UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549  FORM 10-Q  (Mark
  One)x
  QUARTERLY REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
  March 31, 2008ORo
  TRANSITION REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 PARKWAYALAMEDA, CALIFORNIA
  
  94502(Address of principal executive offices)
  
  (zip code)
  Registrants telephone
number, including area code: (510) 864-8800  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yesx No o  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (check one):  Large accelerated filerx
  
  Accelerated fileroNon-accelerated filero
  
  Smaller reporting companyo(Do
  not check if a smallerreporting
  company)
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). 
Yeso No x  As
of May 7, 2008 there were 125,099,129 shares of the registrants common
stock outstanding, par value $0.00125.


TABLE OF CONTENTS  PART IFINANCIAL INFORMATION
  
  3ITEM 1CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS (UNAUDITED)
  
  3ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS
  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  25ITEM 3QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISKS
  
  42ITEM 4CONTROLS AND PROCEDURES
  
  43PART IIOTHER INFORMATION
  
  46ITEM 1LEGAL PROCEEDINGS
  
  46ITEM 1ARISK FACTORS
  
  49ITEM 2UNREGISTERED SALES OF EQUITY
  SECURITIES AND USE OF PROCEEDS
  
  66ITEM 3DEFAULTS UPON SENIOR SECURITIES
  
  66ITEM 4SUBMISSION OF MATTERS TO A VOTE OF
  SECURITY HOLDERS
  
  67ITEM 5OTHER INFORMATION
  
  67ITEM 6EXHIBITS
  
  67SIGNATURES
  
  68  2


PART IFINANCIAL
INFORMATION  ITEM 1CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  UTSTARCOM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data)  March 31,
  
  December 31,2008
  
  2007ASSETSCurrent assets:Cash and cash equivalents
  
  $
  298,482
  
  $
  437,449Short-term investments
  
  6,637
  
  65,629Accounts receivable, net of allowances for
  doubtful accounts of $45,934 and $45,728 at March 31, 2008 and
  December 31, 2007, respectively
  
  239,891
  
  304,654Accounts receivable, related parties, net
  of allowances for doubtful accounts of $0 at March 31, 2008 and
  December 31, 2007
  
  20,943
  
  26,256Notes receivable
  
  8,867
  
  12,615Inventories
  
  330,006
  
  334,467Deferred costs
  
  191,788
  
  190,260Deferred tax assets
  
  1,157
  
  1,157Prepaids and other current assets
  
  141,694
  
  114,037Short-term restricted cash
  
  13,749
  
  6,442Total current assets
  
  1,253,214
  
  1,492,966Property, plant and equipment, net
  
  210,336
  
  209,094Long-term investments
  
  15,671
  
  16,667Intangible assets, net
  
  22,985
  
  24,809Long-term deferred costs
  
  164,922
  
  164,766Long-term deferred tax assets
  
  56,775
  
  46,277Other long-term assets
  
  25,750
  
  30,009Total assets
  
  $
  1,749,653
  
  $
  1,984,588LIABILITIES,
  MINORITY INTEREST AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
  
  $
  214,263
  
  $
  148,440Short-term debt
  
  35,907
  
  322,829Income taxes payable
  
  3,913
  
  1,174Customer advances
  
  244,947
  
  229,050Deferred revenue
  
  108,068
  
  100,502Deferred tax liabilities
  
  49,687
  
  53,922Other current liabilities
  
  221,088
  
  247,299Total current liabilities
  
  877,873
  
  1,103,216Long-term deferred revenue
  
  234,507
  
  236,033Long-term debt
  
  267
  
  333Other long-term liabilities
  
  19,979
  
  23,325Total liabilities
  
  1,132,626
  
  1,362,907Commitments and contingencies (Note 13)Minority interest in consolidated
  subsidiaries
  
  806
  
  3,705Stockholders equity:Common stock: $0.00125 par value;
  750,000,000 authorized shares; 125,099,129 and 123,467,304 issued and
  outstanding at March 31, 2008 and December 31, 2007, respectively
  
  152
  
  152Additional paid-in capital
  
  1,221,567
  
  1,216,691Accumulated deficit
  
  (665,813
  )
  (691,170
  )Accumulated other comprehensive income
  
  60,315
  
  92,303Total stockholders equity
  
  616,221
  
  617,976Total liabilities, minority interest and
  stockholders equity
  
  $
  1,749,653
  
  $
  1,984,588  See accompanying notes to the condensed consolidated financial
statements.  3


UTSTARCOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (In thousands, except per share data)  Three months ended March 31,2008
  
  2007Net salesUnrelated party
  
  $
  574,195
  
  $
  462,786Related party
  
  11,794
  
  13,116585,989
  
  475,902Cost of net salesUnrelated party
  
  487,153
  
  391,850Related party
  
  6,757
  
  8,767Gross profit
  
  92,079
  
  75,285Operating expenses:Selling, general and administrative
  
  79,744
  
  79,837Research and development
  
  41,400
  
  43,662Amortization of intangible assets
  
  1,824
  
  4,046Total net operating expenses
  
  122,968
  
  127,545Operating loss
  
  (30,889
  )
  (52,260
  )Interest income
  
  2,817
  
  4,910Interest expense
  
  (6,071
  )
  (6,725
  )Other income, net
  
  53,970
  
  3,970Income (loss) before income taxes and
  minority interest
  
  19,827
  
  (50,105
  )Income tax benefit (expense)
  
  5,020
  
  (4,341
  )Minority interest in losses of consolidated
  subsidiaries
  
  510
  
  464Net income (loss)
  
  $
  25,357
  
  $
  (53,982
  )Net income (loss) per share - Basic
  
  $
  0.21
  
  $
  (0.45
  )Net income (loss) per share - Diluted
  
  $
  0.21
  
  $
  (0.45
  )Weighted average shares used in per-share
  calculation:- Basic
  
  122,096
  
  120,900- Diluted
  
  123,098
  
  120,900  See accompanying notes to the condensed consolidated financial
statements.  4


UTSTARCOM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)  Three months ended March 31,2008
  
  2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
  
  $
  25,357
  
  $
  (53,982
  )Adjustments to reconcile net income (loss)
  to net cash provided by (used in) operating activities:Depreciation and amortization
  
  10,112
  
  14,744Gain on sale of investments and liquidation
  of ownership interest in a variable interest entity
  
  (47,848
  )
  Net loss (gain) on sale of fixed assets
  
  8
  
  (2,699
  )Stock-based compensation expense
  
  4,795
  
  2,755Recovery of doubtful accounts
  
  (680
  )
  (5,281
  )Provision for (recovery of) deferred costs
  reserves
  
  320
  
  (1,504
  )Deferred income taxes
  
  (11,708
  )
  Other
  
  (343
  )
  266Changes in operating assets and
  liabilities:Accounts receivable
  
  75,177
  
  60,296Inventories
  
  7,650
  
  (2,422
  )Deferred costs
  
  8,028
  
  (5,222
  )Other assets
  
  (19,588
  )
  (31,433
  )Accounts payable
  
  64,287
  
  (41,324
  )Income taxes payable
  
  1,414
  
  5,969Customer advances
  
  19,902
  
  44,298Deferred revenue
  
  (5,771
  )
  (11,790
  )Other current liabilities
  
  (34,404
  )
  (79,336
  )Net cash provided by (used in) operating
  activities
  
  96,708
  
  (106,665
  )CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property, plant and equipment
  
  (7,630
  )
  (5,221
  )Proceeds from the disposition of (purchase
  of) an investment interest
  
  (1,949
  )
  1,800Proceeds from repayment of loan by a
  variable interest entity
  
  7,728
  
  Change in restricted cash
  
  (4,517
  )
  10,365Purchase of short-term investments
  
  (6,578
  )
  (15,576
  )Proceeds from sale of short-term
  investments
  
  58,740
  
  10,483Other
  
  96
  
  (70
  )Net cash provided by investing activities
  
  45,890
  
  1,781CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
  
  
  
  64,621Payments on borrowings
  
  (288,861
  )
  (64,676
  )Other
  
  2,473
  
  (654
  )Net cash used in financing activities
  
  (286,388
  )
  (709
  )Effect of exchange rate changes on cash and
  cash equivalents
  
  4,823
  
  2,120Net decrease in cash and cash equivalents
  
  (138,967
  )
  (103,473
  )Cash and cash equivalents at beginning of
  period
  
  437,449
  
  661,623Cash and cash equivalents at end of period
  
  $
  298,482
  
  $
  558,150Supplemental disclosure of cash flow
  information:Non-cash operating activity:Accounts receivable transferred to notes
  receivable
  
  $
  2,984
  
  $
  9,240  See accompanying notes to the condensed consolidated financial
statements.  5


UTSTARCOM, INC.  NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY  The accompanying unaudited condensed consolidated
financial statements include the accounts of UTStarcom, Inc. (Company)
and its wholly and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the preparation of the
condensed consolidated financial statements. The minority interest in
consolidated subsidiaries is shown separately in the condensed consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current period presentation.  The accompanying unaudited condensed consolidated
financial statements as of March 31, 2008 and for the three months ended March 31,
2008 and 2007 have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The December 31,
2007 balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the Companys December 31, 2007 financial statements, including the
notes thereto, and the other information set forth in the Companys Annual
Report on Form 10-K for the year ended December 31, 2007. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
revenue, costs, expenses and gains and losses not affecting retained earnings
that are reported in the consolidated financial statements and accompanying
disclosures.  Actual results may be
different.  See the Companys 2007 Annual
Report for discussions of the Companys critical accounting policies and
estimates.  In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair statement
of the Companys financial condition, the results of its operations and its
cash flows for the periods indicated. The results of operations for the three
months ended March 31, 2008 are not necessarily indicative of the
operating results for the full year.  The Company reported net losses of $195.6 million,
$117.3 million and $532.6 million for the years ended December 31,
2007, 2006 and 2005, respectively. At December 31, 2007, the Companys
accumulated deficit aggregated $691.2 million. During the year ended December 31,
2007, the Company used $218.2 million of cash in operations. At December 31,
2007, the Company had cash and cash equivalents of $437.4 million of which
$289.5 million was used to repay the convertible subordinated notes due on
March 1, 2008 (the Notes). This amount included a principal payment of
$274.6 million and $14.9 million in accrued interest. At December 31,
2007, $332.4 million of the Companys cash and cash equivalents were held
by its subsidiaries in China and China imposes currency exchange controls on
transfers of funds outside of China. Additionally, the available lines of
credit in China are significantly less than what has been available to the
Company historically and the existing credit facilities in China expire during
the fourth quarter of 2008. These factors raise substantial doubt as to the
Companys ability to continue as a going concern.  The Company had net income of $25.4 million for the quarter ended March 31,
2008.  In the same quarter, the Company
experienced an operating loss of $30.9 million. At March 31, 2008, the
Company had an accumulated deficit of $665.8 million.  Cash provided from operations was $96.7
million during the quarter ended March 31, 2008, primarily the result of
management of working capital during the quarter in preparation for the
repayment of the convertible subordinated notes due March 1, 2008. At March 31,
2008, the Company had cash and cash equivalents of $298.5 million, of which
$166.9 million was held by its China subsidiaries and continues to be subject
to currency exchange controls on transfers of funds from China.  Management believes that it has developed a liquidity plan that, if
executed successfully, will provide sufficient liquidity to finance the Companys
anticipated working capital and capital expenditure requirements for the next
12 months. Managements liquidity plans include divesting the Companys
noncore assets or operations and obtaining loans from financial institutions.
During the quarter ended March 31, 2008, the Company did not consummate
any such divestiture transactions and there is no assurance that such
divestiture transactions will be consummated in the future on acceptable terms
or at all or whether such loans will be available. In addition, through
managements ongoing efforts to improve the Companys profitability and cash
flows, management continues to re-examine all aspects of the Companys business
for areas of improvement and continues to focus on the Companys fixed cost
base and improving the working capital position to better align with
operations, market demand and current sales levels. However, if projected sales
do not materialize,  6


management may need to further
reduce expenses. In addition, the Company may require additional equity or debt
financing. If future funds are raised through issuance of stock or debt, these
securities could have rights, privileges or preference senior to those of the
Companys common stock and debt covenants could impose restrictions on the
Companys operations. The sale of additional equity securities or debt
financing could result in additional dilution to the Companys current shareholders.
There can be no assurance that additional financing, if required, will be
available on terms satisfactory to the Company.  The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets or the amounts and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as
a going concern.  NOTE  2 - RECENT
ACCOUNTING PRONOUNCEMENTS  Adoption
of New Accounting Standards  In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, Fair Value
Measurements, (SFAS 157). SFAS 157 defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The
provisions of this standard apply to current accounting pronouncements that
require or permit fair value measurements. Upon adoption, the provisions of
SFAS 157 are to be applied prospectively with limited exceptions.  Effective January 1, 2008, the Company
adopted the measurement and disclosure requirements of SFAS 157 as it relates
to financial assets and financial liabilities measured at fair value on a
recurring basis. The adoption of SFAS No. 157 for these financial assets
and financial liabilities did not have a material impact on the Companys
financial condition or results of operations in the first quarter of 2008. The
new disclosures required by SFAS 157 are included in Note 6. In February 2008,
the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2),
which delays the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities.  Therefore, the Company has delayed
application of SFAS 157 to its nonfinancial assets and nonfinancial
liabilities until January 1, 2009.  The Company is currently
evaluating the impact of SFAS 157 for nonfinancial assets and nonfinancial
liabilities on the Companys financial position and results of
operations.  While the Company does not expect the adoption of this
statement to have a material impact on its consolidated financial statements in
subsequent reporting periods, the Company continues to monitor any additional
implementation guidance that is issued that addresses the fair value
measurements for non-financial assets and non-financial liabilities not
disclosed at fair value in the consolidated financial statement on at least an
annual basis.  In
February 2007, the FASB issued Statement of Financial Accounting Standard No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
This statement permits, but does not require, companies to report at fair value
the majority of recognized financial assets, financial liabilities and firm
commitments. Under this standard, unrealized gains and losses on items for
which the fair value option is elected are reported in earnings at each
subsequent reporting date. The Company adopted SFAS 159 during the first
quarter of 2008. The Company has chosen not to elect the fair value option for
any items that are not already required to be measured at fair value in
accordance with accounting principles generally accepted in the United States.
As such, the adoption of SFAS 159 did not have an impact on the Companys
financial position or results of operations.  Standards
Issued But Not Yet Effective  In
December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations (SFAS 141(R)). The standard changes the accounting for
business combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for preacquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment
of acquisition related transaction costs and the recognition of changes in the
acquirers income tax valuation allowance. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008.  The Company will assess the impact of SFAS 141(R) if
and when a future acquisition occurs.  In December 2007, the FASB issued Statement No. 160, Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS 160). The standard changes the accounting for non-controlling
(minority) interests in consolidated financial statements including the
requirements to classify non-controlling interests as a component of
consolidated stockholders equity, and the elimination of minority interest
accounting in results of operations with earnings attributable to
non-controlling interests reported as part of consolidated earnings.
Additionally, SFAS 160  7


revises the accounting for both
increases and decreases in a parents controlling ownership interest.
SFAS 160 is effective for fiscal years beginning after December 15,
2008, with early adoption prohibited. The Company is currently evaluating the
impact of the pending adoption of SFAS 160 on its consolidated financial
statements.  In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities
(SFAS 161), which amends and expands the disclosure requirements of FASB
Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133),
with the intent to provide users of financial statements with an enhanced
understanding of:  (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entitys financial
position, financial performance and cash flows.  SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments and disclosures about credit-risk-related contingent
features in derivative instruments.  This statement applies to all
entities and all derivative instruments.  SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after November 15, 2008.  
Since SFAS 161 only provides for additional disclosure requirements,
there will be no impact on the Companys financial position or results of
operations.  NOTE 3 - STOCK-BASED COMPENSATION  During
the quarter ended March 31, 2008, the Company granted equity awards
including restricted stock, restricted stock units and stock options. Such
awards generally vest over a period of one to four years from the date of
grant.  Restricted stock has the voting
rights of common stock and the shares underlying restricted stock are issued
and outstanding.  In
November 2007, the Compensation Committee granted 962,249 shares of
performance-based restricted stock units to certain senior executive
officers.  On February 26, 2008, the
Committee determined, based on the Companys and each executive officers level
of performance during the Companys 2007 fiscal year, that 783,324 shares
underlying the previously granted performance-based restricted stock units had
been earned, with 50% vesting immediately and 50% vesting on February 28,
2009.  Each performance-based restricted
stock unit has a fair value of $2.99 per share, which equals the closing price
of the Companys common stock on the NASDAQ Stock Market on the measurement
date of February 26, 2008.  The
Compensation Committee also granted an additional 1,073,333 performance-based
awards to certain senior executive officers, subject to the attainment of goals
determined by the Compensation Committee in the quarter ended March 31,
2008.  The Company may be subject to
variable levels of expense related primarily to the varying levels of
performance, as well as for fluctuations in the Companys stock price as these
awards are marked to market periodically prior to the date of the
Compensation Committees determination on performance.  The
total stock-based compensation expense recognized in the condensed consolidated
statement of operations is as follows:  Three months ended March 31,2008
  
  2007(in thousands)Cost of net sales
  
  $
  260
  
  $
  124Selling, general and administrative
  
  3,997
  
  1,705Research and development
  
  538
  
  926Total
  
  $
  4,795
  
  $
  2,755  8


The
fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option valuation model and the weighted average
assumptions in the following table. The expected term of options granted is
derived from historical data on employee exercise and post-vesting employment
termination behavior. The risk free interest rate is based on the zero coupon
U.S. Treasury securities with an equivalent remaining term. Expected volatility
is based on the historical volatility of the Companys stock. The weighted
average per share fair value of stock options granted and the assumptions used,
are as follows:  Three months ended March 31,2008
  
  2007 (1)Weighted-average per share fair value of
  grants
  
  $
  1.44
  
  Expected remaining term in years
  
  4.3
  
  Weighted average risk-free interest rate
  
  2.25
  %
  Expected dividend rate
  
  0.00
  %
  Volatility
  
  63
  %
    
 (1) No
stock options were granted during the three months ended March 31, 2007.  Option
activity as of March 31, 2008 and changes during the three months ended March 31,
2008 are as follows:  Number of
  shares
  outstanding
  
  Weighted
  average
  exercise
  price(in thousands)Options outstanding, December 31, 2007
  
  17,647
  
  $
  13.91Options granted
  
  385
  
  2.81Options exercised
  
  (1
  )
  2.50Options forfeited or expired
  
  (1,471
  )
  16.99Options outstanding, March 31, 2008
  
  16,560
  
  $
  13.38  Nonvested
restricted stock and restricted stock units as of March 31, 2008, and
changes during the three months ended March 31, 2008, are as follows:  Shares
  
  Weighted average
  grant date fair value(in thousands)Nonvested at December 31, 2007
  
  6,370
  
  $
  3.09Granted
  
  5,200
  
  2.81Vested
  
  (1,222
  )
  2.82Forfeited
  
  (248
  )
  2.90Nonvested at March 31, 2008
  
  10,100
  
  $
  2.97  At
March 31, 2008, there was approximately $28.1 million of total
unrecognized compensation cost, related to non-vested stock options, restricted
stock and restricted stock units, adjusted for forfeitures, which is expected
to be recognized over a weighted average period of 2.4 years. For additional
information regarding the Companys stock-based compensation plans, see the
Companys Annual Report on Form 10-K for the year ended December 31,
2007.  NOTE4 - EARNINGS (LOSS) PER
SHARE  Basic
earnings per share (EPS) is computed by dividing net income (loss) available
to common stockholders by the weighted average number of shares of the Companys
common stock outstanding during the period, which excludes nonvested restricted
stock. Diluted EPS presents the amount of net income (loss) available to each
share of common stock outstanding during the period plus each share of common
stock that would have been outstanding assuming the Company had issued shares
of common stock for all dilutive potential common shares outstanding during the
period. The Companys potentially dilutive common shares include convertible
subordinated notes prior to their maturity, outstanding stock options,
nonvested restricted  9


stock and restricted stock
units and Employee Stock Purchase Plan (ESPP), which are reflected in diluted
net income per share by application of the treasury stock method. Under the
treasury stock method, the amount that the employee must pay for exercising
stock options, the amount of stock-based compensation cost for future services
that the Company has not yet recognized, and the amount of tax benefit that
would be recorded in additional paid-in capital upon exercise are assumed to be
used to repurchase shares.  The
following is a summary of the calculation of basic and diluted EPS:  Three months ended March 31,2008
  
  2007(in thousands except per share data)Numerator:Net earnings (loss) for basic EPS
  computation
  
  $
  25,357
  
  $
  (53,982
  )Effect of dilutive securities - convertible
  subordinated notes
  
  
  
  Net earnings (loss) adjusted for dilutive
  securities
  
  $
  25,357
  
  $
  (53,982
  )Denominator:Shares used to compute basic EPS
  
  122,096
  
  120,900Dilutive common stock equivalent shares
  
  1,002
  
  Shares used to compute diluted EPS
  
  123,098
  
  120,900Earnings (loss) per share - basic
  
  $
  0.21
  
  $
  (0.45
  )Earnings (loss) per share - diluted
  
  $
  0.21
  
  $
  (0.45
  )  For
the three months ended March 31, 2007, no potential common shares were
dilutive because of the net loss in the period. 
For the three months ended March 31, 2008, certain stock options,
nonvested restricted stock and nonvested restricted stock units whose combined
exercise price, unrecognized compensation cost and excess tax benefits were
greater than the average market price of the Companys common stock have also
been excluded from the calculation of diluted EPS because to include them would
have been anti-dilutive for the period. In addition, weighted shares subject to
performance goals totaling 0.2 million were excluded from the computation of
diluted earnings per share as of March 31, 2008 because the performance
goals had not been attained as of March 31, 2008. The following table summarizes the total
potential shares of common stock that were excluded from the diluted per share
calculation:  Three months ended March 31,2008
  
  2007(in thousands)Stock options
  
  16,771
  
  19,344Assumed conversion of convertible
  subordinated notes
  
  7,611
  
  11,543Nonvested restricted stock and restricted
  stock units
  
  503
  
  63524,885
  
  31,522
  10


NOTE 5 - COMPREHENSIVE LOSS  The
reconciliation of net income (loss) to comprehensive loss for the three months
ended March 31, 2008 and 2007 is as follows:  Three months ended March 31,2008
  
  2007(in thousands)Net income (loss)
  
  $
  25,357
  
  $
  (53,982
  )Unrealized loss on investments, net of tax
  
  (1,450
  )
  (3,869
  )Reclassification adjustment related to
  realization of previously unrealized gains, net of tax
  
  (38,302
  )
  Foreign currency translation
  
  7,764
  
  4,666Total comprehensive loss
  
  $
  (6,631
  )
  $
  (53,185
  )
  The
components of accumulated other comprehensive income reported in the condensed
consolidated balance sheets were as follows:  March 31,
  
  December 31,2008
  
  2007(in thousands)Unrealized (loss) gain on available-for-sale
  securities, net of tax
  
  $
  (2,425
  )
  $
  35,949Foreign currency translation
  
  62,740
  
  56,354Accumulated other comprehensive income
  
  $
  60,315
  
  $
  92,303  NOTE 6 - CASH, CASH EQUIVALENTS, INVESTMENTS AND FAIR VALUE
MEASUREMENTS  Cash
and cash equivalents are recorded at cost. Short-term investments, consisting
of bank notes and available-for-sale securities, were $6.6 million and
$65.6 million at March 31, 2008 and December 31, 2007,
respectively.   Short-term investments
decreased at March 31, 2008 from December 31, 2007 primarily due to
the sale of investments with a carrying value of $42.4 million at December 31,
2007.  The available-for-sale securities
investments are recorded at fair value (see below).  Any unrealized holding gains or losses are
reported as a component of other comprehensive income, net of related income
tax effects. Realized gains and losses are reported in earnings.  At March 31, 2008, the long-term
investments included $2.4 million of unrealized holding loss which was recorded
in accumulated other comprehensive income. There was no unrealized holding gain
or loss in short-term investments.   At December 31,
2007, the long-term and short-term investments included $1.0 million of
unrealized holding loss and $36.9 million of unrealized holding gain,
respectively.  The
Company accepts bank notes receivable with maturity dates of between three and
six months from its customers in China in the normal course of business.  The Company may discount these bank notes
with banking institutions in China. During the three months ended March 31,
2008, the Company sold $22.8 million of bank notes and recorded costs of $0.3
million as a result of discounting the notes. 
There were no bank notes sold during the three months ended March 31,
2007.  11


The
following table shows the break-down of the Companys total investments at March 31,
2008 and December 31, 2007:  March 31,
  
  December 31,2008
  
  2007(in thousands)Equity SecuritiesGemdale Company, Ltd
  
  $
  
  
  $
  30,595Infinera
  
  
  
  11,759Global Asia Partners L.P.
  
  2,211
  
  2,113Cortina
  
  3,013
  
  3,013MRV
  
  2,082
  
  3,523GCT SemiConductor, Inc.
  
  3,000
  
  3,000Xalted Networks
  
  3,302
  
  3,302Others
  
  2,063
  
  1,716Bank Notes
  
  6,637
  
  23,275Total investments
  
  $
  22,308
  
  $
  82,296Short-term investments
  
  6,637
  
  65,629Long-term investments
  
  15,671
  
  16,667  Gemdale  Gemdale Co., Ltd
(Gemdale) is a real estate company that invests and develops properties in
China, primarily in Shanghai, Beijing, Shenzhen and Wuhan.  During the first quarter of 2008, the Company
sold its remaining investment for approximately $32.9 million cash and
recorded a gain of $32.4 million in other income, net.  Infinera  Infinera
Corporation (Infinera) develops optical telecommunications systems using
photonic integrated circuits.  Infinera
became a public company as a result of its initial public offering in June 2007.  During the first quarter of 2008, the Company
sold all of its investment in Infinera for total proceeds of $9.2 million
and recognized a gain of $7.3 million in other income, net.  MRV  On July 1, 2007, Fiberxon, an investment in which the Company had
a 7% ownership interest, completed a merger with MRV Communications (MRV),
which is a publicly-traded company in an active market. In exchange for the
Companys interest in Fiberxon, the Company was entitled to receive
$1.5 million in cash, 1,519,365 shares of MRV common stock valued at
approximately $4.5 million and deferred consideration of approximately
$2.7 million. The deferred consideration becomes payable upon the
completion of certain milestones and may be reduced by legitimate claims of MRV
for certain matters related to the merger. In the third quarter of 2007, the
Company was paid the cash consideration of $1.5 million and received
1,519,365 shares of MRV common stock and recognized a gain on investment of
$2.9 million. During the first quarter of 2008, the Company recorded an unrealized
loss of $1.4 million, in other comprehensive income, representing the
change in fair value of the investment during the quarter.  The accumulated unrealized loss at March 31,
2008 was $2.4 million, representing the difference between the fair value of
the investment on March 31, 2008 and the initial amount recorded of
$4.5 million when the MRV shares were received in 2007.  At March 31, 2008, MRV is the only
investment accounted for under SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities.  Fair
Value Measurements  As
discussed in Note 2, effective January 1, 2008, the Company adopted
SFAS 157 as it relates to financial assets and liabilities that are being
measured and reported at fair value on a recurring basis.  Although
the adoption of SFAS 157 did not materially impact its financial condition,
results of operations, or cash flows, the Company is now required to provide  12


additional disclosures as part
of its financial statements.  In accordance with FSP 157-2, the
Company deferred adoption of SFAS 157 as it relates to nonfinancial assets and
liabilities measured at fair value on a nonrecurring basis.  SFAS No. 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis
for considering such assumptions, SFAS No. 157 establishes a three-tier
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows: (Level 1) observable inputs such as quoted prices in active markets;
(Level 2) inputs other than the quoted prices in active markets that are
observable either directly or indirectly; and (Level 3) unobservable inputs in
which there is little or no market data, which require us to develop our own
assumptions. This hierarchy requires the Company to use observable market data,
when available, and to minimize the use of unobservable inputs when determining
fair value. On a recurring basis, the Company measures certain financial assets
at fair value, including its marketable securities.  At March 31,
2008, the Companys investment in MRV is an available-for sale security
recorded at fair value, classified within Level 1 of the fair value
hierarchy.  The Company has no other
financial assets or liabilities that are being measured at fair value at March 31,
2008.  NOTE 7 - RESTRICTED CASH  At
March 31, 2008 the Company had short-term restricted cash of $13.7
million, and had long-term restricted cash of $17.5 million included in other
long-term assets. At December 31, 2007 the Company had short-term
restricted cash of $6.4 million, and had long-term restricted cash of
$20.2 million included in other long-term assets. These amounts primarily
collateralize the Companys issuances of standby and commercial letters of
credit.  NOTE 8 - NOTES RECEIVABLE AND RECEIVABLES PURCHASE AGREEMENT  Commercial
notes receivable available for sale were $8.9 million and $12.6 million at
March 31, 2008 and December 31, 2007, respectively. The Company may
discount these commercial notes with banking institutions in China. A sale of
these notes is reflected as a reduction of notes receivable and the proceeds of
the settlement of these notes are included in cash flows from operating
activities in the consolidated statement of cash flows. There were no
commercial notes receivable sold during the three months ended March 31,
2008 and 2007.  In August 2005,
the Company entered into a Committed Receivables Purchase Agreement (Agreement)
with a financial institution, whereby the Company could sell up to
$100.0 million of its eligible accounts receivable, as defined in the
Agreement.  In March 2008, the
Company terminated the Agreement. No receivables were sold pursuant to this
arrangement and no premiums or penalties were incurred by the Company in
connection with the termination of this credit facility.  NOTE9 - INVENTORIES  As
of March 31, 2008 and December 31, 2007, total inventories consisted
of the following:  March 31,
  
  December 31,2008
  
  2007(in thousands)Raw materials
  
  $
  30,898
  
  $
  34,413Work-in-process
  
  33,819
  
  35,853Finished goods
  
  265,289
  
  264,201Total Inventories
  
  $
  330,006
  
  $
  334,467  13


NOTE 10 - INTANGIBLE ASSETS  As
of March 31, 2008 and December 31, 2007, intangible assets consisted
of the following:  March 31, 2008
  
  December 31, 2007(in thousands)Gross
  
  
  
  Net
  
  Gross
  
  
  
  
  
  NetCarrying
  
  Accumulated
  
  Carrying
  
  Carrying
  
  Impairment
  
  Accumulated
  
  CarryingAmount
  
  Amortization
  
  Amount
  
  Amount
  
  Charges
  
  Amortization
  
  AmountAmortized intangible assets:Existing technology
  
  $
  15,116
  
  $
  (14,927
  )
  $
  189
  
  $
  39,530
  
  $
  (5,214
  )
  $
  (33,843
  )
  $
  473Customer relationships
  
  35,528
  
  (14,307
  )
  21,221
  
  57,220
  
  (10,458
  )
  (24,676
  )
  22,086Trade names
  
  4,940
  
  (4,940
  )
  
  
  4,940
  
  
  
  (4,940
  )
  Non-compete agreement
  
  10,800
  
  (9,225
  )
  1,575
  
  10,800
  
  
  
  (8,550
  )
  2,250$
  66,384
  
  $
  (43,399
  )
  $
  22,985
  
  $
  112,490
  
  $
  (15,672
  )
  $
  (72,009
  )
  $
  24,809
  Amortization
expense was $1.8 million and $4.0 million for the three months ended March 31,
2008 and 2007, respectively. In the fourth quarter of 2007, the Company
determined that the undiscounted cash flows are not sufficient to recover the
carrying value of the customer relationships and technology intangible assets
within the Other segment and recorded an intangible asset impairment charge of
$15.7 million. The estimated aggregate amortization expense for
intangibles for the remainder of 2008 and each of the next four years and
thereafter is as follows:  (in thousands)Remainder of 2008
  
  $
  4,3612009
  
  3,4632010
  
  3,4632011
  
  3,4632012
  
  3,463Thereafter
  
  4,772$
  22,985
  NOTE 11 - DEBT  The
following represents the outstanding borrowings at March 31, 2008 and December 31,
2007:  March 31,
  
  December 31,2008
  
  2007(in thousands)Bank loans
  
  $
  35,653
  
  $
  47,981Capital lease obligations, at 4.7%-10.0%,
  due through 2011
  
  521
  
  581Convertible subordinated notes, due March 1,
  2008
  
  
  
  274,600Total Debt
  
  $
  36,174
  
  $
  323,162Long-term debt
  
  267
  
  333Short-term debt
  
  $
  35,907
  
  $
  322,829
  14


At
March 31, 2008, the Company had loans with various banks totaling $35.7 million
with interest rates ranging from 6.3% to 7.1% per annum. These bank loans
mature during 2008 and are included in short-term debt. There are no
significant covenants associated with these loans.  At
March 31, 2008, the Company had credit facilities totaling
$158.3 million, of which $42.8 million was for working capital purposes
and the remaining $115.5 million was for use in support of letters of credits
and corporate guarantees.  As of March 31,
2008, $145.4 million of the total credit facilities remained available. All of
these facilities expire in late 2008.  As
of March 31, 2008, the Company has not guaranteed any debt not included in
the condensed consolidated balance sheet.  On March 12, 2003, the Company completed an offering of
$402.5 million of 7/8% convertible subordinated
notes due March 1, 2008 to qualified buyers pursuant to Rule 144A
under the Securities Act of 1933.  In
2007, the Company and holders of the remaining $274.6 million of
convertible subordinated notes entered into two supplemental indentures waiving
certain provisions of the original agreement and providing for an increase in
the interest rate. The notes were convertible into the Companys common stock,
under certain conditions, at a conversion price of $23.79 per share and were
subordinated to all present and future senior debt of the Company.  On March 3, 2008, the Company repaid the
convertible subordinated notes of $289.5 million which included a principal
payment of $274.6 million and the accrued interest of $14.9 million.  On March 21,
2008, the Company entered into a credit agreement providing for a $75.0 million
secured revolving credit facility that is subject to an accounts receivable and
inventory borrowing base formula and will be used to fund the Companys general
working capital requirements.  As of March 31, 2008, there were no
revolving loans or letters of credit outstanding under the credit agreement. In
April 2008, the Company borrowed $50.0 million under a LIBOR draw against
this credit facility which bears interest at 7.0% and also started drawing
daily base rate loans to fund the Companys working capital requirements. The
credit facility matures on September 19, 2008.  NOTE 12 - WARRANTY OBLIGATIONS AND OTHER GUARANTEES  The Company provides a warranty on its equipment and handset sales for
a period generally ranging from one to two years from the time of final
acceptance. At times, the Company has entered into arrangements to provide
limited warranty services for periods longer than two years. The Company
provides for the expected cost of product warranties at the time that revenue
is recognized based on an assessment of past warranty experience and when
specific circumstances dictate. From time to time, the Company may be subject
to additional costs related to non-standard warranty claims from its customers.
If and when this occurs, the Company estimates additional accruals based on
historical experience, communication with its customers and various assumptions
that the Company believes to be reasonable under the circumstances. Such
additional warranty accruals are recorded in the period in which the additional
costs are identified.  Warranty
obligations, included in other current liabilities, are as follows:  Three months ended March 31,2008
  
  2007(in thousands)Balance at beginning of period
  
  $
  52,734
  
  $
  63,900Accruals for warranties issued during the
  period
  
  7,233
  
  3,297Settlements made during the period
  
  (10,395
  )
  (9,886
  )Balance at end of period
  
  $
  49,572
  
  $
  57,311  Certain
of the Companys sales contracts include provisions under which customers would
be indemnified by the Company in the event of, among other things, a
third-party claim against the customer for intellectual property rights
infringement related to the Companys products. 
There are no limitations on the maximum potential future payments under
these guarantees.  The Company has not
accrued any amount in relation to these provisions as no such claims have
developed into assertable claims and the Company believes it has defensible
rights to the intellectual property embedded in its products.  15


NOTE 13 - COMMITMENTS AND CONTINGENCIES  Litigation  Securities Class Action Litigation  Beginning in October 2004, several shareholder class action
lawsuits alleging federal securities violations were filed against the Company
and various officers and directors of our company. The actions have been
consolidated in United States District Court for the Northern District of California
under the caption In re UTStarcom, Inc.
Securities Litigation, Master File No. C-04-4908-JW (PVT). The
lead plaintiffs in the case filed a First Amended Consolidated Complaint on July 26,
2005. The First Amended Complaint alleged violations of the Securities Exchange
Act of 1934, and was brought on behalf of a putative class of shareholders who
purchased the Companys stock after April 16, 2003 and before September 20,
2004. On April 13, 2006, the lead plaintiffs filed a Second Amended
Complaint adding new allegations and extending the end of the class period to October 6,
2005. In addition to the Company defendants, the plaintiffs are also suing
Softbank. Plaintiffs complaint seeks recovery of damages in an unspecified
amount.  On June 2, 2006, the Company and the individual defendants filed a
motion to dismiss the Second Amended Complaint. On March 21, 2007, the
Court granted defendants motion and dismissed plaintiffs Second Amended
Complaint. The Court granted plaintiffs leave to file a Third Amended
Complaint, which plaintiffs filed on May 25, 2007. On July 13, 2007,
the Company and the individual defendants filed a motion to dismiss and a
motion to strike the Third Amended Complaint. On March 14, 2008, the Court
granted defendants motion and dismissed plaintiffs Third Amended
Complaint.  The Court granted plaintiffs
leave to file a Fourth Amended Complaint, which plaintiffs filed on May 14,
2008.  On September 4, 2007, a second shareholder class action complaint
captioned Peter Rudolph v. UTStarcom, et al.,
Case No. C-07-4578 SI, was filed in the United States District Court for
the Northern District of California against the Company and some of its current
and former directors and officers. The complaint alleges violations of the
Securities Exchange Act of 1934 through undisclosed improper accounting
practices concerning our historical equity award grants. Plaintiff seeks
unspecified damages on behalf of a purported class of purchasers of the Companys
common stock between July 24, 2002 and September 4, 2007. On December 14,
2007, the Court appointed James R. Bartholomew lead plaintiff. On January 25,
2008, the lead plaintiff filed an amended complaint.  On April 14, 2008, the Court granted
defendants motion to dismiss the amended complaint.  The Court granted the lead plaintiff leave to
file a second amended complaint no later than May 16, 2008.  Due to the preliminary status of these lawsuits and uncertainties
related to litigation, management is unable to evaluate the likelihood of
either a favorable or unfavorable outcome. Accordingly, management is unable at
this time to estimate the effects of these complaints on our financial
position, results of operations, or cash flows.  Governmental Investigations  On
May 1, 2008, the U.S. Securities and Exchange Commission (the SEC)
announced a final settlement agreement with the Company in connection with an
investigation commenced by the SEC in September 2005.  The investigation involved the Companys
financial disclosures during prior reporting periods, historic option grant
awards practices, certain historical sales contracts in China and other
matters. Without admitting or denying the allegations in the SECs complaint,
the Company consented to a permanent injunction against any future violations
of certain books-and-records and internal control provisions of the federal
securities laws. No monetary penalties were assessed against the Company.  In connection with the same investigation, Mr. Lu,
the Companys Chief Executive Officer and a member of the Board of Directors,
individually entered into a settlement agreement with the SEC. Without
admitting or denying the allegations in the SECs complaint, Mr. Lu agreed
to pay a civil penalty of $100,000 and consented to a permanent injunction on
similar terms as the Company. Mr. Lus settlement is subject to a final
judgment by a United States District Court.  In December 2005, the U.S. Embassy in Mongolia informed the
Company that it had forwarded to the Department of Justice (the DOJ)
allegations that an agent of the Companys Mongolia joint venture had offered
payments to a Mongolian government official in possible violation of the
Foreign Corrupt Practices Act (the FCPA). The Company, through its Audit
Committee, authorized an independent investigation into possible violations of
the FCPA, and it has been in contact with the DOJ and SEC regarding the
investigation. The investigation has identified possible FCPA violations in
Mongolia, Southeast Asia, India, and China, as well as possible violations of
U.S. immigration laws. The DOJ has requested that the Company voluntarily
produce documents related to the investigation, the SEC has subpoenaed the
Company for documents, and the Company has received a Grand Jury Subpoena
requiring the production of documents related to one aspect of the DOJ
investigation, that is, training programs the Company has sponsored. The
Company has executed tolling agreements extending the statute of limitations
for the FCPA issues under investigation by the DOJ. Such proceedings may result
in criminal or civil sanctions, penalties and disgorgements against the
Company. If it is probable that an obligation of the Company exists and will
result in an outflow of resources, a provision will be recorded if the amount
can be reasonably estimated. Regulatory and legal proceedings as well as
government investigation often involve complex legal issues and  16


are subject to substantial
uncertainties. Accordingly, management exercises considerable judgment in
determining whether it is probable that such a proceeding will result in
outflow of resources and whether the amount of the obligation can be reasonably
estimated. The Company periodically reviews the status of these proceedings and
these judgments are subject to change as new information becomes available. At
this time, the Company cannot predict when any inquiry will be completed or
what the outcome of any inquiry will be. The Company is unable to reasonably
estimate the total amount of loss, if any, associated with the proceedings. A
judgment against the Company may have a material adverse effect on the Companys
financial position, results of operations and cash flows.  Shareholder Litigation  On November 17, 2006, a shareholder derivative complaint captioned
Ernesto Espinoza v. Ying Wu et al.,
Case No. RG06298775, was filed against certain of the Companys current
and former officers and directors in the Superior Court of the County of
Alameda, California. The complaint alleges that the individual defendants,
among other things, breached their duties, were unjustly enriched, and violated
the California Corporations Code in connection with the timing of stock option
grants. The complaint names the Company as a nominal defendant and seeks
unspecified monetary damages against the individual defendants and various
forms of injunctive relief. On February 2, 2007, the Company and the
individual defendants filed demurrers against the complaint. On April 11,
2007, the Court sustained the individual defendants demurrer, overruled the
Companys demurrer, ordered the plaintiff to file an amended complaint, and
ordered the Company to answer the original complaint. The plaintiff filed an
amended complaint and the Company has filed an answer to the amended complaint.
On August 21, 2007, the individual defendants filed demurrers against the
amended complaint. The Court sustained the individual defendants demurrers and
ordered the plaintiff to file a second amended complaint. The plaintiff
has not yet filed his second amended complaint.  Due to the preliminary status of this complaint and uncertainties
related to litigation, management of the Company is unable to evaluate the
likelihood of either a favorable or unfavorable outcome. Accordingly, management
of the Company is unable at this time to estimate the effects of this complaint
on the Companys financial position, results of operations, or cash flows.  IPO Allocation  On October 31, 2001, a complaint was filed in United States
District Court for the Southern District of New York against the Company, some
of the Companys directors and officers and various underwriters for the
Companys initial public offering. Substantially similar actions were filed
concerning the initial public offerings for more than 300 different issuers,
and the cases were coordinated as In re
Initial Public Offering Securities Litigation, 21 MC 92 for pretrial
purposes. In April 2002, a consolidated amended complaint was filed in the
matter against the Company, captioned In re
UTStarcom, Initial Public Offering Securities Litigation, Civil
Action No. 01-CV-9604. Plaintiffs allege violations of the Securities Act
of 1933 and the Securities Exchange Act of 1934 through undisclosed improper
underwriting practices concerning the allocation of IPO shares in exchange for
excessive brokerage commissions, agreements to purchase shares at higher prices
in the aftermarket and misleading analyst reports. Plaintiffs seek unspecified
damages on behalf of a purported class of purchasers of the Companys common
stock between March 2, 2000 and December 6, 2000. The Companys
directors and officers have been dismissed without prejudice pursuant to a
stipulation. On February 19, 2003, the Court granted in part and denied in
part a motion to dismiss the claims brought by defendants including the
Company. The order dismissed all claims against the Company except for a claim
brought under Section 11 of the Securities Act of 1933, which alleges that
the registration statement filed in accordance with the IPO was misleading. In June 2004,
a stipulation of settlement and release of claims against the issuer
defendants, including the Company, was submitted to the court for approval. The
terms of the settlement, if approved, would have dismissed and released all
claims against the participating defendants (including the Company). In August 2005,
the Court preliminarily approved the settlement. In December 2006, the
Court of Appeals for the Second Circuit reversed the Courts October 2004
order certifying a class in six test cases that were selected by the
underwriter defendants and plaintiffs in the coordinated proceedings. The
Companys case is not one of the test cases. Because class certification was a
condition of the settlement, it was unlikely that the settlement would receive
final Court approval. On June 25, 2007, the Court entered an order
terminating the proposed settlement based on a stipulation among the parties to
the settlement. Plaintiffs have filed amended master allegations and amended
complaints and moved for class certification in the six test cases, which the
defendants in those cases have opposed. On March 26, 2008, the Court
denied the defendants motion to dismiss the amended complaints.   It is unclear whether there will be any
revised or future settlement. If the litigation proceeds, management of the
Company believes that the Company has meritorious defenses and management of
the Company intends to defend the action vigorously. The total amount of the
loss associated with the above litigation is not determinable at this time.
Therefore, management of the Company is unable to currently estimate the loss,
if any, associated with the litigation.  17


UTStarcom, Inc. v. Starent Patent Infringement
Litigations  On February 16, 2005, the Company filed a suit against Starent for
patent infringement in the U.S. District Court for the Northern District of
California. In the Complaint, the Company asserted that Starent infringes
UTStarcom patent U.S. Reg. No. 6,829,473 (the 473 patent) through
Starents development and testing of a software upgrade for its customers
installed ST-16 Intelligent Mobile Gateways. The Company seeks declaratory and
injunctive relief. Starent subsequently filed its answer and counterclaims, and
the Company then filed a motion to dismiss Starents counterclaim. On July 19,
2005, the parties stipulated that Starent would file an amended answer and
counterclaim and the Company then responded to Starents amended counterclaim.
In early December 2006, the Company filed a reissue application for the 473
patent with the United States Patent and Trademark Office. Starent has also
filed for reexamination of the 473 patent. The reexamination and reissue are
currently co-pending. The litigation is still in a preliminary stage, and is
stayed pending the outcome of the reissue. The litigation and its outcome
cannot be predicted, although management of the Company believes the litigation
has merit. Nonetheless, management of the Company believes that any adverse
judgment on Starents counterclaims will not have a material adverse effect on
the Companys business, financial condition, results of operations or cash
flows.  On May 8, 2007, the Company filed an additional suit against Starent
and sixteen individual defendants (who were all former employees of 3Coms
CommWorks division, of which the Company acquired certain assets in May of
2003) in the Northern District of Illinois. The causes of action include claims
for patent infringement, misappropriation of trade secrets, intentional
interference with business relations and prospective economic advantage and
declarations of ownership of certain patent rights. The Company seeks
compensatory damages, punitive damages and injunctive relief. After the court
denied the defendants motion to dismiss the misappropriation of trade secrets
claims, on August 30, 2007, Starent answered the Companys complaint,
denying the Companys allegations and asserting a number of affirmative
defenses and counterclaims. The Company has filed an Amended Complaint to
allege additional related causes of action. Starent has moved to dismiss
certain causes of action of the Amended Complaint and the Court has not yet
decided the motion to dismiss. The Court has appointed a special master to
handle discovery and issues related to identification of the trade secrets.
Discovery is now ongoing. The Company believes that any adverse judgment on
Starents counterclaims will not have a material adverse effect on the Companys
business, financial condition, results of operations or cash flows.  Telemetrix, Inc.
Arbitration  On October 19, 2006, Telemetrix, Inc.(Telemetrix) filed a formal Request for
Arbitration against the Company to the World Intellectual Property Organization
(WIPO) in Geneva, Switzerland. The Request for Arbitration sought unspecified
damages arising from a contract between Telemetrix and Telos Technology, Inc.,
dated October 22, 2003. The Company assumed Telos rights and obligations
under this contract pursuant to the Companys purchase of Telos assets on May 19,
2004. Telemetrix alleged nine causes of action, including breach of contract,
fraud, negligent misrepresentation, interference with contractual relations,
and interference with prospective economic advantage. In December 2006,
the Company filed a formal response to the Request for Arbitration, denying all
material factual allegations asserted by Telemetrix. An arbitrator was selected
by the parties, and, on August 2, 2007, the arbitrator granted a pleading
motion in favor of the Company due to Telemetrixs failure to allege sufficient
facts in support of a majority of its causes of action. On August 17,
2007, Telemetrix filed an Amended Statement of Claim, alleging six causes of
action, including breach of contract, fraud, interference with contractual
relations and interference with prospective economic advantage. The evidentiary
hearing is scheduled for July 28-30, 2008. Discovery has begun. The
financial impact, if any, of the above claims is not determinable at this time.  Other Litigation  The Company is a party to other litigation matters and claims that are
normal in the course of operations, and while the results of such litigation
matters and claims cannot be predicted with certainty, management of the
Company believes that the final outcome of such matters will not have a
material adverse impact on the Companys financial position, results of
operations or cash flows.  Income Tax Obligations  Effective January 1, 2007, the Company adopted the provisions of
FIN 48.  As of March 31, 2008, the Company had $81.6 million of gross
unrecognized tax benefits. If recognized, the portion of gross unrecognized tax
benefits that would decrease the provision for income taxes and increase the
Companys net income is $8.8 million. The impact on net income reflects the
gross unrecognized tax benefits net of certain deferred tax assets and the
federal tax benefit of state income tax items totaling $72.8 million.  18


Letters of credit  The
Company issues standby letters of credit primarily to support international
sales activities outside of China.  When
the Company submits a bid for a sale, often the potential customer will require
that the Company issue a bid bond or a standby letter of credit to demonstrate
its commitment through the bid process. 
In addition, the Company may be required to issue standby letters of
credit as guarantees for advance customer payments upon contract signing or
performance guarantees.  The standby
letters of credit usually expire without being drawn by the beneficiary
thereof.  Finally, the Company may issue
commercial letters of credit in support of purchase commitments.  As of March 31, 2008 the Company had
outstanding letters of credit approximating $56.9 million.  NOTE 14 - SEGMENT REPORTING  During the fourth quarter of 2007, the Company announced a new
organization structure to align the business units with its corporate strategy.
This new organization structure changed the reporting segments on which the
Company measures performance and allocates resources. Effective October 1,
2007, the new reporting segments are as follows:  ·Broadband
InfrastructureFocused on the Companys world class portfolio of broadband
products.  ·Multimedia
CommunicationsFocuses on development and market opportunities in IPTV
solutions and Wireless infrastructure technologies.  ·Personal Communications
Division (PCD)Focused on distribution of mobile handsets, mainly in the United
States.  ·HandsetsFocused on mobile
phone business with continued focus on the PAS handset market.  ·ServicesFocused on
providing services and support of our Broadband Infrastructure and Multimedia
Communications product lines.  ·Otherincludes Mobile
Solutions which focused on development, sales and services for the IPCDMA
market; and Custom Solutions which focused on customized telecommunication
solution.  The
Companys management makes financial decisions based on information it receives
from its internal management system and currently evaluates the operating
performance of and allocates resources to the reporting segments based on
segment revenue and gross profit. Cost of sales and direct expenses in relation
to production are assigned to the reporting segments.  The accounting policies used in measuring
segment assets and operating performance are the same as those used at the
consolidated level.  19


Summarized
below are the Companys segment net sales, gross profit and segment margin for
the three months ended March 31, 2008 and 2007 based on the current
reporting segment structure.  The Company
has reclassified its previously reported segment information for the three
months ended March 31, 2007 to conform to the current segment
presentation.  Three months ended March 31,2008
  
  % of net
  sales
  
  2007
  
  % of net
  sales(in thousands)Net Sales by SegmentBroadband Infrastructure
  
  $
  25,590
  
  4
  %
  $
  26,544
  
  6
  %Multimedia Communication
  
  67,446
  
  12
  %
  72,554
  
  15
  %PCD
  
  430,724
  
  73
  %
  288,331
  
  61
  %Handsets
  
  44,023
  
  8
  %
  69,719
  
  15
  %Services
  
  11,091
  
  2
  %
  12,559
  
  3
  %Other
  
  7,115
  
  1
  %
  6,195
  
  0
  %$
  585,989
  
  100
  %
  $
  475,902
  
  100
  %  Three months ended March 31,2008
  
  Gross
  profit %
  
  2007
  
  Gross
  profit %(in thousands)Gross profit by SegmentBroadband Infrastructure
  
  $
  2,221
  
  9
  %
  $
  4,210
  
  16
  %Multimedia Communication
  
  33,156
  
  49
  %
  22,794
  
  31
  %PCD
  
  32,836
  
  8
  %
  16,845
  
  6
  %Handsets
  
  16,215
  
  37
  %
  25,048
  
  36
  %Services
  
  2,319
  
  21
  %
  632
  
  5
  %Other
  
  5,332
  
  75
  %
  5,756
  
  93
  %$
  92,079
  
  16
  %
  $
  75,285
  
  16
  %  Three months ended March 31,2008
  
  2007(in thousands)Segment Margin and Operating LossBroadband Infrastructure
  
  $
  (4,225
  )
  $
  (4,239
  )Multimedia Communication
  
  16,195
  
  5,344PCD
  
  24,964
  
  8,206Handsets
  
  1,021
  
  13,764Services
  
  946
  
  (220
  )Other
  
  (4,158
  )
  (3,651
  )Total segment margin
  
  34,743
  
  19,204General and Corporate
  
  (65,632
  )
  (71,464
  )Operating Loss
  
  $
  (30,889
  )
  $
  (52,260
  )  20


Assets by segment are as follows:  March 31,
  
  December 31,2008
  
  2007(in thousands)Property, Plant and Equipment, netBroadband Infrastructure
  
  $
  42,783
  
  $
  42,756Multimedia Communication
  
  78,846
  
  77,478PCD
  
  1,384
  
  1,513Handsets
  
  43,218
  
  43,191Services
  
  43,950
  
  43,922Other
  
  155
  
  234$
  210,336
  
  $
  209,094  March 31,
  
  December 31,2008
  
  2007(in thousands)Total assetsBroadband Infrastructure
  
  $
  434,100
  
  $
  518,742Multimedia Communication
  
  556,991
  
  605,930PCD
  
  314,398
  
  357,004Handsets
  
  301,722
  
  360,075Services
  
  94,847
  
  85,269Other
  
  47,595
  
  57,568$
  1,749,653
  
  $
  1,984,588  Sales
are attributed to a geographical area based upon the location of the customer.
Sales data by geographical area are as follows:  Three months ended March 31,% of net
  
  
  
  % of net2008
  
  sales
  
  2007
  
  sales(in thousands)Sales by regionUnited States
  
  $
  421,863
  
  72
  %
  $
  293,169
  
  62
  %China
  
  117,122
  
  20
  %
  136,734
  
  29
  %Japan
  
  12,637
  
  2
  %
  14,315
  
  3
  %Other
  
  34,367
  
  6
  %
  31,684
  
  6
  %Net sales
  
  $
  585,989
  
  100
  %
  $
  475,902
  
  100
  %  21


Long-lived
assets, consisting of property, plant and equipment, by geographical area are
as follows:  March 31,
  
  December 31,2008
  
  2007(in thousands)U.S.
  
  $
  20,269
  
  $
  18,470China
  
  183,646
  
  185,070Other
  
  6,421
  
  5,554Total long-lived assets
  
  $
  210,336
  
  $
  209,094  NOTE 15 - RELATED PARTY TRANSACTIONS  Softbank and affiliates  The
Company recognizes revenue with respect to sales of telecommunications
equipment to affiliates of Softbank, a significant stockholder of the Company.
Softbank offers ADSL coverage throughout Japan, which is marketed under the
name YAHOO! BB. The Company supports Softbanks fiber-to-the-home service
through sales of its carrier class GEPON product as well as its NetRingÔ product. In addition, the Company supports
Softbanks new internet protocol television (IPTV), through sales of its
RollingStreamÔ product. During the three months ended March 31,
2008 and 2007, the Company recognized revenue of $11.8 million and $13.1
million, respectively, for sales of telecommunications equipment and services
to affiliates of Softbank.  Included
in accounts receivable at March 31, 2008 and December 31, 2007 were
$20.9 million and $26.2 million, respectively, related to these
transactions. The Company had immaterial amounts of accounts payable to
Softbank and its affiliates at March 31, 2008 and December 31, 2007.  Sales
to Softbank include a three year service period and a penalty clause if product
failure rates exceed a certain level over a seven year period. As of March 31,
2008 and December 31, 2007, the Companys customer advance balance related
to Softbank agreements was $0.6 million and $0.3 million, respectively.  The current deferred revenue balance related
to Softbank was $4.1 million and $5.6 million as of March 31, 2008 and December 31,
2007, respectively.  As of March 31,
2008, the Companys noncurrent deferred revenue balance related to Softbank was
$10.0 million compared to $10.1 million as of December 31, 2007.  As
of March 31, 2008, Softbank beneficially owned approximately 12% of the
Companys outstanding stock.  Audiovox  One of the Companys officers serves as a director for Audiovox
Corporation (Audiovox). During each of the three months ended March 31,
2008 and 2007, the Company paid approximately $0.4 million for IT services
provided by Audiovox.  NOTE 16 - RESTRUCTURING COSTS  In
the fourth quarter of 2007, the Company implemented a restructuring plan (the 
2007 Plan) to reduce operating costs. As of March 31, 2008, the Company
had substantially completed the reduction in force, reducing the Companys
headcount by approximately 12%, or approximately 800 employees. The workforce
reduction was primarily in the United States and China and, to a lesser degree,
other international locations.  At  March 31, 2008 and December 31,
2007, the restructuring accrual included within other current liabilities in
the consolidated balance sheet was approximately $1.3 million and $3.2 million,
respectively. The decrease of  $1.9 million during the three months ended March 31,
2008 relates primarily to cash payments against the accrual related to the
workforce reductions and lease costs. The remaining restructuring liability is
primarily related to a lease obligation and will be settled over the remaining
lease term, which expires in fiscal year 2010.  22


NOTE 17 - OTHER INCOME, NET  Other income, net was $54.0 million and
$4.0 million for the three months ended March 31, 2008 and 2007,
respectively. The balances were comprised of the following:  Three months ended March 31,2008
  
  2007(in thousands)Gain on sale of investments
  
  $
  39,679
  
  $
  2,813Gain on liquidation of investment in a
  variable interest entity (See Note 20)
  
  8,169
  
  Foreign exchange gains
  
  5,709
  
  1,058Other
  
  413
  
  99Total
  
  $
  53,970
  
  $
  3,970  NOTE 18 - CREDIT RISK AND CONCENTRATION  The table below outlines the Companys sales to, and
the accounts receivable balances from its largest customers:  For the threemonths endedMarch 31,
  
  March 31,% of% of net
  
  accounts2008
  
  sales
  
  receivableVerizon Wireless
  
  25
  %
  2
  %Sprint Spectrum
  
  18
  %
  11
  %T-Mobile USA, Inc.
  
  10
  %
  4
  %  2007Verizon Wireless
  
  15
  %
  1
  %T-Mobile USA, Inc.
  
  13
  %
  13
  %Sprint Spectrum
  
  11
  %
  5
  %  Approximately 12% and 18% of the Companys net sales
during the three months ended March 31, 2008 and 2007, respectively, were
to entities affiliated with the government of China. Accounts receivable
balances from these China government affiliated entities or state owned
enterprises were $128.4 million and $129.5 million, respectively, as of March 31,
2008 and December 31, 2007. The Company extends credit to its customers in
China generally without requiring collateral. With respect to global sales
outside of China, the Company may require letters of credit from its customers.
The Company monitors its exposure for credit losses and maintains allowances
for doubtful accounts.  Approximately 20% and 29% of the Companys sales for
the three months ended March 31, 2008 and 2007, respectively, were made in
China. Accordingly, the political, economic and legal environment, as well as
the general state of Chinas economy may influence the Companys business,
financial condition and results of operations. The Companys operations in
China are subject to special considerations and significant risks not typically
associated with companies in the United States. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. The Companys results may be adversely affected by, among
other things, changes in the political, economic and social conditions in
China, and by changes in governmental policies with respect to laws and
regulations, changes in Chinas telecommunications industry and regulatory rules and
policies, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation.  23


NOTE 19 - INCOME TAX ASSETS AND LIABILITIES  The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
(FIN 48) on January 1, 2007. As of December 31, 2007, the Companys
gross unrecognized tax benefits totaled $79.7 million and are included in other
long-term liabilities, net of certain deferred tax assets and the federal tax
benefit of state income tax items totaling $71.3 million. If recognized, the portion
of gross unrecognized tax benefits that would decrease the provision for income
taxes and increase the Companys net income is approximately $8.4 million.  As
of March 31, 2008, the Companys gross unrecognized tax benefits totaled
$81.6 million and are included in other long-term liabilities, net of certain
deferred tax assets and the federal tax benefit of state income tax items
totaling $72.8 million. If recognized, the portion of gross unrecognized tax
benefits that would decrease the provision for income taxes and increase the
Companys net income is approximately $8.8 million. The total unrecognized tax
benefits and increase for the current period of these unrecognized tax benefits
relate primarily to the allocations of revenue and costs among our global
operations.  The
Company recognizes interest expense and penalties related to the above
unrecognized tax benefits within income tax expense. The Company had accrued
interest and penalties of approximately $3.2 million as of December 31,
2007 and approximately $3.4 million as of March 31, 2008.  The
Company is subject to taxation in the U.S. federal jurisdiction and various
U.S. state and foreign jurisdictions. The Companys income tax returns for the
2003, 2004, and 2005 tax years are currently under audit by the United States
Internal Revenue Service. The Company is also under audit by the taxing
authorities in China on a recurring basis. The material jurisdictions that the
Company is subject to examination are in the United States and China. The
Company does not anticipate a significant change to the total amount of
unrecognized tax benefits within the next 12 months.  FIN
48 established criteria for recognizing or continuing to recognize only
more-likely-than tax positions, which may result in income tax expense
volatility in future periods. While the Company believes that it has adequately
provided for all tax positions, amounts asserted by taxing authorities could be
greater than our accrued position. Accordingly, additional provisions on income
tax related matters could be recorded in the future as revised estimates are
made or the underlying matters are settled or otherwise resolved.  In
establishing its deferred income tax assets and liabilities, the Company makes
judgments and interpretations based on the enacted tax laws and published tax
guidance applicable to its operations as well as the amount and jurisdiction of
future taxable income. The Company records deferred tax assets and liabilities
and evaluates the need for valuation allowances to reduce the deferred tax
assets to realizable amounts. The Company will maintain a full valuation
allowance on its net deferred tax assets in China, the United States, and other
countries until an appropriate level of profitability that generates taxable
income is sustained or until the Company is able to develop tax strategies that
would enable it to conclude that it is more likely than not that a portion of
its deferred tax assets will be realizable. Any reversal of valuation
allowances will favorably impact our results of operations in the period of the
reversal.  Income
tax benefit was $5.0 million for the three months ended March 31,
2008 compared to tax expense of $4.3 million for the three months ended March 31,
2007.  The
Companys income tax expense for the first quarter of 2008 at statutory rates
was $3.5 million.  This amount has been
adjusted for the two items discussed below. 
The China Corporate Income Tax Law (CIT Law) became effective on January 1,
2008.  As a result of the enactment of new
regulations during the quarter which address CIT Law, the Company has recorded
an income tax benefit of $11.7 million related to reversing a deferred tax
liability on foreign withholding taxes related to the unremitted earnings of
the Companys subsidiaries which the Company had previously determined to not
be permanently reinvested outside the United States.  The Company also has accrued $3.2 million of
foreign withholding taxes related to the realized gain on the sale of its
investment in Gemdale.  For
2008 and 2007, the Company has not provided any tax benefit on any forecasted
losses incurred and tax credits generated in the United States and other
countries, because management believes that it is more likely than not that the
tax benefit associated with these losses will not be realized. Also, for 2008
and 2007, the Company continues to accrue tax expense in jurisdictions where
the Company has been historically profitable. Estimates of the annual effective
tax rate at the end of the interim periods are based on evaluations of possible
future events and transactions and may be subject to subsequent refinement or
revision.  24


NOTE 20VARIABLE INTEREST ENTITIES  During the fourth quarter of 2005, the Company had provided
an interest free, $12.4 million loan to a party in China as seed capital
for a venture organized to participate in providing technical service,
networking technology and equipment to the emerging market for IPTV products in
China. The loan, partially secured by an indirect ownership interest in the
venture, was payable in 10 years and could be called early without
penalty. As a result of the foregoing, and the fact that the ventures
continuing viability was heavily dependent on the further provision of network
and terminal equipment by the Company, the Company determined that the venture
was a variable interest entity (VIE) and that the Company was the primary
beneficiary of the venture. Therefore, the Company was required to consolidate
the VIEs financial statements. The consolidation of this VIE in prior years
did not have a significant impact on the Companys consolidated financial statements.
In March 2008, the Company received a repayment in full of the loans
principal balance, eliminating its interest in the VIE, and resulting in
reconsideration of the Companys position as the primary beneficiary. Based on
this reconsideration event, management has concluded the Company is no longer
the primary beneficiary under FIN 46R, Consolidation of Variable Interest
Entities and is no longer required to consolidate the VIEs financial
statements. The Companys Consolidated Statement of Operations for the three month
period ended March 31, 2008 includes the operating results of the VIE
through February 2008, at which point the VIE was deconsolidated from the
Companys financial statements. The Company recorded an $8.2 million gain upon
the repayment of the loan and deconsolidation that was included in other
income, net, for the three months ended March 31, 2008.As management expects continuing involvement with the ongoing entitys
business as a supplier of IPTV equipment, the Company has determined the
conditions for presentation as a discontinued operation have not been met.  ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  FORWARD-LOOKING STATEMENTS  This
Quarterly Report on Form 10-Q contains forward-looking statements
regarding future events and our future results that are subject to the safe
harbors created under the Securities Act of 1933 and the Securities Exchange
Act of 1934. Forward-looking statements are based on current expectations,
estimates, forecasts and projections about us, our future performance and the
industries in which we operate as well as on our managements assumptions and
beliefs. Statements that contain words like expects, anticipates, may, will,
targets, projects, intends, plans, believes, seeks, estimates, or
variations of such words and similar expressions are forward-looking
statements. In addition, any statements that refer to trends in our businesses,
future financial results, and our liquidity and business plans are forward-looking
statements. Readers are cautioned that these forward-looking statements are
only predictions and are subject to risks and uncertainties, including those
discussed in Part II, Item 1A-Risk Factors of this Form 10-Q.  Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking
statements. We do not guarantee future results, and actual results,
developments and business decisions may differ from those contemplated by those
forward-looking statements.  We undertake
no obligation to update these forward-looking statements to reflect events or
circumstances occurring after the date of this Form 10-Q.  EXECUTIVE SUMMARY  We design, manufacture and sell telecommunications infrastructure,
handsets and customer premise equipment, and provide services associated with
their installation, operation, and maintenance. Our products are sold primarily
to telecommunications service providers or operators. We sell an extensive
range of products that are designed to enable voice, data and video services
for our operator customers and consumers around the world. Over the past few
years, we have expanded our focus to build a global presence and currently sell
our products in several established and emerging growth markets, including
North America, China, Japan, India, Central and Latin America, Europe, the
Middle East, Africa and Southeast and North Asia.  We differentiate ourselves with products designed to reduce network
complexity, integrate high performance capabilities and allow a simple
transition to next generation networks. We design our products to facilitate
cost-effective and efficient deployment, maintenance and upgrades.  Because our products are IP-based, our customers can more easily
integrate our products with other industry standard hardware and software.
Additionally, we believe we can introduce new features and enhancements that
can be  25


cost-effectively added to our
customers existing networks. IP-based devices can be changed or upgraded in
modules, saving our customers the expense of replacing their entire system
installation. Our strategy is built upon the following key concepts:  ·identify key technology
shifts and trends before our competitors;  ·develop differentiated
products, which are designed to offer new and innovative revenue-generating
features and enhanced functionality for our customers;  ·reduce overall operational
and deployment costs of our customers networks, enabling them to meet the
demands of a greater number of consumers by expanding their addressable
markets; and  ·develop tailored products
and services to suit customers current needs and to anticipate future needs.  Our current strategy is to focus on the key segments of the IP
technology market which we have identified as having the greatest potential for
profitable growth. Specifically, our strategy is to:  ·Invest our R&D
resources in select IP-based technologies where we believe we can create unique
end-to-end solutions that will deliver strong market share and create value for
our customers;  ·Drive revenue from this
technology in select core geographic markets where there is high acceptance of
the disruptive shift to IP technologies and where we have established credibility
with customers; and  ·Supplement revenue outside
of core markets by using regional technology and sales partners in areas where
we can leverage their strong customer relationships.  Sale of
Investments  During
the first quarter of 2008 we sold our remaining investment in Gemdale for
approximately $32.9 million cash and recognized a gain of $32.4 million in
other income.  We also sold our
investment in Infinera for approximately $9.2 million and recognized a gain of
$7.3 million in other income, net.  Restructuring Programs  In September 2007, we announced the results of an in-depth
strategic analysis of the Company undertaken by the management team with the
aim of defining a new corporate strategy and making UTStarcom an even stronger
global competitor. During the quarter ended March 31, 2008, we
substantially completed the restructuring plan, having reduced our worldwide
work force by approximately 800 employees, or approximately 12% of the Companys
headcount.  We expect cost savings from
planned restructuring activities to provide liquidity for operations, to be
used to offset market forces or to be reinvested in our businesses to
strengthen our competitiveness.  We will continue our efforts to evaluate certain operations and will
consider opportunities to divest additional non-core assets and may incur
additional costs associated with future actions to further align our business
operations and streamline our business processes.  CRITICAL ACCOUNTING POLICIES AND ESTIMATES  Managements Discussion and Analysis of Financial Condition and Results
of Operations is based upon our Consolidated Condensed Financial Statements,
which we have prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. Estimates are based on historical experience, knowledge of economic
and market factors and various other assumptions that management believes to be
reasonable under the circumstances. Actual results may differ from those
estimates.  On a regular basis
we evaluate our estimates, assumptions and judgments and make changes
accordingly. An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, if different estimates
reasonably could have been used, or if changes in the estimate that are
reasonably likely to occur could materially impact the financial
statements.  We believe  26


that the estimates, assumptions
and judgments involved in 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 and development and capitalized
software development costs, income taxes, impairment of goodwill, intangible
assets and long-lived assets, and valuation and impairment of investments have
the greatest potential impact on our Condensed Consolidated Financial
Statements, so we consider these to be our critical accounting policies.  Management believes that there have been no
significant changes during the three months ended March 31, 2008 to the
items that we disclosed as our critical accounting policies and estimates in
Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2007.  RECENT ACCOUNTING PRONOUNCEMENTS  For
a description of the new accounting standards that affect us, see Note 2
to our Condensed Consolidated Financial Statements included under Part I,
Item 1 of this Quarterly Report on Form 10-Q.  RESULTS OF OPERATIONS  During the fourth quarter of 2007, the Company announced a new
organization structure to align the business units with its corporate strategy.
This new organization structure changed the reporting segments on which the
Company measures performance and allocates resources. Effective October 1,
2007, the new reporting segments are as follows:  ·Broadband Infrastructure;  ·Multimedia Communications;  ·Personal Communications Division;  ·Handsets;  ·Services; and  ·Other, which includes the
Mobile Solutions and Custom Solutions business units.  Our Broadband Infrastructure segment is responsible for software and
hardware products that enable end users to access high-speed, cost effective
wireline data, voice and media communication. Our products within each of these
categories include multiple hardware and software subsystems that can be
offered in various combinations to suit individual carrier needs. Our system
products are based on widely-adopted global communications standards and are
designed to allow service providers to quickly and cost-efficiently integrate
our systems into their existing networks and deploy our systems in new
broadband, IP and wireless network rollouts. Our products are also designed for
quick and cost-effective transition to future network technologies, enabling
our customers to make the best use of their existing infrastructure.  Our Multimedia Communications segment is responsible for the
development and management of IPTV and related technologies (such as
surveillance) plus our core Next Generation Network (NGN) software. The Personal
Handyphone System (PHS) infrastructure and wireless systems teams are also a
part of this segment.  Our Personal Communications Division markets, sells and supports
handsets other than Personal Access System (PAS) handsets, mainly in the
United States. Historically, most of our handset sales in this division were
designed and built by other manufacturers. However, in 2005 we began shipping
handsets designed and manufactured by us, and during the year ended December 31,
2007 handsets manufactured by us made up approximately 35% of the total unit
sales of this segment.  Our Handsets segment designs, builds and sells consumer handset
devices, including PAS handsets, that allow customers to access wireless
services. All handset revenues within China are included in this segment.  We support the growth and operation of the installed base of our system
solutions through our professional services business, UTStarcom Services. Our
globally-deployed experts assist the Companys customers with activities ranging
from network planning, circuit-to-packet network migration planning, systems
integration, program management, operations management and support, and
knowledge transfer.  27


Included in our Other segment are our Mobile Solutions business unit
and our Custom Solutions business unit. Our Mobile Solutions business unit is
responsible for the development, sales and service of our wireless IPCDMA/IPGSM
product line and our Packet Data Services Node (PDSN) product line which
connects CDMA cellular network infrastructure equipment to IP network. Our
Custom Solutions business unit is responsible for the development, sales and
service of other non-core products such as IP messaging, transaction gateways,
and Remote Access Server (RAS) which enables users to access network data and
services from remote locations.  NET
SALES  Three months ended March 31,2008
  
  % of net
  sales
  
  2007
  
  % of net
  sales(in thousands)Net Sales by SegmentBroadband Infrastructure
  
  $
  25,590
  
  4
  %
  $
  26,544
  
  6
  %Multimedia Communication
  
  67,446
  
  12
  %
  72,554
  
  15
  %PCD
  
  430,724
  
  73
  %
  288,331
  
  61
  %Handsets
  
  44,023
  
  8
  %
  69,719
  
  15
  %Services
  
  11,091
  
  2
  %
  12,559
  
  3
  %Other
  
  7,115
  
  1
  %
  6,195
  
  0
  %$
  585,989
  
  100
  %
  $
  475,902
  
  100
  %  Three months ended March 31,% of net
  
  
  
  % of net2008
  
  sales
  
  2007
  
  sales(in thousands)Sales by regionUnited States
  
  $
  421,863
  
  72
  %
  $
  293,169
  
  62
  %China
  
  117,122
  
  20
  %
  136,734
  
  29
  %Japan
  
  12,637
  
  2
  %
  14,315
  
  3
  %Other
  
  34,367
  
  6
  %
  31,684
  
  6
  %Net sales
  
  $
  585,989
  
  100
  %
  $
  475,902
  
  100
  %  Three months ended March 31, 2008 and 2007  Net
sales increased by 23% to $586.0 million during the three months ended March 31,
2008 compared to the same period in 2007. The increase was primarily due to a
49% increase in sales in the PCD segment for the three months ended March 31,
2008 compared to the same period in 2007 primarily due to an increased number
of units sold and higher average selling price. Multimedia Communication net
sales decreased by $5.1 million, or 7%, for the three months ended March 31,
2008 compared to the same period in 2007, mainly due to recognition of a 3G
related product sale in the three months ended March 31, 2007. The Company
exited this product in 2007 and therefore there were no comparable sales in the
three months ended March 31, 2008. Handset sales decreased by $25.7
million, or 37%, in the first quarter of 2008 due to both price and volume
declines when compared to the first quarter of 2007.  As we have been experiencing in recent
quarters, increased competition and lower net subscriber growth of PAS have
resulted in lower demand and decrease in average selling price for our PAS
handsets.  28


For
additional discussion see Segment Reporting section of this Item 2.  In 2008, we expect that new orders from PAS handsets and infrastructure
will continue to decline due to increased competition. We expect that this
decline will be  partially offset by
revenues from higher end PAS products including dual mode PAS handsets, dual
mode CDMA and next generation network products in multiple markets, but we do
not anticipate that these sales will fully offset the decline in PAS sales. We
currently offer and have initial market acceptance of our IPTV products in
China, Japan India, Taiwan and other geographic regions. We believe that the
IPTV market presents a meaningful growth opportunity in these regions as well as
other regions where we have targeted to expand our IPTV offerings.  GROSS PROFIT  Three months ended March 31,2008
  
  Gross
  Profit %
  
  2007
  
  Gross
  Profit %(in thousands)Gross profit by SegmentBroadband Infrastructure
  
  $
  2,221
  
  9
  %
  $
  4,210
  
  16
  %Multimedia Communication
  
  33,156
  
  49
  %
  22,794
  
  31
  %PCD
  
  32,836
  
  8
  %
  16,845
  
  6
  %Handsets
  
  16,215
  
  37
  %
  25,048
  
  36
  %Services
  
  2,319
  
  21
  %
  632
  
  5
  %Other
  
  5,332
  
  75
  %
  5,756
  
  93
  %$
  92,079
  
  16
  %
  $
  75,285
  
  16
  %
  Cost
of sales consists primarily of material and labor costs, including stock-based
compensation, associated with manufacturing, assembly and testing of products,
costs associated with installation and customer training, warranty costs, fees
to agents, inventory write-downs and overhead. Cost of sales also includes
import taxes and tariffs on components and assemblies. Some components and
materials used in our products are purchased from a single supplier or a
limited group of suppliers and, in some cases, are subject to obtaining Chinese
import permits and approvals. We also rely on third party manufacturers to
manufacture and assemble most of our CDMA handsets.  Our
gross profit has been affected by average selling prices, material costs,
product mix, the impact of warranty charges and contract loss provisions as
well as inventory reserves and release of deferred revenues and related cost
pertaining to prior years. Our gross profit, as a percentage of net sales,
varies among our product families. We expect that our overall gross profit, as
a percentage of net sales, will fluctuate in the future as a result of shifts
in product mix, stage of product life cycle, anticipated decreases in average
selling prices and our ability to reduce cost of sales.  Three months ended March 31, 2008 and 2007  Gross
profit was $92.1 million, or 16% of net sales, in the three months ended March 31,
2008, compared to $75.3 million, or 16% of net sales, in the corresponding
quarter of 2007. The overall gross profit increase in absolute dollars was
primarily due to the increase in sales in the PCD segment and improved profit
margins in the PCD and Multimedia Communication segments.   For additional discussion see Segment
Reporting section of this Item 2.  29


OPERATING EXPENSES  The
following table summarizes our operating expenses:  Three months ended March 31,% of net
  
  
  
  % of net2008
  
  sales
  
  2007
  
  sales(in thousands)Selling, general and administrative
  
  $
  79,744
  
  14
  %
  $
  79,837
  
  17
  %Research and development
  
  41,400
  
  7
  %
  43,662
  
  9
  %Amortization of intangible assets
  
  1,824
  
  0
  %
  4,046
  
  1
  %Total operating expenses
  
  $
  122,968
  
  21
  %
  $
  127,545
  
  27
  %  Selling,
general and administrative expenses (SG&A) include compensation and
benefits, professional fees, sales commissions, provision for doubtful accounts
receivable and travel and entertainment costs. Research and development (R&D)
expenses consist primarily of compensation and benefits of employees engaged in
research, design and development activities, costs of parts for prototypes,
equipment depreciation and third party development expenses. We believe that
continued and prudent investment in research and development is critical to our
long-term success, and we will aggressively evaluate appropriate investment
levels.  A portion of our costs are fixed
and are difficult to quickly reduce in periods of lower sales.  SELLING, GENERAL AND ADMINISTRATIVE  Three months ended March 31, 2008 and 2007  SG&A
expenses decreased $0.1 million during the three months ended March 31,
2008 compared to the same period in 2007. The change in SG&A expenses was
primarily due to $0.7 million bad debt recovery in the first quarter of 2008
compared to $5.3 million bad debt recovery 
in the first quarter of 2007, and a $1.2 million increase in legal fees
related to ongoing investigations and litigation, offset by a $2.0 million
savings from a reduction in the use of outside consultants and contractors, a
$1.2 million decrease in trade-show expenses, a $1.0 million decrease in
facilities related expenses, a $0.8 million decrease in depreciation expenses
and a $0.9 million decrease in travel related expenses.  RESEARCH AND DEVELOPMENT  Three months ended March 31, 2008 and 2007  R&D
expenses decreased by $2.3 million during the three months ended March 31,
2008 compared to the same period in 2007. 
The decrease in R&D expenses was mainly due to a $1.1 million
decrease in labor related expenses as we continued to streamline our
operations, as well as a $1.2 million decrease in depreciation expense as a
result of impairment charges recorded in 2007 and reduced capital spending.  STOCK-BASED COMPENSATION EXPENSE  The
following table summarizes the stock-based compensation expense recognized in
the Companys condensed consolidated statements of operations:  Three months ended March 31,2008
  
  2007(in thousands)Cost of net sales
  
  $
  260
  
  $
  124Selling, general and administrative
  
  3,997
  
  1,705Research and development
  
  538
  
  926Total
  
  $
  4,795
  
  $
  2,755  30


Three months ended March 31, 2008 and 2007  The
increase in the level of stock-based compensation in the three months ended March 31,
2008 compared to the same period in 2007 was attributable to the timing of
equity grants that are subject to accounting under SFAS 123(R).  The $2.0 million increase in the three months
ended March 31, 2008 compared with the same period in 2007 was primarily
due to the recognition of expense for annual merit equity awards
granted in November 2007 and February 2008, as compared to the
first quarter in 2007 when no awards were granted as we were delinquent in the
filing of our reports with the SEC.  AMORTIZATION OF INTANGIBLE ASSETS  Three months ended March 31, 2008 and 2007  Amortization
of intangible assets decreased by $2.2 million in the three months ended March 31,
2008 compared to the same quarter last year. Amortization of intangible assets
declined primarily due to the impairment of intangible assets with a carrying
value of $15.7 million in the fourth quarter of 2007, as well as due to the
fact that several intangible assets became fully amortized during the preceding
twelve months.  OTHER
INCOME (EXPENSE)  INTEREST INCOME  Three months ended March 31, 2008 and 2007  Interest
income was $2.8 million and $4.9 million for the three months ended March 31,
2008 and 2007, respectively. Interest income decreased primarily due to the
decrease in cash balances available for investment, mainly because we used
$289.5 million to fully repay the principal and accrued interest on the
convertible notes due on March 1, 2008, and due to a decline in the
average interest rate earned in the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007.  INTEREST EXPENSE  Three months ended March 31, 2008 and 2007  Interest
expense was $6.1 million and $6.7 million for the three months ended March 31,
2008 and 2007, respectively. The decrease in interest expense for the three
months ended March 31, 2008 compared to the same period in 2007 was
primarily attributable to the repayment of $274.6 million of convertible
subordinated notes due March 1, 2008. For the period from January 1,
2008 through maturity on March 1, 2008, the convertible subordinated notes
bore interest at a stated interest rate of 10.875% in accordance with the
Second Supplemental Indenture.  As a
result of the First Supplemental Indenture, our convertible subordinated notes
stated interest rate was 7.625% per annum after January 9, 2007.  Prior to January 9, 2007, our
convertible subordinated notes accrued interest at 7/8% per annum.  OTHER INCOME, NET  Three months ended March 31, 2008 and 2007  Other
income, net was $54.0 million and $4.0 million for the three months
ended March 31, 2008 and 2007, respectively. Other income, net for the
three months ended March 31, 2008 was primarily due to a $32.4 million
gain on the sale of the Gemdale investment, a $7.3 million gain on the sale of
the Infinera investment, an $8.2 gain on the liquidation of investment in a
variable interest entity and a $5.7 million gain on foreign currency
revaluation.  Other income, net for the
three months ended March 31, 2007 was primarily due to a $2.8 million
gain on the sale of the Immenstar investment and a $1.1 million gain on foreign
currency revaluation.  INCOME TAX EXPENSE  Income
tax expense is based upon a blended effective tax rate based upon our
expectation of the amount of income to be earned in each tax jurisdiction and
is accounted under the liability method. Deferred income taxes are recognized
for the differences between the tax bases of assets and liabilities and their
financial statement amounts based on enacted tax rates. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. We expect to maintain a full valuation allowance on
our remaining net deferred tax assets until an appropriate level of
profitability  31


that
generates taxable income is sustained or until we are able to develop tax
strategies that would enable us to conclude that it is more likely than not
that a portion of our deferred tax assets will be realizable. Any reversal of
valuation allowances will favorably impact our results of operations in the
period of the reversal.  We
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
(FIN 48) on January 1, 2007. FIN 48 established criteria for recognizing
or continuing to recognize only more-likely-than tax positions, which may
result in income tax expense volatility in future periods. While we believe
that we have adequately provided for all tax positions, amounts asserted by
taxing authorities could be greater than our accrued position. Accordingly,
additional provisions on income tax related matters could be recorded in the
future as revised estimates are made or the underlying matters are settled or
otherwise resolved.  Three months ended March 31, 2008 and 2007  Income
tax benefit was $5.0 million for the three months ended March 31,
2008 compared to tax expense of $4.3 million for the three months ended March 31,
2007.  Our
income tax expense for the first quarter of 2008 at statutory rates was $3.5
million.  This amount has been adjusted
for the two items discussed below.   The
China Corporate Income Tax Law (CIT Law) became effective on January 1,
2008.  As a result of the enactment of
new regulations during the quarter which address CIT Law, we recorded an income
tax benefit of $11.7 million related to reversing a deferred tax liability on
foreign withholding taxes related to the unremitted earnings of our
subsidiaries which we determined to not be permanently reinvested outside the
United States.  We also have accrued $3.2
million of foreign withholding taxes related to the realized gain on the sale
of our investment in Gemdale.  For
2008 and 2007, we have not provided any tax benefit on any forecasted losses
incurred and tax credits generated in the United States and other countries,
because we believe that it is more likely than not that the tax benefit
associated with these losses will not be realized. Also, for 2008 and 2007, we
continue to accrue tax expense in jurisdictions where we have been historically
profitable. Estimates of the annual effective tax rate at the end of the
interim periods are based on evaluations of possible future events and
transactions and may be subject to subsequent refinement or revision.  SEGMENT REPORTING  As noted previously, during the fourth quarter of 2007, the Company
announced a new corporate organization to align the business units with its
corporate strategy.  Summarized
below are our segment sales revenue and gross profit for the three months ended
March 31, 2008 and 2007, respectively.  Broadband Infrastructure  Three months ended March 31,2008
  
  2007(in thousands)Sales
  
  $
  25,590
  
  $
  26,544Gross Profit
  
  $
  2,221
  
  $
  4,210Gross Profit as a percentage of sales
  
  9
  %
  16
  %  Sales
remained relatively stable as higher sales in CPE and Optical products offset
the decline in our IPDSLAM product line. Our largest Broadband Infrastructure
customer is Softbank in Japan, representing approximately 35% and 30% of total
broadband sales during the three months ended March 31, 2008 and 2007,
respectively.  32


Gross
profit decreased in the first quarter of 2008 when compared to the same period
in 2007, primarily due to an increase in provision for anticipated losses
during the quarter on an infrastructure deployment contract that originated in
2006 offset partially by lower overhead expenses during the three months ended March 31,
2008.  We
may incur additional warranty expense as we introduce new products and may be
required to accrue additional contract losses for certain fixed price contracts
as these contracts progress. Both events may have negative impacts on our
future gross margins, results of operations and financial position.  Multimedia Communications  Three months ended March 31,2008
  
  2007(in thousands)Sales
  
  $
  67,446
  
  $
  72,554Gross Profit
  
  $
  33,156
  
  $
  22,794Gross Profit as a percentage of sales
  
  49
  %
  31
  %  During
the three months ended March 31, 2008, Multimedia Communications sales decreased by 7%
mainly due to lower 3G related products sales in 2008 as we exited these
product lines in 2007.  The decrease was
partially offset by recognition of approximately $10 million of previously
deferred revenue. During the
first quarter of 2008, PAS system and Softswitch product sales increased by 15%
and comprised approximately 97% of our Multimedia Communications sales compared
to 78% during the same period in 2007.  The
gross profit percentage increased from 31% for the three months ended March 31,
2007 to 49% for the corresponding period in 2008.  The increase was primarily due to lower
warranty and inventory costs in the first three months of 2008 and $9.1
million 3G product sales in 2007 with very low margin.  We expect future PAS infrastructure spending to decline in 2008 as
China prepares for 3G launch. We expect the decline in PAS infrastructure new
orders will continue and we plan to aggressively pursue opportunities for our
Packet PAS products (for broadband wireless data market based on PAS
technology), dual mode enterprise PAS products and Softswitch products in
multiple markets.  However, we do not
anticipate that these sales will fully offset the anticipated decline in PAS
sales in 2008.  We believe that the IPTV market presents a meaningful growth
opportunity. We currently offer and have initial market acceptance of our IPTV
products in China, Japan, India, Taiwan and other geographic regions.  33


Personal Communication Devices (PCD)  Three months ended March 31,2008
  
  2007(in thousands)Sales
  
  $
  430,724
  
  $
  288,331Gross Profit
  
  $
  32,836
  
  $
  16,845Gross Profit as a percentage of sales
  
  8
  %
  6
  %  Revenue
for the PCD segment increased 49% for the three months ended March 31,
2008 as compared to the same period in 2007.  The increase was primarily
due to an increase in average selling price and units sold during the quarter
of product sourced from outside vendors and the change in product mix.  The overall average selling price increased
by approximately 48% for the three months ended March 31, 2008 as compared
to the same period in 2007.  The number of units sold during the three
months ended March 31, 2008 increased by approximately 4% as compared to
the same period in 2007. During the three months ended March 31, 2008,
sales of UTStarcom branded devices accounted for 26% of the total units sold,
compared to 51% of the total units sold for the three months ended March 31,
2007.  Gross
profit as a percentage of sales increased to 8% for the three months ended March 31,
2008 compared to 6% for the three months ended March 31, 2007.  The increase in gross profit was primarily
due to higher average selling prices during the quarter, primarily due to an
increase in sales of higher end products in the first quarter of 2008.  Going forward the average selling price will
fluctuate and will depend on the product mix from the different vendors.  Handsets  Three months ended March 31,2008
  
  2007(in thousands)Sales
  
  $
  44,023
  
  $
  69,719Gross Profit
  
  $
  16,215
  
  $
  25,048Gross Profit as a percentage of sales
  
  37
  %
  36
  %  Net
sales declined37% for the three months ended March 31, 2008 compared to the same
period in 2007.  Nearly all our handset
sales are in China, where we have experienced a decline in volume and price for
our PAS handsets.  The PAS handset units
sold declined to 1.1 million
compared to 1.3 million in the comparable period last year. The 15% volume
decline was primarily attributed to lower demand for our PAS handsets resulting
from slower subscriber growth as service providers reduced the marketing
efforts for PAS handsets in anticipation for next generation technology
networks and the restructuring of China Telecom Corporation.  The average selling price per unit in the PAS
products declined 16% due
to competitive pricing pressures and increased sales through distributor
channels. We have also experienced continuing pricing pressure in the China
telecommunications market since the latter part of 2003, which has driven
average unit selling prices lower. We expect to see cumulative PAS subscriber
growth at lower rates in future periods.  Gross profit as a percentage for our Handsets segment increased from
36% for the three months ended March 31, 2007 to 37% for the corresponding
period in 2008. The improvement in the gross profit percentage was primarily
due to reduced  34


warehouse
cost and a $2.0 million reduction in expenses resulting from a reevaluation of
our PHS chipset supply arrangement during the first quarter of 2008.  In 2008 and beyond, we expect slower or even negative growth rates of
PAS subscribers as China prepares for 3G launch. Furthermore, we expect more
price erosion and gross margin deterioration in PAS handsets because of
competition and sales approach shifting from direct sales to carriers to
selling through distributors. We plan to continue to develop high-end models
and PAS packet data cards and TD-SCDMA and CDMA business, which have higher
gross margins and average selling prices. We also expect to continue to focus
on product cost reduction efforts through supply chain improvements and R&D
improvements, including outsourcing part of our product development.  Services  Three months ended March 31,2008
  
  2007(in thousands)Sales
  
  $
  11,091
  
  $
  12,559Gross Profit
  
  $
  2,319
  
  $
  632Gross Profit as a percentage of sales
  
  21
  %
  5
  %  Our
Services segments revenue from external customers decreased by 12% in the
three months ended March 31, 2008 as compared to the corresponding quarter
last year.  The decrease was mainly due
to the decline in the international sales due to lower infrastructure related
sales, partially offset by the continued growth of our China service sales.  Gross
profit increased from 5% for the three months ended March 31, 2007 to 21%
for the corresponding period in 2008. 
The increase was due to a China service sales increase without
corresponding increase in associated cost by utilizing excess capacity.  This situation was only partly offset by the
lower gross margin in non-China service sales.  35


Other  Three months ended March 31,2008
  
  2007(in thousands)Sales
  
  $
  7,115
  
  $
  6,195Gross Profit
  
  $
  5,332
  
  $
  5,756Gross Profit as a percentage of sales
  
  75
  %
  93
  %  Our
Other segment consists of Mobile Solutions and Custom Solutions business
units.  The revenue increased by
$0.9 million, or 15% for the three months ended March 31, 2008 as
compared to the same period in 2007.  Gross
Profit percentage decreased to 75% for the three months ended March 31,
2008 from 93% for the same period in 2007. 
The decrease was primarily related to the recognition of revenue of a
higher margin contract in the first quarter of 2007. Increased overhead expense
related to dedicated supply chain support contributed to a lower gross profit
percentage in 2008.  RELATED PARTY TRANSACTIONS  Softbank and affiliates  We
recognize revenue with respect to sales of telecommunications equipment to
affiliates of Softbank, a significant stockholder of the Company. Softbank
offers ADSL coverage throughout Japan, which is marketed under the name YAHOO!
BB. We support Softbanks fiber-to-the-home service through sales of its
carrier class GEPON product as well as its NetRingÔ product. In addition, we support Softbanks
new internet protocol television (IPTV), through sales of its RollingStreamÔ product. During the three months ended March 31,
2008 and 2007, we recognized revenue of $11.8 million and $13.1 million,
respectively, for sales of telecommunications equipment and services to
affiliates of Softbank.  Included
in accounts receivable at March 31, 2008 and December 31, 2007 were
$20.9 million and $26.2 million, respectively, related to these
transactions. We had immaterial amounts of accounts payable to Softbank and its
affiliates at March 31, 2008 and December 31, 2007.  Sales
to Softbank include a three year service period and a penalty clause if product
failure rates exceed a certain level over a seven year period. As of March 31,
2008 and December 31, 2007, our customer advance balance related to
Softbank agreements was $0.6 million and $0.3 million, respectively.  The current deferred revenue balance related
to Softbank was $4.1 million and $5.6 million as of March 31, 2008 and December 31,
2007, respectively.  As of March 31,
2008, our noncurrent deferred revenue balance related to Softbank was $10.0
million compared to $10.1 million as of December 31, 2007.  As
of March 31, 2008, Softbank beneficially owned approximately 12% of our
outstanding stock.  Audiovox  One of the Companys officers serves as a director for Audiovox
Corporation (Audiovox). During each of the three months ended March 31,
2008 and 2007, we paid approximately $0.4 million for IT services provided by
Audiovox.  36


LIQUIDITY AND CAPITAL RESOURCES  Operating Activities  2008  Net
cash provided by operating activities for the three months ended March 31,
2008 was $96.7 million. Cash flow generated from operations during the
first quarter of 2008 is not indicative of future cash flows from operations.  Operating cash was significantly impacted by
changes in net operating assets and liabilities providing net cash of $116.7
million, offset partially by adjusting net income for gains on sales of
investments and liquidation of ownership interest in a variable interest
entity, as well as certain noncash charges, which resulted in a net use of cash
of $20.0 million, as discussed below.  Net
income of $25.4 million, adjusted for gains on sale of investments of $39.7
million, the $8.2 million gain on liquidation of ownership interest in a
variable interest entity as well as non-cash charges of $2.5 million, resulted
in a net use of cash of $20.0 million. The non-cash charges of $2.5 million
included $10.1 million in depreciation and amortization of acquisition-related
intangible assets and $4.8 million in stock-based compensation expense,
partially offset by a benefit of $11.7 million resulting from a change in the
China Corporate Income Tax Law.  Cash
provided by the net change in operating assets and liabilities totaled $116.7
million and was primarily the result of management of working capital in the
first quarter of 2008 in preparation for the repayment of the convertible
subordinated notes due March 1, 2008. 
Operating cash was positively impacted by decreases in accounts
receivable of $75.2 million, increases in accounts payable of $64.3 million and
increases in customer advances of $19.9 million, offset partially by increases
in other assets of $19.6 million and decreases in other current liabilities of
$34.4 million.  The decrease in accounts
receivable was primarily due to strong customer collections in our PCD business
segment.  The increase in accounts
payable was due to the high level of inventory purchasing activity late into
the first quarter of 2008, as well as a management decision to forgo early
payment discounts with a significant vendor.  2007  Net
cash used in operating activities for the three months ended March 31,
2007 was $106.7 million. Operating cash was negatively affected by the net
loss of $54.0 million and changes in other assets, inventories, payables and
other current liabilities offset by changes in accounts receivable and customer
advances, as discussed below.  During
the first three months of 2007, inventories increased $2.4 million primarily
due to inventory purchases related to a large infrastructure deployment
contract that we entered into in the fourth quarter of 2006, and increases in
other assets of $31.4 million primarily due to advances to our suppliers and
the prepayment of taxes and insurance. 
In addition, accounts payable decreased $41.3 million, due to our
decision to change the timing of payments to vendors in the first quarter of
2007 to comply with shorter vendor payment terms.  Other current liabilities decreased $79.3
million in the first three months of 2007, due primarily to payments of bonuses
and commissions earned in the prior year and warranty settlements.  The
cash used in operating activities was partially offset by a reduction in
accounts receivable of $60.3 million as a result of strong cash collections and
the high percentage of revenue in the first quarter of 2007 from our PCD
segment which generally has experienced a shorter collection period on related
receivables.  Customer
advances increased by $44.3 million at March 31, 2007.  Customer advances represents cash deposits we
have received from our customers for orders that have not yet received final
acceptance.  Upon subsequent receipt of
final acceptances and revenue recognition, customer advances are reduced and
revenue and cost of sales is recorded.  Investing Activities  2008  Net
cash provided by investing activities for the three months ended March 31,
2008 totaled $45.9 million. Cash of $58.7 million was received from
the proceeds of the sale of short-term investments and $7.7 million was the net
cash provided by the repayment of a loan by a variable interest entity. Cash
outflows from investing activities included $8.5 million for the purchase of
short-term and long-term investments, $7.6 million for the purchase of
property, plant and equipment and $4.5 million was the result of an increase in
restricted cash, primarily to collateralize letters of credit.  37


2007  Net
cash provided by investing activities for the three months ended March 31,
2007 totaled $1.8 million. Cash of $12.3 million was received from
the disposition of an investment interest and from the proceeds of the sale of
short-term investments, and $10.4 million was the result of a decrease in
restricted cash.  Cash outflows from
investing activities included $15.6 million for the purchase of short-term
investments as well as $5.2 million for the purchase of property, plant and
equipment.  Financing Activities  2008  Net
cash used in financing activities was $286.4 million during the three
months ended March 31, 2008, primarily due to the repayment of the
convertible subordinated notes of $274.6 million due March 1, 2008.  2007  Net
cash used in financing activities was $0.7 million, primarily consisting
of a change in cash overdrafts for the three months ended March 31, 2007.  Liquidity  We reported net losses of $195.6 million, $117.3 million and
$532.6 million for the years ended December 31, 2007, 2006 and 2005,
respectively. At December 31, 2007 we had an accumulated deficit of
$691.2 million and used $218.2 million of cash in operations during
the year ended December 31, 2007. At December 31, 2007 we had cash
and cash equivalents of $437.4 million, of which $289.5 million was
used to repay our convertible subordinated notes and the accrued interest
thereon, that matured in March 2008. These factors, as well as others
discussed below, raised substantial doubt as to our ability to continue as a
going concern and our independent registered public accounting firm included an
explanatory paragraph highlighting this uncertainty in their Report of
Independent Registered Public Accounting Firm dated February 29, 2008
included in Part II, Item 8-Financial Statements and Supplementary Data
in our Annual Report on Form 10-K for the year ended December 31,
2007.  Although we had net income of $25.4 million for the quarter ended March 31,
2008, we experienced an operating loss of $30.9 million. Cash provided from
operations was $96.7 million during the quarter ended March 31, 2008,
primarily as a result of management of working capital during the quarter in
preparation for the repayment of the convertible subordinated notes due March 1,
2008.   At March 31, 2008,
$166.9 million of our cash and cash equivalents was held by our
subsidiaries in China. Additionally, the available lines of credits in China
are now significantly less than what has been available to us historically and
the existing credit facilities in China expire during the fourth quarter of
2008.  Management believes that it has developed a liquidity plan that, if
executed successfully, will provide sufficient liquidity to finance our
anticipated working capital and capital expenditure requirements for the next
12 months. Managements liquidity plans include divesting our noncore
assets or operations and obtaining loans for financial institutions. During the
quarter ended March 31, 2008, we did not consummate any such divestiture
transactions and there is no assurance that such transactions will be
consummated on acceptable terms or at all in the future. In addition, through
managements ongoing efforts to improve our profitability and cash flows,
management continues to re-examine all aspects of our business. This review
includes a focus on our fixed cost base and improvements in the management of our
working capital to better align with operations, market demand and current
sales levels. However, if projected sales do not materialize, management may
need to further reduce expenses. In addition, we may require additional equity
or debt financing. If future funds are raised through issuance of stock or
debt, these securities could have rights, privileges or preference senior to
those of our common stock and debt covenants could impose restrictions on our
operations. The sale of additional equity securities or debt financing could
result in additional dilution to our current shareholders. There can be no
assurance that additional financing, if required, will be available on terms
satisfactory to us.  The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets or the
amounts and classification of liabilities or any other adjustments that might
be necessary should the Company be unable to continue as a going concern.  38


In
March 2008, we repaid the convertible subordinated notes of $289.5 million
which included a principal payment of $274.6 million and the accrued interest
of $14.9 million.  During the three
months ended March 31, 2008, we also sold certain short term investments
for $42.1 million.  At March 31,
2008, we had cash and cash equivalents and short-term investments of $305.1
million in the aggregate to meet our liquidity requirements of which
$173.5 million was held by our subsidiaries in China. While our China
subsidiaries transferred a $150 million dividend during the year ended December 31,
2007 and another $100 million in February 2008, the amount of cash
available for transfer from the China subsidiaries is limited both by the
liquidity needs of the subsidiaries in China and by Chinese-government mandated
requirements including currency exchange controls on transfers of funds outside
of China. Currently, our primary sources of available credit are a $75 million
secured revolving credit facility in the U.S. and a series of credit facilities
in China.  In April 2008, we
borrowed $50.0 million under a LIBOR draw against the U.S. credit facility and
we also started drawing daily base rate loans to fund our working capital requirements.  The U.S. credit facility matures on September 19,
2008.  At March 31, 2008, we also had credit facilities in China with a
total of $145.4 million available for future borrowings, of which an aggregate
of $35.6 million remained available for general working capital purposes
and $109.8 remained available in support of letters of credit and corporate
guarantees.  The China facilities expire
during the fourth quarter of 2008. 
During the fourth quarter of 2007, credit facilities in China in the aggregate
amount of approximately $481.7 million matured or were extinguished. Our
practice in China is to draw new loans under the credit facilities prior to
either the maturity of our borrowings or expiration of our facilities to ensure
we maintain adequate liquidity to re-pay the existing borrowings at maturity,
or to effectively lengthen the credit facility period to the latest maturity
date of the underlying borrowings. We currently are in negotiations to renew
these credit facilities.  Our available lines of credit in China are now significantly less than
what has been available to us historically. We are in the process of renewing
the matured lines of credit and may need to collateralize certain of our assets
in China to increase those lines. However, we cannot be certain that such
additional lines of credit will be available to us on commercially reasonable
terms or at all. Furthermore, each borrowing under the credit facilities is
subject to the banks current favorable opinion of the credit worthiness of the
Companys China subsidiaries, as well as the bank having funds available for
lending and other Chinese banking regulations. Managements liquidity plans
include divesting our noncore assets or operations, obtaining funding from
outside sources, including by the sale of our securities, or obtaining loans
from financial institutions.  Our China sales are generally denominated in local currency, and we
accept commercial notes receivable with maturity dates ranging from three to
six months from our customers in China in the normal course of business. Notes
receivable available for sale was $8.9 million and $12.6 million at March 31,
2008 and December 31, 2007, respectively. We may discount these notes with
banking institutions in China. Any notes that have been sold are not included
in our consolidated balance sheets if the criteria for sale treatment
established by Statement of Financial Accounting Standards No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
(SFAS 140) have been met.  Due to the limitations on converting Renminbi, we are limited in our
ability to engage in foreign currency hedging activities in China. We cannot
guarantee that fluctuations in foreign currency exchange rates in the future
will not have a material adverse effect on revenues from international sales
and, correspondingly, on our business, financial condition, results of
operations and cash flows. We have contracts negotiated in Japanese Yen and we
maintain bank accounts in Japanese Yen for purchasing portions of our
inventories and supplies. The balance of these Japanese Yen accounts at March 31,
2008 and December 31, 2007 was approximately $17.5 million and
$10.5 million, respectively.  On August 1,
2005, we entered into a 364-day $100.0 million committed receivables
purchase facility with a financial institution. On March 20, 2008, we
terminated the commitments under this Amended and Restated Receivables Purchase
Agreement in connection with the $75.0 million credit agreement entered into on
March 21, 2008.  No receivables were sold pursuant to this
arrangement and no premiums or penalties were incurred by us in connection with
the termination of this credit facility.  Income taxes  The
China Corporate Income Tax Law (CIT Law) became effective on January 1,
2008.  Under the CIT Law, Chinas dual
tax system for domestic enterprises and foreign investment enterprises (FIEs)
was effectively replaced by a unified system. 
The new law establishes a tax rate of 25% for most enterprises and a
reduced tax rate of 15% for certain qualified high technology enterprises.  39


Prior
to this change in tax law, certain subsidiaries and joint ventures located in
China enjoyed tax benefits in China which are generally available to FIEs.   The tax holidays/incentives for FIEs were
applicable or potentially applicable to UTStarcom ChongQing Telecom Co. Ltd. (CUTS),
UTStarcom Telecom Co., Ltd. (HUTS), Hangzhou UTStarcom Telecom Co., Ltd. (HSTC)
and UTStarcom China Co., Ltd. (UTSC), our subsidiaries in China, as those
entities may qualify as accredited technologically advanced enterprises.  The
CIT Law targets certain industries for the reduced 15% tax rate for certain
qualified high technology enterprises.   
For FIEs established before the enactment of the new law who were
enjoying lower tax rates, any increase in their tax rates would be gradually
phased in over five years.  Significant
regulations regarding the interpretation and implementation of the new tax law
are still pending.  There is potential
risk that our subsidiaries may not qualify for the reduced 15% tax rate.  Therefore, the new law may have an adverse
impact on our future tax expense in China.  Moreover,
the Chinese central government may review and audit tax benefits granted by
local or provincial authorities and could determine to disallow such benefits.
Certain of our subsidiaries and joint ventures located in China enjoy tax
benefits in China that are generally available to foreign investment
enterprises. If these tax benefits are reduced, disallowed or repealed due to
changes in tax laws or determination by the Chinese government, our business
could suffer.  Off-balance sheet arrangements  At
March 31, 2008, we do not have any off-balance sheet arrangements.  Contractual obligations and other commitments  Our
obligations under contractual obligations and commercial commitments at March 31,
2008 were as follows:  Payments due by periodLess than
  
  
  
  
  
  More thanTotal
  
  1 year
  
  1-3 years
  
  3-5 years
  
  5 years(in thousands)Contractual
  ObligationsBank loans
  
  $
  35,653
  
  $
  35,653
  
  $
  
  
  $
  
  
  $
  Lease obligations
  
  $
  31,174
  
  $
  14,411
  
  $
  13,541
  
  $
  2,719
  
  503Other
  Commercial CommitmentsLetters of credit
  
  $
  56,917
  
  $
  39,397
  
  $
  17,520
  
  $
  
  
  Purchase commitments
  
  $
  115,954
  
  $
  110,997
  
  $
  4,957
  
  $
  
  
    Bank loans  At
March 31, 2008, we had loans with various banks totaling
$35.7 million with interest rates ranging from 6.3% to 7.1% per annum.
These bank loans mature during the 2008, and are included in short-term debt.  Operating leases  We
lease certain facilities under non-cancelable operating leases that expire at
various dates through 2013.  Letters of credit  We
issue standby letters of credit primarily to support international sales
activities outside of China. When we submit a bid for a sale, often the
potential customer will require that we issue a bid bond or a standby letter of
credit to demonstrate our commitment through the bid process. In addition, we
may be required to issue standby letters of credit as guarantees for advance
customer payments upon contract signing or performance guarantees. The standby
letters of credit usually expire six to twelve months from date of issuance
without being drawn by the beneficiary thereof.  40


Purchase commitments  We
are obligated to purchase raw materials and work-in-process inventory under
various orders from various suppliers, all of which should be fulfilled without
adverse consequences material to our operations or financial condition.
Purchase commitments exclude agreements that are cancelable without
penalty.  As of March 31, 2008 total
open commitments under these purchase orders extending beyond one year were
approximately $5.0 million. Additionally, we have agreed to purchase from
Marvell certain chip-sets that will be included in 50% to 100% of our PAS
handsets, through 2011.  Intellectual property  Certain
sales contracts include provisions under which customers would be indemnified
by us in the event of, among other things, a third-party claim against the
customer for intellectual property rights infringement related to our products.
There are no limitations on the maximum potential future payments under these
guarantees. We have not accrued any amounts in relation to these provisions as
no such claims have been made and we believe we have valid enforceable rights
to the intellectual property embedded in our products.  Income Tax Obligations  Effective
January 1, 2007, we adopted the provisions of FIN 48.  As of March 31,
2008, we have $81.6 million of gross unrecognized tax benefits. If recognized,
the portion of gross unrecognized tax benefits that would decrease the
provision for income taxes and increase our net income is $8.8 million. The
impact on net income reflects the gross unrecognized tax benefits net of
certain deferred tax assets and the federal tax benefit of state income tax
items totaling $72.8 million. We have not included these amounts in the table
of contractual obligations and commercial commitments because of the difficulty
in making reasonably reliable estimates of the timing of cash settlements with
the respective taxing authorities.  Third Party Commissions  The
Company records accruals for commissions payable to third parties in the normal
course of business.  Such commissions are recorded based on the terms of
the contracts between the Company and the third parties and paid pursuant to
such contracts.  Consistent with our accounting policies, these
commissions are recorded as operating expense in the period in which the
liability is incurred.  As of March 31, 2008, approximately $7
million of such accrued commissions have not been claimed by the third parties
for more than three years.  Management has performed, and continues to
perform, follow-up procedures with respect to these accrued commissions. Upon
completion of such follow-up procedures, if the accrued commissions have not been
claimed and the statute of limitations, if any, has expired or a reasonable
period of time has elapsed, the Company will reverse such accruals. Such
reversals will be recorded in the Statement of Operations during the
period management determines that such accruals are no longer necessary. During
the three months ended March 31, 2008 and 2007, no accruals related to
third party commissions were reversed.  41


ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS  We
are exposed to the impact of interest rate changes, changes in foreign currency
exchange rates and changes in the stock market.  Interest Rate Risk  Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. The fair value of our investment
portfolio would not be significantly affected by either a 10% increase or
decrease in interest rates due mainly to the short term nature of most of our investment
portfolio. However, our interest income can be sensitive to changes in the
general level of U.S and China interest rates since the majority of our funds
are invested in instruments with maturities of less than one year. In a
declining interest rate environment, as short term investments mature,
reinvestment occurs at less favorable market rates. Given the short term nature
of certain investments, anticipated declining interest rates will negatively
impact our investment income.  We maintain an investment portfolio of various holdings, types and
maturities. We do not use derivative financial instruments. We place our cash
investments in instruments that meet high credit quality standards, as
specified in our investment policy guidelines. Our policy is to limit the risk
of principal loss and to ensure the safety of invested funds by generally
attempting to limit market risk. Funds in excess of current operating
requirements are mostly invested in government-backed notes, commercial paper,
floating rate corporate bonds and fixed income corporate bonds. In accordance
with our investment policy, all short-term investments are invested in investment
grade rated securities with minimum A or better ratings. Currently, most of
our short-term investments have AA or better ratings.  Our cash and cash equivalents are not subject to significant interest
rate risk due to the short maturities of these instruments. As of March 31,
2008 the carrying value of our cash and cash equivalents approximated fair
value.  The
table below represents carrying amounts and related weighted-average interest
rates of our investment portfolio at March 31, 2008:  (in thousands, exceptinterest rates)Cash and cash equivalents
  
  $
  298,482Average interest rate
  
  1.78
  %Restricted cash - short-term
  
  $
  13,749Average interest rate
  
  2.93
  %Short-term investments
  
  $
  6,637Average interest rate
  
  1.54
  %Restricted cash - long-term
  
  $
  17,520Average interest rate
  
  3.11
  %Total investment securities
  
  $
  336,388Average interest rate
  
  1.89
  %  Equity Investment Risk  Our
investment portfolio includes equity investments in publicly traded companies,
the values of which are subject to market price volatility.  Economic events could adversely affect the
public equities market and general economic conditions may worsen.  Should the fair value of our publicly traded
equity investments decline below their cost basis in a manner deemed to be
other-than-temporary, our earnings may be adversely affected.  We have also invested in several privately
held companies as well as investment funds which invest primarily in privately
held companies, many of which can still be considered in the start-up or
development stages.  These investments
are inherently risky, as the market for the technologies or products they have
under development are typically in the early stages and may never materialize.  42


Foreign Exchange Rate Risk  As
a multinational company, we conduct our business in a wide variety of
currencies and are therefore subject to market risk for changes in foreign
exchange rates.  We expect to continue to
expand our business globally and, as such, expect that an increasing proportion
of our business may be denominated in currencies other than U.S. Dollars.  As a result, fluctuations in foreign
currencies may have a material impact on our business, results of operations
and financial condition.  Historically,
the majority of our foreign-currency denominated sales have been made in China,
denominated in Renminbi.  Additionally,
during 2006 and 2007 we made significant sales in Japanese Yen, Euros, Indian
Rupees and Canadian Dollars.  Due to
Chinas currency exchange control regulations, we are limited in our ability to
convert and repatriate Renminbi, as well as in our ability to engage in foreign
currency hedging activities in China. 
The balance of our cash and short-term investments held in China was
$173.5 million at March 31, 2008. 
Since China un-pegged the Renminbi from the U.S. Dollar in July, 2005,
through March 31, 2008, the Renminbi has strengthened by more than 15%
versus the U.S. Dollar.  However, it is
uncertain what further adjustments may be made in the future.  We
may manage foreign currency exposures using forward and option contracts to
hedge and thus minimize exposure to the risk of the eventual net cash inflows
and outflows resulting from foreign currency denominated transactions with
customers, suppliers, and non-U.S. subsidiaries, however, we are not currently
hedging any such transactions.  As our
foreign currency balances are not currently hedged, any significant revaluation
of our foreign currency exposures may materially and adversely effect on our business,
results of operation and financial condition. 
We do not enter into foreign exchange forward or option contracts for
trading purposes.  Given
our exposure to international markets, we regularly monitor all of our material
foreign currency exposures.  We use
sensitivity analysis to measure our foreign currency risk by computing the
potential decrease in cash flows that may result from adverse or beneficial
changes in foreign exchange rates, relative to the functional currency with all
other variables held constant.  The
analysis covers all of our underlying exposures for foreign currency
denominated financial instruments.  The
foreign currency exchange rates used were based on market rates in effect at March 31,
2008.  The sensitivity analysis indicated
that a hypothetical 10% adverse or beneficial movement in exchange rates would
have resulted in a loss or gain in the fair values of our foreign currency
denominated financial instruments of $4.6 million at March 31, 2008.  ITEM
4CONTROLS AND PROCEDURES  Evaluation of Disclosure Controls and Procedures  UTStarcom, Inc.
(UTStarcom or the Company) maintains disclosure controls and procedures
that are designed to ensure that information required to be disclosed in the
reports the Company files or submits under the Securities Exchange Act of 1934,
as amended (Exchange Act), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions (SEC)
rules and forms, and that such information is accumulated and communicated
to the Companys management, including its chief executive officer (CEO) and
chief financial officer (CFO), as appropriate, to allow timely decisions
regarding required financial disclosure.  In
connection with the preparation of this Quarterly Report on Form 10-Q (Form 10-Q),
the Company carried out an evaluation as of March 31, 2008 under the
supervision and with the participation of the Companys management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. Based upon this evaluation, management
concluded that as of March 31, 2008 the Companys disclosure controls and
procedures were not effective because of the material weaknesses described in Managements
Annual Report on Internal Control over Financial Reporting, included in Part II,
Item 9A - Controls and Procedures (Item 9A) in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2007, which have
not yet been remediated. Investors are directed to Item 9A in the 2007 Annual
Report for the description of these weaknesses.  A
material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a timely basis. To
address these material weaknesses in internal control over financial reporting
noted above, the Company performed additional analyses and other procedures (as
further described below under Managements Planned Remediation Initiatives and
Interim Measures) to ensure that the Companys consolidated financial
statements are prepared in accordance with generally accepted accounting
principles in the United States (GAAP). Accordingly, the Companys management
believes that the consolidated financial statements included in this Form 10-Q
fairly present in all material respects the Companys financial condition,
results of operations and cash flows for the periods presented  43


and
that this Form 10-Q does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the periods covered by this report.  Managements Planned Remediation Initiatives and Interim
Measures  The
Company plans to make necessary changes and improvements to the overall design
of its control environment to address the material weaknesses in internal
control over financial reporting described in Item 9A in the 2007 Annual
Report. In particular, the Company has implemented during 2007 and the first
quarter of 2008, and plans to continue to implement during 2008, the specific
measures described below.  In addition,
in connection with the March 31, 2008 quarter-end reporting process, the
Company has undertaken additional measures described under the subheading Interim
Measures below to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Companys consolidated financial
statements included in this Form 10-Q and to ensure that material
information relating to the Company and its consolidated subsidiaries was made
known to management in connection with the preparation of this Form 10-Q.  Remediation Initiatives  1.To remediate the material weakness described in Item 9A
in the 2007 Annual Report, in The Company failed to
prevent or detect non-compliance with established policies and procedures
intended to ensure compliance with laws and regulations, the
Company launched a formal investigation at the direction of the Audit Committee
of the Companys Board of Directors (Audit Committee) to review alleged
violations of the FCPA during the second quarter of 2006; refer to Governmental Investigations under Part II,
Item 1 Legal Proceedings for additional information. Throughout the course of
this investigation, the Company has taken and plans to continue to take all
appropriate actions including changes to its training, processes and procedures
related to its code of business conduct and ethics, its payment controls
particularly in outlying regions, and its due diligence evaluation of business
partnerships. Upon conclusion of this investigation, the Company will review
and, as necessary, further enhance its procedures to reduce the risk of ongoing
control deficiencies in this area. In the third and fourth quarters of 2007 and
the first quarter of 2008, the Company provided training to personnel in
offices in various regions including North America, Europe, China and India
and, in the remainder of 2008, plans to continue to provide training and expand
its coverage to personnel employed in other regions and countries. In addition,
the Companys internal audit staff commenced audits and plans to continue to
expand and increase the scope of the Companys efforts to monitor controls at
company operations globally, through reviews and audits of employee compliance
with applicable policies and procedures at business units, subsidiaries and
other locations.  2.To remediate the material weaknesses described
in Item 9A in the 2007 Annual Report over appropriately matching of
costs of sales with revenue and recording the reserves for losses on customer
contracts and the associated cost of sale,, the Companys planned remediation measures are intended
to address material weaknesses at its U.S. headquarters that have the potential
of misstating these balances in the financial statements in future financial
periods. These measures include the following:  i.The
Company effected changes in the overall design and structure of its financial
reporting organization, in the months of September and October of
2007.  These changes have enabled, and
are expected to continue to foster, improvements in the flow of information
between various groups within finance, and enhancements in various processes
including the review of the sales contracts gross margins to ensure proper
matching of cost to revenue, and identification of loss contracts as well as
the review of the accuracy and adequacy of existing reserves for losses on
customer contracts.  ii.In
the first quarter of 2008, the Company enhanced, and in the reminder of 2008,
the Company plans to continue enhancing, its processes and procedures to ensure
the completeness and accuracy of the recording of the cost of sales when
revenue is recognized, and the accuracy and adequacy of recording of the
reserves for losses on customer contracts. The revised processes included
involving and obtaining detailed and timely input from business units,
operations and sales operations personnel to enhance the information available
for finance to analyze these accounts. Additional analytical processes were put
in place to ensure the accuracy of the recording of the cost of sales when
revenue is recognized. In addition, finance management has placed increased
attention on reviewing in detail the accounting in this area.  3.To remediate the material weaknesses
described in Item 9A in the 2007 Annual Report over its process toensure the complete and
accurate preparation and review of its consolidated financial statements and
disclosures in accordance with GAAP, the Companys planned
remediation measures are intended to address material weaknesses at its U.S.
headquarters  44


that
have the potential of misstating these balances in the financial statements in
future financial periods. These measures include the following:  i.During
the year of 2007 and the first quarter of 2008 the Company enhanced, and in the
remainder of 2008 the Company plans to continue enhancing, the month and
quarter-end closing procedures within its corporate accounting function to
standardize its processes for financial review to ensure that reviewers at its
U.S. headquarters analyze and monitor financial information in a consistent and
thorough manner. The enhanced procedures included timely communication with the
remote locations to ensure the completeness and accuracy of the close
processes.  ii.During
the year of 2007 and the first quarter of 2008 the Company implemented, and in
the remainder of 2008 the Company plans to continue enhancing and improving the
documentation and review of required information associated with the
preparation of its quarterly and annual filings under the Exchange Act.
Additional reviews were put in place to ensure the accuracy of the financial
statements in the quarterly and annual filings, and procedures were added to
ensure the completeness of the reviews of the quarterly and annual filings.  Interim Measures  Management
has not yet implemented and/or tested all of the measures described above under
the heading Remediation Initiatives. Nevertheless, management believes
the measures identified above (to the extent these have been implemented),
together with other measures undertaken by the Company in connection with
preparation of the consolidated financial statements included in this Form 10-Q
and described below, address the material weaknesses in internal control over
financial reporting described in Item 9A in the 2007 Annual Report and that
remain material weaknesses as of March 31, 2008. These other measures
include the following:  1.The Company retained on an
interim basis outside consultants with relevant accounting experience, skills
and knowledge, working under the supervision and direction of the Companys
management, to assist with its review in a number of areas including SEC
external financial reporting.  2.The Company implemented and
performed a number of additional detailed procedures and a comprehensive review
of its accounting in various areas, including:  a)Analysis
of the backlog report, gross margin report and contract analysis report,
enhanced discussions with business unit, finance personnel in various
locations, operations and sales and services personnel to enhance the
information available for finance to analyze, and thorough review of related
sales and cost information to determine the reserves for losses on customer
contracts and associated cost of sales.  b)A
variety of manual review procedures, such as an extensive review of journal
entry postings into the Oracle system, a thorough review of account
reconciliations, and a detailed review at its U.S. headquarters of trial
balances including those issued from decentralized locations, to ensure the completeness
and accuracy of the underlying financial information used to generate the
financial statements.  Managements Conclusion  Management
believes the remediation measures described under Managements Planned Remediation Initiatives and Interim Measures
above will strengthen the Companys internal control over financial reporting
and remediate the material weaknesses identified in Managements Annual Report
on Internal Control over Financial Reporting. However, management has not yet
implemented all of these measures and/or tested them.  Management believes that the interim measures
described under Managements Planned Remediation Initiatives and Interim
Measures above provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Companys financial statements
included in this Form 10-Q and has discussed this with the Companys Audit
Committee.  The
Company is committed to continuing to improve its internal control processes
and will continue to diligently and vigorously review its disclosure controls
and procedures and its internal control over financial reporting in order to
ensure compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. However, any control system, regardless of how well
designed, operated and evaluated, can provide only reasonable, not absolute,
assurance that its objectives will be met. As management continues to evaluate
and work to improve the Companys internal control over financial reporting, it
may determine to take additional or alternate measures to address control
deficiencies, and it may determine not to complete certain of the measures
described under Managements Planned
Remediation Initiatives and Interim Measures above.  45


Changes in Internal Control over Financial Reporting  During
the first quarter of 2008 the Company implemented an upgrade to its enterprise
resource planning (ERP) system. The Company will continue to enhance its ERP
system through the remainder of 2008 and beyond. The Company has modified and
will continue modifying the design and documentation of internal controls
processes and procedures relating to the upgraded system as appropriate and
necessary to supplement and complement existing internal controls over
financial reporting.  The
discussion in this section and in the Managements
Planned Remediation Initiatives and Interim Measures section includes a description of the material
changes to the Companys internal control over financial reporting during the
first quarter of 2008 that materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.  PART IIOTHER
INFORMATION  ITEM 1LEGAL PROCEEDINGS  Securities Class Action Litigation  Beginning in October 2004, several shareholder class action
lawsuits alleging federal securities violations were filed against us and
various officers and directors of our company. The actions have been
consolidated in United States District Court for the Northern District of
California under the caption In re UTStarcom, Inc.
Securities Litigation, Master File No. C-04-4908-JW (PVT) (the Consent).
The lead plaintiffs in the case filed a First Amended Consolidated Complaint on
July 26, 2005. The First Amended Complaint alleged violations of the
Securities Exchange Act of 1934, and was brought on behalf of a putative class
of shareholders who purchased our stock after April 16, 2003 and before September 20,
2004. On April 13, 2006, the lead plaintiffs filed a Second Amended
Complaint adding new allegations and extending the end of the class period to October 6,
2005. In addition to the Company defendants, the plaintiffs are also suing
Softbank. Plaintiffs complaint seeks recovery of damages in an unspecified
amount.  On June 2, 2006, we and the individual defendants filed a motion
to dismiss the Second Amended Complaint. On March 21, 2007, the Court
granted defendants motion and dismissed plaintiffs Second Amended Complaint.
The Court granted plaintiffs leave to file a Third Amended Complaint,
which plaintiffs filed on May 25, 2007. On July 13, 2007, we and the
individual defendants filed a motion to dismiss and a motion to strike the
Third Amended Complaint. On March 14, 2008, the Court granted defendants
motion and dismissed plaintiffs Third Amended Complaint.  The Court granted plaintiffs leave to file a
Fourth Amended Complaint, which plaintiffs filed on May 14, 2008.  On September 4, 2007, a second shareholder class action complaint
captioned Peter Rudolph v. UTStarcom, et al.,
Case No. C-07-4578 SI, was filed in the United States District Court for
the Northern District of California against us and some of our current and
former directors and officers. The complaint alleges violations of the
Securities Exchange Act of 1934 through undisclosed improper accounting
practices concerning our historical equity award grants. Plaintiff seeks
unspecified damages on behalf of a purported class of purchasers of our common
stock between July 24, 2002 and September 4, 2007. On December 14,
2007, the Court appointed James R. Bartholomew lead plaintiff. On January 25,
2008, the lead plaintiff filed an amended complaint. On April 14, 2008,
the Court granted defendants motion to dismiss the amended complaint.  The Court granted the lead plaintiff leave to
file a second amended complaint no later than May 16, 2008.  Due to the preliminary status of these lawsuits and uncertainties
related to litigation, we are unable to evaluate the likelihood of either a favorable
or unfavorable outcome. Accordingly, we are unable at this time to estimate the
effects of these complaints on our financial position, results of operations,
or cash flows.  Governmental Investigations  On
May 1, 2008, the U.S. Securities and Exchange Commission (the SEC)
announced a final settlement agreement with us in connection with an
investigation commenced by the SEC in September 2005.  The investigation involved our financial
disclosures during prior reporting periods, historic option grant awards
practices, certain historical sales contracts in China and other matters.
Without admitting or denying the allegations in the SECs complaint, we
consented to a permanent injunction against any future violations of certain
books-and-records and internal control provisions of the federal securities
laws. No monetary penalties were assessed against us.  In connection with the same investigation, Mr. Lu,
the Companys Chief Executive Officer and a member of the Board of Directors,
individually entered into a  46


settlement
agreement with the SEC. Without admitting or denying the allegations in the SECs
complaint, Mr. Lu agreed to pay a civil penalty of $100,000 and consented
to a permanent injunction on similar terms as the Company. Mr. Lus
settlement is subject to a final judgment by a United States District Court.  In December 2005, the U.S. Embassy in Mongolia informed us that it
had forwarded to the Department of Justice (the DOJ) allegations that an
agent of our Mongolia joint venture had offered payments to a Mongolian
government official in possible violation of the Foreign Corrupt Practices Act
(the FCPA). The Company, through its Audit Committee, authorized an
independent investigation into possible violations of the FCPA, and it has been
in contact with the DOJ and SEC regarding the investigation. The investigation
has identified possible FCPA violations in Mongolia, Southeast Asia, India, and
China, as well as possible violations of U.S. immigration laws. The DOJ has
requested that the Company voluntarily produce documents related to the
investigation, the SEC has subpoenaed the Company for documents, and the
Company has received a Grand Jury Subpoena requiring the production of documents
related to one aspect of the DOJ investigation, that is, training programs the
Company has sponsored. The Company has executed tolling agreements extending
the statute of limitations for the FCPA issues under investigation by the DOJ.
Such proceedings may result in criminal or civil sanctions, penalties and
disgorgements against the Company. If it is probable that an obligation of the
Company exists and will result in an outflow of resources, a provision will be
recorded if the amount can be reasonably estimated. Regulatory and legal
proceedings as well as government investigation often involve complex legal
issues and are subject to substantial uncertainties. Accordingly, management
exercises considerable judgment in determining whether it is probable that such
a proceeding will result in outflow of resources and whether the amount of the
obligation can be reasonably estimated. The Company periodically reviews the
status of these proceedings and these judgments are subject to change as new
information becomes available. At this time, the Company cannot predict when
any inquiry will be completed or what the outcome of any inquiry will be. The
Company is unable to reasonably estimate the total amount of loss, if any,
associated with the proceedings. A judgment against the Company may have a
material adverse effect on the Companys financial position, results of
operations and cash flows.  Shareholder Litigation  On November 17, 2006, a shareholder derivative complaint captioned
Ernesto Espinoza v. Ying Wu et al.,
Case No. RG06298775, was filed against certain of our current and former
officers and directors in the Superior Court of the County of Alameda,
California. The complaint alleges that the individual defendants, among other
things, breached their duties, were unjustly enriched, and violated the
California Corporations Code in connection with the timing of stock option
grants. The complaint names us as a nominal defendant and seeks unspecified
monetary damages against the individual defendants and various forms of
injunctive relief. On February 2, 2007, we and the individual defendants
filed demurrers against the complaint. On April 11, 2007, the Court
sustained the individual defendants demurrer, overruled our demurrer, ordered
the plaintiff to file an amended complaint, and ordered us to answer the
original complaint. The plaintiff filed an amended complaint and we have filed
an answer to the amended complaint. On August 21, 2007, the individual
defendants filed demurrers against the amended complaint. The Court sustained
the individual defendants demurrers and ordered the plaintiff to file a
second amended complaint. The plaintiff has not yet filed his second amended
complaint.  Due to the preliminary status of this complaint and uncertainties
related to litigation, we are unable to evaluate the likelihood of either a
favorable or unfavorable outcome. Accordingly, we are unable at this time to
estimate the effects of this complaint on our financial position, results of
operations, or cash flows.  IPO Allocation  On October 31, 2001, a complaint was filed in United States
District Court for the Southern District of New York against us, some of our
directors and officers and various underwriters for our initial public
offering. Substantially similar actions were filed concerning the initial
public offerings for more than 300 different issuers, and the cases were
coordinated as In re Initial Public Offering
Securities Litigation, 21 MC 92 for pretrial purposes. In April 2002,
a consolidated amended complaint was filed in the matter against us, captioned In re UTStarcom, Initial Public Offering Securities
Litigation, Civil Action No. 01-CV-9604. Plaintiffs allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934 through undisclosed improper underwriting practices concerning the
allocation of IPO shares in exchange for excessive brokerage commissions,
agreements to purchase shares at higher prices in the aftermarket and
misleading analyst reports. Plaintiffs seek unspecified damages on behalf of a
purported class of purchasers of our common stock between March 2, 2000
and December 6, 2000. Our directors and officers have been dismissed
without prejudice pursuant to a stipulation. On February 19, 2003, the
Court granted in part and denied in part a motion to dismiss the claims
brought by defendants including us. The order dismissed all claims against us
except for a claim brought under Section 11 of the Securities Act of 1933,
which alleges that the registration statement filed in accordance with the IPO
was misleading. In June 2004, a stipulation of settlement and release of claims
against the issuer defendants, including us, was submitted to the court for  47


approval.
The terms of the settlement, if approved, would have dismissed and released all
claims against the participating defendants (including us). In August 2005,
the Court preliminarily approved the settlement. In December 2006, the
Court of Appeals for the Second Circuit reversed the Courts October 2004
order certifying a class in six test cases that were selected by the
underwriter defendants and plaintiffs in the coordinated proceedings. Our case
is not one of the test cases. Because class certification was a condition of
the settlement, it was unlikely that the settlement would receive final Court
approval. On June 25, 2007, the Court entered an order terminating the
proposed settlement based on a stipulation among the parties to the settlement.
Plaintiffs have filed amended master allegations and amended complaints and
moved for class certification in the six test cases, which the defendants in
those cases have opposed. On March 26, 2008, the Court denied the
defendants motion to dismiss the amended complaints. It is unclear whether
there will be any revised or future settlement. If the litigation proceeds, we
believe that we have meritorious defenses and intend to defend the action
vigorously. The total amount of the loss associated with the above litigation
is not determinable at this time. Therefore, we are unable to currently
estimate the loss, if any, associated with the litigation.  UTStarcom, Inc. v. Starent Patent Infringement
Litigation  On February 16, 2005, we filed a suit against Starent for patent
infringement in the U.S. District Court for the Northern District of
California. In the Complaint, we assert that Starent infringes UTStarcom patent
U.S. Reg. No. 6,829,473 (the 473 patent) through Starents development
and testing of a software upgrade for its customers installed ST-16
Intelligent Mobile Gateways. We seek declaratory and injunctive relief. Starent
subsequently filed its answer and counterclaims and we then filed a motion to
dismiss Starents counterclaim. On July 19, 2005, the parties stipulated
that Starent would file an amended answer and counterclaim and we then
responded to Starents amended counterclaim.. In early December 2006, we
filed a reissue application for the 473 patent with the United States Patent
and Trademark Office. Starent has also filed for reexamination of the 473
patent. The reexamination and reissue are currently co-pending. The litigation
is still in a preliminary stage, and is stayed pending the outcome of the
reissue. The litigation and its outcome cannot be predicted, although we
believe the litigation has merit. Nonetheless, we believe that any adverse
judgment on Starents counterclaims will not have a material adverse effect on
our business, financial condition, results of operations or cash flows.  On May 8, 2007, the Company filed an additional suit against
Starent and sixteen individual defendants (who were all former employees of
3Coms CommWorks division, of which the Company acquired certain assets in May of
2003) in the Northern District of Illinois. The causes of action include claims
for patent infringement, misappropriation of trade secrets, intentional
interference with business relations and prospective economic advantage and
declarations of ownership of certain patent rights. The Company seeks
compensatory damages, punitive damages and injunctive relief. After the court
denied the defendants motion to dismiss the misappropriation of trade secrets
claims, on August 30, 2007, Starent answered the Companys complaint,
denying the Companys allegations and asserting a number of affirmative
defenses and counterclaims. The Company has filed an Amended Complaint to
allege additional related causes of action. Starent has moved to dismiss
certain causes of action of the Amended Complaint and the Court has not yet
decided the motion to dismiss. The Court has appointed a special master to
handle discovery and issues related to identification of the trade secrets.
Discovery is now ongoing. The Company believes that any adverse judgment on
Starents counterclaims will not have a material adverse effect on the Companys
business, financial condition, results of operations or cash flows.  Telemetrix, Inc.
Arbitration  On October 19, 2006, Telemetrix, Inc.(Telemetrix) filed a formal Request for
Arbitration against us to the World Intellectual Property Organization (WIPO)
in Geneva, Switzerland. The Request for Arbitration sought unspecified damages
arising from a contract between Telemetrix and Telos Technology, Inc.,
dated October 22, 2003. We assumed Telos rights and obligations under
this contract pursuant to our purchase of Telos assets on May 19, 2004.
Telemetrix alleged nine causes of action, including breach of contract, fraud,
negligent misrepresentation, interference with contractual relations, and
interference with prospective economic advantage. In December 2006, we
filed a formal response to the Request for Arbitration, denying all material
factual allegations asserted by Telemetrix. An arbitrator was selected by the
parties, and, on August 2, 2007, the arbitrator granted a pleading motion
in favor of us due to Telemetrixs failure to allege sufficient facts in
support of a majority of its causes of action. On August 17, 2007,
Telemetrix filed an Amended Statement of Claim, alleging six causes of action,
including breach of contract, fraud, interference with contractual relations
and interference with prospective economic advantage. The evidentiary hearing
is scheduled for July 28-30, 2008. Discovery has begun. The financial
impact, if any, of the above claims is not determinable at this time.  48


Other Litigation  We are a party to other litigation matters and claims that are normal
in the course of operations, and while the results of such litigation matters
and claims cannot be predicted with certainty, we believe that the final
outcome of such matters will not have a material adverse impact on our
financial position, results of operations or cash flows.  ITEM 1ARISK FACTORS  Set forth below and
elsewhere in this report are descriptions of the risks and uncertainties that
could cause our actual results to differ materially from the results
contemplated by the forward-looking statements contained in this report. The
descriptions below include any material changes to and supersede the
description of the risk factors affecting our business previously disclosed in Part I,
Item 1A - Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007.  FACTORS AFFECTING FUTURE OPERATING RESULTS  RISKS RELATED TO OUR COMPANY  We continue to experience net operating losses and do
not have sufficient liquidity to execute our business plan or to continue our
operations without obtaining additional funding. Our ability to obtain
additional funding is not assured.  We reported net losses of $195.6 million, $117.3 million and
$532.6 million for the years ended December 31, 2007, 2006 and 2005,
respectively. At December 31, 2007 we had an accumulated deficit of
$691.2 million and used $218.2 million of cash in operations during
the year ended December 31, 2007. At December 31, 2007 we had cash
and cash equivalents of $437.4 million, of which $289.5 million was
used to repay our convertible subordinated notes that matured on March 1,
2008. These factors, as well as others discussed below, raised substantial
doubt as to our ability to continue as a going concern and our independent
registered public accounting firm included an explanatory paragraph
highlighting this uncertainty in their Report of Independent Registered Public
Accounting Firm dated February 29, 2008 included in Part II, Item
8-Financial Statements and Supplementary Data in our Annual Report on Form 10-K
for the year ended December 31, 2007.  Although we reported net income of $25.4 million for the quarter ended March 31,
2008, we experienced an operating loss of $30.9 million in the same quarter. At
March 31, 2008, we had an accumulated deficit of $665.8 million. Cash
provided from operations was $96.7 million during the quarter ended March 31,
2008, primarily as a result of active working capital management during the
quarter in preparation for the repayment of the convertible subordinated notes
due March 1, 2008.  At March 31,
2008, we had cash and cash equivalents of $298.5 million, of which $166.9
million was held by our China subsidiaries.  Currently, our primary sources of available credit are a $75 million
secured revolving credit facility in the U.S. and a series of credit facilities
in China.  On April 21, 2008, we
borrowed $50.0 million under a LIBOR draw against the U.S. credit facility and
we also started drawing daily base rate loans to fund our working capital
requirements. The U.S. credit facility matures during the third quarter of
2008.  At March 31, 2008, the
Company also had credit facilities in China with a total of $145.4 million
available for future borrowings, of which an aggregate of $35.6 million
remained available for general working capital purposes and $109.8 remained
available in support of letters of credit and corporate guarantees.  The China facilities expire during the fourth
quarter of 2008. We cannot be certain that we can renew or replace the U.S. and
China credit facilities as they mature on commercially reasonable terms or at all.
Furthermore, with respect to China, our available lines of credit are now
significantly less than what had been available to us in the past, and we may
need to pledge certain of our assets in China to renew matured or maturing
lines and/or to increase those lines.  Over the past year, our China subsidiaries were a significant source of
liquidity for the Company.  However,
after having transferred dividends to us in the amounts of $150 million in the
year ended December 31, 2007 and an additional $100 million in the quarter
ended March 31, 2008, the amount of cash available for dividends from our
China subsidiaries is significantly less than in the past.  The amount of cash available for transfer
from the China subsidiaries is limited both by the liquidity needs of the
subsidiaries in China and by Chinese-government mandated requirements including
currency exchange controls on transfers of funds outside of China.  Managements liquidity plans include divesting our noncore assets or
operations and obtaining loans from financial institutions. If we cannot
successfully implement our liquidity plans, it may be necessary for us to make
significant  49


changes
to our business plan in order to maintain adequate liquidity for at least the
next 12 months. In addition, various other matters may impact our
liquidity such as:  ·changes in financial market conditions or our business
condition that could limit our access to existing credit facilities or make new
financings more costly or even unfeasible;  ·inability to achieve planned operating results that could
increase liquidity requirements beyond those considered in our business plan;
and  ·changes in Chinas currency exchange control regulations
that could limit our ability to access cash in China to meet liquidity
requirements for our operations in China or elsewhere.  Although management has developed liquidity plans, we may have
difficulty maintaining existing relationships, or developing new relationships,
with suppliers or vendors as a result of our financial condition. Our suppliers
or vendors could choose to provide supplies or services to us on more stringent
payment terms than those currently in place, such as by requiring advance
payment or payment upon delivery of such supplies or services, which would have
an adverse impact on our short-term cash flows. As a result, our ability to
retain current customers, attract new customers and maintain contracts that are
critical to our operations may be adversely affected.  Thus, our ability to continue as a going concern until we generate
sustained profits and/or positive cash flows from operations is subject to our
ability to successfully divest noncore assets or operations and/or obtain loans
from financial institutions. Our continuing operating losses increase the
difficulty of our meeting such goals and our efforts to continue as a going
concern may not prove successful.  Any failure by us to execute successfully on our
business plan, including our cost reduction strategy, could result in total
costs and expenses that are greater than expected which would adversely affect
our operating results.  Management has undertaken a significant review of our business and has
developed an operating plan that it believes will address our cash requirements
for the next 12 months. In addition to increasing our liquidity through
the divestiture of our noncore assets or operations and obtaining loans, as
discussed above, we anticipate continuing to take rebalancing actions,
including work force reductions, as needed to bring operational expenses to
appropriate levels for each of our businesses and to address our cash flow
requirements.  During the quarter ended March 31,
2008, we substantially completed the restructuring plan approved by our Board
of Directors in October 2007, having reduced our worldwide work force by
approximately 800 employees, or approximately 12% of the Companys
headcount.  We expect cost savings from
planned restructuring activities to provide liquidity for operations, to be
used to offset market forces or to be reinvested in our businesses to
strengthen our competitiveness, but we cannot be certain that we will be
successful in these efforts. Significant risks associated with these actions
and other workforce management issues that may impair our ability to
successfully implement our business plan and achieve anticipated cost
reductions or that may otherwise harm our business include delays in
implementation of any further workforce reductions in highly regulated
locations outside of the United States, particularly in Europe and Asia,
redundancies among restructuring programs, decreases in employee morale and the
failure to meet operational targets or respond rapidly to future growth
opportunities due to the loss of employees, particularly sales employees.
Moreover, our management must devote significant time and attention to any
corporate restructuring, and, if it becomes necessary to undertake additional
restructuring measures, management may not be able to devote sufficient time
and attention to our core operations. If we are unable to realize the
anticipated benefits of the completed cost reductions, or if it becomes
necessary to undertake additional restructuring measures, our results of
operations will be harmed. In addition, our ability to retain key employees may
be adversely affected by our restructuring plans.  We may not realize the anticipated benefits of any
divestitures that we undertake.  We plan to divest noncore assets and operations in order to address our
liquidity requirements. To date, we have not consummated any such
transactions.  In addition, anticipated
benefits of divestitures, if consummated, may not be realized. Our divestiture
plans have in the past and will require in the future a significant diversion
of managements time and attention from other business concerns and, in
addition, may distract our employees away from our operations, harm our
reputation, increase our expenses and result in recording significant losses
upon consummation of such divestitures.  50


We may have to sell our
securities.  If we cannot meet our liquidity needs through improved operating
results, the divestiture of our noncore assets or operations, or by obtaining
loans from financial institutions, we may have to sell our securities, which
would dilute the ownership of our stockholders. 
Our ability to sell our securities is not assured.  Our
failure to successfully implement an enhanced version of our enterprise
resource planning system could result in material financial misstatements and/or
cause delays in our filings.  During
the first quarter of 2008, we implemented an enhanced version of our enterprise
resource planning system.  Because we
have not yet completed the testing of the system, certain additional processes
have been required in connection with the preparation of our condensed
consolidated financial statements. These additional processes have increased
the time otherwise needed by us to prepare our condensed consolidated financial
statements.  For example, the additional
time needed to prepare our condensed consolidated financial statements for the
first quarter of 2008 caused us to file, pursuant to SEC Rule 12b-25, for
an extension for the filing of this Quarterly Report on Form 10-Q.  In addition to increasing the amount of time
it takes us to prepare our condensed consolidated financial statements, the
additional processes also may increase the risk of errors in our condensed
consolidated financial statements. Our ability to prepare accurate and timely
consolidated financial statements already had been identified as a material
weakness by management in its assessment of the Companys internal controls
over financial reporting as of December 31, 2007.  We continue to test the enhancements to our
enterprise resource planning systems so that the additional processes it is
causing will no longer be necessary, but until we have successfully tested the
system, and there is no assurance that we will be successful in this regard,
the Company and its stockholders are subject to the risks associated with late
filings, material misstatements to the quarterly and annual consolidated
financial statements and/or financial restatements, any of which could cause
investors to lose confidence in our reported financial information and lead to
a decline in our stock price.  We face risks related to possible violations of the
Foreign Corrupt Practices Act.  In December 2005, the U.S. Embassy in Mongolia informed us that it
had forwarded to the Department of Justice (the DOJ) allegations that an agent
of our Mongolia joint venture had offered payments to a Mongolian government
official in possible violation of the Foreign Corrupt Practices Act (the FCPA).
We, through our Audit Committee, authorized an independent investigation into
possible violations of the FCPA, and we have been in contact with the DOJ and
the Securities and Exchange Commission (the SEC) regarding the
investigation. The investigation has identified possible FCPA violations in
Mongolia, Southeast Asia, India and China, as well as possible violations of
U.S. immigration laws. The DOJ has requested that the Company voluntarily
produce documents related to the investigation, the SEC has subpoenaed the
Company for documents, and we have received a Grand Jury Subpoena requiring the
production of documents related to one aspect of the DOJ investigation, that
is, certain training programs we have sponsored. The Company has executed
tolling agreements extending the statute of limitations for the FCPA issues
under investigation by the SEC and the DOJ and the immigration issues under
investigation by the DOJ.  At this time, we
cannot predict when the FCPA inquiries will be completed or what the outcome of
these inquiries will be. These inquiries could harm relationships with existing
customers and our ability to obtain new customers and partners. If the SEC or
the DOJ makes a determination that we have violated federal laws, we may face
severe criminal and civil sanctions including, but not limited to, fines,
disgorgement and an injunction. These inquires also could result in regulatory
proceedings, and thus potentially adverse findings, that could require us to
pay damages or penalties or have other remedies imposed upon us. In addition,
it is possible that the findings and outcome of any of these inquiries and any
subsequent regulatory proceedings may affect other lawsuits that are pending
and we cannot guarantee that new lawsuits related to the matters under inquiry
will not be filed. Thus, any adverse findings or other negative outcomes of these
inquiries with respect to the possible FCPA violations could adversely affect
our business, results of operations, financial position and cash flows, and
ultimately our stock price.  Adverse resolution of pending civil litigation may harm our operating
results or financial condition.  We are a party to
lawsuits in the normal course of our business. In addition to litigation in the
ordinary course of business, we and various of our executive officers and
directors are currently named defendants in various actions arising from or
relating to our past accounting restatements, our past stock option award
practices and the allocation of shares by our underwriters in our initial
public offering. This litigation is, and any future additional litigation could
be, time consuming and expensive, could divert our managements attention away
from our regular business, and if any one of these lawsuits is adversely
resolved against us, could have a material adverse effect on our financial
condition and liquidity. Moreover, the results of complex legal proceedings are
difficult to predict. For additional information regarding certain of the
matters in which we are involved, see Part II, Item 1 Legal
Proceedings of this report.  51


Our future product sales are unpredictable and, as a
result, our operating results are likely to fluctuate from quarter to quarter.  Our quarterly and annual operating results have fluctuated in the past
and are likely to fluctuate in the future due to a variety of factors, some of
which are outside of our control. Factors that may affect our future operating
results include:  ·the timing and size of the
orders for our products;  ·consumer acceptance of new
products we may introduce to market;  ·changes in the growth rate
of customer purchases of communications services;  ·the lengthy and
unpredictable sales cycles associated with sales of our products;  ·revenue recognition, which
is based primarily on customer acceptance of delivered products, is
unpredictable;  ·cancellation, deferment or
delay in implementation of large contracts;  ·quality issues resulting
from the design or manufacture of the products, or from the software used in
the product;  ·cash collection cycles in
China and other emerging markets;  ·reliance on product,
software and component suppliers who may constitute a sole source of supply or
may have going concern issues;  ·the decline in business
activity we typically experience during the Chinese Lunar New Year, which leads
to decreased sales and collections during our first fiscal quarter;  ·issues that might arise
from the integration of acquired entities or divestiture of noncore assets or
operations and the inability to achieve expected results from such acquisitions
or divestitures;  ·shifts in our product mix
or market focus; and  ·availability of adequate
liquidity to implement our business plan.  As a result of these and other factors, period-to-period comparisons of
our operating results are not necessarily meaningful or indicative of future
performance. In addition, the factors noted above may make it difficult for us
to forecast our projected financial performance. Furthermore, it is possible
that in some future quarters our operating results will fall below our internal
forecasts, public guidance or the expectations of securities analysts or
investors. If this occurs, the trading price of our common stock could decline.  Competition in our markets may lead to reduced
prices, revenues and market share.  We face intense competition, and will continue to face intense
competition, from both domestic and international companies in our target
markets, many of which may operate under lower cost structures and have much
larger sales forces than we do. Additionally, other companies not presently
offering competing products may also enter our target markets. Many of our
competitors have significantly greater financial, technical, product
development, sales, marketing and other resources than we do. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in service provider requirements. Our competitors may also be able
to devote greater resources than we can to the development, promotion and sale
of new products. These competitors may be able to offer significant financing
arrangements to service providers, which may give them a competitive advantage
in selling systems to service providers with limited financial resources. In
many of the developing markets in which we operate or intend to operate,
relationships with local governmental telecommunications agencies are important
to establish and maintain through permissible means. In many such markets, our
competitors may have or be able to establish better relationships with local
governmental telecommunications agencies than we have, which could result in
their ability to influence governmental policy formation and interpretation to
their advantage. Additionally, our competitors might have better relationships
with their third party suppliers and obtain component parts at reduced rates,
allowing them to offer their end products at reduced prices. Moreover, the  52


telecommunications and data
transmission industries have experienced significant consolidation, and we
expect this trend to continue. If we have fewer significant customers, we may
be more reliant on such large customers and our bargaining position and profit
margins may suffer.  Increased competition is likely to result in price reductions, reduced
gross profit as a percentage of net sales and loss of market share, any one of
which could materially harm our business, cash flows and financial condition,
including potential impairment in value of our tangible and intangible assets
if extended losses were incurred. In order to be competitive, we must
continually reduce the cost of manufacturing our products through design and
engineering changes and other cost control measures. We may not be successful
in these efforts or in delivering our products to market in a timely manner. In
addition, any redesign may not result in sufficient cost reductions to allow us
to reduce the prices of our products to remain competitive or to improve or
maintain our gross profit as a percentage of net sales, which would cause our
financial results to suffer.  Our overall financial performance continues to depend
in large part upon our China subsidiaries.  Approximately 23% of our sales were generated in China in 2007, as
compared to approximately 32% of our sales in 2006. Although China now accounts
for a smaller portion of our overall sales, we have made substantial
investments in China and, therefore, our business, financial condition and
results of operations are to a significant degree subject to economic,
political, legal and social developments and other events in China. In
addition, we recently had significant changes within our senior management team
in China, and our current senior management team as a whole does not have the same
degree of experience in China as our senior management team had in the past. If
our current senior management in China cannot maintain and /or establish key
relationships with customers, governmental entities and others in China, our
business in China may decline significantly. If our business in China declines,
our financial condition, results of operations and cash flows may be
significantly harmed.  The average selling prices of our products may
decrease, which may reduce our revenues and our gross profit.  The average selling prices for communications access and switching
systems and handsets have historically declined as a result of a number of
factors, including:  ·increased competition;  ·aggressive price
reductions by competitors;  ·rapid technological
change; and  ·constant change in
customer buying behavior and market trends.  The average selling prices of our products may continue to decrease in
the future in response to product introductions by us or our competitors or
other factors, including price pressures from customers. Certain of our
products, including wireless handsets, historically have had low gross profit
margins, and any further deterioration of our profit margins on such products
could result in losses with respect to such products. Therefore, we must
continue to develop, source and introduce new products and enhancements to
existing products that incorporate features that can be sold at higher average
selling prices. Failure to do so, or the failure of consumers or our direct customers
to accept such new products, could cause our revenues and gross profit to
decline.  Our market is subject to rapid technological change,
and to compete effectively, we must continually introduce new products and
product enhancements that achieve market acceptance.  The market for communications equipment is characterized by rapid
technological developments, frequent new product introductions, changes in
consumer preferences and evolving industry and regulatory standards. Our
success will depend in large part on our ability to enhance our technologies
and develop and introduce new products and product enhancements that anticipate
changing service provider requirements, technological developments and evolving
consumer preferences. We may need to make substantial capital expenditures and
incur significant research and development costs to develop and introduce new
products and enhancements. If we fail to develop and introduce new products or
enhancements to existing products that effectively respond to technological
change on a timely basis, our business, financial condition and results of
operations could be materially adversely affected. Certain of our products,
including wireless handsets, have a short product life. Moreover, from time to
time, our competitors or we may announce new products or product enhancements,  53


technologies or services
that have the potential to replace or shorten the life cycles of our products
and that may cause customers to defer purchasing our existing products,
resulting in charges for inventory obsolescence reserves. Future technological
advances in the communications industry may diminish or inhibit market
acceptance of our existing or future products or render our products obsolete.
Even if we are able to develop and introduce new products, they may not gain
market acceptance. Market acceptance of our products will depend on various
factors, including:  ·our ability to obtain
necessary approvals from regulatory organizations within the countries in which
we operate and for any new technologies that we introduce;  ·the length of time it
takes service providers to evaluate our products, causing the timing of
purchases to be unpredictable;  ·the compatibility of our
products with legacy technologies and standards existing in previously deployed
network equipment;  ·our ability to attract
customers who may have pre-existing relationships with our competitors;  ·product pricing relative
to performance;  ·the level of customer
service available to support new products; and  ·the timing of new product
introductions meeting demand patterns.  If our products fail to obtain market acceptance in a timely manner,
our business and results of operations could suffer.  We depend on some sole source and key suppliers for
handsets, base stations, components and materials used in our products. If we
cannot secure from these suppliers adequate supplies of high quality products
at competitive prices or in a timely manner, or if these suppliers successfully
market their products directly to our customers, our competitive position,
reputation and business could be harmed.  We
have contracts with a limited group of suppliers to purchase certain components
and materials used in our products. If any supplier is unwilling or unable to
provide us with high-quality components and materials in the quantities
required and at the costs specified by us, we may not be able to find alternative
sources on favorable terms, in a timely manner, or at all. For example,
chipsets used in certain of our handsets are provided by a sole source
supplier. If we had to begin using chipsets from another supplier for any
reason, we would have to re-engineer our handsets to be compatible with the new
chipset, which could cause delays in the manufacturing and shipping of our
handsets. Further, a supplier could market its products directly to our
customers. The possibility of a supplier marketing its own products would
create direct competition and may affect our ability to obtain adequate
supplies. Our inability to obtain or to develop alternative sources if and as
required could result in delays or reductions in manufacturing or product
shipments. From time to time, there could be shortages of certain products or
components. Moreover, our suppliers may supply us with inferior quality
products. If an inferior product supplied by a third party is embedded in our
end product and causes a problem, it might be difficult to identify the source
of the problem as being due to the component parts. If any of these events
occur, our competitive position, reputation and business could suffer.  Our ability to source a sufficient quantity of high-quality,
cost-effective components used in our products may also be limited by import
restrictions and duties in the foreign countries in which we manufacture our
products. We require a significant number of imported components to manufacture
our products, and imported electronic components and other imported goods used
in the operation of our business may be limited by a variety of permit
requirements, approval procedures, patent infringement claims, import duties
and licensing requirements. As an example, a recent court case between a third
party and one of our suppliers involved a patent dispute potentially
restricting the importation of handsets into the U.S. While this case has been
resolved in the suppliers favor at the trial court level, our supply of
products could be affected by similar cases in the future. Moreover, import
duties on such components increase the cost of our products and may make them
less competitive.  54


Our global diversification strategy has strained our resources
and subjects us to various economic, political, regulatory and legal risks.  We market and sell our products globally. The expansion of our existing
multinational operations and entry into new markets requires significant
management attention and financial resources. To manage our global
diversification strategy, we will need to take various actions, including:  ·enhancing management
information systems, including forecasting procedures;  ·further developing our
operating, administrative, financial and accounting systems and controls;  ·managing our working
capital and sources of financing;  ·maintaining close
coordination among our engineering, accounting, finance, marketing, sales and
operations organizations;  ·retaining, training and
managing our employee base;  ·enhancing human resource
operations and improving employee hiring and training programs;  ·reorganizing our business
structure to more effectively allocate and utilize our internal resources;  ·improving and sustaining
our supply chain capability; and  ·managing both our direct
and indirect sales channels in a cost-efficient and competitive manner.  If
we fail to implement or improve systems or controls or to manage any future
growth and transformation effectively, our business could suffer.  Furthermore, multinational operations are subject to a variety of
risks, such as:  ·the complexity of complying
with a variety of foreign laws and regulations;  ·the complexity of
complying with United States laws and regulations for foreign operations,
including the Foreign Corrupt Practices Act;  ·difficulty complying with
continually evolving and changing global product and communications standards
and regulations for both our end products and their component technology;  ·market acceptance of our
new products, including longer product acceptance periods in new markets into
which we enter;  ·reliance on local original
equipment manufacturers (OEMs), third party distributors and agents to
effectively market and sell our products;  ·unusual contract terms
required by customers in developing markets;  ·changes to import and
export regulations, including quotas, tariffs, licensing restrictions and other
trade barriers;  ·the complexity of
compliance with complex and varying taxation requirements of multiple
jurisdictions;  ·evolving and unpredictable
nature of the economic, regulatory, competitive and political environments;  ·reduced protection for
intellectual property rights in some countries;  ·unproven business
operation models developed or operated in specific countries or regions;  55


·longer accounts receivable
collection periods; and  ·difficulties and costs of
staffing, monitoring and managing multinational operations, including but not
limited to internal controls and compliance.  In addition, many of the global markets are
less developed, presenting additional economic, political, regulatory and legal
risks unique to developing economies, such as thefollowing:  ·customers that may be
unable to pay for our products in a timely manner or at all;  ·new and unproven markets
for our products and the telecommunications services that our products enable;  ·lack of a large, highly
trained workforce;  ·difficulty in controlling
local operations from our headquarters;  ·variable ethical standards
and an increased potential for fraud;  ·unstable political and
economic environments; and  ·lack of a secure
environment for our personnel, facilities and equipment.  In particular, these factors create the potential for physical loss of
inventory and misappropriation of operating assets. We have in the past
experienced cases of vandalism and armed theft of our equipment that had been
or was being installed in the field. If disruptions for any of these reasons
become too severe in any particular market, it may become necessary for us to
terminate contracts and withdraw from that market and suffer the associated
costs and lost revenue.  Our success depends on continuing to hire and retain
qualified personnel, including  senior
managers. If we are not successful in attracting and retaining these personnel and
in managing key employee turnover, our business will suffer.  The success of our business depends in significant part upon the
continued contributions of key technical and senior management personnel, many
of whom would be difficult to replace. The loss of a key employee, the failure
of a key employee to perform satisfactorily in his or her current position or
our failure to attract and retain other key technical and senior management
employees could have a significant negative impact on our operations. This is
particularly the case in China, where we recently have had significant changes
within our senior management team.  Notwithstanding our recent workforce restructurings, to effectively
manage our operations, we will need to recruit, train, assimilate, motivate and
retain qualified employees both locally and internationally. Competition for
qualified employees is intense, and the process of recruiting personnel in all
fields, including technology, research and development, sales and marketing,
administration and management with the combination of skills and attributes
required to execute our business strategy can be difficult, time-consuming and
expensive. As we grow globally, we must implement hiring and training processes
that are capable of quickly deploying qualified local residents to
knowledgeably support our products and services. Alternatively, if there is an
insufficient number of qualified local residents available, we might incur
substantial costs importing expatriates to service new global markets. For
example, we have historically experienced difficulty finding qualified
accounting personnel knowledgeable in both U.S. and Chinese accounting
standards who are Chinese residents. If we fail to attract, hire, assimilate or
retain qualified personnel, our business would be harmed. Competitors and
others have in the past, and may in the future, attempt to recruit our
employees. In addition, companies in the telecommunications industry whose
employees accept positions with competitors frequently claim that the
competitors have engaged in unfair hiring practices. We may be the subject of
these types of claims in the future as we seek to hire qualified personnel.
Some of these claims may result in material litigation and disruption to our
operations. We could incur substantial costs in defending ourselves against
these claims, regardless of their merit.  Currency rate fluctuations and exchange controls may
adversely affect our cash flow and operating results.  Our
business is subject to risk from changing foreign exchange rates because we
conduct a substantial part of our business in a variety of currencies other
than the U.S. Dollar.  Historically, the
majority of our sales have been made in China and denominated in Renminbi, and
during 2007 and 2006 we also made significant sales denominated in Japanese
Yen, Euros, Indian Rupees and Canadian Dollars. 
Additionally, we have exposures to emerging market currencies, which can  56


have extreme currency volatility. Although we
could attempt to manage foreign currency exposures using forward and option
contracts to hedge against the risk of the eventual net cash inflows and
outflows resulting from foreign currency denominated transactions with
customers, suppliers, and non-U.S. subsidiaries, we are not currently hedging
such transactions. Furthermore, we would be limited in our ability to hedge our
exposure to rate fluctuations in certain currencies, including the Renminbi, on
account of governmental currency exchange control regulations that restrict
currency conversion and remittance. 
Thus, even if we engage in hedging activities in the future, there is no
assurance that we would be successful in minimizing the impact of foreign
currency fluctuations. As a result, fluctuations in foreign currencies may have
a material impact on our business, results of operations and financial
condition.  We may not be able to take advantage of acquisition
opportunities or achieve the anticipated benefits of completed acquisitions.  We have in the past acquired certain businesses, products and
technologies.  We will continue to
evaluate acquisition prospects that would complement our existing product
offerings, augment our market coverage, enhance our technological capabilities,
or that may otherwise offer growth opportunities. To the extent we may desire
to raise additional funds for purposes not currently included in our business
plan, such as to take advantage of acquisition opportunities or otherwise
develop new or enhanced products, respond to competitive pressures or raise
capital for strategic purposes, there is no assurance that additional financing
for these or other purposes would be available on acceptable terms or at all.
If we raise additional funds through the issuance of equity securities, our
stockholders will experience dilution of their ownership interest, and the
newly issued securities may have rights superior to those of common stock. If
we raise additional funds by issuing debt, our ability to meet our debt service
obligations will be dependent upon our future performance, which will be
subject to financial, business and other factors affecting our operations, many
of which are beyond our control, we may be subject to limitations on our
operations, and our leverage may increase. 
In addition, acquisitions involve numerous risks, including difficulties
in the assimilation of operations, technologies, products and personnel of the
acquired company, diversion of managements attention from other business
concerns, risks of entering markets in which we have no direct or limited prior
experience, the potential loss of key employees of the acquired company,
unanticipated costs and, in the case of the acquisition of financially troubled
businesses, challenges as to the validity of such acquisitions from third party
creditors of such businesses.  We may be unable to adequately protect the loss or
misappropriation of our intellectual property, which could substantially harm
our business.  We rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual obligations to protect our technology. We have
applied for patents in the United States and internationally. Additional
patents may not be issued from our pending patent applications, and our issued
patents may not be upheld. In addition, we have, from time to time, chosen to
abandon previously filed patent and trademark applications. Moreover, we may
face difficulties in registering our existing trademarks in new jurisdictions
in which we operate, and we may be forced to abandon or change product or
service trademarks because of the unavailability of our existing trademarks or
because of oppositions filed or legal challenges to our trademark filings. We
cannot guarantee that the intellectual property protection measures that we
have taken will be sufficient to prevent misappropriation of our technology or
trademarks or that our competitors will not independently develop technologies
that are substantially equivalent or superior to ours. In addition, the legal
systems of many foreign countries do not protect or honor intellectual property
rights to the same extent as the legal system of the United States. For
example, in China, the legal system in general, and the intellectual property
regime in particular, are still in the development stage. It may be very
difficult, time-consuming and costly for us to attempt to enforce our
intellectual property rights in these jurisdictions.  We may be subject to claims that we infringe the
intellectual property rights of others, which could substantially harm our
business.  The industry in which we compete is moving towards aggressive
assertion, licensing, and litigation of patents and other intellectual property
rights. From time to time, we have become aware of the possibility or have been
notified that we may be infringing certain patents or other intellectual
property rights of others. Regardless of their merit, responding to such claims
could be time consuming, divert managements attention and resources and cause
us to incur significant expenses. In addition, although some of our supplier
contracts provide for indemnification from the supplier with respect to losses
or expenses incurred in connection with any infringement claim, certain
contracts with our key suppliers do not provide for such protection. Moreover,
certain of our sales contracts provide that we must indemnify our customers
against claims by third parties for intellectual property rights infringement
related to our products. There are no limitations on the maximum  57


potential future payments
under these guarantees. Therefore, we may incur substantial costs related to
any infringement claim, which may substantially harm our results of operations
and financial condition.  We have been and may in the future become subject to litigation to
defend against claimed infringements of the rights of others or to determine
the scope and validity of the proprietary rights of others. Future litigation
may also be necessary to enforce and protect our patents, trade secrets and
other intellectual property rights. Any intellectual property litigation or
threatened intellectual property litigation could be costly, and adverse
determinations or settlements could result in the loss of our proprietary
rights, subject us to significant liabilities, require us to seek licenses from
or pay royalties to third parties which may not be available on commercially
reasonable terms, if at all, and/or prevent us from manufacturing or selling
our products, which could cause disruptions to our operations.  In the event that there is a successful claim of infringement against
us and we fail to develop non-infringing technology or license the proprietary
rights on commercially reasonable terms and conditions, our business, results
of operations and financial condition could be materially and adversely
impacted.  The
impact of potential United States patent reform legislation, USPTO reforms, and
third party legal proceedings may adversely impact our intellectual property.  Changes
to certain United States patent laws and regulations may occur in the future,
some or all of which may impact our intellectual property, specifically our
patent costs, the scope of future patent coverage we secure, and damages we may
be awarded in patent litigation. Currently pending legislation in the U.S.
Congress, titled the Patent Reform Act of 2007, would modify U.S. patent laws
relating to, among other things, how patent damages are calculated, the procedures
for challenging issued patents, and where patent lawsuits can be filed in the
United States. Final administrative rule changes issued by the U.S. Patent
and Trademark Office (USPTO), the implementation of which rule changes
currently is subject to a court-ordered injunction, would modify the U.S.
patent application process, including current practices with respect to
continuing applications. Additionally, there have been recent U.S. Supreme
Court and other court rulings relating to, among other things, the standard for
determining whether an invention is obvious, which is a key issue when
assessing patentability, the ability of a patent holder to obtain injunctive
relief against infringers, and the ability of patent licensees to challenge the
patents under which they are licensed. The ruling concerning injunctive relief
may make it more difficult, under some circumstances, for us to enjoin a party
that has been found to infringe one or more of our patents.  Any or all of these proposed statutory or
regulatory changes or court rulings may materially and adversely impact our
ability to assert our rights in our intellectual property either defensively or
against potential infringers.  We are subject to risks related to our financial and
strategic investments in third party businesses.  From time to time we make financial and/or strategic investments in
third party businesses. We cannot be certain that such investments will be
successful. In certain instances we have lost part or all of the value of such
investments, resulting in a financial loss and/or the loss of potential
strategic opportunities. If we have to write-down or write-off such
investments, or if potential strategic opportunities do not develop as planned,
our financial performance may suffer. Moreover, these investments are often
illiquid, such that it may be difficult or impossible for us to monetize such
investments.  In certain cases, we have invested in third party businesses that are
outside of the United States. In such cases, even if we are able to
successfully liquidate such investments, it may be difficult for us to
repatriate the proceeds of such investments to the United States in a prompt
manner due to restrictions imposed by the local laws of the jurisdictions in
which we invest. If we are unable to repatriate the proceeds of our investments
promptly as needed, our business could suffer.  Our wireless handset products are subject to a wide
range of environmental, health and safety laws, and may expose us to potential
health and environmental liability claims.  Our handset products are subject to a wide range of environmental,
health and safety laws, including laws relating to the use, disposal and clean
up of, and human exposure to, hazardous substances. In the United States, these
laws often require parties to fund remedial action regardless of fault. Factors
such as the discovery of additional contaminants, the extent of remediation and
compliance expenses, and the imposition of additional clean up obligations
could cause us to incur substantial costs relating to remediation activities.
Compliance with existing or future environmental, health and safety laws could
also cause us to incur substantial costs relating to such compliance, including
the expense of modifying product designs and manufacturing processes. In
addition, restrictions on the use of certain materials in our facilities or
products in the future could have a negative impact on our operations.  58


Additionally, there have been claims made alleging a link between the
use of wireless handsets and the development or aggravation of certain cancers,
including brain cancer. The scientific community is divided on whether there is
a risk from wireless handset use, and if so, the magnitude of the risk. Even if
there is no link established between wireless handset use and cancer, the
negative publicity and possible litigation could have a material adverse effect
on our business. In the past, several plaintiffs groups have brought class actions
against wireless handset manufacturers and distributors, alleging that wireless
handsets have caused cancer. To date, we have not been named in any of these
actions and none of these actions has been successful. In the future we could
incur substantial costs in defending ourselves against similar claims,
regardless of their merit. Also, claims may be successful in the future and may
have a material adverse effect on our business.  Furthermore, there have been claims made alleging a link between the
use of Bluetooth enabled mobile phone handsets and noise-induced hearing loss.
To date, we have not been named in any of these actions. In the future we could
incur substantial costs in defending ourselves against similar claims,
regardless of their merit. Also, claims may be successful in the future and may
have a material adverse effect on our business.  We are subject to a wide range of environmental,
health and safety laws and efforts to comply with such laws may be costly and
may adversely impact our financial performance.  Our operations and the products we manufacture and/or sell are subject
to a wide range of global environmental, health and safety laws. Compliance
with existing or future environmental, health and safety laws could subject us
to future costs, liabilities, impact our production capabilities, constrict our
ability to sell, expand or acquire facilities and generally impact our
financial performance. Some of these laws relate to the use, disposal, clean up
of, and exposure to, hazardous substances. In the United States, laws often
require parties to fund remedial studies or action regardless of fault. Over
the last several years, the European Union (the EU) countries have enacted
environmental laws regulating electronic products. For example, beginning July 1,
2006, our products have been subject to laws that mandate the recycling of
waste in electronic products sold in the EU and that limit or prohibit the use
of certain substances in electronic products. Other countries outside of Europe
are expected to adopt similar laws. We may incur additional expenses to comply
with these laws.  We may incur costs and expenses as a
result of our past stock option granting practices.  We may incur costs and expenses greater than expected with respect to past
awards of discount stock options to employees. 
Employees who were awarded options at a discount from fair market value
and were totally or partially unvested as of December 31, 2004, may be
subject to a penalty tax under Internal Revenue Code Section 409A (Section 409A)
and corresponding states taxes upon exercise of these stock options. We are
considering certain actions, including implementing, subject to stockholder
approval, an option exchange program for employees (excluding executive
officers and directors), which we believe would be in the best interests of our
stockholders and employees and would, among other things, substantially reduce
or eliminate the potential federal and state penalty taxes for those employees
who elect to participate in the option exchange. However, there is no guarantee
that we will be successful in addressing all of our employees potential
adverse tax consequences without us having to incur additional cash or noncash
compensation expense. Furthermore, such actions, or the failure of such
actions, may require the Company to incur substantial expenses for legal,
accounting, tax and other professional services and may divert managements
attention from our business, which could in the future harm our business,
financial condition, results of operations and cash flows.  We may experience a variety of unanticipated events, such as
litigation or product defect or quality issues, that divert managements
attention from our business and/or result in costs and expenses that could
adversely affect our operating results.  Product defects or performance quality issues could cause us to lose
customers and revenue or to incur unexpected expenses.  Many of our products are highly complex and
may have quality deficiencies resulting from the design or manufacture of such
product, or from the software or components used in the product. Often these
issues are identified prior to the shipment of the products and may cause
delays in market acceptance of our products, delays in shipping products to
customers, or the cancellation of orders. In other cases, we may identify the
quality issues after the shipment of products. In such cases, we may incur
unexpected expenses and diversion of resources to replace defective products or
correct problems. Such pre-shipment and post-shipment quality issues could
result in delays in the recognition of revenue, loss of revenue or future
orders, and damage to our reputation and customer relationships. In addition,
we may be required to pay damages for failed performance under certain customer
contracts, and may receive claims from customers related to the performance of
our products.  59


Business interruptions could adversely affect our
business.  Our operations are vulnerable to interruption by fire, earthquake,
power loss, telecommunications failure, external interference with our
information technology systems, incidents of terrorism and other events beyond
our control that affect us, either directly or indirectly through one or more
of our key suppliers. For example, our Hangzhou manufacturing facilitys
ability to produce sufficient products is dependent upon a continuous power
supply. However, the Hangzhou facility has in the past been subject to power
shortages, which has affected our ability to produce and ship sufficient
products. Also, our operations in Alameda, California and China are located in
areas prone to earthquakes. We do not have a detailed disaster recovery plan,
and the occurrence of any events like these that disrupt our business could
harm our business and operating results.  We also may be adversely impacted by the recent earthquake in Sichuan
Province, China.  Depending upon the
extent of the damage and disruption caused by the earthquake to us, our
suppliers and our customers, our business and operating results may be
adversely affected.  We may suffer losses with respect to equipment held
at customer sites, which could harm our business.  We face the risk of loss relating to our equipment held at customer
sites. In some cases, our equipment held at customer sites is under contract,
pending final acceptance by the customer. We generally do not hold title or
risk of loss on such equipment, as title and risk of loss are typically
transferred to the customer upon delivery of our equipment. However, we do not
recognize revenue and accounts receivable with respect to the sale of such
equipment until we obtain acceptance from the customer. If we do not obtain
final acceptance, we may not be able to collect the contract price and recover
this equipment or its associated costs. In other cases, particularly in China,
where governmental approval is required to finalize certain contracts,
inventory not under contract may be held at customer sites. We hold title and
risk of loss on this inventory until the contracts are finalized and, as such,
are subject to any losses incurred resulting from any damage to or loss of this
inventory.  If our contract negotiations fail or if the government of China
otherwise delays approving contracts, we may not recover or receive payment for
this inventory. Moreover, our insurance may not cover all losses incurred if
our inventory at customer sites not under contract is damaged prior to contract
finalization. If we incur a loss relating to inventory for any of the above
reasons, our financial condition, cash flows, and operating results could be
harmed.  Restrictions on the use of handsets while driving a
motor vehicle could affect our future growth.  Several foreign governments and U.S. state and local governments,
including California, have adopted or are considering adopting legislation that
would restrict or prohibit the use of wireless handsets while driving a motor
vehicle. Widespread legislation that restricts or prohibits the use of wireless
handsets while driving could negatively affect our future growth.  Failure to achieve and maintain effective internal
controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
could have a material adverse effect on our business and stock price.  Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act)
requires that we establish and maintain an effective internal control structure
and procedures for financial reporting and include a report of management on
our internal control over financial reporting. Our annual report on Form 10-K
must contain an assessment by management of the effectiveness of our internal
control over financial reporting and must include disclosure of any material
weaknesses in internal control over financial reporting that we have
identified. In addition, our independent registered public accounting firm must
attest to the effectiveness of our internal control over financial reporting.  We have identified material weaknesses in our internal control over
financial reporting. We are still in the process of implementing remedial
measures related to the material weaknesses identified in 2004 through 2007. If
our efforts to remediate the weaknesses we identified are not successful, our
business and operating results could be harmed and the reliability of our
financial statements could be impaired, which could adversely affect our stock
price.  The requirements of Section 404 of the Sarbanes-Oxley Act are
ongoing and also apply to future years. We expect that our internal control
over financial reporting will continue to evolve as we continue in our efforts
to transform our business. Although we are committed to continue to improve our
internal control processes and we will continue to diligently and vigorously
review our internal control over financial reporting in order to ensure
compliance with the Section 404 requirements, any control system,
regardless of how well designed, operated and evaluated, can provide only
reasonable, not absolute, assurance that its objectives will be met. In
addition, successful remediation of the noted control deficiencies is dependent
on the Companys ability to hire and retain qualified personnel. Therefore, we
cannot be certain that in the future additional material weaknesses or
significant deficiencies will not exist or otherwise be discovered.  60


RISKS RELATED TO CONDUCTING BUSINESS IN CHINA  Chinas governmental and regulatory reforms may
impact our ability to do business in China.  Since 1978, the Chinese government has been in a state of evolution and
reform. The reforms have resulted in and are expected to continue to result in
significant economic and social development in China. Many of the reforms are
unprecedented or experimental and may be subject to change or readjustment due
to a variety of political, economic and social factors. Multiple government
bodies are involved in regulating and administering affairs in the
telecommunications and information technology industries, among which the
Ministry of Information Industry (MII), the National Development and Reform
Commission (NDRC), the State-owned Assets Supervision and Administration
Commission (SASAC) and the State Administration of Radio, Film and Television
(SARFT) play the leading roles. These government agencies have broad
discretion and authority over all aspects of the telecommunications and
information technology industry in China, including but not limited to, setting
the telecommunications tariff structure, granting carrier licenses and
frequencies, approving equipment and products, granting product licenses,
approving of the form and content of transmitted data, specifying technological
standards as well as appointing carrier executives, all of which may impact our
ability to do business in China.  Any of the following changes in Chinas political and economic
conditions and governmental policies could have a substantial impact on our
business:  ·the promulgation of new
laws and regulations and the interpretation of those laws and regulations;  ·inconsistent enforcement
and application of the telecommunications industrys rules and regulations
by the Chinese government between foreign and domestic companies;  ·the restructuring of
telecommunications carriers in China, including policy making governing next
generation network infrastructure and licensing;  ·restrictions on IPTV
license grants, which could limit the potential market for our products;  ·the introduction of
measures to control inflation or stimulate growth;  ·the introduction of new
guidelines for tariffs and service rates, which affect our ability to competitively
price our products and services;  ·changes in the rate or
method of taxation;  ·the imposition of laws, rules or
regulations affecting the direct or indirect nationalization of assets
controlled by non-governmental persons or entities;  ·the imposition of
additional restrictions on currency conversion and remittances abroad; or  ·any actions that limit our
ability to develop, manufacture, import or sell our products in China, or to
finance and operate our business in China.  In addition to modifying the existing telecommunications regulatory
framework, the Chinese government is currently preparing a draft of a standard,
national telecommunications law (Telecommunications Law) to provide a uniform
regulatory framework for the telecommunications industry. Currently a draft of
the law has been finished and delivered to the National Peoples Congress for
discussion. We do not yet know the final nature or scope of the regulations
that would be created if the Telecommunications Law is passed. Accordingly, we
cannot predict whether it will have a positive or negative effect on us or on
some or all aspects of our business.  Under Chinas current regulatory structure, the communications products
that we offer in China must meet government and industry standards. In
addition, a network access license for the equipment must be obtained. Without
a license, telecommunications equipment is not allowed to be connected to
public telecommunications networks or sold in China. Moreover, we must ensure
that the quality of the telecommunications equipment for which we have obtained
a network access license is stable and reliable, and will not negatively affect
the quality or performance of other installed licensed products.  61


Chinas currency exchange controls may impact our
ability to transfer funds outside of China.  China imposes currency exchange controls on transfers of funds outside
of China. Furthermore, the Chinese government requires that our China subsidiaries
have funds available for mandated employee benefits.  We have no assurance, therefore, that in the
future our China subsidiaries will be able to transfer funds to us in the
amounts or within the times that we may require to meet our liquidity or other
business needs.  Chinas changing economic environment may impact our
ability to do business in China.  Since 1978, the Chinese government has been reforming the economic
system in China to increase the emphasis placed on decentralization and the
utilization of market forces in the development of Chinas economy. These
reforms have resulted in significant economic growth. However, any economic
reform policies or measures in China may from time to time be modified or
revised by the Chinese government. While we may be able to benefit from the
effects of some of these policies, these policies and other measures taken by
the Chinese government to regulate the economy could also have a significant
negative impact on economic conditions in China, which would result in a
negative impact on our business.  Chinas entry into the World Trade Organization and
relaxation of trade restrictions have led to increased foreign investment in
Chinas telecommunications industry and may lead to increased competition in
our markets which may have an adverse impact on our business.  Chinas economic environment has been changing as a result of Chinas
entry, in December of 2001, into the World Trade Organization (WTO).
Foreign investment in the telecommunications sector is regulated by the Provisions
on Administration of Foreign Invested Telecommunications Enterprises
promulgated by the State Council in December 2001 and effective as of January 1,
2002. The provisions brought foreign equity limits into conformity with Chinas
WTO commitments, allowing foreign investors to own equity generally up to 49%
for basic telecom services enterprises and up to 50% for value-added telecom
services enterprises. Furthermore, China is gradually introducing a market
oriented pricing mechanism for telecommunication services. On July 13,
2005, Chinas Ministry of Information Industry (MII) and National Development
and Reform Commission (NDRC) approved the launch of plan-based pricing for
fixed-line telephone service by Chinas two fixed-line operators, China Telecom
and China Netcom. In August 2005, MII and NDRC endorsed a Circular on the
Changes in Administration of Telecom Service Pricing, which became effective
on October 1, 2005 and further relaxed the pricing administration on
certain telecom services. As China gradually relaxes such legal provisions,
international telecommunication service vendors may seize this opportunity to
adjust their China strategy, increasing their investment in China and
converting some of their joint-ventures into fully-owned enterprises.  As the existing international vendors increase their investment in
China, and more vendors enter the China market, the competition in the
telecommunication equipment market may increase, and as a result, our business
may suffer. If Chinas entry into the WTO results in increased competition or
has a negative impact on Chinas economy, our business could suffer. In
addition, although China is increasingly according foreign companies and
foreign investment enterprises established in China the same rights and
privileges as Chinese domestic companies as a result of its admission into the
WTO, special laws, administrative rules and regulations governing foreign
companies and foreign investment enterprises in China may still place foreign
companies at a disadvantage in relation to Chinese domestic companies and may
adversely affect our competitive position.  Uncertainties with respect to the Chinese legal
system may adversely affect us.  We conduct our business in China primarily through our wholly owned
subsidiaries incorporated in China. Our subsidiaries are generally subject to
laws and regulations applicable to foreign investment in China. Accordingly,
our business might be affected by Chinas developing legal system. Since 1978,
many new laws and regulations covering general economic matters have been
promulgated in China, and government policies and internal rules promulgated
by governmental agencies may not be published in time, or at all. As a result,
we may operate our business in violation of new rules and policies without
having any knowledge of their existence. In addition, there are uncertainties
regarding the interpretation and enforcement of laws, rules and policies
in China. Governmental authorities have broad discretion in the interpretation
and enforcement of the laws, regulations and rules. The Chinese legal system is
based on written statutes, and prior court decisions have limited precedential
value. Because many laws and regulations are relatively new and the Chinese
legal system is still evolving, the interpretations of many laws, regulations
and rules are not always uniform. Moreover, the relative inexperience of
Chinas judiciary in many cases creates additional uncertainty as to the
outcome of any litigation,  62


and the interpretation of
statutes and regulations may be subject to government policies reflecting
domestic political changes. Finally, enforcement of existing laws or contracts
based on existing law may be uncertain and sporadic, and it may be difficult to
obtain swift and equitable enforcement, or to obtain enforcement of a judgment
by a court of another jurisdiction. Any litigation in China may be protracted
and result in substantial costs and diversion of resources and managements
attention.  If tax benefits available to its subsidiaries located in
China are reduced or repealed, our business could suffer.  The
China Corporate Income Tax Law (CIT Law) became effective on January 1,
2008. Under the CIT Law, Chinas dual tax system for domestic enterprises and
foreign investment enterprises (FIEs) was effectively replaced by a unified
system. The new law establishes a tax rate of 25% for most enterprises and a
reduced tax rate of 15% for certain qualified high and new technology
enterprises.  Prior
to January 1, 2008, certain subsidiaries and joint ventures located in
China enjoyed tax benefits in China which were generally available to FIEs. The
tax holidays/incentives for FIEs were applicable to UTStarcom Chongqing
Telecom Co. Ltd. (CUTS), UTStarcom Telecom Co., Ltd. (HUTS),
Hangzhou UTStarcom Telecom Co., Ltd. (HSTC) and UTStarcom
China Co., Ltd. (UTSC), our subsidiaries in China, because these
entities could qualify as accredited technologically advanced enterprises.  The
CIT Law allows certain qualified high and new technology enterprises to pay a
reduced 15% tax rate. For FIEs established before the promulgation of the new
law who were eligible for lower tax rates prior to January 1, 2008, their
tax rates would be gradually increased to 25% over five years commencing from January 1,
2008. Significant regulations regarding the interpretation and implementation
of the new tax law are still pending. 
There is potential risk that our subsidiaries may not qualify for the
reduced 15% tax rate.  Therefore, the new
law may have an adverse impact on our future tax expense in China.  Moreover,
the Chinese central government may review and audit tax benefits granted by
local or provincial authorities and could determine to disallow such benefits.
Certain of our subsidiaries and joint ventures located in China enjoy tax
benefits in China that are generally available to foreign investment
enterprises. If these tax benefits are reduced, disallowed or repealed due to
changes in tax laws or determinations by the Chinese government, we could face
higher tax rates which may have an adverse impact on our business.  Our ability to continue successful deployment of PAS
system and sales of PAS handsets are limited by certain factors, including the
following:  Maturing PAS market and increased competition in
handsets and tariffs.  We believe the PAS market has matured. PAS is available in most of the
provinces throughout China. If additional handset competitors enter the market,
or if competitors decide to further reduce pricing, our sales of PAS handsets
may be adversely impacted.  Furthermore, competition from mobile operators, such as China Mobile
and China Unicom, has increased in cities where PAS is deployed. Mobile
operators offering special promotional pricing or incentives to customers, such
as free incoming calls or free mobile-to-mobile calls, have harmed the ability
of our customers, China Telecom and China Netcom, to compete effectively. The
continued use of such incentive programs by mobile operators may adversely
impact China Telecom and China Netcoms ability to increase PAS subscriptions.
Due to our relationships with China Telecom and China Netcom, reduced
subscription growth at these carriers may have a material adverse effect on our
pricing and harm our business or results of operations.  Our PAS system and handsets sales may experience a
sharp decline if China Telecom or China Netcom obtain licenses allowing them to
deliver mobile services or the integration of the telecom operators.  Chinas media sources have widely reported that the MII may grant 3G
mobile licenses to China Telecom or China Netcom, or both. If China Telecom or
China Netcom obtains 3G mobile licenses, they may re-allocate capital expenditures
to construct 3G networks, and as a consequence, may significantly reduce
capital expenditures relating to PAS networks that utilize our existing
products. In addition, it is possible that current PAS frequency bands utilized
by PAS networks may be  63


reallocated for use by 3G
networks, resulting in the restriction of or shutting down of PAS networks. If
this were to occur, we could lose current and potential future customers of our
products, and our financial condition and results of operations could be
significantly harmed.  It is widely reported that China is intending to integrate the existing
telecom operators which include our two primary customers, China Telecom and
China Netcom. Some media sources have reported that it is possible that both
China Telecom or China Netcom will be integrated with other telecom operators
which engage in wireless business. If this were to occur, we could lose current
and potential future customers of our products and our financial condition and
results of operations could be significantly harmed.  We only have trial licenses for the PAS system and
handsets in China.  We only have trial licenses for our PAS systems and handsets. We have
applied for, but have not yet received, a final official network access license
for our PAS systems and handsets. Based upon communication with the MII, we
understand that our PAS systems and handsets are considered to still be in the
trial period and sales of our PAS systems and handsets may continue to be made
by us during this trial period, but that licenses will ultimately be required.
If we fail to obtain the required licenses, we could be prohibited from making
further sales of the unlicensed products, including our PAS systems and handsets,
in China, which would substantially harm our business, financial condition and
results of operations. The regulations implementing these requirements are not
very detailed, have not been applied by a court and may be interpreted and
enforced by regulatory authorities in a number of different ways. Our external
legal counsel in China has advised us that Chinas governmental authorities may
interpret or apply the regulations with respect to which licenses are required
and the ability to sell a product while a product is in the trial period in a
manner that is inconsistent with the information received by our legal counsel
in China, and either of these conditions could have a material adverse effect
on our business, financial condition and results of operations.  Increasing centralization of purchasing
decision-making by carriers may lead to customer concentration and affect the
results of our business.  Most Chinese carriers have three levels of operations: the central
headquarters level, the provincial level and the local city/county level. Both
central and provincial levels are independent legal persons and have their own
corporate mandate. The purchasing decision-making process may take various
forms for different projects and may also differ significantly from carrier to
carrier. In the case of PAS systems, we negotiate and enter into all China
Netcom contracts with the provincial operators. However, the central
headquarters of China Telecom has chosen to exert its influence in the
purchasing decision-making process by negotiating contractual terms, such as
purchase price, payment terms, and acceptance clauses at the central level. The
provincial operator then further negotiates the contract based on the
guidelines provided by the headquarters. We enter into final contracts with the
provincial operator. However, if this trend of centralized decision-making
expands to unified purchasing, resulting in the negotiation and execution of
contracts at the central headquarter level, there may be a concentration of
customers which could have a significant impact on our business. If China
Netcom follows China Telecom and exerts the headquarters influence in price
negotiation, it may give downward pressure to the margin of our PAS system
products to China Netcom.  Television over the internet is a new business in
China and laws regulating the business have not been fully developed and may be
unpredictable. Unfavorable regulation of the industry may adversely affect our
IPTV operations in China and negatively impact our business.  Broadcasting television over the internet has only recently begun in
China. SARFT, the central governments regulatory body, issued a measure in July 2004
to regulate the broadcasting of audio-visual programs through the information
network, which includes our Internet Protocol television (IPTV) business. SARFT
categorized the information network into the mobile telecommunication network,
fixed communications network, microwave communication network, cable television
network, satellite or other metropolitan area network, wide area network, local
area network and other information networks categories. The equipment that
receives information from these networks includes computers, television sets,
mobile phones and other electronic products. In December 2007, MII and
SARFT jointly issued a measure to regulate the service of audio-visual programs
on the internet, which also includes our IPTV business. This measure requires
the entities engaged in the services of audio-visual program on the internet to
be owned or controlled by the State owned entities. While regulating the IPTV
business, SARFT is encouraging development in China of the digital television
business, a business that may be competitive with IPTV in the target market.
The digital television and IPTV target complementary markets and it is not
clear the extent of support SARFT will provide for IPTV in setting regulations.
For example, the Zhejiang Administration of Radio, Film, and Television, the
local regulatory body in the province of Zhejiang, issued a similar notice on January 10,
2006. Because the IPTV industry relates to both television and telecom sectors,
it may be subject to regulation by different  64


governmental authorities, including
MII. However, due to a lack of uniform regulation on the development of the
IPTV industry, we cannot predict that our IPTV business will operate smoothly
in China. Our business may suffer if the law or policy in China does not
encourage the IPTV industry.  We currently do not have a license to engage in the
IPTV operator service business in China and development of our IPTV business
depends upon the cooperation of IPTV license holder(s) and network
operators. If we are unable to work cooperatively with license holder(s) and
network operators, our business may suffer.  Under the measures issued by SARFT in July 2004, entities
intending to engage in the IPTV operator service business should obtain a
license from SARFT and foreign investment enterprises are prohibited from
engaging in the IPTV operator service business. The new measure jointly issued
by MII and SARFT indicates that SARFT will only grant such licenses to
state-owned companies. Since we are the technical service and equipment
provider in this field, our business development will depend on the cooperation
of license holders and network operators. Our business may suffer if we fail to
cooperate with license holders or network operators, or if the license holder(s) we
are cooperating with lose their licenses.  RISKS RELATED TO OUR STOCK PERFORMANCE  Our stock price is highly volatile.  The trading price of our common stock has fluctuated significantly
since our initial public offering in March of 2000. Our stock price could
be subject to wide fluctuations in the future in response to many events or
factors, including those discussed in the preceding risk factors relating to
our operations, as well as:  ·actual or anticipated
fluctuations in operating results, actual or anticipated gross profit as a
percentage of net sales, levels of inventory, our actual or anticipated rate of
growth and our actual or anticipated earnings per share;  ·changes in expectations as
to future financial performance or changes in financial estimates or buy/sell
recommendations of securities analysts;  ·changes in governmental
regulations or policies in China and other developing countries in which we do
business;  ·our, or a competitors,
announcement of new products, services or technological innovations;  ·the operating and stock
price performance of other comparable companies; and  ·news and commentary
emanating from the media, securities analysts or government bodies in China
relating to us and to the industry in general.  General market conditions and domestic or international macroeconomic
factors unrelated to our performance may also affect our stock price. For these
reasons, investors should not rely on recent trends to predict future stock
prices or financial results. In addition, following periods of volatility in a
companys securities, securities class action litigation against a company is
sometimes instituted. We have experienced substantial costs and the diversion
of managements time and resources on this type of litigation and may do so in
the future.  In addition, public announcements by China Telecom, China Netcom, China
Mobile, and China Unicom each of which exert significant influence over many of
our major customers in China, may contribute to volatility in the price of our
stock. The price of our stock may react to such announcements.  SOFTBANK CORP. with its related entities, including
SOFTBANK America Inc., has significant influence over our management and
affairs, which it could exercise against the best interests of our
stockholders.  SOFTBANK CORP. and its related entities, including SOFTBANK
America Inc. (collectively, SOFTBANK), beneficially owned approximately
12% of our outstanding stock as of March 31, 2008. As a result, SOFTBANK
has the ability to influence all matters submitted to our stockholders for
approval, as well as our management and affairs. Matters that could require
stockholder approval include:  ·election and removal of
directors;  65


·our merger or
consolidation with or into another entity; and  ·sale of all or
substantially all of our assets.  This concentration of ownership may delay or prevent a change of
control or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which could decrease the market
price of our common stock.  Delaware law and our charter documents contain
provisions that could discourage or prevent a potential takeover, even if the
transaction would benefit our stockholders.  Other companies may seek to acquire or merge with us. Our acquisition
or merger could result in benefits to our stockholders, including an increase in
the value of our common stock. Some provisions of our Certificate of
Incorporation and Bylaws, as well as provisions of Delaware law, may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include:  ·authorizing the board of
directors to issue additional preferred stock;  ·prohibiting cumulative
voting in the election of directors;  ·limiting the persons who
may call special meetings of stockholders;  ·prohibiting stockholder
action by written consent;  ·creating a classified
board of directors pursuant to which our directors are elected for staggered
three year terms;  ·establishing advance
notice requirements for nominations for election to the board of directors and
for proposing matters that can be acted on by stockholders at stockholder
meetings; and  ·requiring for-cause
removal of directors.  Our failure to timely file periodic reports with the
Securities and Exchange Commission could result in the delisting of our common
stock from the NASDAQ National Market and cause us to default on covenants
contained in contractual arrangements.  If we are unable to maintain compliance with the conditions for
continued listing required by NASDAQ, then our shares of common stock may be
subject to delisting from the NASDAQ Global Select Market. For example, as a
result of our failure to timely file with the Securities and Exchange
Commission our Quarterly Report on Form 10-Q for the quarter ended September 30,
2006, our Annual Report on Form 10-K for the fiscal year ended December 31,
2006, our Quarterly Report on Form 10-Q for the quarter ended March 31,
2007, and our Quarterly Report on Form 10-Q for the quarter ended June 30,
2007, we were not in full compliance with NASDAQ Marketplace Rule 4310(c)(14),
which requires us to make, on a timely basis, all filings with the Securities
and Exchange Commission required by the Securities Exchange Act of 1934. While
we returned to full compliance with NASDAQs listing requirements on October 19,
2007, we are required to comply with NASDAQ Marketplace Rule 4310(c) (14) as
a condition for our common stock to continue to be listed on the NASDAQ Global
Select Market. If our shares of common stock are delisted from the NASDAQ
Global Market, our common stock may not be eligible to trade on any national
securities exchange or the over-the counter market. If our common stock is no
longer traded through a market system, the liquidity of our common stock may be
greatly reduced, which could negatively affect its price. In addition, we may
be unable to obtain future equity financing, or use our common stock as
consideration for mergers or other business combinations. A delisting from the
NASDAQ Global Select Market may also have other negative implications,
including the potential loss of confidence by suppliers, customers and
employees, the loss of institutional investor interest, and fewer business
development opportunities.  ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None  ITEM 3DEFAULTS UPON SENIOR SECURITIES  None  66


ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  None  ITEM 5OTHER INFORMATION  None  ITEM 6EXHIBITS  Exhibit
  Number
  
  EXHIBIT DESCRIPTION3.1
  
  Thirteenth
  Amended and Restated Certificate of Incorporation of UTStarcom, Inc., as
  amended. (incorporated by reference to Exhibit 3.1 of Current Report on
  Form 8-K filed with the SEC on December 12, 2003)3.2
  
  First
  Amended and Restated Bylaws of UTStarcom, Inc., as amended on August 22,
  2007 (incorporated by reference to Exhibit 3.2 of the Companys
  Quarterly Report on Form 10-Q filed with the SEC on November 9,
  2007)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. (incorporated by reference to Exhibit 4.1 of
  Form S-1/A filed with the SEC on February 7, 2000)4.3
  
  Third
  Amended and Restated Registration Rights Agreement dated December 14,
  1999. (incorporated by reference to Exhibit 4.2 of Form S-1 filed
  with the SEC on December 20, 1999)10.1
  
  Credit
  Agreement, dated as of March 21, 2008, by and among, Borrower, each of
  the lenders party thereto from time to time and Wells Fargo Foothill, LLC, as
  Arranger and Administrative Agent (incorporated by reference to
  Exhibit 10.1 of Current Report on Form 8-K filed with the SEC on
  March 25, 2008)10.2
  
  Security
  Agreement, dated as of March 21, 2008, by and among, the Grantors party
  thereto from time to time and Wells Fargo Foothill, LLC, as Administrative
  Agent (incorporated by reference to Exhibit 10.2 of Current Report on
  Form 8-K filed with the SEC on March 25, 2008)10.3
  *
  Amendment to
  Stock Option Agreements dated January 11, 2008 between the Company and
  Hong Liang Hu (incorporated by reference to Exhibit 10.1 of Current
  Report on Form 8-K filed with the SEC on January 17, 2008)10.4
  *
  Amended and Restated
  Change of Control/Involuntary Termination Severance Agreement between the
  Company and Hong Liang Lu, dated January 30, 2008 (incorporated by
  reference to Exhibit 10.1 of Current Report on Form 8-K filed with
  the SEC on February 5, 2008)10.5
  *
  Amended and Restated
  Change of Control/Involuntary Termination Severance Agreement between the
  Company and Peter Blackmore, dated January 30, 2008 (incorporated by
  reference to Exhibit 10.2 of Current Report on Form 8-K filed with
  the SEC on February 5, 2008)10.6
  *
  Amended and Restated
  Change of Control/Involuntary Termination Severance Agreement between the
  Company and Francis P. Barton, dated January 30, 2008 (incorporated by
  reference to Exhibit 10.3 of Current Report on Form 8-K filed with
  the SEC on February 5, 2008)10.7
  *
  Amended and Restated
  Executive Involuntary Termination Severance Pay Plan, dated January 30,
  2008 (incorporated by reference to Exhibit 10.4 of Current Report on
  Form 8-K filed with the SEC on February 5, 2008)10.8
  *
  Vice
  President Change in Control and Involuntary Termination Severance Pay Plan as
  amended and restated April 25, 2008 (incorporated by reference to
  Exhibit 10.1 of Current Report on Form 8-K filed with the SEC on
  May 1, 2008)31.1
  
  Certification
  of the Chief Executive Officer pursuant to Rule 13a-14(a) or
  Rule 15d-14(a) promulgated under the Securities Exchange Act of
  1934, as amended.31.2
  
  Certification
  of the Chief Financial Officer pursuant to Rule 13a-14(a) or
  Rule 15d-14(a) promulgated under the Securities Exchange Act of
  1934, as amended.32.1
  
  Certifications
  of the Chief Executive Officer and Chief Financial Officer pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.  
 *Management contract, plan or arrangement  67


SIGNATURES  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.  UTSTARCOM, INC.Date: May 15, 2008
  
  By:
  /s/ FRANCIS P. BARTONFrancis P. BartonExecutive Vice President and Chief Financial
  Officer(Principal Financial Officer)  68