4 million stock-based compensation and also offset by changes in operatingassets and liabilities providing net cash of $99.7 million. The decrease in sales activity in the first six months of 2009was the primary driver of the changes in operating assets and liabilities.

 

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Cash provided by investing activities during thesix months ended June 30, 2010 of $123.7 million included net proceedsfrom divestiture of $1.5 million, proceeds from sale of building of $124.0million, and changes in restricted cash of $3.0 million, offset partially bycash outflows including $3.8 million for net purchases of short-terminvestments, $1.8 million for purchases of property, plant and equipment and$0.6 million for purchase of an investment interest. Cash outflows ofapproximately $3.8 million for net purchases of short-term investments relatedprimarily to a non-qualified deferred compensation plan established in fiscal2010 which allows a six-month deferral of compensation for certain employees. Cash provided by investing activities duringthe six months ended June 30, 2009 was $1.3 million. No significantinvesting activities occurred in the six months ended June 30, 2009.

 

Cashused in financing was immaterial during the six months ended June 30, 2010and 2009.

 

Accounts Receivable, Net

 

Accountsreceivable increased $2.0 million from $42.3 million at December 31, 2009to $44.3 million at June 30, 2010. At June 30, 2010, our allowancefor doubtful accounts was $30.1 million on gross receivables of $74.4 million.We recorded provision for doubtful accounts of $0.3 million and $4.3 millionfor the three and six months ended June 30, 2010, respectively. Werecorded net recoveries of doubtful accounts of approximately $10.5 million and$2.1 million for the three and six months ended June 30, 2009,respectively, primarily due to significant collection of long-aged receivablesduring the second quarter of 2009, partially offset by provision for doubtfulaccounts. We assess collectability of receivables based on a number of factorsincluding analysis of creditworthiness, our customer’s historical paymenthistory and current economic conditions, our ability to collect payment and onthe length of time an individual receivable balance is outstanding. We havecertain accounts receivable in China that have been outstanding for asignificant period of time. We provide allowances for these receivables basedon the criteria discussed above. While we believe we have sufficient experienceand knowledge of the China market and customer payment patterns to reasonablyestimate such allowances, actual payment patterns and customer behavior coulddiffer from our expectations.

 

Inventoriesand Deferred Costs

 

Thefollowing table summarizes our inventories and deferred costs:

 
| ** **                | ** ** | **June 30** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** |
|---------------------------|------------|------------------|------------|-----------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**         | ** ** | **2009**              | ** ** | **(Decrease)** | ** ** |
| ** **                | ** ** | ** **       | ** ** | **(in thousands)**    | ** ** | ** **     | ** ** |
| Inventories:              |       |             |       |                  |       |           |       |
| Raw materials             |       | $                | 8,861      |                  | $          | 18,863         |       | $ | (10,002 | ) |
| Work in-process           |       | 21,715           |       | 12,881                |       | 8,834          |       |
| Finished goods            |       | 28,514           |       | 40,556                |       | (12,042        | )          |
| Total inventories         |       | $                | 59,090     |                  | $          | 72,300         |       | $ | (13,210 | ) |
|                      |       |             |       |                  |       |           |       |
| Short-term deferred costs |       | $                | 102,231    |                  | $          | 130,453        |       | $ | (28,222 | ) |
| Long-term deferred costs  |       | $                | 180,777    |                  | $          | 184,978        |       | $ | (4,201 | ) |

 

Inventoriesconsist of product held at our manufacturing facility and warehouses, as wellas finished goods at customer sites for which the customer has takenpossession, but based on specific contractual terms, title has not yet passedto the customer. Finished goods at customer sites were approximately $21.8million and $33.8 million at June 30, 2010 and December 31, 2009,respectively.

 

Inventoriesof approximately $2.9 million held by the Company’s manufacturing outsourcepartner are recorded in prepaids and other current assets in the condensedconsolidated balance sheet at June 30, 2010.

 

***Liquidity***

 

Wehave incurred net losses of $225.7 million, $150.3 million and $195.6 millionduring the years ended December 31, 2009, 2008 and 2007, respectively.During the six months ended June 30, 2010, we incurred a net loss of $24.9million. We have recorded operating losses in 21 of the 22 consecutivequarters in the period ended June 30, 2010. At June 30, 2010, we havean accumulated deficit of $1,092.1million. We incurred net cash outflows fromoperations of $67.4 million, $55.2 million and $225.1 million in2009, 2008 and 2007 respectively. Cash used in operations was $85.0 millionduring the six months ended June 30, 2010. While operating results areexpected to improve in 2010 compared with prior years, we expect to continue toincur losses for fiscal 2010.

 

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AtJune 30, 2010, we had cash and cash equivalents of $306.8 million, ofwhich $213 million was held by our subsidiaries in China. The amount ofcash available for transfer from the China subsidiaries will be limited both bythe liquidity needs of the subsidiaries in China and the restriction oncurrency exchange by Chinese-government mandated requirements includingcurrency exchange controls on certain transfers of funds outside of China.

 

AtJune 30, 2010, we had approximately $28.6 million of available creditfacilities. In the second quarter of 2010, we enteredinto two credit facilities totaling $29.4 million. Both credit facilitiescan be used for the issuance of certain letters of credit and guaranteesand both facilities expire in the second quarter of 2011.

 

Globaleconomies have experienced a significant downturn driven by a financial andcredit crisis that will continue to challenge such economies for some period oftime. Under the current macroeconomic environment there are significant risksand uncertainties inherent in management’s ability to forecast future results.The operating environment confronting us, both internally and externally,raises significant uncertainties.

 

Inthe past two years, we took a number of actions to improve our liquidity. InMarch 2008, we paid $289.5 million to retire our convertiblesubordinated notes and related accrued interest. On July 1, 2008, wecompleted the sale of PCD. In addition, we divested our Mobile SolutionsBusiness Unit in July 2008. In the fourth quarter of 2008, managementinitiated actions to disband our Custom Solutions Business Unit, to wind downour Korea based handset operations, and announced initiatives including effortsto eliminate functional duplications by consolidation of a number of functionsinto our China operations. In June 2009, management expanded theinitiatives to include a worldwide reduction in workforce, outsourcing ofmanufacturing operations and optimizing research and development spending witha focus on selected products. Our year-to-year quarterly selling, general andadministrative and research and development operating expenses decreasedsignificantly in 2009 compared with 2008 and management believes the continuingefforts to stream-line operations will enable our fixed cost base to be betteraligned with operations, market demand and projected sales levels. If projectedsales do not materialize, we will need to take further actions to reduce costsand expenses or explore other cost reduction options.

 

InDecember 2009, we entered into a Sales Leaseback Agreement for the sale ofour manufacturing, research and development, and administrative officesfacility in Hangzhou, China to another third party for approximately$138.8 million with leaseback of a portion of the facility. On May 31,2010, the buyer and we agreed that all conditions precedent to the closing hadbeen met and the leaseback commenced on June 1, 2010. As of May 31, 2010, wehad received all of the sales proceeds and met all criteria for consummation ofsale of the Hangzhou facility.

 

OnFebruary 1, 2010, we entered into agreements for a strategic relationshipwith Beijing E-town International Investment and Development Co., Ltd(“BEIID”) which includes an investment of $48.5 million in our commonstock by BEIID, and two unrelated investment funds, Elite Noble Limited andShah Capital Opportunity Fund LP. These investments are expected to closein the third quarter of 2010 and will provide additional cash for workingcapital and general purposes.

 

Managementbelieves that both our China and non-China operations have sufficient liquidityto finance working capital and capital expenditure needs during the next12 months. There can be no assurance that additional financing, ifrequired, will be available on terms satisfactory to us or at all, and if fundsare raised in the future through issuance of preferred stock or debt, thesesecurities could have rights, privileges or preference senior to those of ourcommon stock and newly issued debt could contain debt covenants that imposerestrictions on our operations. Further, any sale of newly issued debt orequity securities could result in additional dilution to our currentshareholders.

 

***Income taxes***

 

TheChina Corporate Income Tax Law (“CIT Law”) became effective on January 1,2008. Under the CIT Law, China’s dual tax system for domestic enterprises andforeign investment enterprises (“FIEs”) was effectively replaced by a unifiedsystem. The new law establishes a tax rate of 25% for most enterprises and areduced tax rate of 15% for certain qualified high technology enterprises.

 

Priorto this change in tax law, certain subsidiaries and joint ventures located inChina enjoyed tax benefits in China which were generally available to FIEs. Thetax holidays/incentives for FIEs were applicable or potentially applicable toUTStarcom ChongQing Telecom Co. Ltd. (“CUTS”), UTStarcomTelecom Co., Ltd. (“HUTS”) and UTStarcom China Co., Ltd. (“UTSC”),our active subsidiaries in China, as those entities may qualify as accreditedtechnologically advanced enterprises.

 

TheCIT Law targets certain industries for the reduced 15% tax rate for certainqualified high technology enterprises. For FIEs established before thepromulgation of the new law who had previously enjoyed lower tax rates, anyincrease in their tax rates would be gradually phased in over five years.During the fourth quarter of 2008, two of our China subsidiaries, HUTS andUTSC, were approved for the reduced 15% tax rate. The approval lasts for threeyears and is retroactive to January 1, 2008.

 

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TheChinese central government may review and audit tax benefits granted by localor provincial authorities and could determine to disallow such benefits.Certain of our subsidiaries and joint ventures located in China enjoy taxbenefits in China that are generally available to foreign investmententerprises. If these tax benefits are reduced, disallowed or repealed due tochanges in tax laws or determination by the Chinese government, our businesscould suffer.

 

***Off-balance sheet arrangements***

 

AtJune 30, 2010, we do not have any off-balance sheet arrangements.

 

***Contractual obligations and other commitments***

 

Ourobligations under contractual obligations and commercial commitments atJune 30, 2010 were as follows:

 
| ** **           | ** ** | **Payments Due by Period** | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| ** **           | ** ** | ** **                 | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases     |       | $                          | 80,977     |   | $ | 16,666 |   | $ | 28,915 |   | $ | 28,134 |   | $ | 7,262 |   |
| Letters of credit    |       | 25,419                     |       | 13,745 |   | 9,114 |   | 58 |   | 2,502 |   |
| Purchase commitments |       | 33,861                     |       | 33,433 |   | 428 |   | — |   | — |   |
| Total                |       | $                          | 140,257    |   | $ | 63,844 |   | $ | 38,457 |   | $ | 28,192 |   | $ | 9,764 |   |

 

*Operating leases*

 

Welease certain facilities under non-cancelable operating leases that expire atvarious dates through “2013” to “2016”. In connection with the Sale LeasebackAgreement, on February 1, 2010, we entered into a Lease Contract (the “Lease”)with respect to the leaseback of a portion of the Hangzhou facility. The Leasebecame effective on June 1, 2010 and the contractual obligations related to theHangzhou facility Lease are included in the table above.

 

*Letters of credit*

 

Weissue standby letters of credit primarily to support international salesactivities outside of China and in support of purchase commitments. When wesubmit a bid for a sale, often the potential customer will require that weissue a bid bond or a standby letter of credit to demonstrate our commitmentthrough the bid process. In addition, we may be required to issue standbyletters of credit as guarantees for advance customer payments upon contractsigning or performance guarantees. The standby letters of credit usually expiresix to twelve months from date of issuance without being drawn by the beneficiarythereof.

 

*Purchase commitments*

 

Weare obligated to purchase raw materials and work-in-process inventory undervarious orders from various suppliers, all of which should be fulfilled withoutadverse consequences material to our operations or financial condition.Purchase commitments in the table above include agreements that are cancelablewithout penalty.

 

*Intellectual property*

 

Certainsales contracts include provisions under which customers would be indemnifiedby us in the event of, among other things, a third-party claim against thecustomer for intellectual property rights infringement related to our products.There are no limitations on the maximum potential future payments under theseguarantees. We have not accrued any amounts in relation to these provisions asno such claims have been made and we believe we have valid enforceable rightsto the intellectual property embedded in our products.

 

*Uncertain tax positions*

 

Asof June 30, 2010, we had $92.4 million of gross unrecognized tax benefits. Ifrecognized, the portion of gross unrecognized tax benefits that would decreasethe provision for income taxes and decrease our net loss is $14.0 million.The impact on net loss reflects the gross unrecognized tax benefits net ofcertain deferred tax assets and the federal tax benefit of state income taxitems totaling $78.4 million. We have not included these amounts in the tableof contractual obligations and commercial commitments because of the difficultyin making reasonably reliable estimates of the timing of cash settlements withthe respective taxing authorities.

 

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*Third Party Commissions*

 

TheCompany records accruals for commissions payable to third parties in the normalcourse of business. Such commissions are recorded based on the terms of thecontracts between the Company and the third parties and paid pursuant to suchcontracts. Consistent with our accounting policies, these commissions arerecorded as operating expense in the period in which the liability is incurred.As of June 30, 2010, approximately $6.2 million of such accrued commissions hadnot been claimed by the third parties for more than three years. Management hasperformed, and continues to perform, follow-up procedures with respect to theseaccrued commissions. Upon completion of such follow-up procedures, if theaccrued commissions have not been claimed and the statute of limitations, if any,has expired or a reasonable period of time has elapsed, the Company willreverse such accruals. Such reversals will be recorded in the Statementof Operations during the period management determines that such accrualsare no longer necessary. During the six months ended June 30, 2010approximately $0.2 million was released to cost of net sales as a result ofexpiration of statute of limitations. During the six months ended June 30,2009, no accruals were released to cost of net sales as a result of expirationof statute of limitations.

 

**ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Weare exposed to the impact of interest rate changes, changes in foreign currencyexchange rates and changes in the stock market.

 

***Interest Rate Risk***

 

Our exposure to market risk for changes in interest rates relatesprimarily to our investment portfolio. The fair value of our investmentportfolio would not be significantly affected by either a 10% increase ordecrease in interest rates due mainly to the short term nature of most of ourinvestment portfolio. However, our interest income can be sensitive to changesin the general level of U.S and China interest rates since the majority of ourfunds are invested in instruments with maturities of less than one year. In adeclining interest rate environment, as short term investments mature,reinvestment occurs at less favorable market rates. Given the short term natureof certain investments, anticipated declining interest rates will negativelyimpact our investment income.

 

We maintain an investment portfolio of various holdings, types andmaturities. We do not use derivative financial instruments. We place our cashinvestments in instruments that meet high credit quality standards, asspecified in our investment policy guidelines. Our policy is to limit the riskof principal loss and to ensure the safety of invested funds by generallyattempting to limit market risk. Funds in excess of current operatingrequirements are mostly invested in money market funds which are rated AAA. Ourcash and cash equivalents are not subject to significant interest rate risk dueto the short maturities of these instruments. As of June 30, 2010 thecarrying value of our cash and cash equivalents approximated fair value.

 

Thetable below represents carrying amounts and related weighted-average interestrates of our investment portfolio at June 30, 2010:

 
| ** **                   | ** ** | **(in thousands, except** | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **interest rates)**            | ** ** |
| Cash and cash equivalents    |       | $                                   | 306,841    |   |
| Average interest rate        |       | 0.84                                | %          |
|                         |       |                                |       |
| Restricted cash - short-term |       | $                                   | 22,162     |   |
| Average interest rate        |       | 0.09                                | %          |
|                         |       |                                |       |
| Short-term investments       |       | $                                   | 1,155      |   |
| Average interest rate        |       | 0.00                                | %          |
|                         |       |                                |       |
| Restricted cash - long-term  |       | $                                   | 12,090     |   |
| Average interest rate        |       | 0.01                                | %          |
|                         |       |                                |       |
| Total investment securities  |       | $                                   | 342,248    |   |
| Average interest rate        |       | 0.76                                | %          |

 

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***Investment Risk***

 

Wehave invested in several privately held companies as well as investment fundswhich invest primarily in privately held companies, many of which can still beconsidered in the start-up or development stages. These investments areinherently risky, as the market for the technologies or products they haveunder development are typically in the early stages and may never materialize.

 

***Foreign Exchange Rate Risk***

 

Asa multinational company, we conduct our business in a wide variety ofcurrencies and are therefore subject to market risk for changes in foreignexchange rates.  We expect to continue toexpand our business globally and, as such, expect that an increasing proportionof our business may be denominated in currencies other than U.S. Dollars.  As a result, fluctuations in foreigncurrencies may have a material impact on our business, results of operationsand financial condition.

 

Historically,the majority of our foreign-currency denominated sales have been made in China,denominated in Renminbi. Additionally, since 2006, we made significant sales inJapanese Yen, Euros, Indian Rupees and Canadian Dollars. Due to China’scurrency exchange control regulations, we are limited in our ability to convertand repatriate Renminbi, as well as in our ability to engage in foreigncurrency hedging activities in China. The balance of our cash held in China was$213 million at June 30, 2010. Since China un-pegged the Renminbi from the U.S. Dollar in July, 2005,through June 30, 2010, the Renminbi has strengthened by more than 15% versusthe U.S. Dollar.  However, it isuncertain what further adjustments may be made in the future.

 

Wemay manage foreign currency exposures using forward and option contracts tohedge and thus minimize exposure to the risk of the eventual net cash inflowsand outflows resulting from foreign currency denominated transactions withcustomers, suppliers, and non-U.S. subsidiaries, however, we are not currentlyhedging any such transactions.  As ourforeign currency balances are not currently hedged, any significant revaluationof our foreign currency exposures may materially and adversely affect ourbusiness, results of operation and financial condition.  We do not enter into foreign exchange forwardor option contracts for trading purposes.

 

Givenour exposure to international markets, we regularly monitor all of our materialforeign currency exposures.  We usesensitivity analysis to measure our foreign currency risk by computing thepotential decrease in cash flows that may result from adverse or beneficialchanges in foreign exchange rates, relative to the functional currency with allother variables held constant.  Theanalysis covers all of our underlying exposures for foreign currencydenominated financial instruments.  Theforeign currency exchange rates used were based on market rates in effect atJune 30, 2010.  The sensitivityanalysis indicated that a hypothetical 10% adverse or beneficial movement inexchange rates would have resulted in a loss or gain in the fair values of ourforeign currency denominated financial instruments of $14.2 million at June 30,2010.

 

**ITEM 4—CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

UTStarcom, Inc.(“UTStarcom” or the “Company”) maintains disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in thereports the Company files or submits pursuant to the Securities Exchange Act of1934, as amended (“Exchange Act”), is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s (“SEC”) rules and forms, and that such information isaccumulated and communicated to the Company’s management, including its chiefexecutive officer (“CEO”) and chief financial officer (“CFO”), as appropriate,to allow timely decisions regarding required financial disclosure.

 

Inconnection with the preparation of this Quarterly Report on Form 10-Q (“Form 10-Q”),the Company carried out an evaluation as of June 30, 2010 under the supervisionand with the participation of the Company’s management, including the CEO andCFO, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures, as such term is defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act. Based uponthis evaluation, management concluded that as of June 30, 2010 the Company’sdisclosure controls and procedures were not effective because of the materialweaknesses described in “Management’s Annual Report on Internal Control overFinancial Reporting,” included in “Part II, Item 9A - Controls and Procedures”(“Item 9A”) in the Company’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2009 (the “2009 Annual Report”), which have notyet been remediated. Investors are directed to Item 9A in the 2009 AnnualReport for the description of these weaknesses.

 

A“material weakness” is a deficiency, or a combination of deficiencies, ininternal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the Company’s annual or interimfinancial statements will not be prevented or detected on a timely basis. Toaddress the material weaknesses in internal control over financial reportingnoted above, the Company performed additional analyses and other procedures (asfurther described below under “Management’s Planned Remediation Initiatives andInterim Measures”) to ensure that the Company’s consolidated financialstatements were prepared in accordance with generally accepted accountingprinciples in the United States (“GAAP”). Accordingly, the Company’s managementbelieves that the consolidated financial statements included in thisForm 10-Q fairly present in all material respects the Company’s 

 

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financialcondition, results of operations and cash flows for the periods presented andthat this Form 10-Q does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the periods covered by this report.

 

**Management’s Planned Remediation Initiatives and InterimMeasures**

 

TheCompany plans to make necessary changes and improvements to the overall designof its control environment to address the material weaknesses in internalcontrol over financial reporting noted above. In particular, the Companyimplemented during 2009 and the first and second quarters of 2010, and plans tocontinue to implement during the remainder of 2010, the specific measuresdescribed below. In addition, in connection with the June 30, 2010 quarter-endreporting process, the Company has undertaken additional measures describedunder the subheading “Interim Measures” below to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of theCompany’s consolidated financial statements included in this Form 10-Q andto ensure that material information relating to the Company and itsconsolidated subsidiaries was made known to management in connection with thepreparation of this Form 10-Q.

 

***Remediation Initiatives***

 

1. To remediate the material weakness described in Item 9A in the 2009Annual Report over “*The recording ofreserves for losses on customer contracts,*” the Company transitionedthe responsibility for calculating the loss contract reserves to its localproject office in India in the third and further quarters of 2008, whichfacilitated enhanced coordination between the local business units, operations,sales and the finance teams resulting in more timely and complete informationavailable for the finance team to analyze. During the third quarter of 2009,the Company finalized its assessment of additional implemented modules of itsERP system in the operation in India, which enhanced the overall monitoring andanalysis of the various accounts and balances in India. Although we believethat these enhanced procedures improved the accuracy of the loss reservecalculation, they did not operate for an adequate period of time to ensureeffective remediation as of June 30, 2010. In the remainder of 2010, theCompany will continue performing the current procedures and make furtherenhancements, if needed, to confirm full and effective remediation.

 

2. To remediate the material weakness described in Item 9A in the 2009Annual Report over “*Period-end financialreporting process*” the Company added technical resources to thefinance team in China in the third and fourth quarters of 2009 as well as thefirst and second quarters of 2010. In the remainder of 2010, the Company willcontinue its effort to consolidate and streamline its global close process inChina, to standardize the processes for such financial reviews and to ensurethe reviewers analyze and monitor financial information in a consistent andthorough manner. Additional technical resources will enable the Company tobroaden the scope and quality of the independent reviews of underlyinginformation related to the Company’s period-end financial reporting process.

 

3. To remediate the material weakness described in Item 9A in the 2009Annual Report over “*internal control overfinancial reporting related to revenue recognition,*” the Companywill continue to enhance its contracts review process in order to ensure thatappropriate members of management have reviewed and confirmed criticalinformation necessary to assess the proper revenue recognition accounting. TheCompany will continue to assess and enhance its technical resources to broadenthe scope and quality of the independent reviews of underlying informationrelated to the revenue contracts.

 

***Interim Measures***

 

Management has not yet implemented all of the measures described aboveunder the heading “RemediationInitiatives” and/or tested them. Nevertheless, management believes themeasures identified above to the extent they have been implemented, togetherwith other measures undertaken by the Company in connection with thepreparation of the condensed consolidated financial statements included in thisForm 10-Q and described below, address the material weaknesses in internalcontrol over financial reporting described above. These other measures includethe following:

 

1. Extensive reviews of the reserves for losses on customer contractsincluding, in India, reviews of the inventory cost against the current costbacklog report and reconciliation between the local cost records to the costrecords at the Company’s headquarters.

 

2. A variety of manual review procedures, such as an extensive reviewof journal entry postings into the ERP system, a thorough review of accountreconciliations, including revenue and deferred revenue accounts, and adetailed review at its headquarters of trial balances including those issuedfrom decentralized locations, to ensure the completeness and accuracy of theunderlying financial information used to generate the consolidated financialstatements.

 

3. Various reviews of the revenue contracts and associated accountingmemos as well as the consolidated revenue schedules and fulfillment statusreports to ensure that revenue is accurately and completely recorded.

 

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***Management’s Conclusion***

 

Managementbelieves the remediation measures described under “Management’s PlannedRemediation Initiatives and Interim Measures” above will strengthen the Company’sinternal control over financial reporting and remediate the material weaknessesidentified above. However, management has not yet implemented all of thesemeasures and/or tested them. Management believes that the interim measuresdescribed under “Management’s Planned Remediation Initiatives and InterimMeasures” above ensure the reliability of financial reporting and thepreparation of the Company’s financial statements included in thisForm 10-Q and has discussed this with the Company’s Audit Committee.

 

TheCompany is committed to continue improving its internal control processes andwill continue to diligently and vigorously review its disclosure controls andprocedures and its internal control over financial reporting in order to ensurecompliance with the requirements of Section 404 of the Sarbanes-Oxley Actof 2002. However, any control system, regardless of how well designed, operatedand evaluated, can provide only reasonable, not absolute, assurance that itsobjectives will be met. As management continues to evaluate and work to improvethe Company’s internal control over financial reporting, it may determine totake additional or alternate measures to address control deficiencies, and itmay determine not to complete certain of the measures described under “Management’sPlanned Remediation Initiatives and Interim Measures” above.

 

**Changes in Internal Control over Financial Reporting**

 

Nochanges other than those described above occurred during the three months endedJune 30, 2010 in our internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II—OTHERINFORMATION**

 

**ITEM 1—LEGAL PROCEEDINGS**

 

Fora description of litigation and governmental investigations, see Note 10 to ourCondensed Consolidated Financial Statements included under Part 1, Item 1of this Quarterly Report on Form 10-Q.

 

**ITEM 1A—RISK FACTORS**

 

For a description of risk factors that couldmaterially affect our business, financial condition and future operating results,please consider the risk factors set forth in “Part I, Item 1A — RiskFactors” of our Annual Report on Form 10-K for the fiscal yearended December 31, 2009. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materially andadversely affect our business, financial condition or future operating results.

 

**ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

Therewere no unregistered sales of equity securities during the period covered bythis report.

 

**Issuer Purchases of Equity Securities**

 

**The following table summarizes the Company’s stock repurchase activityfor the three months ended June 30, 2010:**

 
| ** **      | ** ** | ** **                  | ** ** | ** **          | ** ** | **Total  number of shares**     | ** ** | **Approximate  dollar value**   | ** ** |
|-----------------|------------|-----------------------------|------------|---------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | ** **                  | ** ** | ** **          | ** ** | **purchased  as**               | ** ** | **of  shares that**             | ** ** |
| ** **      | ** ** | **Total  number of shares** | ** ** | **Average  price**  | ** ** | **part  of publicly announced** | ** ** | **may  yet be purchased under** | ** ** |
| **Period**      | ** ** | **Purchased  (1)**          | ** ** | **paid  per share** | ** ** | **plans  or programs**          | ** ** | **the  plans or programs**      | ** ** |
|            |       |                        |       |                |       |                            |       |                            |       |
| April 2010 |       | —                      |       | $                   | —     |                            | —     |                            | $          | — |   |
| May 2010   |       | 5,038                       |       | $                   | 2.11       |                            | —     |                            | $          | — |   |
| June 2010  |       | —                      |       | $                   | —     |                            | —     |                            | $          | — |   |
| Total           |       | 5,038                       |       |                |       | —                          |       | $                               | —     |   |

 

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(1)          During the second quarter of 2010, the Companyacquired 5,038 shares of common stock that employees presented to the Companyto satisfy withholding taxes in connection with the vesting of restricted stockawards.

 

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**ITEM 3—DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM 4— REMOVED AND RESERVED**

 

**ITEM 5—OTHER INFORMATION**

 

None

 

**ITEM 6—EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description** | ** **                                                                                                                                                                   | **Form** | ** ** | **Incorporated  by Reference  From Exhibit  Number** | ** ** | **Date Filed** |
|---------------------|------------|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|------------|------------------------------------------------------|------------|----------------|
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |
| 3.1                 |       |            | Thirteenth  Amended and Restated Certificate of Incorporation of UTStarcom, Inc., as  amended.                                                                          |     | 8-K        |                                                 | 3.1        |           | 12/12/2003 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 3.2                 |       |            | Second  Amended and Restated Bylaws of UTStarcom, Inc., as effective  June 28, 2008.                                                                               |     | 8-K        |                                                 | 3.1        |           | 4/14/2008 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 4.1                 |       |            | See  exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation  and Bylaws defining the rights of holders of Common Stock.                                |     | —     |                                                 | —     |           | — |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 4.2                 |       |            | Specimen  Common Stock Certificate.                                                                                                                                          |     | S-1/A      |                                                 | 4.1        |           | 2/7/2000 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 4.3                 |       |            | Third  Amended and Restated Registration Rights Agreement dated December 14,  1999.                                                                                     |     | S-1        |                                                 | 4.2        |           | 12/20/1999 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 4.4                 |       |            | Stockholder  Rights Agreement, made as of February 1, 2010, by and between  UTStarcom, Inc. and Beijing E-town International Investment and  Development Co., Ltd. |     | 8-K        |                                                 | 4.1        |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 4.5                 |       |            | Stockholder  Rights Agreement, made as of February 1, 2010, by and among  UTStarcom, Inc., Elite Noble Limited and Shah Capital Opportunity  Fund LP.         |     | 8-K        |                                                 | 4.2        |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 10.1                |       |            | Amendment  to Common Stock Purchase Agreement dated February 1, 2010 by and between the  Company and Beijing E-town International Investment and Development Co., Ltd.       |     | 8-K        |                                                 | 10.1       |           | 5/4/2010 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 10.2                |       |            | Amendment  to Common Stock Purchase Agreement dated February 1, 2010 by and among the  Company, Elite Noble Limited and Shah Capital Opportunity Fund LP.                    |     | 8-K        |                                                 | 10.2       |           | 5/4/2010 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 10.3                | *          |            | Offer  Letter to Edmond Cheng dated April 26, 2010.                                                                                                                          |     | 8-K        |                                                 | 10.1       |           | 5/4/2010 |
|                |       |            |                                                                                                                                                                         |     |       |                                                 |       |           |   |
| 10.4                | *          |            | Agreement  between Kenneth Luk and UTStarcom, Inc. dated May 3, 2010.                                                                                                        |     | 8-K        |                                                 | 10.2       |           | 5/4/2010 |

 

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                               | ** ** | **Form**       | ** ** | **Incorporated  by Reference  From Exhibit  Number** | ** ** | **Date Filed**    |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------------------------------|------------|-------------------|
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 10.5                |       | Supplementary  Agreement on Payment (translation from Chinese).                                                                                                                                                               |       | 10-Q           |       | 10.11                                                |       | 5/10/2010         |
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 10.6                |       | Second  Amendment to Common Stock Purchase Agreement dated February 1, 2010, as  amended on April 30, 2010, by and between the Company and Beijing E-town  International. Investment and Development Co., Ltd.                |       | 8-K            |       | 10.1                                                 |       | 6/10/2010         |
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 10.7                |       | Second  Amendment to Common Stock Purchase Agreement dated February 1, 2010, as  amended on April 30, 2010, by and among the Company, Elite Noble Limited and  Shah Capital Opportunity Fund LP.                              |       | 8-K            |       | 10.2                                                 |       | 6/10/2010         |
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 10.8                |       | Third  Amendment to Common Stock Purchase Agreement dated February 1, 2010, as  amended on April 30, 2010 and June 4, 2010, by and between the Company and  Beijing E-town International Investment and Development Co., Ltd. |       | 8-K            |       | 10.1                                                 |       | 7/13/2010

  |
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 10.9                |       | Third  Amendment to Common Stock Purchase Agreement dated February 1, 2010, as  amended on April 30, 2010 and June 4, 2010, by and among the Company, Elite  Noble Limited and Shah Capital Opportunity Fund LP.              |       |  

8-K    |       |  

10.2                                         |       |  

7/13/2010 |
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 31.1                |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                    |       | Filed herewith |       | —                                               |       | —            |
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 31.2                |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                    |       | Filed herewith |       | —                                               |       | —            |
|                |       |                                                                                                                                                                                                                          |       |           |       |                                                 |       |              |
| 32.1                |       | Certifications  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                          |       | Filed herewith |       | —                                               |       | —            |

 

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*              Management contract, plan orarrangement

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                       |     | UTSTARCOM, INC. |
|----------------------------|----------|----------------------|
|                       |     |                 |   |
| Date:  August 6, 2010 |     | By:                  | /s/  EDMOND CHENG |
|                       |     |                 | Edmond  Cheng |
| * *                   | * * | * *             | *Senior Vice President and Chief Financial Officer* |
| * *                   | * * | * *             | *(Principal  Financial Officer)* |

 

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