UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549

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FORM 10-K

|ý                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934    
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|For the Fiscal Year Ended December 31, 2003.
|o                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from
 to          
|Commission File Number: 000-29661           

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UTSTARCOM, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction
of incorporation or organization)                                       |  | 52-1782500(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|1275 Harbor Bay Parkway
Alameda, California(Address of principal executive offices)                          |  | 94502(Zip Code)                               
|(510) 864-8800(Registrant's telephone number, including area code)                                          
|Securities registered pursuant to Section 12(b) of the Act:None                                             
|Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.00125 par value(Title of class)

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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. Yes ý    No o

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently
completed second fiscal quarter was approximately $2,893,028,280 based upon the closing price of $35.64 reported for such date on The Nasdaq National Market. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 10% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant, have been excluded in that such persons may
be deemed to be affiliates. This determination is not necessarily conclusive for other purposes.

As
of February 29, 2004 the registrant had 117,110,056 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2004 are incorporated herein by reference in Part III.



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UTSTARCOM, INC.        TABLE OF CONTENTS

|              |          |                                                                                                | PAGE
|------------- | -------- | ---------------------------------------------------------------------------------------------- | ----
|PART I.       |          |                                                                                                |     
|              | Item 1.  | Business                                                                                       |     
|              | Item 2.  | Properties                                                                                     |     
|              | Item 3.  | Legal Proceedings                                                                              |     
|              | Item 4.  | Submission of Matters to a Vote of Security Holders                                            |     
|PART II.      |          |                                                                                                |     
|              | Item 5.  | Market for UTStarcom, Inc.'s Common Equity and Related Stockholder Matters                     |     
|              | Item 6.  | Selected Consolidated Financial Data                                                           |     
|              | Item 7.  | Management's Discussion and Analysis of Financial Condition and Results of Operation           |     
|              | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                                     |     
|              | Item 8.  | Financial Statements and Supplementary Data                                                    |     
|              | Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |     
|              | Item 9A. | Controls and Procedures                                                                        |     
|PART III.     |          |                                                                                                |     
|              | Item 10. | Directors and Executive Officers of UTStarcom, Inc.                                            |     
|              | Item 11. | Executive Compensation                                                                         |     
|              | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |     
|              | Item 13. | Certain Relationships and Related Transactions                                                 |     
|              | Item 14. | Principal Accountants Fees and Services                                                        |     
|PART IV.      |          |                                                                                                |     
|              | Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |     
|Exhibit Index |          | 106                                                                                           
|Signatures    |          | 112                                                                                           

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PART I        ADDITIONAL INFORMATION

UTStarcom and CommWorks are registered as a trademark in the United States. UTStarcom, CommWorks and PAS are registered as trademarks in China.

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

Unless
specifically stated, information in this Annual Report on Form 10-K assumes an exchange rate of 8.2775 Renminbi for one U.S. dollar, the exchange rate in effect
as of December 31, 2003.

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

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ITEM 1BUSINESS

OVERVIEW

We design, manufacture and sell telecommunications equipment and products and provide services associated with their operation. Our products are deployed and
installed exclusively by telecommunications wireless and wireline service providers. We provide an extensive range of products for transportation of voice, data and video traffic for service providers
around the world. Our business is conducted globally in China, Japan, India, the Central and Latin American region, North America, the European, Middle Eastern and African region and southeastern and
northern Asia. Historically, substantially all of our sales have been to service providers in China.

UTStarcom
was incorporated in 1991 in Delaware. Our headquarters are based in Alameda, California, with research and design operations in New Jersey, Chicago, China and India. Our
primary mailing address is 1275 Harbor Bay Parkway, Alameda, California, 94502. We can be reached by telephone at (510) 864-8800, and our website address is www.ustar.com. All Securities and
Exchange Commission filings can be found under the Investor Relations section of the website, and are available free
of charge.

STRATEGY

Our objective is to be a leading global provider of Internet Protocol ("IP") networking products and services. We differentiate ourselves with products designed,
developed and commercialized to reduce network complexity, integrate high performance capabilities and that allow a simple transition to next generation networks. This results in deployment,
maintenance and upgrades that are both economical and efficient, allowing operators to earn a high return on their investment.

Our
strategy is built upon the following key concepts:



We
intend to implement our strategy by:

Expanding and leveraging our presence in China

Over the course of several years, we have built an extensive administrative, research and development, manufacturing, sales and support infrastructure in China
that we believe is critical to our success both within China and also on a global basis. This infrastructure allows us to quickly identify service providers' needs and to focus our engineering,
product development and sales and marketing efforts to address those needs. We believe this strategy has helped us become a leading communications equipment and services provider in China. In
addition, the low-cost research and development and manufacturing capabilities in China allow us to be competitive on a cost and pricing basis for our products. Finally, by virtue of its
large population base and low teledensity, or the number of telephones per person in a region, the China market provides a highly conducive platform for UTStarcom to deploy our most advanced
technology in substantial volume. This provides a model for success that we hope to leverage when pursuing other customer relationships on a global basis.

We
intend to further capitalize on China's favorable market conditions, including its large population, low teledensity and strong demand for communications services. We intend to expand
our presence in this market by:



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Intensifying our global market diversification

Our target customers consist of the largest, most well established global telecommunications service providers. In addition, we target smaller, emerging carriers,
such as Yahoo!BB in Japan and Reliance Infocomm in India, who focus on driving IP-based voice, video and data services.

In
May 2003, we acquired the CommWorks division of US-based 3Com Corporation in order to further extend our sales presence outside of China. We believe this
acquisition has significantly enhanced our ability to gain access to the largest and most well established operators in North America and Europe. We intend to continue to seek additional acquisitions
and to use partnerships to solidify our market position and expand our technology portfolio and sales channels in these markets.

We
believe emerging markets beyond China present us with significant opportunities for growth. According to a November 2003 RHK, Inc. report, two thirds of the world's six
billion inhabitants still do not have access to, and cannot afford basic telecommunications services. We believe that many developing regions see a correlation between increased teledensity and
improved economic growth, recognizing the need to invest in a telecommunications infrastructure in order to compete globally and overcome economic disparities. Our strategy is to develop products and
design services specifically tailored to the needs and level of affordability of these emerging-market service providers and their customers. In addition, we recognize that to be successful in these
emerging markets, it is important to commit to establishing a local presence, as we have already done in China. This commitment often includes a local sales and support presence and where practical,
local research and development and manufacturing capability. To date, we have deployed products in a number of emerging communications markets outside of China, including markets in India,
southeastern and northern Asia, Latin America and Africa. We continue to explore major growth potential in global markets outside of China and believe that many of these markets are ideal candidates
for our products and services.

Focusing on our technology innovation

Our technology focus centers on an IP-based core network that creates a single platform for delivering multiple services to the end-user
of the telecommunications network. In contrast, a traditional Asynchronous Transfer Mode ("ATM") network is based on transferring data in packets of a small, fixed size that facilitate transmission of
various data types over the same network, assuring that no single type of data monopolizes the line. If a service provider operating a traditional ATM-based network wanted to offer
multiple services, it would have to build, run and maintain a separate network for each service, including separate billing, network management and
support functionalities. This would create a costly and inefficient model for providing services to the end user. An IP-based core network is designed so that all services can be converged
into one platform with one billing, network management and support function for all services. In addition, because it is largely software-based, an IP network is by design more cost effective to run
and maintain than a traditional ATM-based infrastructure. All of our products are compatible with each other and can be integrated into a single IP-based network. We intend to
continue to support our IP-based wireless and wireline access services and enhance their functionality for deployment in all global markets. We also intend to continue our research and
development efforts on future IP-based access services. We believe we are well positioned in this market based on our large-scale deployments in China and Japan.

In
addition, we intend to focus on delivering customer premise equipment to support the end-user. We will continue to introduce new products that offer our customers value
and functionality.

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Finally,
as a complement to our core access franchise, we entered the optical transport market in 2003 and intend to expand our portfolio of optical products to meet increased
requirements and enhanced functionality.

TECHNOLOGY AND PRODUCTS

Our technologies and products fall into three major categories:



Our
products within each of these categories include multiple hardware and software subsystems that can be offered in various combinations to suit individual subscriber needs. Our system
technologies and 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, Internet Protocol ("IP") and wireless network rollouts. Our system technologies are also designed to allow timely and cost efficient
transition to future next-generation network technologies, enabling our service provider customers to protect their initial infrastructure investments.

WIRELESS

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

Wireless Products and Services Platform

Our globally deployed Personnel Access Systems ("PAS"), a family of wireless access handsets, wireless consumer products and core infrastructure equipment, are
designed to help our customers create new revenue opportunities with high quality voice services, rich suites of handsets and network-based services.

Our
PAS wireless access system and IP-based PAS ("iPAS") wireless access systems employ micro cell radio technology and specialized handsets and enable service providers to
offer subscribers both mobile and fixed access to telephone services. Our PAS wireless access architecture is designed to enable service providers to transition from wireline to wireless communication
networks, allowing them to offer both mobile wireless voice and data services within a city or community. Using our products, service providers can offer new wireless services, including citywide
mobility, same-number wireless extension, e-mail, mobile Internet access, short messaging and location-based services.

Our
wireless products are designed to offer a full suite of integrated, customizable, value-added services, including short-message services, web browsing, e-mail, voice
mail, and 64Kbps Internet access.

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PAS Wireless Mobile Phone Systems

We design, manufacture, market and sell a comprehensive line of mobile and fixed wireless telephone products.









2G CDMA System

Our second generation ("2G") code division multiple access (or CDMA, a wireless standard) wireless data products, which are based on the IS-95A
standard, enable service providers to offer wide area wireless data service to end users on IS-95A-compatible networks. Our 2G CDMA products meet the open wireless standards and the
standards of the United States standardization body, TIA/EIA.

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3G W-CDMA and TD-CDMA Systems

We are developing and testing a suite of products and services for 3G wireless networks that support the open 3G wireless standards (wideband-code division
multiple access, or W-CDMA and time division-synchronous code division multiple access, or TD-SCDMA) defined under 3GPP, the international standardization body, and the
standards of TIA/EIA, the United States Standardization body. Our 3G enhanced wireless data products are designed to be capable of delivering data at much higher speeds, enabling cost savings and new
revenue-generating services for our customers.

We
have entered into strategic alliances with Matsushita (Panasonic), interWAVE and Datang Mobile to co-design and jointly develop 3G wireless systems based on the open
wireless standards. At the end of 2003, Panasonic Mobile Communications Co., Ltd. and we announced a joint venture to focus on the design, development, and manufacture of 3G telecommunications
equipment.



Transition from Personal Access Systems to 3G Wireless Systems

Our iPAS and 3G wireless systems are both based on our mSwitch softswitch platform, which is designed for future IP-based next generation networks.
Because we have designed these systems to operate on the same platform, our iPAS system core network equipment can be upgraded to support both iPAS and 3G wireless services simultaneously.

WIRELINE

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

Digital
subscriber line ("DSL") technology enables high-speed data and content transfer while providing simultaneous telephone communications over the same
fixed copper line. Our IP-based DSL Access Multiplexers ("DSLAMs") enable high-speed access and deliver services to residential and commercial subscribers using broadband
technology.

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Wireline Products and Services Platform

Our broadband wireline networking platform, which we call the AN-2000 platform:



Our
wireline products and services enable the delivery of both broadband service and traditional voice, video and data services to subscribers via a copper, fiber or a wireless
transmission facility.

AN-2000 Platform

We offer our AN-2000 platform in three variations featuring IP, ATM and multi-service access capabilities:









Television over IP (TVoIP) System





Optical Transport System



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SWITCHING

Our IP-based, multi-service soft switching architecture is a diverse assembly of software-and hardware-based networking elements designed to replace
traditional central office telephone switches. Our architecture delivers multiple services including providing comprehensive broadband and narrowband access, call control of telephone and data
communications and delivering next generation features not offered by the traditional fixed line switching infrastructure.

Our
soft switching technology helps our service provider customers increase revenue while reducing churn by supporting a wide range of new customer enabling services. Service providers
can use our switching products when transitioning to an upgraded network, allowing them to utilize their existing network infrastructure and protecting their initial investment.

Switching Products and Services Platform

Softswitch, where all the service intelligence resides for the delivery of telephone services, is the industry name for the IP-based approach to
telephony switching that has the potential to reduce the cost of long distance and local exchange switching and to create differentiated telephony services. A softswitch can support a wide array of
functions, including address translation, service monitoring and assurance, billing authorization, and supplementary services like call forwarding and call conferencing.



The
mSwitch platform, which combines softswitch functionality with our wireless technology, supports our iPAS-based wireless infrastructure. This combination allows our
mSwitch platform to provide expandable, mobile switching centers that can operate with our PAS system. By focusing on mobility services, mSwitch is targeting one of the most complex and commercially
important segments of softswitch applications.

We
believe that our mSwitch softswitching architecture was one of the first to provide mobile switching functionality. Mobile telephony and information delivery services are among the
most demanding and complex, requiring wireless mobile networks to track subscribers' locations dynamically whether or not they are on a telephone call.

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Our
mSwitch platform is designed to be a cost-effective, flexible and expandable networking platform designed to replace traditional central office switches. This platform
delivers multiple services, including broadband and narrowband remote access services on an IP-based packet-switching infrastructure via wireless and wireline networks. It allows customers
to increase their revenue opportunities by supporting a wide range of new services.

The
mSwitch platform is designed to reliably transport data along with signaling, control, and management information. The architecture includes operations support systems for associated
billing, provisioning, and service management.

NETWORK MANAGEMENT (UNMS/iNetman)

We provide a powerful and user-friendly graphical user interface-based network management solution for the operation, administration and maintenance
of our products. The network management system provides fault management, configuration management, accounting management, performance management and security management in accordance with standards
required by local governments and/or carriers to assist the service providers in smooth network operation.

MARKETS AND CUSTOMERS

Our Global Market Deployment

Our products and services are being deployed and implemented throughout the world such as in China, Japan, India, the Central and Latin American region, the
European, Middle Eastern and African
region, North America and southeastern and northern Asia. China continues to be our single largest market, representing 86% of our overall revenue for the year ended December 31, 2003. Japan
and the United States represent the largest markets outside of mainland China for 2003. Other emerging markets including Vietnam, Thailand and Taiwan continue to contribute to global sales outside of
China, while increasing amounts of sales are being made in North America and the Central and Latin American region, including Brazil, Mexico, Guatemala and Honduras.

Global Customers

Our customers, telecommunications service providers, enable delivery of wireless and wireline access services including data, voice, and/or video communication
services to their subscribers. They include but are not limited to, local, regional, national and international telecommunications carriers, inclusive of broadband, cable, Internet, and wireline and
wireless providers. Telecommunications service providers typically require extensive proposal review, product certification, test and evaluation as well as network design, and, in most cases, are
associated with long sales cycles. Our service provider customers' networking requirements are influenced by numerous variables, including their size, the number and types of subscribers that they
serve, the relative teledensity of the served geography and their subscriber demand for wireless and wireline communications and access services in the served geography.

During
2003, the provincial-level telecommunications service entities continued to consolidate telecommunications purchasing decisions by province. As a result of this consolidation
trend, all customers were grouped together by province, and each province is treated as one customer. Giving effect to this consolidation, in 2003, the Hei Long Jiang province accounted for 11% of net
sales. In 2002, sales to the Zhejiang province accounted for 18% and sales to Softbank BB Corporation, an affiliate of SOFTBANK America Inc., a related party, accounted for 13% of net sales.

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Global Sales and Service

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

In
addition to our product offerings, we provide a broad range of service offerings, including technical support services. Our service offerings complement our products with a range of
consulting, technical, project, quality and maintenance support-level services including 24-hour support through technical assistance centers. Technical support services are designed to
help ensure that our products operate efficiently, remain highly available, and benefit from the most up-to-date system software. These services enable customers to protect
their network investments and minimize downtime for systems running mission-critical applications.

China's Market

China is currently our largest market for our wireless and switching products. China will continue to be an important market for our current and future
technologies and product development for the foreseeable future. To support this large and growing market, we have sales offices, manufacturing facilities and research and development centers
throughout China that enable us to react and respond to our customers' needs in an expeditious manner.

China
continues to be one of the fastest-growing, largest communications market in the world, and the Chinese government has committed to developing a powerful communications
infrastructure in order to support strong demand for communications services in support of robust economic growth in the region. According to China's State Statistics Bureau, China's gross domestic
product (GDP) grew 9.1% in 2003, and the GDP per capita surpassed $1,000.00 USD in 2003. The bureau also estimates that China's GDP will grow by approximately 7% through 2005. We believe that China
will continue to focus on its telecommunications infrastructure for the foreseeable future. Please refer to the table below for information, provided by China's Ministry of Information Industry,
regarding the increasing telecommunications spending in China:

2003

%
increase
over 2002(in millions)Telecommunications revenue

$
55.9

14
%Telecommunications capital expenditure

$
26.6

9
%Fixed line subscribers


263.3

16
%Cellular subscribers


268.7

19
%


Despite
the increased teledensity rate of China's fixed-line and cellular telephony to 20% and 21%, respectively, in 2003, the teledensity remains relatively low in
comparison to that of developed countries. In contrast, fixed-line teledensity rates for the United Kingdom, France, Japan and the United States were 59%, 57%, 59%, and 66% respectively,
according to a report published by the International Telecommunication Union in June 2003. We believe that China's low teledensity will continue to drive the growth in its telecommunications
market.

Although
voice services predominantly drive China's communications market growth, the increasing demand for data services also presents a growing opportunity in China. According to data
provided by the MII, Internet users in China reached 79.5 million by the end of 2003, an increase of over 30% from 2002. In order to support this growth in data traffic, service providers in
China must continue to

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expand
their networks. In 2003, China's broadband users increased from 2.5 million at the beginning of the year to approximately 10 million at the close of 2003.

The
following chart presents relevant historical and estimated data related to the development of China's telecommunications, based on information provided by the MII:

|                              |                        | 1999  |       | 2000  |       | 2001  |       | 2002  |       | 2003  |      
|----------------------------- | ---------------------- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | -----
|China's population (Millions) |                        | 1,258 |       | 1,267 |       | 1,276 |       | 1,286 |       | 1,293 |      
|China's GDP per capita (RMB)  |                        | 6,551 |       | 7,081 |       | 7,543 |       | 7,930 |       | 9,047 |      
|Fixed-line Telephone          |                        |       |       |       |       |       |       |       |       |       |      
|                              | Subscribers (Millions) |       | 108.8 |       | 144.8 |       | 180.4 |       | 214.4 |       | 263.3
|                              | Teledensity            |       | 9     | %     | 11    | %     | 14    | %     | 17    | %     | 20   
|Mobile Telephone              |                        |       |       |       |       |       |       |       |       |       |      
|                              | Subscribers (Millions) |       | 43.2  |       | 84.5  |       | 144.8 |       | 206.6 |       | 268.7
|                              | Teledensity            |       | 3     | %     | 7     | %     | 11    | %     | 16    | %     | 21   
|Internet                      |                        |       |       |       |       |       |       |       |       |       |      
|                              | Users (Millions)       |       | 8.9   |       | 22.5  |       | 33.7  |       | 59.1  |       | 79.5 
|                              | Teledensity            |       | 1     | %     | 2     | %     | 3     | %     | 5     | %     | 6    

Global Markets Outside of China

We have continued to offer our products in growing communications markets outside of mainland China, establishing global sales operations in Asia, the Central and
Latin American region, the European, Middle Eastern and African region and North America. We continue to penetrate these markets in several ways:



Our
sales division began establishing regional offices and local direct sales representative offices to provide support for our expanding global sales operations.

Japan

The significant majority of our global sales outside of China are derived from Japan. Japan was our largest wireline products market in 2003. One of our key
customers in Japan is Yahoo! BB, a related party. According to the Japan Ministry of Public Management, Yahoo! BB is the leading provider of broadband service in Japan with over 3.6 million
IP-based ADSL lines at December 31, 2003, representing over 34% of the total market within the region. Yahoo! BB continues to expand and deploy our AN-2000
IP-DSLAM (Broadband Access Platform) and mSwitch equipment in support of their Voice over Broadband and 12, 26 and 45 Mbps ADSL services. In December 2003, we signed
$40 million in expansion contracts for additional IP-DSLAM deployments with Yahoo! BB.

We
have begun to offer our mSwitch and MediaSwitch products and services in Japan and conducted trials in the Japanese market. We anticipate further growth in Japan specifically within
the wireline and switching product sectors, as well as with our TVoIP (broadcast television and video on demand over IP) systems in Japan.

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India

We offer our AN-2000 Multi-Service Access products and services in India. With over one million access lines deployed today, we anticipate that we
will continue to implement and deploy our products and conduct trials with several operators, including Reliance Telecommunications Inc.

In
addition, we continue research and development at our facility on the outskirts of New Delhi. We are focusing on developing the India market and as well as on global research and
development initiatives. We have also established local manufacturing of our AN-2000 technology in association with Himachal Futuristic Communications Limited.

According
to a July 2003 estimate by the Department Of Telecommunications India, India has a population of 1,049,700,118 and a low fixed line teledensity of approximately 4.4%. We
believe that India represents a substantial potential market for our wireless, wireline and switching products and services.

Central and Latin America

We have successfully established sales and service operations in support of the Central and Latin American region, and anticipate growth in this market in fiscal
year 2004.

Targeting,
but not limited to, countries like Brazil, Mexico, Panama, Haiti, Honduras and Guatemala, we have shipped equipment for service providers and continue to perform extensive
testing and certification for telecommunications carriers within these regions.

We
announced our first PAS deployments with Multifon in Honduras in 2003.

North America and the European, Middle Eastern and African Region

Our market presence in North America and the European, Middle Eastern and African region grew in 2003, and we established sales and service operations to support
these regions.

We
offer our mSwitch, MediaSwitch, PAS, and AN-2000 products and services in both North America and the European, Middle Eastern and African region. We expect to continue to
conduct trials within these regions in 2004.

Specifically,
we have seen increased demand for our wireless data products as a result of increased consumer demand for faster and more comprehensive data services. New camera phones,
messaging and other high demand data content products and services increase demand for our wireless data systems.

In
2003, we were awarded new contracts for our enhanced service and optical equipment and expect growth to continue within these regions.

Southeast and North Asia

Southeast and North Asia, another of our target markets, has a combined population of over 169 million people according to the CIA World Fact Book 2003. We
have established business operations in various countries in this region including, but not limited to, Vietnam, Thailand and Taiwan. We have local sales and service operations to support this region,
and at the close of fiscal year 2003, we had over 1.2 million lines of PAS wireless capacity deployed.

We
expect continued growth in this region for the foreseeable future, given the growth objectives set forth by primary service providers like Vietnam Posts & Telecommunications
("VNPT") through 2005 including optimizing the existing telecommunications network at local and long-distance levels, applying modern access technology and a goal to reach a teledensity of
8 lines per 100 inhabitants by the year 2005, according to an ITU July 2003 report.

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We
already have PAS deployments at VNPT; as such, we believe that our wireless, wireline and switching products are well positioned to aid in VNPT's overall growth plans.

Vietnam
continued to show growth in 2003. We announced additional contracts with VNPT for expansion in both Ho Chi Minh and Hanoi for 2003 and expect new PAS expansion contracts and
deployments in additional cities in 2004.

In
Taiwan in 2003, we entered into expansion contracts with First International Telecommunications Corporation of Taiwan ("FITEL") in Kaohsiung; and anticipate future
growth and expansion in 2004.

Competition

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

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

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



OPERATIONS

EMPLOYEES

As of December 31, 2003, we employed a total of approximately 5,500 full-time employees. We also from time to time employ part-time
employees and hire contractors. Of the total number of full-time employees at December 31, 2003, approximately 2,300 were in research and development, approximately 600 were in
manufacturing, approximately 2,200 were in marketing, sales and support, and approximately 400 were in administration. We had approximately 4,560 employees located in China, approximately 720
employees located in the United States, and approximately 220 employees in

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other
countries. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that we have good employee relations.

SALES, MARKETING AND CUSTOMER SUPPORT

We pursue a direct sales and marketing strategy in China, targeting sales to individual telecommunications bureaus and to manufacturers or equipment distributors
with closely associated customers. We maintain sales and customer support sites in Beijing, Chengdu, Fuzhou, Guangzhou, Hangzhou, Jinan, Kunming, Nanning, Nanjing, Inner Mongolia, Shanghai, Shenyang,
Wuhan, Xian, and Zhengzhou. We also sell through relationships with regional government-owned telecommunications manufacturing companies, which act as agents in the sale of our products to
telecommunications bureaus.

We
believe our customer support services in China allow us to offer our customers high quality service. Our customer service operation in Hangzhou is co-located with our
manufacturing joint venture and serves as both a technical resource and liaison to our product development organization. In China, customer service technicians are distributed in the regional sales
and customer support sites to provide a local presence. We provide additional support on a 24-hour, 365-day basis from our customer support center in Hangzhou in the form of
field dispatch personnel, who also provide training on installation, operation and maintenance of equipment. As of December 31, 2003, we employed approximately 1,800 people in sales, marketing
and customer support in China.

Our
sales efforts in markets outside of China combine direct sales, original equipment manufacturers, distributors, resellers, agents and licensees. We maintain sales and customer
support sites in Iselin, New Jersey, to address North American markets; in Tokyo, Japan, to address the Japan market; in Gurgaon, India, to address the Indian market; in Miami, Florida and Mexico
City, Mexico, to address the Latin American markets; in Frankfurt, Germany, to address the European and African markets; in Manila, Philippines, to address the Philippine market; in Taipei, Taiwan, to
address the Taiwan market; in Hanoi, Vietnam, to address the Vietnam market; and in Shanghai, China, to address other Pacific Rim markets.

MANUFACTURING, ASSEMBLY AND TESTING

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

Our
manufacturing facility is ISO 9001-2000 certified. ISO 9001-2000, an upgrade from ISO 9002 certification, requires that the certified entity establish,
maintain and follow an auditable quality process including documentation requirements, development, training, testing and continuous improvement which is periodically audited by an independent outside
auditor.

We
contract with third parties in China to undertake high volume assembly and manufacturing of our handsets and we conduct final assembly, testing and packaging at our own facilities. In
addition, we generally use third parties for high volume assembly of circuit boards.

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

16

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RESEARCH AND DEVELOPMENT

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

In
the past we have made, and expect to continue to make, significant investments in research and development. Our research and development expenditures totaled $155.3 million in
2003, $86.2 million in 2002 and $59.8 million in 2001.

INTELLECTUAL PROPERTY

Our ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well
as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. To date, we have relied primarily on proprietary processes and know-how to
protect our intellectual property. We hold U.S. and foreign patents for our existing products expiring between 2014 and 2021, and have patents pending in both the U.S. and in foreign countries. In
addition, we have, from time to time, chosen to abandon previously filed applications. Patents may not issue and any patents issued may not cover the scope of the claims sought in the applications.
Our U.S. patents do not afford any intellectual property protection in China or other international jurisdictions. Moreover, we have applied for but have not yet obtained, patents in China and Taiwan.
Please refer to discussion of risks associated with our intellectual property in section entitled "Management's Discussion and Analysis of Financial Statement Results of OperationsFactors
Affecting Future Operating Results."

ITEM 2PROPERTIES

We lease properties in the United States, China and globally; these properties are used for corporate headquarters, sales and support offices, research and
development and manufacturing purposes.

We
lease approximately 420,000 square feet of property in the United States and globally (apart from China). In the United States, we have approximately 345,000 square feet of leased
property used for the following purposes: approximately 63,000 square feet for our corporate headquarters in Alameda, 107,000 square feet for research and development and 175,000 square feet for
sales. The remaining property is comprised of global leased property: approximately 56,000 square feet are global sales and support offices, approximately 12,000 square feet are used for research and
development and approximately 7,000 square feet are for our regional headquarters in Hong Kong.

We
lease approximately 930,000 square feet of property in China. Approximately 64,000 square feet are for corporate headquarters in Beijing, approximately 180,000 square feet are for
sales and

17

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support
offices, approximately 522,000 square feet are used for manufacturing, and approximately 164,000 square feet are used for research and development.

In
2001, we purchased the rights to use 49 acres of land located in Zhejiang Science and Technology Industry Garden of Hangzhou Hi-tech Industry Development Zone. As of
December 31, 2003, we had completed the foundation and groundwork of a facility to be located there, have commenced construction of the building, and anticipate completion during fiscal year
2004.

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

ITEM 3LEGAL PROCEEDINGS

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 asIn re Initial Public Offering Securities Litigation, 21 MC 92. In April 2002, a consolidated amended complaint was filed in
the matter against us, captionedIn 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 brought by defendants including us. The order
dismisses 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. A proposal has been made for the settlement and release of claims against the issuer defendants, including us. The settlement is subject to a number of conditions, including approval of
the proposed settling parties and the court. If the settlement does not occur, and litigation against us continues, we believe we have valid defenses and we intend to defend the case 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.

We
are a party to other litigation matters and claims that are normal in the course of our 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 or results of operations.

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

None.

18

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PART II

ITEM 5MARKET FOR UTSTARCOM, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

High

LowFiscal 2002First Quarter

$
33.95

$
20.25Second Quarter


27.03


18.58Third Quarter


20.82


12.57Fourth Quarter


21.10


15.66Fiscal 2003First Quarter

$
23.90

$
16.56Second Quarter


35.86


19.70Third Quarter


46.45


31.18Fourth Quarter


39.07


30.85


Our
common stock has been traded on The Nasdaq National Market under the symbol UTSI since our initial public offering on March 3, 2000. The preceding table sets forth the high
and low closing sales prices per share of our common stock as reported on The Nasdaq National Market for the periods indicated. As of February 29, 2004 we had approximately 199 stockholders of
record.

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

Equity Compensation Plan Information

The following table sets forth information, as of December 31, 2003, about equity awards under our equity compensation plans:

|Plan category(1)                                           |  | Number of securities
to be issued upon
exercise
of outstanding
options, warrants
and rights |     | Weighted-average
exercise price of
outstanding options,
warrants and rights |       | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a)) |          
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|
|Equity compensation plans approved by security holders(2)  |  | 13,149,059                                                                                  | (3) | $                                                                           | 17.92 |                                                                                                                                             | 7,673,957
|Equity compensation plans not approved by security holders |  | 1,551,813                                                                                   | (5) | $                                                                           | 28.55 | (6)                                                                                                                                         | 61,700   
|                                                           |  |                                                                                             |     |                                                                             |       |                                                                                                                                             |          
|Total                                                      |  | 14,700,872                                                                                  |     | $                                                                           | 18.97 |                                                                                                                                             | 7,735,657
|                                                           |  |                                                                                             |     |                                                                             |       |                                                                                                                                             |          

---

19

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20

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ITEM 6SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected consolidated financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our Consolidated Financial Statements and the Notes thereto included elsewhere in this report. Historical results are not necessarily indicative of results that may be
expected for any future period.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              | Year Ended December 31, |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ----------------------- | ---------
|
|
|Consolidated Statement of Operations Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                              |                         |          
|Net sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                              | $                       | 1,964,332
|Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                              |                         | 636,168  
|Operating income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         | 274,732  
|Income from continuing operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                              |                         | 202,251  
|Net income (loss) available to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                              |                         | 202,251  
|Basic earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Income (loss) from continuing operations                                                                     |                         | $        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Income (loss) from discontinued operations                                                                   |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Net income (loss)(1)                                                                                         |                         | $        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|Diluted earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                              |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Income (loss) from continuing operations                                                                     |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Income (loss) from discontinued operations                                                                   |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|Net income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                              | $                       | 1.64     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|Proforma amounts assuming application of SAB101 "Revenue Recognition in Financial Statements" is applied retroactively:                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                              |                         |          
|Net income (loss) available to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                              | $                       | 202,251  
|Earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                              |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Basic                                                                                                        |                         | $        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Diluted                                                                                                      |                         | $        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|Weighted average shares used in per share calculations:                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                              |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Basic                                                                                                        |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Diluted                                                                                                      |                         |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|(1)    Net loss available to common stockholders for 1999 includes a one-time charge for approximately $30.0 million related to the issuance of Series F preferred stock in 1999 that included a beneficial conversion
feature pursuant to which the preferred shares converted into common shares on a one-for-one basis at a price below the expected offering price upon the completion of our initial public offering. This reduced diluted earnings per share available to
common stockholders by $3.45. |                                                                                                             
|
|
|
|Consolidated Balance Sheet Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                              |                         |          
|Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                              | $                       | 373,974  
|Working capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                              |                         | 887,200  
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                              |                         | 2,226,958
|Total short-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                              |                         | 1        
|Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                              |                         | 402,500  
|Total stockholders' equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                              |                         | 879,191  

21

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ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements are
based on information that is currently available to management. We intend such forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, and we are including this statement for purposes of complying with those provisions. The forward-looking statements include, without limitation, those concerning the following: our expectations
as to the nature of possible trends; our expectations regarding continued growth in our business and operations; our expectation that there will be fluctuations in our overall gross profit, gross
margin, product mix, quarter to quarter results, customer base and selling prices; our plans for expanding the direct sales organization and our selling and marketing campaigns and activities; our
expectation that we may use our cash, debt or securities to acquire or invest in complementary businesses, technologies or product offerings; our expectation that there will be increases in selling,
marketing, research and development, and general and administrative expenses; our expectations regarding future growth of our business and operations; our expectation that we will continue to invest
significantly in research and development; our expectations regarding the status of products under development; our expectations regarding our future investments; our expectations regarding our future
levels of cash and cash equivalents, as well as our expectation that existing cash and cash equivalents will be sufficient to finance our operations for the foreseeable future; our expectations
regarding licensing requirements and our ability to receive licenses in China for our PAS system and other products; our expectations regarding the development of a 3G network in China; our
expectations regarding the impact of a reorganization of China Netcom; our expectation that our business will continue to be significantly influenced by the political, economic and legal environment
in China, as well as expectations about the nature of political, economic and legal reform in China; our expectations regarding the future allocation of net sales by product group; our expectations
regarding efficiencies we hope to achieve in supply chain and inventory purchasing, as well as trends in inventory growth; and our expectations regarding our expansion into new markets around the
world. Additional forward-looking statements may be identified by the words, "anticipate," "expect," "believe," "intend," "will" and similar expressions, as they relate to us or our management.
Investors are cautioned that these forward-looking statements are inherently uncertain. These statements are subject to risks and uncertainties that may cause actual results and events to differ
materially. For a detailed discussion of these risks and uncertainties, see the "Factors Affecting Future Operating Results" section of this Form 10-K. We do not guarantee future
results and undertake no obligation to update
the forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

EXECUTIVE SUMMARY

We design, manufacture and sell telecommunications equipment and products and provide services associated with their operation. Our products are deployed and
installed exclusively by telecommunications wireless and wireline service providers. We provide an extensive range of products for transportation of voice, data and video traffic for service providers
around the world. Our business is conducted globally in China, Japan, India, the Central and Latin American region, North America, the European, Middle Eastern and African region and southeastern and
northern Asia. Our objective is to be a leading global provider of Internet Protocol ("IP") networking products and services. We differentiate ourselves with products designed, developed and
commercialized to reduce network complexity, integrate high performance capabilities and that allow a simple transition to next generation networks. This results in deployment, maintenance and
upgrades that are both economical and efficient, allowing operators to earn a high return on their investment.

22

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Our
technologies and products fall into three major categories:



Our
products within each of these categories include multiple hardware and software subsystems that can be offered in various combinations to suit individual subscriber needs. Our system
technologies and
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, Internet Protocol ("IP") and wireless network rollouts. Our system technologies are also designed to allow timely and cost efficient transition to
future next-generation network technologies, enabling our service provider customers to protect their initial infrastructure investments.

Historically,
substantially all of our sales have been to service providers in China. 86% of our sales for the year ended December 31, 2003 were derived from China and 10% of our
sales were from Japan. However, we are currently expanding our sales efforts to include other communications markets such as in the Central and Latin American region, the European, Middle Eastern and
African region, North America and southeastern and northern Asia. We intend to penetrate these markets through direct sales offices located in key market regions, by licensing our technology to local
manufacturers where import taxation is favorable, by developing local sales agency and distributor relationships within specific market regions, and by establishing sales relationships with original
equipment manufacturers. Our sales division began establishing regional offices and local direct sales representative offices to provide support for our expanding global sales operations.

In
a telecommunications industry that has experienced a period of contraction over the last few years, we experienced significant growth in revenue and profit during this period. In
2003, we had approximately $2.0 billion of revenue, a 100% increase over 2002. This growth in revenue was driven by China's growing telecommunications market. China, which we believe to be one
of the fastest growing telecommunications markets in the world, continued to experience increasing fixed-line and mobile telephone and Internet subscriber growth, from 480.1 million
subscribers in 2002 to 611.5 million subscribers in 2003, according to China's Ministry of Information Industry. We believe this subscriber growth led to increased demand for our PAS services
and handsets. We use subscriber growth statistics to gauge future inventory purchasing requirements as well as to forecast our anticipated revenue growth. We expect this subscriber growth trend to
continue in 2004 as China's teledensity rates remain low in comparison to that of developed countries.

The
number of competitors for communications access and switching systems and handsets in China grew in 2003 in line with China's growing telecommunications market. This growth led to
competitive pricing pressure, causing our average selling prices to decrease in 2003 relative to 2002 levels. At the same time, a larger percentage of our revenue was derived from handsets sales,
which generally have a lower margin than communications access and switching systems, contributing to decreased margins overall from 2001 to 2003. We continued to develop products with more advanced
features and to enhance the features of our existing products in 2003, which we believe will enable us to offer our customers a more advanced product at a higher average selling price than otherwise
would be possible. In addition, we worked in 2003, and intend to continue to strive to, reduce the cost of manufacturing our products by streamlining our design and engineering functions.

23

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In
an effort to penetrate new markets around the world, support our growing business and expand our product offerings, we continued to invest resources in our selling, administrative and
research and development groups in 2003. While these costs increased significantly from 2001 to 2003 in line with increased business levels, we reduced these costs as a percentage of our revenues
during this period. Operating costs as a percentage of revenue were 18% in 2003 compared to 20% in 2002.

We
continued to operate on a positive cash flow basis in 2003, despite increased accounts receivable and inventory balances. Our increased inventory levels were, in part, attributable to
our increased backlog. We typically funded our inventory requirements with customer advances, which we received upon signing new contracts. Our accounts receivable balance continued to increase in
2003, but at the same time our cash collections from customers increased as our days sales outstanding continued to improve, enabling us to continue to obtain net cash provided by our operations.

ACQUISITIONS AND OTHER KEY TRANSACTIONS

Acquisitions and in-process research and development ("IPR&D")

Since our incorporation, we have focused our resources on developing products for the global communications market, with an emphasis on the China communications
market. We have made several key strategic acquisitions to acquire additional resources to further this development. These acquisitions were accounted for as purchases and the results of operations
have been included in our consolidated financial statements from the closing dates of the acquisitions. Acquisitions prior to 2003 including HUTS, GUTS, Issanni and Advanced Communications Devices
Corporation have not had a significant ongoing impact on our consolidated results of operations.

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

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

CommWorks

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

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

The
amount of the purchase price allocated to IPR&D of $1.3 million, based on an independent valuation was charged to the Company's results of operations, as no alternative future
uses existed at the acquisition date.

24

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As
of the date of the acquisition, CommWorks had two projects under development that qualified for IPR&D, SLAP and High Density Voice ("HDV") 2.0. SLAP is an IPR&D project in the
Wireless division of CommWorks. It is an interface that connects our products with radio switch manufacturers' products in China in order to connect a cellular network to the Internet. HDV 2.0 is an
IPR&D project in the Wireline product line of CommWorks. HDV 2.0 utilizes software technology to increase data capacity for Voice over Internet Protocol ("VoIP") solutions.

There
are significant risks associated with those technologies. The technological risks stem from the fact that the new technologies are in an early stage of development. As of the
closing date, CommWorks' SLAP IPR&D project was approximately 60% complete and HDV 2.0 was approximately 40% complete. Therefore, there are significant risks associated with reaching the technological
milestones on time and on budget. Commercial risks are associated with the competitive nature of the telecommunications equipment market.

Additional
costs will be required to complete the IPR&D projects. The SLAP product is now expected to be commercialized in the first quarter of fiscal 2004. Remaining costs required to
complete the project, are estimated to be $0.1 million. The HDV 2.0 product is now expected to be commercialized in
the first quarter of fiscal 2004. Remaining costs required to complete the project are estimated to be $0.2 million.

RollingStreams

On June 30, 2003, we completed the acquisition of RollingStreams Systems, Ltd. ("RollingStreams"), a development-stage company, pursuant to a share
exchange agreement. RollingStreams designs streaming, end-to-end TV-over-Internet-Protocol ("TVoIP") products and services for telecommunications
operators and broadband service providers. Our investment in RollingStreams was $0.4 million prior to the acquisition. The purchase consideration for all the outstanding shares of
RollingStreams, other than those already held by us prior to the acquisition, was 301,074 shares of our common stock. In addition, we assumed all outstanding RollingStreams options, which became
options to purchase an aggregate of 12,742 shares of our common stock, valued at $0.5 million. Of the 301,074 shares, 164,115 shares valued at $5.8 million, were issued at the closing,
28,696 of which are held in escrow for any undisclosed liabilities or contingencies incurred by RollingStreams prior to the closing or for any breach of the share exchange agreement. These shares will
be distributed to the former shareholders of RollingStreams within ten days of the six-month anniversary of the closing, after deducting any claims. Up to 136,959 of the 301,074 shares
will be payable in the form of an earnout after an earnout period expiring 18 months after the closing, subject to the achievement of certain revenue milestones during such earnout period.

The
amount of the purchase price allocated to in-process research and development was $6.2 million, based on an independent valuation. This amount was charged to our
results of operations, as no alternative future uses existed at the acquisition date.

As
of the date of the acquisition, RollingStreams had one project under development that qualified for in-process research and development, MediaSwitch. MediaSwitch is an
end-to-end solution designed for telecom operators and broadband service providers to deliver broadcast quality TV and on-demand entertainment services over
Internet Protocol networks.

MediaSwitch
is considered an IPR&D project because there are significant risks associated with the development of this technology. These risks include technological and commercial risks.
The technological risks stem from the fact that the technology is 70% complete. Therefore, there are significant risks associated with reaching the technological milestones on time and on budget.
Commercial risks are associated with the lack of market acceptance for the TVoIP concept.

25

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In
addition to the technological and commercial risks stated above, significant additional costs will be required to complete the IPR&D project. MediaSwitch is now expected to be
commercialized in the second quarter of 2004. Remaining costs required to complete the project are estimated to be $4.5 million. Remaining engineering tasks include the productization of the
complete solution. This involves adding new features and functionalities and stabilizing the software code.

Xebeo

On May 7, 2003, we completed the purchase of all of the assets of Xebeo Communications, Inc. ("Xebeo") for $2.4 million in cash. Xebeo
develops and manufactures optical packet switches that enable telecommunications carriers to provide single fiber, multi-service access to customers. In addition, an amount up to $0.7 million
may be payable based on future contingencies related to employment.

The
amount of the purchase price allocated to in-process research and development of $1.9 million, based on an independent valuation, was charged to our results of
operations, as no alternative future uses existed at the acquisition date.

As
of the date of the acquisition, Xebeo was focusing its resources on the development of its first product, MetroBridge, an optical packet switching solution, and was considered in the
development stage. The development of MetroBridge was 60% complete as of the closing date. The technological feasibility of the technology was not established and the technology had no future
alternative uses, therefore the development of MetroBridge is considered IPR&D. The product achieved its technical milestones as of November 2003, and is now available for customer trials and
evaluations. It is expected to be marketed and sold in the third quarter of 2004. Commercial risks are associated with the lack of market acceptance with a product with these features and for its use
in TVoIP implementations.

Shanghai Yi Yun

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

Debt Issuance

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

Concurrent
with the issuance of the convertible notes, we entered into convertible bond hedge and call option transactions with respect to our common stock. Both the bond hedge and call
option

26

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transactions
may be settled at our option either in cash or net shares and expire on March 1, 2008. The convertible bond hedge and call option transactions are expected to reduce the potential
dilution from conversion of the notes. The options have been included in stockholders' equity in accordance with the guidance in Emerging Issues Task Force Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."

Transactions with Softbank

We recognized revenue of $184.4 million, $123.0 million, and $13.9 million during the years ended December 31, 2003, 2002 and 2001,
respectively, with respect to sales of telecommunications equipment to Softbank BB Corporation ("SBBC"), an affiliate of SOFTBANK CORP. and SOFTBANK America Inc., a significant stockholder of
ours. SBBC offers asynchronous digital subscriber line ("ADSL") coverage throughout Japan, which is marketed under the name "YAHOO BB!". The majority of the products we provide to SBBC
is associated with ADSL technology. The contract was competitively bid and the terms of this contract were on terms no more favorable than those with unrelated parties. Included in accounts receivable
at December 31, 2003 and 2002 were $43.9 million and $0.8 million, respectively, related to this agreement. There were no amounts included in deferred revenue in respect to this
agreement at December 31, 2003 and 2002.

During
2000, we invested $10.0 million in Softbank China, an investment fund established by SOFTBANK CORP. focused on investments in Internet companies in China. This investment
permits us to participate in the anticipated growth of Internet-related businesses in China. Our investment
constitutes 10% of the funding for Softbank China, with SOFTBANK CORP. contributing the remaining 90%. The fund has a separate management team, and none of our employees are employed by the fund. Many
of the fund's investments are and will be in privately held companies, many of which are still in the start-up or development stages. These investments are inherently risky as the market
for the technologies or products the companies have under development are typically in the early stages and may never materialize. We account for this investment under the cost method and recorded
losses of $0.2 million, $2.8 million and $1.7 million due to an other-than-temporary decline in the carrying value of this investment in 2003, 2002 and
2001, respectively. The balance in this investment was $5.3 million at December 31, 2003.

During
the first quarter of fiscal 2002, we invested $2.0 million in Restructuring Fund No. 1, a venture capital investment limited partnership established by SOFTBANK
INVESTMENT CORP., an affiliate of SOFTBANK CORP. The fund focuses on leveraged buyout investments in companies in Asia undergoing restructuring or bankruptcy proceedings. The total fund offering is
expected to be between approximately $150.0 million and $226.0 million, with each investor contributing a minimum of $0.8 million. The fund has a separate management team, and
none of our employees are employed by the fund. We account for this investment under the equity method of accounting. During the year ended December 31, 2003 we recorded equity losses of
$0.1 million, and recorded no losses for the year ended December 31, 2002. The balance in this investment is $1.9 million at December 31, 2003.

On
August 29, 2002, we completed the repurchase of 6.0 million shares of our common stock for $72.9 million from our largest shareholder, SOFTBANK
America Inc. As part of this transaction, SOFTBANK signed a voluntary "lock up" agreement stipulating that it would not sell any of our common stock within the next six months.

This
lock up agreement, which ended on March 1, 2003, coincided with the start of our "blackout period" in which insiders are not permitted to sell shares. The blackout period
began March 1, 2003 and ended commencing at the close of business on the second trading day following the public release of our first quarter fiscal 2003 results on April 16, 2003.

On
April 5, 2003, we repurchased 8.0 million shares of our common stock beneficially owned by SOFTBANK America Inc., at a purchase price of $17.385 per share. The
total cost of the repurchase

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was
$139.6 million including transaction fees. In connection with this repurchase transaction, SOFTBANK America Inc. entered into an agreement with us not to offer, sell or otherwise
dispose of our common stock for a period of one year, subject to a number of exceptions. As of December 31, 2003, SOFTBANK America Inc. beneficially owned approximately 14.1% of our
outstanding stock.

On
July 17, 2003, we entered into a Mezzanine Loan Agreement with BB Modem Rental PLC ("BB Modem"), an affiliate of SOFTBANK CORP. Under the terms of the agreement we loaned BB
Modem $10.1 million, for the purposes of investing in a portfolio of ADSL modems and associated modem rental agreements, from SOFTBANK BB CORP., formerly BB Technologies, an affiliate of
SOFTBANK CORP. SOFTBANK BB CORP. will continue to service such modems and modem rental agreements. Our loan is subordinated to certain senior lenders of BB Modem, and repayments are payable to us over
a forty-two month period through January 31, 2007, with a substantial portion of the principal amount of the loan schedule to be repaid during the last 16 months of this
period. Our recourse for nonpayment of the loan is limited to the assets of BB Modem, the account into which subscriber payments are made and its rights under the securitization transaction documents.
The value of BB Modem's modems that serve as collateral for the loan may decrease over time and may not be sufficient upon sale to pay the outstanding amounts on the loans. We assess the loan for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We periodically review the underlying quality of the asset pool securing the loan to
assess whether impairment has incurred and needs to be recorded. During 2003, we recorded $0.5 million in interest income in respect of this loan. The loan receivable at December 31,
2003 was approximately $11.2 million based on a foreign exchange rate of approximately $1.07 for 100 Japanese Yen.

Subsequent Event

On January 14, 2004, we sold 12.1 million shares of common stock at $39.25 per share to Banc of America Securities LLC, for net proceeds of
approximately $474.2 million. We intend to use the net proceeds for strategic and general corporate purposes, including, but not limited to, acquisitions, investments, working capital or
capital expenditures.

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RESULTS OF OPERATIONS

Approximately 86%, 84% and 90% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively, were in China. Accordingly, our
business, financial condition and results of operations are likely to be influenced by the political, economic and legal environment in China, and by the general state of China's economy for the
foreseeable future. Our results may be adversely affected by, among other things, changes in the political, economic, competitive and social conditions in China, including changes in governmental
policies with respect to laws and regulations, changes in the telecommunications industry and regulatory rules and policies, anti-inflationary measures, currency conversion and remittance abroad, and
rates and methods of taxation. We extend credit to our customers in China without requiring collateral. We monitor our exposure for credit losses and maintain allowances for doubtful accounts.
Business activity in China and many other countries in Asia declines considerably during the first quarter of each year in observance of the Lunar New Year. As a result, sales during the first quarter
of our fiscal year have typically been lower than sales during the fourth quarter of the preceding year, and we expect this trend to continue.

Cost
of sales consists primarily of material costs, payments to agents, costs associated with manufacturing, assembly and testing of products, costs associated with installation and
customer training and overhead and warranty costs. Cost of sales also includes import taxes and 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 our obtaining Chinese import permits and approvals. We also rely on third party manufacturers in China to
manufacture and assemble most of our handsets.

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

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

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

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NET SALES

The following table summarizes our net sales by geographic region and by product line:

|                        |                 | Years ended December 31, |          
|----------------------- | --------------- | ------------------------ | ---------
|
|
|Sales by region         |                 |                          |          
|China                   |                 | $                        | 1,679,966
|Japan                   |                 |                          | 194,894  
|Other                   |                 |                          | 89,472   
|                        |                 |                          |          
|                        | TOTAL NET SALES |                          | $        
|                        |                 |                          |          
|Sales by product line   |                 |                          |          
|Wireless infrastructure |                 | $                        | 719,700  
|Subscriber handsets     |                 |                          | 968,192  
|Wireline products       |                 |                          | 276,440  
|                        |                 |                          |          
|                        | TOTAL NET SALES |                          | $        
|                        |                 |                          |          

Fiscal 2003 vs. 2002

This increase in sales was primarily attributable to increased demand for our products and services, the continued strength of our sales in China, as well as an
increase in our global sales. Net sales growth
was due to an increase in subscribers, which required telecommunication providers to expand their telecommunication infrastructures. As a result, we had more sales to customers that were expanding
their existing networks in 2003. Approximately 30% of our sales in 2003 were attributable to new customers compared to 54% of sales to new customers in 2002. In addition to increasing the amount of
infrastructure sales, this increase in subscribers also led to an increase in customer demand for handsets.

During
2003, the China provincial-level telecommunications service entities continued to consolidate telecommunications purchasing decisions by province. As a result of this
consolidation trend, we grouped all of our China customers together by province, and treat each province as one customer. At December 31, 2003 and 2002, we had approximately 31 such customers.
Giving effect to this consolidation, in 2003, the Hei Long Jiang province accounted for 11% of our net sales. In 2002, sales to the Zhejiang province accounted for 18% and sales to SBBC accounted for
13% of our net sales. We expect our sales to grow at a moderate rate through 2004, with our global sales growing at a higher rate than our China sales. Our handset sales increased as a result of
increased subscribers, from approximately 12 million subscribers in 2002 to approximately 35 million subscribers in 2003, and we expect this growth rate to continue into 2004.

We
expect that 2004 net sales will be comprised of approximately 35% to 40% wireless infrastructure sales, approximately 40% to 50% subscriber handset sales and approximately 10% to 20%
wireline products.

Fiscal 2002 vs. 2001

International sales of telecommunications equipment increased primarily due to sales of equipment to SBBC in Japan to support its ADSL rollout. In 2002, sales to
the Zhejiang province accounted for 18% and sales to SBBC accounted for 13% of our net sales. In 2001, sales to the Zhejiang and Guangdong provinces accounted for 28% and 10% of our net sales,
respectively.

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Our
handset sales increased as a result of subscriber growth and the increased popularity of our PAS system.

GROSS PROFIT

The following table summarizes our gross profit:

Years ended December 31,2003

2002

2001(in thousands)Gross profit

$
636,168

$
345,472

$
224,548Gross profit percentage


32
%

35
%

36
%


Fiscal 2003 vs. 2002

Our gross profit varies across our different product lines and is affected by product mix, average selling prices and the cost of materials. The decrease in gross
profit as a percent of net sales in 2003 from 2002 is attributable to increased competitive market pricing pressures and lower margins on our iPAS and PAS systems as well as to our having a higher
volume of sales of our lower margin handset products. The telecommunications market experienced continued pricing pressures in 2003. We anticipate that this pricing pressure will continue on both our
iPAS and PAS systems and on our handset products. Our gross profit also decreased in 2003 due to an increased cost of sales from foreign exchange losses resulting from our purchasing significant
amounts of inventory denominated in Japanese Yen. We believe that our overall gross profit as a percentage of net sales will continue to fluctuate from period to period as a result of shifts in
product mix, anticipated decreases in average selling prices and our ability to reduce cost of sales. We expect that there will be continued competitive market pricing pressures on our products in
line with current trends in the industry. Additionally, we expect that handsets will continue to represent 40% to 50% of our net sales.

Fiscal 2002 vs. 2001

The decrease in gross profit, as a percentage of net sales, was primarily due to increased sales of lower margin handsets, which comprised 38% of net sales in
2002 compared to 30% in 2001.

OPERATING EXPENSES

The following table summarizes our operating expenses:

|                                              |  | Years ended December 31, |        
|--------------------------------------------- |  | ------------------------ | -------
|
|
|Selling, general and administrative ("SG&A")  |  | $                        | 187,128
|Research and development ("R&D")              |  |                          | 155,252
|In-process research and development ("IPR&D") |  |                          | 10,686 
|Amortization of intangible assets             |  |                          | 8,370  
|                                              |  |                          |        
|TOTAL OPERATING EXPENSES                      |  | $                        | 361,436
|                                              |  |                          |        

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Selling, general and administrative

Fiscal 2003 vs. 2002

Selling, general and administrative expenses include compensation and benefits, professional fees, sales commissions, provision for doubtful accounts receivable
and travel and entertainment costs. The increase in absolute dollars of selling, general and administrative expenses is due to expanding our overall business activities both in China and globally. To
support our expanding global business, we hired approximately 1,150 additional selling, general and administrative employees in 2003, which also contributed to the increased selling, general and
administrative expenses. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to economies of scale associated with the significant increase in
net sales.

Fiscal 2002 vs. 2001

The increase in selling, general and administrative expenses was primarily due to the growth in net sales and the expansion of our overall level of business
activities globally. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to economies of scale associated with the significant increase in net
sales.

Research and development

Fiscal 2003 vs. 2002

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

Fiscal 2002 vs. 2001

The increase in research and development expenses was primarily due to the hiring of an additional 303 technical personnel, and increased prototype expenses and
licensing fees to support our research and development efforts. As a percentage of net sales, research and development expenses decreased to 9% in 2002 from 10% in 2001. The reduction in research and
development expenses as a percent of net sales was attributable to increased economies of scale associated with increased business levels.

In-process research and development costs

Fiscal 2003 vs. 2002

The IPR&D charge for 2003 resulted from our acquisition of CommWorks, a former division of 3Com, and three smaller acquisitions: RollingStreams, Xebeo and
Shanghai Yi Yun Telecom Technology Co. Ltd., which accounted for $1.3 million, $6.2 million, $1.9 million and $1.3 million, respectively, and were based on
independent valuations. The charge for 2002 arose from our acquisition of Issanni Communications, Inc. on April 19, 2002 and was based on independent valuation.

Refer
to the acquisitions and other key transactions section of the MD&A for additional detail on our IPR&D costs incurred in 2003.

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Fiscal 2002 vs. 2001

2002 IPR&D costs resulted from our acquisition of Issanni on April 19, 2002. 2001 in-process research and development costs resulted from our
acquisition of ACD in November 2001. These charges were based upon independent valuations.

Amortization of intangible assets

Fiscal 2003 vs. 2002

The increase in amortization of intangible assets was primarily due to an additional $44.9 million of intangibles recorded upon our acquisition of
CommWorks in May 2003. The estimated useful lives of these purchased intangibles are from one to ten years. Estimated amortization expense for the next five years, beginning with the year ended
December 31, 2004, is $10.7 million, $7.6 million, $5.8 million, $5.6 million and $4.0 million, respectively.

Fiscal 2002 vs. 2001

The decrease in amortization of intangible assets was primarily due to the elimination of goodwill amortization upon the adoption of SFAS No. 142 on
January 1, 2002 of $7.4 million, offset by an increase in amortization of intangibles of $2.0 million. Had SFAS No. 142 been in effect during the year ended
December 31, 2001, amortization expense would have been $0.2 million.

OTHER INCOME (EXPENSES)

Interest income (expense), net

Fiscal 2003 vs. 2002

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

Interest
expense was $4.3 million in 2003 compared to $1.3 million in 2002. The increase of $3.0 million in interest expense was primarily attributable to the
interest associated with our convertible debt issued in March 2003, which accrues at a rate of approximately $1.4 million per quarter. $0.6 million of interest was capitalized in 2003.

Fiscal 2002 vs. 2001

Interest income was $5.5 million in 2002 compared to interest income of $8.6 million in 2001. Interest expense was $1.3 million in 2002
compared to $3.9 million in 2001. The decrease in interest income was
primarily due to a reduction in cash and cash equivalents and short-term investments of $58.3 million and a reduction in interest rates on deposits. The decrease of
$2.7 million in interest expense was related to debt balances that were paid off in September 2002. At December 31, 2002, we did not have any debt.

Other income (expense), net

Fiscal 2003 vs. 2002

Net other income was $1.4 million in 2003, compared to net other expense of $9.9 million in 2002. Net other income in 2003 was primarily comprised
of a reinvestment incentive payment received in China of $3.9 million, an incentive payment for exports and value added taxes in China of $2.6 million, government incentive related to our
operations in Japan of $6.2 million, offset by foreign exchange

33

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losses
of approximately $8.7 million and expenses attributable to selling or transferring of notes receivable of $2.3 million.

Fiscal 2002 vs. 2001

Net other expense was $9.9 million in 2002, compared to net other expense of $0.3 million in 2001. Net other expense in 2002 was primarily comprised
of impairment write-downs of $4.4 million relating to our investment portfolio and foreign exchange losses of $5.4 million.

Equity in net income (loss) of affiliated companies

Fiscal 2003 vs. 2002

Consolidated equity in net loss of affiliated companies was $5.3 million in 2003 and $4.1 million in 2002. The equity loss for 2003 was primarily
comprised of our share of losses relating to our joint venture with one of our stockholders, Matsushita Communication Industrial Co., Ltd., to jointly design and develop, manufacture and sell
telecommunications products. We have a 49% ownership interest in the joint venture company, which has a registered share capital of $10.0 million. The equity loss for 2002 was related to losses
relating to our interests in investment funds and to our share of losses generated by GUTS prior to our acquisition of the remaining 49% ownership interest in this entity.

Fiscal 2002 vs. 2001

Consolidated equity in net loss of affiliated companies was $4.1 million in 2002 and $3.0 million in 2001. This included equity losses of
$2.9 million and $1.7 million in 2002 and 2001, respectively, related to our interest in investment funds. In May 2002, we acquired the remaining 49% ownership interest in GUTS,
which is now a wholly-owned subsidiary. Its results of operations are included in our consolidated financial statements beginning June 1, 2002. Prior to May 2002, GUTS was accounted for
using the equity method of accounting. On July 5, 2002, we entered into a joint venture agreement with Matsushita Communication Industrial Co., Ltd., and Matsushita Electric Industrial
Co., Ltd., to jointly design, develop, manufacture and sell telecommunication products. We have a 49% ownership interest in this joint venture company. The investment in and results of
operations of the joint venture company were accounted for using the equity method of accounting, commencing October 2002.

Income tax expense

Fiscal 2003 vs. 2002

Income tax expense was $67.4 million in 2003 and $27.3 million in 2002. The primary reason for the increase in income tax expense was that our
income increased 100% in 2003 from 2002. Secondarily, our income tax expense increased due to a higher tax rate in 2003. Our effective tax rate was 25% in 2003 compared to 20% in 2002 primarily due to
higher tax rates globally as some of our China subsidiaries tax holidays expired in 2003. We expect that our income tax expense will grow in absolute dollars in line with anticipated increases in
pretax income; however, we expect that our income tax rate will decrease to below 25% in 2004 due to the implementation of various global tax planning strategies.

Fiscal 2002 vs. 2001

Income tax expense was $27.3 million in 2002 and $19.8 million in 2001. The increase in income tax expense was due to our increased income. Our
effective tax rate was 20% in 2002 compared to 25% in 2001. The reduction in our effective tax rate can be attributed to the increased portion of our net income derived from our operations in Chinese
jurisdictions, which have granted us temporary tax holidays.

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Minority interest in earnings of consolidated subsidiaries

Fiscal 2003 vs. 2002

Minority interest in earnings of consolidated subsidiaries was $0.1 million for the year ended 2003 and $1.2 million for the year ended 2002. The
decrease is due to the acquisition of the remaining 12% ownership interest in HUTS during 2002. Minority interest in earnings of consolidated subsidiaries for 2003 represented the 10% share of
earnings of CUTS, our Chongqing manufacturing joint venture, attributable to our joint venture partner. Minority interest in earnings of consolidated subsidiaries for 2002 represented the share of
earnings in HUTS, our Zhejiang manufacturing joint venture, attributable to our joint venture partner, prior to our acquisition of the remaining 12% ownership interest in HUTS in May 2002. HUTS
is now a wholly-owned subsidiary.

Fiscal 2002 vs. 2001

Minority interest in earnings of consolidated subsidiaries was $1.2 million in 2002 and $1.3 million in 2001. The decrease is due to the acquisition
of the remaining 12% ownership interest in HUTS in May 2002. HUTS is now a wholly-owned subsidiary. The expected decrease was offset by an increase in HUTS net income for the four months ended
April 30, 2002 as compared to the corresponding period in 2001.

Liquidity and Capital Resources

Operating Activities

2003

Net cash provided by operating activities for the year ended December 31, 2003 was $50.5 million. Operating cash was affected by changes in accounts
receivable, inventory, accounts payable, other assets and offset by changes in deferred revenue. The $151.7 million increase in our accounts receivable balance, attributable to a 100% increase
in sales in 2003, reduced our net cash provided by operations. In 2003, we sold $298.8 million of our notes receivable with associated expenses of $2.3 million. Cash provided by
operating activities was also reduced by a $81.6 million and $318.0 million increase in inventory and deferred costs, respectively. Inventory and deferred costs increased in absolute
dollars in 2003 over 2002 to support our increased backlog. Operating cash also decreased due to a $5.8 million decrease in accounts payable. Historically, the majority of our accounts payables
have been comprised of inventory related payables. In mid-2003, we implemented a "just in time" inventory process to increase efficiencies in inventory purchasing. Going forward, we expect
to continue to improve the efficiencies surrounding our supply chain and inventory process. As such, inventory will grow at a slower rate than we have historically experienced. The decrease in
operating cash in 2003 was offset by an increase in customer advances and deferred revenue of $302.3 million and $27.4 million, respectively. We collected approximately
$2.5 billion in cash from our customers in 2003. Customer advances are comprised of cash we have collected from our customers for which we have not yet recognized revenue; the increase was
attributable to an increase in customer contracts.

2002

Net cash provided by operating activities in fiscal 2002 was $157.3 million. Net cash provided by operations was mainly due to a $170.5 million and
$87.8 million increase in accounts payable and customer advances, respectively, offset by increases in inventories, deferred costs, accounts receivable and other assets of $76.1 million,
$137.8 million, $34.2 million and $45.8 million, respectively.

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2001

Net cash provided by operating activities in fiscal 2001 was $40.2 million. Net cash provided by operations was mainly due to a $39.1 million,
$42.8 million and $41.4 million increase in accounts payable, customer advances and other liabilities, respectively, offset by increases in inventories, deferred costs, accounts
receivable and other assets of $60.4 million, $60.8 million, $39.2 million and $43.0 million, respectively.

Investing Activities

2003

Net cash used in investing activities was $177.5 million for the year ended December 31, 2003. Net cash used in investing activities was affected by
increased business acquisitions and property, plant and equipment purchases. We spent $111.7 million for business acquisitions in 2003. This was primarily attributable to our May 2003
CommWorks acquisition, which was $109.3 million including transaction and transition fees. In addition to business acquisitions, net cash used in investing activities increased due to
$122.3 million of property, plant and equipment purchases. $45.5 million of these property, plant and equipment purchases were construction costs incurred on our Hangzhou manufacturing
facility. Net cash used in investing activities also increased due to $147.5 million of purchases of short-term investments. Offsetting net cash used in investing activities was
$217.2 million of proceeds from the sale of our short-term investments.

2002

Net cash used in investing activities in fiscal 2002 was $144.2 million. This was mainly due to $75.3 million of property, plant and equipment
purchases; $17.7 million of business acquisitions, primarily
attributable to our purchase of the remaining interest in HUTS; $28.9 million of investments in affiliates which primarily comprised investments in public and private technology companies
offset by $22.4 million of net purchases of short-term investments.

2001

Net cash used in investing activities in fiscal 2001 of $43.7 million was primarily due to $30.2 million of property, plant and equipment purchases,
$9.8 million of investments in affiliates, which primarily comprised investments in public and private technology companies offset by $2.1 million of net purchases of
short-term investments.

Financing Activities

2003

Net cash provided by financing activities was $267.2 million for the year ended December 31, 2003 due to proceeds raised from a convertible
subordinated notes issuance and stock option exercises offset by a repurchase of our common stock and the purchase of a bond hedge and call option. Net cash provided by financing activities was
primarily attributable to $391.4 million in net proceeds received from issuing convertible subordinated notes in March 2003. In addition to the proceeds received from our notes issuance,
we received $58.9 million for the issuance of common stock through stock option and ESPP exercises. Offsetting cash provided by financing activities, we used a portion of the capital raised to
repurchase 8.0 million shares of our common stock that was beneficially owned by SOFTBANK America, Inc. at a purchase price of $17.385 per share. The total cost of the repurchase was
$139.6 million, including transaction fees. We used the remainder of the funds raised to fund 2003 business acquisitions. Net cash provided by financing activities was also offset by our
purchase of a call spread for $43.8 million, which was purchased to minimize shareholder dilution upon conversion of the convertible subordinated notes.

36

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2002

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

2001

Net cash provided by financing activities of $175.5 million was primarily due to $160.6 million of proceeds from our follow-on public
offering of common stock in August 2001, stock option exercises, and net proceeds from borrowings under our line of credit arrangements of $15.1 million.

Liquidity

Our working capital was $887.2 million and $568.2 million at December 31, 2003 and 2002, respectively. This increase in working capital is
due to increased cash on hand, from $231.9 million in cash and cash equivalents and $107.3 of short-term investments in 2002, to $374.0 million of cash and cash equivalents
and $48.6 million of short-term investments. Our working capital also increased due to larger accounts receivable and inventory balances, which was offset by larger customer
advances and deferred revenue balances. We anticipate having more working capital and cash on hand in 2004 as a result of our $474.2 million equity offering in January 2004. Going
forward, this cash will position us to take advantage of strategic investment opportunities. We had lines of credit totaling $583.7 million available for future borrowings expiring between 2004
and 2010 with interest rates ranging from approximately 4.5% to 6.0%, and we had not guaranteed any debt not included in the consolidated balance sheet.

Income taxes

Our subsidiaries and joint ventures located in China enjoy tax benefits in China which are generally available to foreign investment enterprises, including full
exemption from national enterprise income tax for two years starting from the first profit-making year and/or a 50% reduction in national income tax rate for the following three years. In addition,
local enterprise income tax is often waived or reduced during this tax holiday/incentive period. Under current regulations in China, foreign investment enterprises that have been accredited as
technologically advanced enterprises are entitled to additional tax incentives. These tax incentives vary in different locales and could include preferential national enterprise income tax treatment
at 50% of the usual rates for different periods of time. The tax holidays discussed above are applicable to UTStarcom (Chongqing) Co., Ltd. ("CUTS"), UTStarcom Telecom Co., Ltd. ("HUTS"), Hangzhou
UTStarcom Telecom Co., Ltd. ("HSTC") and UTStarcom China Co., Ltd. ("UTSC"), our active subsidiaries in China, as those entities qualify as accredited technologically advanced enterprises.
Specifically, HUTS currently enjoys a 15% tax rate that will continue indefinitely provided they remain as a technologically advanced enterprise and the Government does not change the tax laws. UTSC
currently enjoys a 10% holiday tax rate that expires on December 31, 2005. HSTC and CUTS are currently exempt from income tax until December 31, 2004, at which point they will be subject
to a 7.5% tax rate, which will expire on December 31, 2007.

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Contractual obligations and other commercial commitments

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

December 31, 2003
Payments Due by PeriodTotal

Less than
1 year

1-3 years

3-5 years(in thousands)Contractual ObligationsNotes Payable

$
1

$
1Convertible Subordinated Notes

$
402,500

$


$


$
402,500Operating leases

$
25,724

$
10,154

$
15,131

$
439Other Commercial CommitmentsStandby letters of credit

$
20,461

$
15,353

$
5,108

$
Purchase Commitments

$
2,261

$
2,261


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.

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

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 nine months from date of issuance without being drawn by the beneficiary thereof.

Accounts receivable transferred to notes receivable

We accept bank notes receivable and commercial notes receivable, with maturity dates between three and six months, from our customers in China in the normal
course of business. We may discount these notes with banking institutions in China. A sale of these notes is reflected as a reduction of other current assets and the proceeds of the settlement of
these notes are included in cash flows from operating activities in the consolidated statement of cash flows. Notes receivable sold during the years ended December 31, 2003 and 2002 were
$298.8 million and $2.5 million, respectively. These notes are not included in our consolidated balance sheets as 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"), has been met. Under SFAS 140, upon a
transfer, the transferor or entity must derecognize financial assets when control has been surrendered and the transferee obtains control over the assets. In addition, the transferred assets have been
isolated from the transferor, beyond the reach of its creditors, and the transferee has the right, without conditions or constraints, to pledge or exchange the assets it has received. The costs of
settling or transferring these notes receivable were $2.3 million and immaterial for the years ended December 31, 2003 and 2002, respectively, and were included in other income
(expense), net in the

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Consolidated
Statements of Operations. Notes receivable available for sale were $11.4 million and $12.0 million at December 31, 2003 and December 31, 2002, respectively.

Investment commitments

As of December 31, 2003, we had invested a total of $2.0 million in Global Asia Partners L.P. that is recorded as a long-term
investment. The fund size is anticipated to be $100 million and the fund was formed to make private equity investments in private or pre-IPO technology and telecommunications
companies in Asia. We have a commitment to invest up to a maximum of $5.0 million. The remaining amount is due at such times and in such amounts as shall be specified in one or more future
capital calls to be issued by the general partner.

Purchase commitments

We are obligated to purchase raw materials and work-in-process inventory under various orders from one supplier, all of which are expected to be fulfilled with no
adverse consequences material to our operations or financial condition. As of December 31, 2003 total open commitments under these purchase orders were approximately $2.3 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue Recognition and Product Warranty

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

Final
acceptance is required in our complex multiple element contractual arrangements since installation stretches over a time frame of six to twelve months, terms and deliverables are
not finalized until project completion, and customers extensively test the systems after installation. Final acceptance indicates that the customer has fully accepted delivery of equipment and that we
are entitled to the full payment. We will not recognize revenue before final acceptance is granted by the customer if acceptance is considered substantive to the transaction. Additionally, we do not
recognize revenue when cash payments are received from customers for transactions that do not have the customer's final acceptance. We record these cash receipts as customer advances, and defer
revenue recognition until final acceptance is received.

Sales
may be generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in the areas of multiple element arrangements. Where
multiple elements exist in an arrangement, the arrangement fee is allocated to the different elements based upon verifiable objective evidence of the fair value of the elements, as governed under EITF
00-21 and

39

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SEC
Staff Accounting Bulletin No. 104 "SAB 104". Multiple element arrangements primarily involve the sale of PAS or iPAS equipment with handsets, installation and training and the provision of
such equipment to different locations for the same customer. Revenue is recognized as each element is earned, namely upon installation and acceptance of equipment or delivery of handsets; provided
that the fair value of the undelivered element(s) has been determined, the delivered element has stand-alone value, there is no right of return on delivered element(s), and we are in control of
delivery of the undelivered element(s).

Where
multiple elements exist in an arrangement that includes software, and the software is considered more than incidental to the equipment or services in the arrangement, software and
software-related elements are recognized under the provisions of Statement of Position 97-2, as amended, and Emerging Issues Task Force Issue No. 03-05. The Company allocates
revenues to each element of software arrangements based on vendor-specific objective evidence ("VSOE"). VSOE of each element is based on the price charged when the same element is sold separately. We
use the residual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and VSOE of the fair value of all the undelivered elements exists. Under
the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of fair value of one or more
undelivered elements does not exist, revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

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

We
recognize revenue for system integration, installation and training upon completion of performance if all other revenue recognition criteria are met. Other service revenue, such as
that related to maintenance and support contracts, is recognized ratably over the contract term.

The
assessment of collectability is also a factor in determining whether revenue should be recognized. We assess collectability based on a number of factors, including payment history
and the creditworthiness of the customer. We do not request collateral from our customers in China. In global sales outside of China, we often require letters of credit that can be drawn on demand if
a customer defaults on its payment. If we determine that collection of a fee is not reasonably assured, we recognize revenue upon receipt of cash.

Because
of the nature of doing business in China and other emerging markets, our billings and/or customer payments may not correlate with the contractual payment terms and we generally
do not enforce contractual payment terms on complex, multiple-element arrangements prior to final acceptance. Accordingly, these accounts receivable are not booked until we recognize the related
customer revenue. Advances from customers are recognized when we have collected cash from the customer prior to recognizing revenue.

We
provide a warranty on our equipment and handset sales for a period generally ranging from twelve to eighteen months from the time of final acceptance. We provide for the expected cost
of product warranties at the time that we recognize revenue, based on our assessment of past warranty experience. We continually monitor the level of our warranty expenses. If, however, there were to
be a

40

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material
adverse change in our product failure rates, an additional warranty provision would be required. Historically, our warranty experience has been within our expectations.

Receivables

We are required to estimate the collectability of our trade receivables and notes receivable. We maintain an allowance for doubtful accounts for the estimated
losses on the trade receivables and notes receivable. We assess collectability of the receivable by determining whether the creditworthiness of the customer has deteriorated and could result in an
inability to collect payment; if collectability is doubtful, we record an allowance against the receivable. If the financial condition of our customers was to deteriorate and their ability to make
payments suffers as a result, we may need to increase our allowances for our receivables.

Inventories

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

Deferred costs/Inventories at customer sites under contracts

Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs, separate from what we have historically considered
inventory. These are stated at the lower of cost or net realizable value, net of reserves based upon assessment of potential losses and obsolescence during the lengthy acceptance process. The title
and risk of loss of this inventory is transferred to the customer upon delivery. Revenue and cost of sales are recorded when we receive final acceptance from the customer.

Research and Development and Capitalized Software Development Costs

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

Deferred Income Taxes

We recognize deferred income taxes as the difference between the tax bases of assets and liabilities and their financial statement amounts based on enacted tax
rates. Management judgment is required in the assessment of the recoverability of our deferred tax assets based on our assessment of projected taxable income. Numerous factors could affect our results
of operations in the future. If there was a significant decline in our future operating results, our assessment of the recoverability of our deferred tax assets would need to be revised, and any such
adjustment to our deferred tax assets would be

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

Goodwill and Intangibles

We have recorded goodwill and intangible assets in connection with our business acquisitions. Management judgment is required in the assessment of the related
useful lives, assumptions regarding our ability to successfully develop and ultimately commercialize acquired technology, and assumptions regarding the fair value and the recoverability of these
assets. We perform our annual goodwill impairment review in the fourth quarter of each year or when changes in circumstances indicate a potential impairment. We currently operate as a single
reportable segment without reporting units, as our management evaluates performance, make operating decisions and allocates resources based on consolidated financial data. As such, we determine
whether impairment to goodwill is necessary on a consolidated basis. When assessing potential impairment to goodwill, we compare our book value to our fair market value. Fair market value is our
market capitalization at the date impairment is assessed. Historically, our fair market value has exceeded our book value and no impairment has been necessary.

Long-Term Investments

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

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46(R) was issued in December 2003. FIN 46 provides accounting guidance for consolidation of variable interest entities ("VIE"). FIN 46 applies to public and private business
enterprises that have a controlling interest or business or contractual relationship with a VIE. FIN 46 requires consolidation of existing non-controlled affiliates if the VIE is unable to
finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. The Company adopted FIN 46 for the quarter
ended December 31, 2003. The adoption of FIN 46 did not have an impact on the consolidated financial statements.

In
April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). This statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities. The
adoption of SFAS 149, which was effective for contracts entered into or modified after June 30, 2003, did not have a material effect on the Company's consolidated financial condition or
results of operations.

In
May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both

42

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Liabilities
and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as
equity. As the Company does not have any of these financial instruments, the adoption of FAS 150 is not expected to have any impact on the Company's consolidated financial statements.

On
December 17, 2003, the Staff of the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101, Revenue Recognition in
Financial Statements. SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SAB 101 Topic 13. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104
did not materially affect our revenue recognition policies, nor our results of operations, financial position or cash flows.

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FACTORS AFFECTING FUTURE OPERATING RESULTS        RISKS RELATED TO OUR COMPANY

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

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



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.
Furthermore, it is possible that in some future quarters our operating results will fall below 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 believe that we 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 or may be given preferential treatment by applicable governmental regulators and policies 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 and currency 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. 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 a reduced rate, allowing them to offer their end products at reduced prices. Increased
competition is likely to result in price reductions, reduced gross profit as a percentage of net sales and loss of market share, any one of which could materially harm our business, financial
condition, cash flows, and results of operations.

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

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



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. Therefore, we must continue to develop 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 could cause our revenues and gross profit to decline.

Our
cost reduction efforts may not allow us to keep pace with competitive pricing pressures or lead to improved gross profit, as a percentage of net sales. In order to be competitive, we
must continually reduce the cost of manufacturing our products through design and engineering changes. 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.

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

Approximately $1.7 billion, or 86%, and $822.3 million, or 84%, of our net sales in the year ended December 31, 2003 and 2002, respectively,
occurred in China. While we anticipate expansion into other foreign markets, a significant majority of our net sales will be derived from China for the foreseeable future. In addition, we plan to
continue to make further investments in China in the future. 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. Please read the risks detailed below under the heading "Risks Related to Conducting Business in China" for additional information about the risks we
face in connection with our China operations.

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

The market for communications equipment is characterized by rapid technological developments, frequent new product introductions and evolving industry and
regulatory standards. Our success will depend in large part on our ability to enhance our network and broadband access and switching technologies and develop and introduce new products and product
enhancements that anticipate changing service provider requirements and technological developments. 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. Moreover, from time to time, our competitors or we may announce new products or
product enhancements, 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 inventory obsolescence. Future technological advances in the communications industry may diminish or inhibit market acceptance of our existing or future products or render our products
obsolete.

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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:



We depend on some sole source and other key suppliers, as well as international sources, for handsets, base stations, components and materials used in
our products. If we cannot obtain adequate supplies of high quality products at competitive prices or in a timely manner from these suppliers or sources, our competitive position, reputation and
business could be harmed.

We have contracts with a single supplier or with a limited group of suppliers to purchase some components and materials used in 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. 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 different products or components. For example, in 2001 and 2002 there was a worldwide shortage of handset components resulting from our third-party
manufacturers' inability to assemble and manufacture a sufficient quantity of handsets to keep pace with consumer demand. 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, import duties and registration requirements. Moreover, import duties on such
components increase the cost of our products and may make them less competitive.

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

We currently anticipate that our available cash resources, which include existing cash and cash equivalents, short-term investments and cash from
operations, will be sufficient to meet our anticipated needs for working capital and capital expenditures for the foreseeable future. If we are unable to generate sufficient cash flows from
operations, we may need to raise additional funds to develop new or enhanced products, respond to competitive pressures, take advantage of acquisition opportunities or

46

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raise
capital for strategic purposes. 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, we may be subject to limitations on our operations and increase our leverage. For
example, in connection with the sale of convertible debt securities in March 2003, we incurred $402.5 million of indebtedness. As a result of this indebtedness, our principal and
interest payment obligations have increased substantially. The degree to which we are leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions
or other purposes and could make us more vulnerable to industry downturns and competitive pressures. 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. Finally, additional sources of financing may not be available on
reasonable terms or at all if and when we require it, which could harm our business.

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

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



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

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

The success of our business depends in significant part upon the continued contributions of key technical and senior management personnel, many of whom would be
difficult to replace. In particular, our success depends in large part on the knowledge, expertise and services of Hong Liang Lu, our Chairman of the Board, President and Chief Executive Officer, and
Ying Wu, our Chairman and Chief Executive Officer of China Operations. The loss of any key employee, the failure of any 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.

To
effectively manage our recent growth as well as any future growth, we will need to recruit, train, assimilate, motivate and retain qualified employees both locally and
internationally. Competition for

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qualified
employees is intense, and the process of recruiting personnel 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.

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

We may acquire other businesses, products and technologies. For example, on May 23, 2003, we purchased certain assets and liabilities of the CommWorks
division of 3Com Corporation for $100.0 million in cash and incurred related transaction and other related costs of $9.3 million. Any anticipated benefits of an acquisition may not be
realized. We have in the past and will continue to evaluate acquisition prospects that would complement our existing product offerings, augment our market coverage, enhance our technological
capabilities, or that may otherwise offer growth opportunities. Acquisitions may result in dilutive issuances of equity securities, use of our cash resources, the incurrence of debt and the
amortization of expenses related to intangible assets. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of operations, technologies, products and personnel
of the acquired company, diversion of management's attention from other business concerns, risks of entering markets in which we have no direct or limited prior experience, and the potential loss of
key employees of the acquired company.

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 applications. Moreover, we may face difficulties in registering our existing trademarks in new jurisdictions in which we operate. 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.

48

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

The industry in which we compete is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual 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, some of our contracts 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 potential future payments under these guarantees. Therefore, we may incur substantial costs related to any infringement claim, which may substantially harm our results of operations and
financial condition.

We
may, in the future, become subject to litigation to defend against claimed infringements of the rights of others or to determine the scope and validity of the proprietary rights of
others. Future litigation may also be necessary to enforce and protect our 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 propriety rights on commercially
reasonable terms and conditions, our business, results of operations or financial condition could be materially and adversely impacted.

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

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



49

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

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



In
particular, these factors create the potential for physical loss of inventory and 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.

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

Because most of our sales are made in foreign countries, we are exposed to market risk for changes in foreign exchange rates on our foreign currency-denominated
accounts and notes receivable balances. We do not currently hedge our foreign currency-denominated transactions. Historically, the majority of
our sales have been made in China and denominated in Renminbi; as such, the impact of currency fluctuations of Renminbi thus far has been insignificant as it is fixed to the U.S. dollar. However, in
the future, China could choose to devalue the Renminbi versus the U.S. dollar, or the Renminbi-U.S. dollar exchange rate could float, and the Renminbi could depreciate relative to the U.S.
dollar. Fluctuations in currency exchange rates in the future may have a material adverse effect on our results of operations.

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

Moreover,
some of the foreign countries in which we do business might impose currency restriction that may limit the ability of our subsidiaries and joint ventures in such countries to
obtain and remit foreign currency necessary for the purchase of imported components and may limit our ability to obtain

50

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and
remit foreign currency in exchange for foreign earnings. For example, China employs currency controls restricting Renminbi conversion, limiting our ability to engage in currency hedging activities
in China. Various foreign exchange controls may also make it difficult for us to repatriate earnings, which could have a material adverse effect on our ability to conduct business globally.

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. For example, our Hangzhou manufacturing facility's ability to produce sufficient products is dependent upon a continuous power
supply, and the power required to source our manufacturing operations is inconsistent. The Hangzhou facility has in the past been subject to power shortages, which has affected our ability to produce
and ship sufficient products. We do not have a detailed disaster recovery plan, and the occurrence of any events like these that disrupt our business could harm our operating results.

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

We face the risk of loss relating to our equipment held at customer sites. In some cases, our equipment held at customer sites is 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 contracts is damaged prior to contract finalization. If we incur a loss relating
to inventory for any of the above reasons, our operating results could be harmed.

We have been named as a defendant in securities litigation.

We and various underwriters for our initial public offering are defendants in a purported shareholder class action. The complaint alleges undisclosed improper
underwriting practices concerning the allocation of IPO shares, in violation of the federal securities laws. Similar complaints have been filed concerning the IPOs of more than 300 companies, and the
litigation has been coordinated in United States District Court for the Southern District of New York as In re Initial Public Offering Securities Litigation, 21 MC 92. Although we believe we have
valid defenses to the claims against us and intend to defend the litigation vigorously, until the matter is resolved, it will be necessary for us to continue to expend time and financial resources on
the matter. Moreover, an adverse judgment in the litigation could materially harm our operations.

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

The Sarbanes-Oxley Act of 2002 has required and will continue to require changes in some of our corporate governance and securities disclosure or compliance
practices. That Act also requires the SEC to promulgate new rules on a variety of subjects, in addition to rule proposals already made, and The Nasdaq National Market has revised its requirements for
companies that are Nasdaq-listed. We expect these developments will require us to devote additional resources to our operational, financial and management information systems procedures and controls
to ensure our continued compliance with current and future laws and regulations. We expect these developments to make it more difficult and more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced coverage, increase our level of self-insurance, or incur substantially higher costs to obtain coverage. These developments
could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers. We are presently evaluating and monitoring regulatory
developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

RISKS RELATED TO CONDUCTING BUSINESS IN CHINA

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

The Chinese government, through the Ministry of Information Industry, the Chinese telecommunication industry's regulating body, has broad discretion and authority
over all aspects of the telecommunications and information technology industry in China, with the power to permit or prohibit the sales of any of our products. 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. While we anticipate that the basic principles underlying the
reforms will remain unchanged, any of the following changes in China's political and economic conditions and governmental policies could have a substantial impact on our business:



For
example, in the year 2000, the Ministry of Information Industry temporarily halted deployment of our PAS systems and handsets, pending its review of personal handyphone system
("PHS")-based telecommunications equipment, a microcellular wireless communications technology. The Ministry of Information Industry later allowed the continued deployment of PHS-based
systems, such as our PAS systems and handsets, in China's county-level cities, towns and villages but limited deployments within large and medium-sized cities to very limited areas of dense
population, such as campuses, commercial buildings and special development zones. If in the future the Ministry of Information Industry

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determines
to prohibit the sale or deployment of our PAS systems and handsets or our other products, or if it imposes additional limitations on their sale, our business and financial condition could
suffer.

In
addition to modifying the existing telecommunications regulatory framework, the Chinese government is currently preparing a draft of a standard, national telecommunications law (the
"Telecommunications Law") to provide a uniform regulatory framework for the telecommunications industry. We do not yet know the final nature or scope of the regulation 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.

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 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. More recently, China's economic environment has been
changing as a result of China's entry into the World Trade Organization (WTO), which was effective in December of 2001. Entry into the WTO requires that China reduce tariffs and eliminate
non-tariff barriers, including quotas, licenses and other restrictions, by 2005 at the latest, and we cannot predict the impact of these changes on China's economy. Moreover, although
China's entry into the WTO and the related relaxation of trade restrictions may lead to increased foreign investment, it may also lead to increased competition in China's markets from other foreign
companies. 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. 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, 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 attention.

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We only have trial licenses to sell certain of our network access products in China.

Under China's current regulatory structure, the communications products that we offer in China must meet government and industry standards, and 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 lower the quality or performance of other installed
licensed products. China's State Council's product quality supervision department, in concert with China's Ministry of Information Industry, performs spot checks to track and supervise the quality of
licensed telecommunications equipment and publishes the results of such spot checks.

We
have obtained a probationary network access license for our mSwitch product, and after the trial period, we anticipate that an official network access license will be issued if the
trial demonstrates that mSwitch satisfies all the applicable government and industry standards. However, we cannot be certain that we will receive this license. Moreover, 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 conversations with China's
Ministry of Information Industry, we
understand that our PAS systems and handsets are considered to still be in the trial period and that sales of our PAS systems and handsets may continue to be made by us during this trial period, but
that a license 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 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 counsel in China, and either of these conditions could have a material adverse effect on our business, financial condition and results of operations.

If China Telecom or China Netcom obtain licenses allowing them to deliver mobile services, our ability to sell our PAS mobile systems and handsets could
be impaired.

China Telecom and China Netcom hold and operate the fixed line telephone and data communications assets in China, and currently do not have the licenses necessary
to offer mobile services. However, China's media sources have widely reported that China's Ministry of Information Industry may grant mobile licenses to the new China Telecom or China Netcom, or to
both toward the end of 2004. Furthermore, it is anticipated that the mobile license granted by the government will be used for 3G mobile network deployments.

If
China Telecom or China Netcom obtain 3G mobile licenses, they may direct capital expenditures to build-out 3G networks, and capital expenditures to build-out
PAS networks that utilize our existing products may decline. Moreover, they may elect not to deploy our PAS systems and handsets or other mobile services that we may offer in the future. In addition,
it is possible that current PAS frequency bands utilized by PAS networks may be reallocated for use by 3G networks, which would have the effect of restricting or shutting down PAS networks. If this
were to occur, we could lose current and potential future customers for our products, and our financial condition and results of operations could be significantly harmed.

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Promotional or incentive programs offered by mobile operators such as China Mobile and China Unicom may adversely impact the competitiveness and pricing
of our PAS systems and related products.

The official tariffs and per-minute usage rates charged to mobile users in China are generally set by the Ministry of Information Industry and the
National Development and Reform
Commission, and are usually adhered to by mobile operators. However, from time to time, certain mobile operators such as China Mobile and China Unicom have offered special promotional pricing or
incentives to customers, such as free incoming calls or free mobile-to-mobile calls. The continued use of such incentive programs by mobile operators may adversely impact the
competitiveness and pricing of our PAS systems and related products and their rollout by the new China Telecom and China Netcom. Such incentive programs may continue or be expanded in the future. We
cannot be certain as to what impact such incentive programs may have on our financial condition. However, it is possible that the continuation or expansion of such programs may have a material adverse
effect on our business or results of operations.

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

The Chinese government is considering the imposition of a "unified" corporate income tax that would phase out, over time, the preferential tax treatment to which
foreign investment enterprises, such as our company, are currently entitled. While it is not certain whether the government will implement such a unified tax structure or whether our company will be
grandfathered into any new tax structure, if a new tax structure is implemented, a new tax structure may adversely affect our financial condition. Moreover, 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 or repealed due to changes in tax laws, our
business could suffer.

RISKS RELATED TO OUR STOCK PERFORMANCE AND  CONVERTIBLE DEBT SECURITIES

Our stock price is highly volatile.

The trading price of our common stock has fluctuated significantly since our initial public offering in March of 2000. Our stock price 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:



55

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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. This type of litigation could result in substantial costs and the diversion of management time and resources.

In
addition, public announcements by China Telecom and China Netcom, each of which exert significant influence over many of our major customers in China, may contribute to volatility in
the price of our stock. In 2002, China Telecom completed its initial public offering, which has caused that entity to issue press releases more frequently than in prior years. The price of our stock
may react to such announcements. More recently, it has been reported that China Netcom has been restructuring its operations for its own initial public offering. More frequent public announcements
from China Netcom relating to or resulting from their initial public offering could cause the price of our stock to become even more volatile.

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

SOFTBANK CORP. and its related entities, including SOFTBANK America Inc. (collectively, "SOFTBANK"), beneficially owned approximately 14.1% of our
outstanding stock as of December 31, 2003. 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:



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 our
company, 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. An acquisition or merger of our company 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:



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The holders of our convertible subordinated notes due in 2008 and we face a variety of risks related to the notes.

Holders of our convertible subordinated notes due 2008 (the "notes") and we face a variety of risks with respect to the notes, including the following:



ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk.Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio.
The fair value of our 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. interest rates since the majority of our funds are invested in instruments with maturities
less than one year. Our policy is to limit the risk of principal loss and 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, fixed income corporate bonds and tax exempt instruments. 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.

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

(in thousands except interest rates)Cash and cash equivalents

$
373,974Average interest rate


1.19
%Restricted cash


3,943Average interest rate


0.50
%Restricted short-term investments


20,461Average interest rate


1.19
%Short-term investments


48,617Average interest rate


1.36
%Total investment securities


446,995Average interest rate


1.20
%


Concentration of Credit Risk and Major Customers:

The table below outlines our sales to, and the accounts receivable balances with respect to our largest customers:

For the year ended December 31,

% of Net
Sales

% of
Accounts
Receivable2003Customer A

11
%
3
%2002Customer B

18
%
6
%Customer C

13
%
0
%2001Customer B

28
%
29
%Customer D

10
%
8
%


Approximately
76%, 84% and 90% of the Company's net sales during 2003, 2002 and 2001, respectively, were to entities affiliated with the government of China. Accounts receivable balances
from these China government affiliated entities or state owned enterprises were $304.0 million and $238.0 million, respectively, as of December 31, 2003 and 2002. The Company
extends credit to its customers in China generally without requiring collateral. In global sales outside of China, the Company often requires letters of credit from its customers. The Company monitors
its exposure for credit losses and maintains allowances for doubtful accounts.

Country Risks:

Approximately 86%, 84% and 90% of the Company's sales for the year ended December 31, 2003, 2002 and 2001, 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.

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Approximately
10%, 13% and 3% of the Company's sales for the year ended December 31, 2003, 2002 and 2001, respectively, were made in Japan. Accordingly, the political, economic
and legal environment and the general state of Japan's economy may influence the Company's business, financial condition and results of operations.

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 continue to 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.

Debt Investment Risk.Our debt investment portfolio consists of a $11.2 million note receivable from BB Modem Rental PLC ("BB
Modem"), an affiliate of SOFTBANK CORP., pursuant to a Mezzanine Loan Agreement we entered into with BB Modem on July 17, 2003. Our loan is subordinated to certain senior lenders of BB Modem,
and repayments are payable to us over a forty-two month period, with a substantial portion of the principal amount of the loan schedule to be repaid during the last 16 months of this period.
Our recourse for nonpayment of the loan is limited to the assets of BB Modem, the account into which subscriber payments are made and its rights under the securitization transaction documents. The
value of BB Modem's modems that serve as collateral for the loan may decrease over time and may not be sufficient upon sale to pay the outstanding amounts on the loan.

Foreign Exchange Rate Risk.We are exposed to foreign exchange rate risk because most of our sales in China are denominated
in Renminbi and portions of our accounts payable are denominated in Japanese Yen. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities
in China. Although the impact of currency fluctuations of Renminbi to date has been insignificant, fluctuations in currency exchange rates in the future may have a material adverse effect on our
results of operations. Although we are expanding our global operations outside of China, as of December 31, 2003, we have not experienced a material foreign exchange rate risk due to the fact
that the significant majority of our business has remained in China. We have a multi-currency bank account in Japanese Yen for purchasing portions of our inventories and supplies. The balance of this
Japanese Yen account at December 31, 2003 was approximately $28.6 million.

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ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedules

|                               |                                                                                                      | Page                                           
|------------------------------ | ---------------------------------------------------------------------------------------------------- | -----------------------------------------------
|Financial Statements:          |                                                                                                      |                                                
|                               | Report of Independent Auditors                                                                       |                                                
|                               | Consolidated Balance Sheets at December 31, 2003 and 2002                                            |                                                
|                               | Consolidated Statements of Operations for the years ended December 31, 2003, 2002
and 2001           |                                                
|                               | Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003,
2002 and 2001 |                                                
|                               | Condensed Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001 |                                                
|                               | Notes to Consolidated Financial Statements                                                           |                                                
|Financial Statement Schedules: |                                                                                                      |                                                
|                               | For each of the three years in the period ended December 31, 2003                                    |                                                
|                               |                                                                                                      | Report of Independent Auditors                 
|                               |                                                                                                      | ICondensed Financial Information of Registrant
|                               |                                                                                                      | IIValuation and Qualifying Accounts           

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

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REPORT OF INDEPENDENT AUDITORS

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

In
our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of UTStarcom, Inc. and its
subsidiaries (the "Company") at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/PRICEWATERHOUSECOOPERS LLP

San
Francisco, California
February 27, 2004

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UTSTARCOM, INC.        CONSOLIDATED BALANCE SHEETS        (In thousands)

|                                               |                                                                                                                                                                   | December 31,
2003 |           | December 31,
2002 |  
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | --------- | ----------------- | -
|ASSETS                                         |                                                                                                                                                                  
|Current assets:                                |                                                                                                                                                                   |                   |           |                   |  
|                                               | Cash and cash equivalents                                                                                                                                         |                   | $         | 373,974           |  
|                                               | Short-term investments                                                                                                                                            |                   |           | 48,617            |  
|                                               | Accounts receivable, net of allowances for doubtful accounts                                                                                                      |                   |           | 324,921           |  
|                                               | Accounts receivable, related parties                                                                                                                              |                   |           | 43,944            |  
|                                               | Notes receivable                                                                                                                                                  |                   |           | 11,362            |  
|                                               | Inventories                                                                                                                                                       |                   |           | 257,038           |  
|                                               | Deferred costs/Inventories at customer sites under contracts                                                                                                      |                   |           | 558,977           |  
|                                               | Prepaids                                                                                                                                                          |                   |           | 136,262           |  
|                                               | Restricted cash and short-term investments                                                                                                                        |                   |           | 24,404            |  
|                                               | Other current assets                                                                                                                                              |                   |           | 52,408            |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|Total current assets                           |                                                                                                                                                                   |                   | 1,831,907 |                   |  
|Property, plant and equipment, net             |                                                                                                                                                                   |                   | 186,076   |                   |  
|Long-term investments                          |                                                                                                                                                                   |                   | 24,066    |                   |  
|Goodwill                                       |                                                                                                                                                                   |                   | 100,180   |                   |  
|Intangible assets, net                         |                                                                                                                                                                   |                   | 45,753    |                   |  
|Other long-term assets                         |                                                                                                                                                                   |                   | 38,976    |                   |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|                                               | Total assets                                                                                                                                                      |                   | $         | 2,226,958         |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY           |                                                                                                                                                                  
|Current liabilities:                           |                                                                                                                                                                   |                   |           |                   |  
|                                               | Accounts payable                                                                                                                                                  |                   | $         | 251,176           |  
|                                               | Income taxes payable                                                                                                                                              |                   |           | 16,780            |  
|                                               | Customer advances                                                                                                                                                 |                   |           | 458,654           |  
|                                               | Deferred revenue                                                                                                                                                  |                   |           | 44,958            |  
|                                               | Other                                                                                                                                                             |                   |           | 173,139           |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|Total current liabilities                      |                                                                                                                                                                   |                   | 944,707   |                   |  
|Long-term debt                                 |                                                                                                                                                                   |                   | 402,500   |                   |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|                                               | Total liabilities                                                                                                                                                 |                   |           | 1,347,207         |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|Commitments and contingencies (Note 14)        |                                                                                                                                                                   |                   |           |                   |  
|Minority interest in consolidated subsidiaries |                                                                                                                                                                   |                   | 560       |                   |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|Stockholders' equity:                          |                                                                                                                                                                   |                   |           |                   |  
|                                               | Common stock: $0.00125 par value; authorized: 750,000,000 shares; issued and outstanding: 104,272,477 and 106,787,908 at December 31, 2003 and 2002, respectively |                   |           | 131               |  
|                                               | Additional paid-in capital                                                                                                                                        |                   |           | 653,624           |  
|                                               | Deferred stock compensation                                                                                                                                       |                   |           | (7,761            | )
|                                               | Retained earnings                                                                                                                                                 |                   |           | 229,777           |  
|                                               | Receivable from stockholders                                                                                                                                      |                   |           |                  |  
|                                               | Accumulated other comprehensive income (loss)                                                                                                                     |                   |           | 3,420             |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|Total stockholders' equity                     |                                                                                                                                                                   |                   | 879,191   |                   |  
|                                               |                                                                                                                                                                   |                   |           |                   |  
|                                               | Total liabilities, minority interest and stockholders' equity                                                                                                     |                   | $         | 2,226,958         |  
|                                               |                                                                                                                                                                   |                   |           |                   |  

See accompanying notes to consolidated financial statements.

62

---



UTSTARCOM, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share amounts)

|                                                           |                                           | Year ended December 31, |          
|---------------------------------------------------------- | ----------------------------------------- | ----------------------- | ---------
|
|Net sales                                                  |                                           |                         |          
|                                                           | Unrelated parties                         |                         | $        
|                                                           | Related parties                           |                         |          
|                                                           |                                           |                         |          
|                                                           |                                           |                         | 1,964,332
|Cost of sales                                              |                                           |                         | 1,328,164
|                                                           |                                           |                         |          
|Gross profit                                               |                                           |                         | 636,168  
|                                                           |                                           |                         |          
|Operating expenses:                                        |                                           |                         |          
|                                                           | Selling, general and administrative       |                         |          
|                                                           | Research and development                  |                         |          
|                                                           | In-process research and development costs |                         |          
|                                                           | Amortization of intangible assets         |                         |          
|                                                           |                                           |                         |          
|Total operating expenses                                   |                                           |                         | 361,436  
|                                                           |                                           |                         |          
|Operating income                                           |                                           |                         | 274,732  
|Interest income                                            |                                           |                         | 3,194    
|Interest expense                                           |                                           |                         | (4,281   
|Other income (expenses), net                               |                                           |                         | 1,384    
|Equity in loss of affiliated companies                     |                                           |                         | (5,260   
|                                                           |                                           |                         |          
|Income before income taxes and minority interest           |                                           |                         | 269,769  
|Income tax expense                                         |                                           |                         | 67,442   
|Minority interest in earnings of consolidated subsidiaries |                                           |                         | (76      
|                                                           |                                           |                         |          
|Net income                                                 |                                           | $                       | 202,251  
|                                                           |                                           |                         |          
|Basic earnings per share                                   |                                           | $                       | 1.95     
|Diluted earnings per share                                 |                                           | $                       | 1.64     
|Weighted average shares used in per-share calculation:     |                                           |                         |          
|                                                           | Basic                                    |                         |          
|                                                           |                                           |                         |          
|                                                           | Diluted                                  |                         |          
|                                                           |                                           |                         |          

See
accompanying notes to consolidated financial statements.

63

---

UTStarcom, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(In thousands, except share data)

|                                                                                            |                                              | Common Stock |   |   |     |   |   | Retained
Earnings
(Accumulated
Deficit |   | Notes
Receivable
from
stockholders |         |   |   |         |   |   |     
|------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------ | - | - | --- | - | - | -------------------------------------- | - | ---------------------------------- | ------- | - | - | ------- | - | - | ----
|
|
|Balances, December 31, 2000                                                                 |                                              | 95,032,657   |   | $ | 120 |   | $ | 426,665                                |   | $                                  | (6,491  | ) | $ | (7,808  | ) | $ | (314
|Common stock issued upon exercise of options                                                |                                              | 5,363,601    |   |   | 8   |   |   | 18,756                                 |   |                                    |         |   |   |         |   |   |     
|Common stock issued upon ESPP purchases                                                     |                                              | 118,223      |   |   |     |   |   | 1,866                                  |   |                                    |         |   |   |         |   |   |     
|Common stock issued related to acquisition of Stable Gain                                   |                                              | 439,810      |   |   |     |   |   | 10,700                                 |   |                                    |         |   |   |         |   |   |     
|Common stock issued upon secondary offering, net of expenses                                |                                              | 7,400,000    |   |   | 9   |   |   | 139,911                                |   |                                    |         |   |   |         |   |   |     
|Common stock issued for ACD acquisition, net of expenses                                    |                                              | 948,525      |   |   | 1   |   |   | 20,733                                 |   |                                    |         |   |   |         |   |   |     
|ACD deferred compensation                                                                   |                                              |              |   |   |     |   |   | 5,000                                  |   |                                    | (5,000  | ) |   |         |   |   |     
|Amortization of deferred compensation related to ACD acquisition                            |                                              |              |   |   |     |   |   |                                        |   |                                    | 1,250   |   |   |         |   |   |     
|Amortization of deferred stock compensation related to grants of stock options to employees |                                              |              |   |   |     |   |   | 23                                     |   |                                    | 3,928   |   |   |         |   |   |     
|Cancellation of deferred compensation charges due to employee terminations                  |                                              |              |   |   |     |   |   | (268                                   | ) |                                    | 268     |   |   |         |   |   |     
|Tax benefits for non-qualified stock option exercises                                       |                                              |              |   |   |     |   |   | 15,311                                 |   |                                    |         |   |   |         |   |   |     
|Issuance of notes receivable from stockholders                                              |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   | (67 
|Net income                                                                                  |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   | 56,954  |   |   |     
|Other comprehensive income:                                                                 |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            | Unrealized holding gain (net of tax of $95)  |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            | Translation adjustment (net of tax of $25)   |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Total comprehensive income                                                                  |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Balances, December 31, 2001                                                                 |                                              | 109,302,816  |   |   | 138 |   |   | 638,697                                |   |                                    | (6,045  | ) |   | 49,146  |   |   | (381
|Common stock issued upon exercise of options                                                |                                              | 1,717,899    |   |   | 3   |   |   | 9,162                                  |   |                                    |         |   |   |         |   |   |     
|Common stock issued upon Softbank offering, net of expenses                                 |                                              | 1,500,000    |   |   | 2   |   |   | 28,933                                 |   |                                    |         |   |   |         |   |   |     
|Common stock issued upon ESPP purchases                                                     |                                              | 182,437      |   |   |    |   |   | 2,828                                  |   |                                    |         |   |   |         |   |   |     
|ACD acquisition-related stock issuances                                                     |                                              | 84,756       |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Buyback of Softbank shares, net of fees                                                     |                                              | (6,000,000   | ) |   | (8  | ) |   | (36,433                                | ) |                                    |         |   |   | (36,488 | ) |   |     
|Cancellation of deferred compensation charges due to employee terminations                  |                                              |              |   |   |     |   |   | (1,282                                 | ) |                                    | 1,282   |   |   |         |   |   |     
|Amortization of deferred stock compensation                                                 |                                              |              |   |   |     |   |   | 103                                    |   |                                    | 2,997   |   |   |         |   |   |     
|Acquisition-related deferred compensation                                                   |                                              |              |   |   |     |   |   | 10,000                                 |   |                                    | (10,000 | ) |   |         |   |   |     
|Tax benefits for non-qualified stock option exercises                                       |                                              |              |   |   |     |   |   | 6,538                                  |   |                                    |         |   |   |         |   |   |     
|Collections on notes receivable from stockholders                                           |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   | 99  
|Net income                                                                                  |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   | 107,862 |   |   |     
|Other comprehensive income:                                                                 |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            | Unrealized holding loss (net of tax of $298) |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            | Translation adjustment (net of tax of $25)   |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Total comprehensive income                                                                  |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Balances, December 31, 2002                                                                 |                                              | 106,787,908  |   |   | 135 |   |   | 658,546                                |   |                                    | (11,766 | ) |   | 120,520 |   |   | (282
|Common stock issued upon exercise of options                                                |                                              | 4,490,195    |   |   | 6   |   |   | 55,053                                 |   |                                    |         |   |   |         |   |   |     
|Common stock issued upon ESPP purchases                                                     |                                              | 261,103      |   |   |     |   |   | 3,839                                  |   |                                    |         |   |   |         |   |   |     
|Repurchase of Softbank Shares including fees                                                |                                              | (8,000,000   | ) |   | (10 | ) |   | (46,605                                | ) |                                    |         |   |   | (92,994 | ) |   |     
|Purchase of convertible bond hedge and call option                                          |                                              |              |   |   |     |   |   | (43,792                                | ) |                                    |         |   |   |         |   |   |     
|Common stock issued for RollingStreams acquisition                                          |                                              | 164,115      |   |   |     |   |   | 6,233                                  |   |                                    |         |   |   |         |   |   |     
|Shanghai Yi Yun acquisition-related stock issuance                                          |                                              | 226,302      |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Deferred Compensation related to RollingStream acquisition                                  |                                              |              |   |   |     |   |   |                                        |   |                                    | (434    | ) |   |         |   |   |     
|Cancellation of deferred compensation charges due to employee terminations                  |                                              |              |   |   |     |   |   | (156                                   | ) |                                    | 156     |   |   |         |   |   |     
|Amortization of deferred stock compensation                                                 |                                              |              |   |   |     |   |   |                                        |   |                                    | 4,283   |   |   |         |   |   |     
|Common stock issued for Shanghai Yi Yun acquisition                                         |                                              | 342,854      |   |   |     |   |   | 6,001                                  |   |                                    |         |   |   |         |   |   |     
|Tax benefits for non-qualified stock option exercises                                       |                                              |              |   |   |     |   |   | 14,505                                 |   |                                    |         |   |   |         |   |   |     
|Collections of notes receivable from stockholders                                           |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   | 282 
|Net income                                                                                  |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   | 202,251 |   |   |     
|Other comprehensive income:                                                                 |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            | Unrealized holding gain (net of tax of $506) |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            | Translation adjustment (net of tax of $791)  |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Total comprehensive income                                                                  |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|                                                                                            |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     
|Balances, December 31, 2003                                                                 |                                              | 104,272,477  |   | $ | 131 |   | $ | 653,624                                |   | $                                  | (7,761  | ) | $ | 229,777 |   | $ |    
|                                                                                            |                                              |              |   |   |     |   |   |                                        |   |                                    |         |   |   |         |   |   |     

See accompanying notes to the consolidated financial statements.

64

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UTSTARCOM, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

|                                                                                 |                                                          | Twelve months ended                                          |         
|-------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------------ | --------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                            |                                                          |                                                              |         
|Net income                                                                       |                                                          | $                                                            | 202,251 
|Adjustment to reconcile net income to net cash provided by operating activities: |                                                          |                                                              |         
|                                                                                 | Gain on change in ownership interest in subsidiary       |                                                              |         
|                                                                                 | Depreciation and amortization                            |                                                              |         
|                                                                                 | Non-qualified stock option exercise tax benefits         |                                                              |         
|                                                                                 | Loss on sale of assets                                   |                                                              |         
|                                                                                 | Loss on sale of notes receivable                         |                                                              |         
|                                                                                 | In-process research and development costs                |                                                              |         
|                                                                                 | Amortization of debt issuance costs                      |                                                              |         
|                                                                                 | Warrants adjustment to fair value                        |                                                              |         
|                                                                                 | Loss on sale of investment                               |                                                              |         
|                                                                                 | Impairment of long-term investment                       |                                                              |         
|                                                                                 | Stock compensation expense                               |                                                              |         
|                                                                                 | Allowance for doubtful accounts                          |                                                              |         
|                                                                                 | Inventory reserve                                        |                                                              |         
|                                                                                 | Equity in loss of affiliated companies                   |                                                              |         
|                                                                                 | Deferred income taxes                                    |                                                              |         
|                                                                                 | Minority interest in earnings of consolidated subsidiary |                                                              |         
|                                                                                 | Changes in operating assets and liabilities:             |                                                              |         
|                                                                                 |                                                          | Accounts receivable                                          |         
|                                                                                 |                                                          | Inventories                                                  |         
|                                                                                 |                                                          | Deferred costs/Inventories at customer sites under contracts |         
|                                                                                 |                                                          | Other current and non-current assets                         |         
|                                                                                 |                                                          | Accounts payable                                             |         
|                                                                                 |                                                          | Income taxes payable                                         |         
|                                                                                 |                                                          | Customer advances                                            |         
|                                                                                 |                                                          | Deferred revenue                                             |         
|                                                                                 |                                                          | Other current liabilities                                    |         
|                                                                                 |                                                          |                                                              |         
|Net cash provided by operating activities                                        |                                                          |                                                              | 50,534  
|                                                                                 |                                                          |                                                              |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                            |                                                          |                                                              |         
|Additions to property, plant and equipment                                       |                                                          |                                                              | (122,339
|Investment in affiliates, net of cash acquired                                   |                                                          |                                                              | (661    
|Issuance of note receivable to related party                                     |                                                          |                                                              | (10,071 
|Purchase of minority interest                                                    |                                                          |                                                              |        
|Purchase of businesses, net of cash acquired                                     |                                                          |                                                              | (111,720
|Proceeds from disposal of property, plant and equipment                          |                                                          |                                                              | 21      
|Purchase of intangible assets                                                    |                                                          |                                                              | (2,340  
|Purchase of short-term investments                                               |                                                          |                                                              | (147,544
|Proceeds from sale of short-term investments                                     |                                                          |                                                              | 217,180 
|                                                                                 |                                                          |                                                              |         
|Net cash used in investing activities                                            |                                                          |                                                              | (177,474
|                                                                                 |                                                          |                                                              |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                            |                                                          |                                                              |         
|Issuance of stock, net of expenses                                               |                                                          |                                                              | 58,878  
|Purchase of convertible bond hedge and call option                               |                                                          |                                                              | (43,792 
|Proceeds from borrowing                                                          |                                                          |                                                              | 414,821 
|Payments for borrowing                                                           |                                                          |                                                              | (23,389 
|Repurchase of stock                                                              |                                                          |                                                              | (139,609
|Proceeds from stockholder notes                                                  |                                                          |                                                              | 282     
|                                                                                 |                                                          |                                                              |         
|Net cash provided by (used in) financing activities                              |                                                          |                                                              | 267,191 
|Effect of exchange rate changes on cash                                          |                                                          |                                                              | 1,779   
|                                                                                 |                                                          |                                                              |         
|Net increase (decrease) in cash and cash equivalents                             |                                                          |                                                              | 142,030 
|Cash and cash equivalents at beginning of period                                 |                                                          |                                                              | 231,944 
|                                                                                 |                                                          |                                                              |         
|Cash and cash equivalents at end of period                                       |                                                          | $                                                            | 373,974 
|                                                                                 |                                                          |                                                              |         

See accompanying notes to the consolidated financial statements.

65

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1DESCRIPTION OF BUSINESS

UTStarcom Inc. (the "Company"), a Delaware corporation, provides Internet Protocol ("IP") networking product and service platforms and global service and
support. The Company sells wireless, wireline and switching platforms to operators in both fast growth and established telecommunications markets around the world. The Company enables its customers to
rapidly deploy revenue-generating access services using their existing infrastructure, while providing a migration path to cost-efficient end-to-end IP networks.
Incorporated in 1991 and headquartered in Alameda, California, the Company has research and design operations in New Jersey, China, and India.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority (over 50 percent) owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements. Minority interest in consolidated subsidiaries and equity in
affiliated companies are shown separately in the consolidated financial statements.

Reclassifications:

Certain reclassifications have been made in the prior years' financial statements to conform to the 2003 presentation. Such reclassifications had no impact on
previously reported net income or stockholders' equity.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents:

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

Short-term Investments:

Short-term investments consist of investments with original maturities of less than twelve months. In accordance with the Company's investment policy,
all short-term investments are invested in "investment grade" rated securities with a minimum of A or better ratings. Currently, most of the Company's short-term investments
have AA or better ratings. Marketable securities are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are recorded as a separate component of stockholders' equity. Unrealized losses on securities classified as
available-for-sale that are determined to be other-than temporary losses are reported in earnings. Realized gains and losses are reported in earnings. The fair
value of

66

---

investments
is based on quoted market prices. At December 31, 2003 and 2002, short-term investments in available-for-sale securities consisted of (in
thousands):

|                                            |  | December 31, 2003
|------------------------------------------- |  | -----------------
|
|Debt securities                             |  | $                
|                                            |  |                  
|Total current available for-sale securities |  | $                
|                                            |  |                  

|                                            |  | December 31, 2002
|------------------------------------------- |  | -----------------
|
|Government and agency obligations           |  | $                
|Debt securities                             |  |                  
|                                            |  |                  
|Total current available for-sale securities |  | $                
|                                            |  |                  

Revenue Recognition:

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

Sales
may be generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in the areas of multiple element arrangements. Where
multiple elements exist in an arrangement, the arrangement fee is allocated to the different elements based upon verifiable objective evidence of the fair value of the elements, as governed under EITF
00-21, and SEC Staff Accounting Bulletin No. 104 "SAB 104." Multiple element arrangements primarily involve the sale of PAS or iPAS equipment with handsets, installation and
training and the provision of such equipment to different locations for the same customer. Revenue is
recognized as each element is earned, namely upon installation and acceptance of equipment or delivery of handsets, provided that the fair value of the undelivered element(s) has been determined, the
delivered element has stand-alone value, there is no right of return on delivered element(s), and the vendor is in control of the undelivered element(s).

Final
acceptance is required for revenue recognition when installation services are not considered perfunctory. Final acceptance indicates that the customer has fully accepted delivery
of equipment and the Company is entitled to the full payment. The Company will not recognize revenue before final acceptance is granted by the customer if acceptance is considered substantive to the
transaction. Additionally, the Company does not recognize revenue when cash payments are received from

67

---

customers
for transactions that do not have the customer's final acceptance. The Company records these cash receipts as customer advances, and defers revenue recognition until final acceptance is
received.

Where
multiple elements exist in an arrangement that includes software, and the software is considered more than incidental to the equipment or services in the arrangement, software and
software-related elements are recognized under the provisions of Statement of Position 97-2, as amended, and Emerging Issues Task Force Issue No. 03-05. The Company allocates
revenues to each element of software arrangements based on vendor-specific objective evidence ("VSOE"). VSOE of each element is based on the price charged when the same element is sold separately. The
Company uses the residual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and VSOE of the fair value of all the undelivered elements
exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of fair value of one or
more undelivered elements does not exist, revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

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

The
Company also sells products through resellers. Revenue is generally recognized when the standard price protection period which ranges from 30 to 90 days, has lapsed. If
collectability cannot be reasonably assured in a reseller arrangement, revenue is recognized upon sell-through to the end customer and receipt of cash. In China, there may be additional
obligations in reseller arrangements such as inventory rotation, or stock exchange rights on the product. As such, revenue is recognized in accordance with Statement of Financial Accounting Standards
No. 48 "Revenue Recognition When Right of Return Exists" ("SFAS 48"). The Company has developed reasonable estimates for stock exchanges. Estimates are derived from historical experience with
similar types of sales of similar products.

The
assessment of collectability is also a factor in determining whether revenue should be recognized. The Company assesses collectability based on a number of factors, including payment
history and the credit-worthiness of the customer. The Company does not request collateral from its customers. In international sales, the Company often requires letters of credit from its customers
that can be drawn on demand if the customer defaults on its payment. If the Company determines that collection of a payment is not reasonably assured, the Company recognizes revenue at the time
collection becomes reasonably assured, which is generally upon receipt of cash.

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

68

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The
Company provides a warranty on its equipment and handset sales for a period generally ranging from twelve to eighteen months from the time of final acceptance. 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.

Accounts and notes receivable:

The Company accepts bank notes and commercial notes, with maturity dates between three and six months, from its customers in China in the normal course of
business and estimates the collectability of its trade receivables and notes receivable. An allowance for doubtful accounts is maintained for the estimated losses on the trade receivables and notes
receivable. The Company assesses collectability of the receivable by determining whether the creditworthiness of the customer has deteriorated and could result in an inability to collect payment; if
collectability is doubtful, the Company records an allowance against the receivable. If a customer's financial condition were to deteriorate, causing their ability to make payments to suffer as a
result, the allowances for receivables would be increased. Allowances for doubtful accounts were $31.2 million and $26.3 million at December 31, 2003 and 2002, respectively.

Inventories:

Inventories consist of inventories held at the Company's manufacturing facility, at warehouses or at customer sites prior to signing of contracts. The Company may
ship inventory to existing customers that require additional equipment to expand their existing networks prior to the signing of an expansion contract. Inventories are stated at the lower of cost or
net realizable value, net of write-downs for excess, slow moving and obsolete inventory. Cost is computed using standard cost, which approximates actual cost on a first-in,
first-out basis. Inventory is written down for estimated obsolescence or unmarketable inventory equal to the difference between inventory cost and the estimated market value.

Deferred costs/Inventories at customer sites under contracts:

Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs, separate from what was historically considered
inventory. These are stated at the lower of cost or net realizable value, net of reserves based upon assessment of potential losses and obsolescence during the lengthy acceptance process. The title
and risk of loss of this inventory is transferred to the customer upon delivery. Revenue and cost of sales are recorded when final acceptance is received from the customer.

Research and Development and Capitalized Software Development Costs:

Research and development costs are charged to expense as incurred. Costs incurred in the development of software that will ultimately be sold are capitalized
between the time when technological feasibility has been attained and the related product is ready for release. During 2003 and 2002, the Company capitalized $4.2 million and
$3.4 million of software development costs, respectively. Amortization of capitalized development costs was $1.8 million, $1.1 million and $0.3 million in 2003, 2002 and
2001, respectively. Unamortized capitalized software development costs for 2003 and 2002 were $7.5 million and $4.5 million, respectively. Direct costs of software developed for internal
use are expensed during the preliminary project stage and capitalized during the application development stage.

69

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Property, Plant and Equipment:

Property, plant and equipment are recorded at cost and are stated net of accumulated depreciation. Depreciation is provided for on a straight-line
basis over the estimated useful lives of the related assets. Land use rights related to property leased by the Company in China are amortized over the life of the lease. Leasehold improvements are
amortized on a straight-line basis over the shorter of the useful life of the improvements or the term of the lease. When assets are disposed of, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or losses are included in results of operations. The Company generally depreciates its assets over the following periods:

YearsFurniture, test or manufacturing equipment

5Computers and software

2-3Buildings

39Automobiles

5Land use rights

life of use rightsLeasehold improvements

lesser of 5 or remaining lease life


The
Company capitalizes interest incurred related to construction of property, plant or equipment until it is ready for use. As of December 31, 2003, the Company had recorded
$0.6 million of interest to construction in progress applicable to the construction of its Hangzhou manufacturing facility and had incurred interest expenses associated with the building's
construction of $2.8 million for the year ended December 31, 2003. The Company will continue to capitalize interest until the building is placed into service, upon which time
amortization will begin. Capitalized interest will be amortized on a straight-line basis over the life of the building.

Goodwill and Intangible Assets:

The Company has recorded goodwill and intangible assets in connection with business acquisitions. Management judgment is required in the assessment of the related
useful lives, assumptions regarding the ability to successfully develop and ultimately commercialize acquired technology, and assumptions regarding the fair value and the recoverability of these
assets. An annual goodwill impairment review is performed in the fourth quarter of each year or when changes in circumstances indicate a potential impairment. The Company currently operates as a
single reportable segment without reporting units, as its management evaluates performance, makes operating decisions and allocates resources based on consolidated financial data. As such, the Company
determines whether impairment to goodwill is necessary on a consolidated basis. When assessing potential impairment to goodwill, book value is compared to fair value. Fair value is the Company's
market capitalization at the date impairment is assessed. Historically, fair value has exceeded book value and no impairments have been necessary.

Impairment of Long-Lived Assets:

Long-lived assets and certain intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable. If undiscounted expected future cash flows are less than the carrying value of the assets, an impairment loss will be recognized based on the excess of the carrying amount over the
fair value of the assets. Long-lived

70

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assets
that are to be disposed of by sale are measured at the lower of book value or fair value less cost to sell.

Stock-Based Compensation:

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

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

71

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The
following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation (in thousands, except per share data):

|                          |                                                                                                                        | Year ended December 31, |        
|------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------
|
|Basic                     |                                                                                                                        |                         |        
|Net income:               |                                                                                                                        |                         |        
|                          | As reported                                                                                                            |                         | $      
|                          | Add: Stock-based employee compensation expense included in reported net income, net of related tax effects             |                         |        
|                          | Deduct: Total compensation expense determined under fair value based method for all awards, net of related tax effects |                         |        
|                          |                                                                                                                        |                         |        
|Pro forma net income      |                                                                                                                        | $                       | 175,032
|                          |                                                                                                                        |                         |        
|Basic income per share:   |                                                                                                                        |                         |        
|                          | As reported                                                                                                            |                         | $      
|                          | Pro forma                                                                                                              |                         | $      
|Diluted                   |                                                                                                                        |                         |        
|Net income:               |                                                                                                                        |                         |        
|                          | As reported                                                                                                            |                         | $      
|                          | Effect of dilutive securities 7/8% Convertible subordinated notes                                                      |                         |        
|                          | Add: Stock-based employee compensation expense included in reported net income, net of related tax effects             |                         |        
|                          | Deduct: Total compensation expense determined under fair value based method for all awards, net of related tax effects |                         |        
|                          |                                                                                                                        |                         |        
|Pro forma net income      |                                                                                                                        | $                       | 178,122
|                          |                                                                                                                        |                         |        
|Diluted income per share: |                                                                                                                        |                         |        
|                          | As reported                                                                                                            |                         | $      
|                          | Pro forma                                                                                                              |                         | $      

The following assumptions were used to calculate the fair value of the options granted:

|                                         |  | Year ended December 31,
|---------------------------------------- |  | -----------------------
|
|Expected remaining term in years         |  | 3.00                   
|Weighted average risk-free interest rate |  | 1.91%                  
|Expected dividend rate                   |  | 0.00%                  
|Volatility                               |  | 64.00%                 

72

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The
weighted average fair value per share of options granted in 2003, 2002 and 2001 was $11.41, $9.16 and $11.30, respectively.

Comprehensive Income:

Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. Accumulated other comprehensive income or
loss is shown in the consolidated statement of stockholders' equity

Income Taxes:

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.

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

Segment Reporting:

The Company operates in a single segment, selling wireless, wireline and switching platforms to operators in both fast growth and established telecommunications
markets around the world.

Disclosures About Fair Value of Financial Instruments:

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

The
following table summarizes the Company's carrying values and fair values of its other financial instruments:

December 31,20022003Carrying valueCarrying value

Fair value

Fair value(In thousands)Convertible debt

$
(402,500
)
$
(686,263
)
$


$
Convertible bond hedge


125,040


356,314





Written call option


(81,248
)

(283,730
)




Long-term investments


24,066


35,545


35,360


57,894


Foreign Currency Translation:

Operations of the Company's subsidiaries are conducted primarily in China and the financial statements of those subsidiaries are translated from China's Renminbi,
the functional currency, into U.S. Dollars in accordance with SFAS No. 52, "Foreign Currency Translation." Accordingly, all foreign

73

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currency
assets and liabilities are translated at the period-end exchange rate and all revenues and expenses are translated at the average exchange rate for the period. The effects of
translating the financial statements of foreign subsidiaries into U.S. Dollars are reported as a cumulative translation adjustment, a separate component of comprehensive income in stockholders'
equity. Some inventory purchases are made in Japan and consequentially, portions of accounts payable are denominated in Japanese Yen. Foreign currency transaction gains and losses are reported in
earnings and were $8.7 million and $5.4 million of losses in 2003 and 2002, respectively. They were not material for 2001.

Earnings Per Share:

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of the Company's common
stock outstanding during the period. Diluted earnings per share is determined by adjusting net income as reported by the effect of dilutive securities and increasing the number of shares by
potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of employee stock options, a written call option, warrants and convertible subordinated
notes.

The
following is a summary of the calculation of basic and diluted earnings per share (in thousands, except per share data):

Year ended December 31.2003

2002

2001Numerator:Net income (for basic EPS computation)

$
202,251

$
107,862

$
56,954Effect of Dilutive Securities7/8% Convertible Subordinated Notes


3,090





Net income adjusted for dilutive securities

$
205,341

$
107,862

$
56,954Denominator:Shares used to compute basic EPS


103,659


109,566


101,433Dilutive common stock equivalent shares:Stock options


5,770


4,510


7,151Written call option


1,235Conversion of convertible subordinated notes


13,674





Warrants


29


28


28Other


542


303Shares used to compute diluted EPS


124,909


114,407


108,612Basic earnings per share

$
1.95

$
0.98

$
0.56Diluted earnings per share

$
1.64

$
0.94

$
0.52


Certain
potential shares related to employee stock options and warrants outstanding during the years ended December 31, 2003, 2002 and 2001 were excluded in the diluted per share
computations, since their exercise prices were greater than the average market price of the common shares during the period and, accordingly, their effect is anti-dilutive. For the years
ended December 31, 2003, 2002 and 2001, these shares totaled 17.6 million with a weighted average exercise price of $32.22 per share, 2.8 million shares with a weighted average
exercise price of $23.35 per share and 1.8 million shares with

74

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a
weighted average exercise price of $24.18 per share, respectively. The Company has outstanding warrants for issuance of 32,000 shares at the exercise price of $2.50 per share.

On
December 31, 2003, each of the Company's 7/8% convertible subordinated notes outstanding was eligible for conversion into shares of common stock. For each $1,000
of aggregate principal amount of notes converted, the Company will deliver approximately 42.0345 shares of common stock, if the Company's stock price exceeds a specified threshold. At
December 31, 2003 the closing price of the Company's common stock exceeded the specified threshold, which had the effect of increasing the denominator for diluted earnings per share by
13.7 million. Additionally, during the year ended December 31, 2003, the average price of the Company's stock exceeded the specified strike prices of the convertible bond hedge and call
option transactions that the Company entered into to reduce the potential dilution from conversion of the notes. Both the bond hedge and call option transactions may be settled at the Company's option
either in cash or net shares and expire on March 1, 2008. Using the treasury stock method, under FAS 128, this would have the effect of decreasing the denominator for diluted earnings
per share by 3.1 million shares for the bond hedge transaction, and increasing the denominator for diluted earnings per share by 1.2 million shares for the call option transaction.
However, only the dilutive effect of the 1.2 million shares with respect to the call option transaction is included in the Company's diluted earnings per share calculation above. The
convertible bond hedge, under FAS 128, is always anti-dilutive.

The
net income for the diluted EPS computation reflects the reduction in interest expense of $3.1 million for the year ended December 31, 2003, that would result from an
assumed conversion of the 7/8% convertible subordinated notes.

The
Company sold 12.1 million shares of common stock in January 2004, which would have a dilutive effect on the earnings per share calculation. Refer to Note 23 for
additional detail on this stock issuance.

Recent Accounting Pronouncements:

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46(R) was issued in December 2003. FIN 46 provides accounting guidance for consolidation of variable interest entities ("VIE"). FIN 46 applies to public and private business
enterprises that have a controlling interest or business or contractual relationship with a VIE. FIN 46 requires consolidation of existing non-controlled affiliates if the VIE is unable to
finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. The Company adopted FIN 46 for the quarter ended
December 31, 2003. The adoption of FIN 46 did not have an impact on the consolidated financial statements.

In
April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). This statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities. The
adoption of SFAS 149, which was effective for contracts entered into or modified after June 30, 2003, did not have a material effect on the Company's consolidated financial condition or
results of operations.

In
May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both

75

---

Liabilities
and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as
equity. As the Company does not have any of these financial instruments, the adoption of FAS 150 is not expected to have any impact on the Company's consolidated financial statements.

On
December 17, 2003, the Staff of the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), Revenue Recognition, which supercedes SAB 101, Revenue Recognition
in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SAB 101 Topic 13. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104
has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not
materially affect the Company's revenue recognition policies, nor the Company's results of operations, financial position or cash flows.

NOTE 3FOLLOW-ON PUBLIC OFFERING AND RESALE PUBLIC OFFERING

On August 3, 2001, the Company completed a follow-on public offering and sold an aggregate of 7,400,000 shares of common stock at $20.00 per
share. Selling stockholders sold an additional 2,950,000 shares of common stock in the offering. The aggregate net proceeds to the Company were $139.9 million. On February 28, 2002, the
Company sold 1,500,000 shares of common stock in connection with the resale public offering of 10,000,000 shares of our common stock by SOFTBANK America Inc., one of the Company's stockholders.
The aggregate net proceeds to the Company were $28.9 million.

NOTE 4SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Year ended December 31,2003

2002

2001(In thousands)Cash paid during the period for:Interest

$
2,795

$
1,492

$
3,798Income taxes

$
47,192

$
18,442

$
10,832


76

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Non-cash
activities were as follows:

Year ended December 31,2003

2002

2001(in thousands)Noncash operating activities were as follows:Accounts receivable transferred to notes receivable

$
92,181

$
14,545

$
Noncash investing and financing activities were as follows:Common stock issued in conjunction with acquisitions

$
12,234

$


$
31,434


NOTE 5RESTRICTED CASH AND SHORT-TERM INVESTMENTS

At
December 31, 2003, the Company had restricted cash and short-term investments of $24.4 million primarily comprised of $20.5 million of restricted
short-term investments for standby letters of credit and a $3.7 million time deposit required for Japanese tax purposes. At December 31, 2002, the Company had restricted cash
of $21.3 million comprised of $9.8 million of standby letters of credit, and an $11.5 million deposit required by China regulatory authorities.

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 six to nine months from date of issuance without being
drawn by the beneficiary thereof.

NOTE 6ACQUISITIONS AND DIVESTITURES OF COMPANIES

2003

CommWorks

On May 23, 2003, the Company completed its acquisition of selected assets and liabilities of the CommWorks division ("CommWorks") from 3Com Corporation, a
Delaware corporation, ("3Com"). The Company paid $100.0 million in cash and incurred related transaction and other related costs of $9.3 million. The Company funded the consideration for
the acquisition from cash on hand.

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

The
Company made a preliminary allocation of the purchase price based in part upon a preliminary independent appraisal. During the three months ended September 30, 2003, the
Company completed the allocation of the purchase price of CommWorks. The estimated amounts for intangible assets and goodwill changed due to revised assumptions of future revenues from existing
customers. The amount of the purchase price allocated to in-process research and development ("IPR&D") of

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$1.3 million
was charged to the Company's results of operations, as no alternative future uses existed at the acquisition date. The Company recorded goodwill of $52.3 million, the excess
of costs of acquiring CommWorks and the fair value of identified net assets acquired, in connection with the acquisition. Goodwill is expected to be deductible for tax purposes. The results of
operations of CommWorks have been included in the Company's consolidated results of operations beginning on the acquisition date of May 23, 2003.

In
assessing CommWorks' IPR&D projects, the key characteristics of the products under development were considered as well as future prospects, the rate at which technology changes in the
telecommunications equipment industry, product life cycles, and the projects' stages of development.

As
of the date of the acquisition, CommWorks had two projects under development that qualified for IPR&D, SLAP and High Density Voice ("HDV") 2.0. SLAP is an IPR&D project in the
Wireless division of CommWorks. The objective of SLAP is to develop an interface that connects UTStarcom's products with radio switch manufacturers' products in China in order to connect a cellular
network to the Internet. HDV 2.0 is an IPR&D project in the Wireline product line of CommWorks. HDV 2.0 utilizes software technology to increase data capacity for Voice over Internet Protocol ("VoIP")
solutions.

There
are significant risks associated with those technologies. The technological risks stem from the fact that the new technologies are in an early stage of development. As of the
closing date, CommWorks' SLAP IPR&D project was approximately 60% complete and HDV 2.0 was approximately 40% complete. Therefore, there are significant risks associated with reaching the technological
milestones on time and on budget. Commercial risks are associated with the competitive nature of the telecommunications equipment market.

Significant
additional costs will be required to complete the IPR&D projects. The SLAP product is approximately 80% complete as of December 31, 2003 and commercialization is
expected in the first quarter of fiscal 2004. Remaining costs required to complete the project are estimated to be $0.1 million. The HDV 2.0 product is approximately 50% complete as of
December 31, 2003. Commercialization is expected in the first quarter of fiscal 2004. Remaining costs required to complete the project are estimated to be $0.2 million.

The
following table summarizes the final allocation of the purchase price for CommWorks based upon the final independent valuation. The final valuation resulted in changes in estimated
fair value, changes in the estimated useful lives of the intangible assets acquired and a change in the amount attributable to goodwill, mainly due to revised assumptions of future revenues from
existing customers. The Company also recorded additional employee-related liabilities. The estimated useful life of

78

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purchased
technology is from one to five years, the estimated useful life of customer relationships is ten years, and the estimated useful lives of backlog and trade names are from one to two years.

(in thousands)Fair value of tangible net assetsProperty, plant and equipment

$
10,973Other tangible assets


6,522Deferred transition costs


6,588Fair value of identified intangible assetsCustomer relationships


27,820Backlog


1,950Trade names


940Existing technology


14,190In-process research and development


1,290Liabilities assumed


(13,315
)Excess of costs of acquiring CommWorks over fair value of identified net assets acquired (goodwill)


52,349$
109,307


The
following pro forma results of operations reflect the combined results of the Company and CommWorks for the years ended December 31, 2003 and 2002 as if the business
combination occurred at the beginning of the period. These results do not purport to be indicative of what would have occurred had the acquisition been made as of that date or the results of
operations which may occur in future periods.

Year ended
December 31,2003

2002(In thousands, except per share data)Pro forma adjusted net sales

$
2,006,120

$
1,142,146Pro forma adjusted net income

$
177,304

$
18,132Pro forma adjusted basicEarnings per share

$
1.71

$
0.17Pro forma adjusted dilutedEarnings per share

$
1.44

$
0.16


The
pro forma results of operations include historical operations of the Company and CommWorks. Certain non-recurring charges were recorded by CommWorks and are included
above including a $15.0 million restructuring charge in both the first and second quarter of 2002 and a $15.0 million and $6.1 million charge relating to goodwill impairment,
which was recorded in the second quarter of 2002 and the first quarter of 2003, respectively.

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RollingStreams

On June 30, 2003, the Company completed the acquisition of RollingStreams Systems, Ltd. ("RollingStreams"), a development-stage company, pursuant to
a share exchange agreement. RollingStreams designs streaming, end-to-end TV-over-Internet-Protocol ("TVoIP") solutions for telecommunications operators
and broadband service providers. The Company's investment in RollingStreams was $0.4 million prior to the acquisition. The purchase consideration for all the outstanding shares of
RollingStreams, other than those already held by the Company prior to the acquisition, was 301,074 shares of the Company's common stock. In addition, the Company assumed all outstanding RollingStreams
options, which became options to purchase an aggregate of 12,742 shares of the Company's common stock, valued at $0.5 million. Of the 301,074 shares, 164,115 shares valued at
$5.8 million, were issued at the closing, including 28,696 of which were held in escrow for any undisclosed liabilities or contingencies incurred by RollingStreams prior to the closing or for
any breach of the share exchange agreement. Up to 136,959 of the 301,074 shares will be payable in the form of an earnout after an earnout period expiring 18 months after the closing, subject
to the achievement of certain revenue milestones during such earnout period.

The
amount of the purchase price allocated to IPR&D was $6.2 million. This amount was charged to the Company's results of operations, as no alternative future uses existed at the
acquisition date. The results of operations of RollingStreams have been included in the Company's consolidated results of operations beginning on July 1, 2003.

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

MediaSwitch
is considered an IPR&D project because there are significant risks associated with the development of this technology. These risks include technological and commercial risks.
The technological risks stem from the fact that the technology was 70% complete as of December 31, 2003. Therefore, there are significant risks associated with reaching the technological
milestones on time and on budget. Commercial risks are associated with the lack of market acceptance for the TVoIP concept.

In
addition to the technological and commercial risks stated above, significant additional costs will be required to complete the IPR&D project. Commercialization of MediaSwitch is
expected in the second quarter of 2004. Remaining costs required to complete the project are estimated to be $4.5 million. This involves adding new features and functionalities and stabilizing
the software code.

The
following table represents the final allocation of the purchase price for RollingStreams. The allocation of the purchase price is based upon an independent valuation.

(in thousands)Fair value of tangible net assets acquired

$
34In-process research and development


6,189Investment


(363
)Deferred compensation


434Liabilities assumed


(3
)$
6,291


80

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Xebeo

On May 7, 2003, the Company completed the purchase of all of the assets of Xebeo Communications, Inc. ("Xebeo") for $2.4 million in cash.
Xebeo develops and manufactures optical packet switches that enable telecommunications carriers to provide single fiber, multi-service access to customers. In addition, an amount up to
$0.7 million may be payable based on future contingencies related to employment.

The
amount of the purchase price allocated to IPR&D of $1.9 million was charged to the Company's results of operations, as no alternative future uses existed at the acquisition
date.

As
of the date of the acquisition, Xebeo was focusing its resources on the development of its first product, MetroBridge, an optical packet switching solution, and was considered in the
development stage. The development of MetroBridge was 60% complete as of the closing date. The technological feasibility of the technology was not established and the technology had no future
alternative uses, therefore the development of MetroBridge is considered IPR&D. The product achieved its technical milestones as of November 2003, and is now available for customer trials and
evaluations. It is expected to be marketed and sold in the third quarter of 2004. Commercial risks are associated with the lack of market acceptance with a product with these features and for its use
in TVoIP implementations.

The
following table represents the final allocation of the purchase price for Xebeo based upon the independent valuation.

(in thousands)Fair value of tangible net assets acquired

$
659In-process research and development


1,888Liabilities assumed


(129
)$
2,418


Shanghai Yi Yun

On October 16, 2002, the Company acquired the assets and intellectual property of Shanghai Yi Yun Telecom Technology Co. Ltd. ("Shanghai Yi Yun"), a
provider of synchronous digital hierarchy equipment. Shortly thereafter, there was a claim surrounding potential infringement of the intellectual property acquired which led to a possible recission of
the transaction, creating a contingency whose outcome was not determinable beyond a reasonable doubt. This transaction was recorded in March 2003, when the Company determined that none of the
intellectual property acquired was subject to the claim. Consideration was $0.2 million of cash and 342,854 shares of restricted stock valued at $6.0 million. In connection with the
acquisition, Shanghai Yi Yun and each of the stockholders that received part of the 342,854 shares of restricted stock executed an indemnity escrow agreement in favor of the Company and such shares of
restricted stock were placed in escrow. In addition, the Company issued 514,290 shares of restricted stock valued at that time at $9.0 million to the Shanghai Yi Yun employees that were hired
by one of the Company's subsidiaries. Such shares of restricted stock vest over five years through 2007, with accelerated vesting upon the achievement of specified milestones. The Company has treated
these 514,290 shares of restricted stock as deferred compensation. During 2003, 226,302 of these shares vested upon achievement of specified milestones.

81

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This
acquisition will enable the Company to enter the synchronous digital hierarchy transport market with internally developed products. Goodwill of $3.0 million was recorded in
connection with this acquisition and is expected to be deductible for tax purposes. The amount of the purchase price allocated to in-process research and development of $1.3 million was charged to the
Company's results of operations, as no alternative future uses existed at the acquisition date.

The
following represents the allocation of the purchase price for Shanghai Yi Yun:

(in thousands)Fair value of tangible net assets acquired

$
250Fair value of identified intangible assets  technology


1,870In-process research and development


1,319Excess costs of acquiring Shanghai Yi Yun Telecom over fair value of net assets acquired (goodwill)


3,021$
6,460


2002

HUTS and GUTS

On December 18, 2001, the Company entered into an agreement to acquire the remaining 49% ownership interest in GUTS, one of the Company's two primary
manufacturing facilities in China, for a total consideration of $3.6 million in cash, in order to achieve 100% ownership in the joint venture. On January 21, 2002, the Company entered
into an agreement to acquire the remaining 12% ownership interest in HUTS, one of the Company's two primary manufacturing facilities in China, for a total consideration of $14.5 million in
cash. As a result of the GUTS and HUTS transactions, which closed in May 2003, the Company was able to conduct its operations in China through wholly owned subsidiaries.

Issanni

On April 19, 2002, the Company completed the purchase of Issanni Communications, Inc. ("Issanni"). The Company's investment in Issanni was
$2.0 million prior to the acquisition. The purchase consideration for all the outstanding shares of Issanni, other than those already held by the Company prior to the acquisition, was $2.1
million in cash. In addition, $2.0 million will be payable in the form of an earnout to all Issanni shareholders of record at closing, subject to the completion of certain performance milestones
during 2002, 2003 and 2004. This earnout will be recorded as additional purchase price when earned. No milestones have been met as of December 31, 2003. Furthermore, the Company adopted an
incentive program providing for the issuance of 39,876 shares of common stock valued at $1.0 million to Issanni employees who will continue to perform services for the Company. These shares vest at
the earlier of five years or upon the achievement of certain performance milestones. The Company records this amount as compensation expense ratably over the vesting period and will accelerate the
amortization if the milestones are met. The amount of the purchase price allocated to in-process research and development of $0.7 million was charged to the Company's results of operations, as no
alternative future uses existed at the acquisition date. Goodwill of $0.2 million was recorded in connection with the acquisition and is expected to be deductible for tax purposes. The

82

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results
of operations of Issanni were included in the Company's consolidated results of operations beginning on April 19, 2002.

2001

Advanced Communication Devices Corporation

In November 2001, the Company completed the purchase of Advanced Communication Devices Corporation ("ACD") for $21.3 million, comprised of
approximately one million shares of the Company's common stock valued at $19.9 million, $0.9 million of vested common stock options valued using the Black-Scholes pricing model, and
$0.5 million of acquisition-related expenses. ACD was a System on Chip ("SoC") semiconductor company focusing on LAN and IP switching technology whose then current markets included Taiwan,
China and Korea. In addition, the Company adopted an incentive plan providing for the issuance of shares of common stock valued at $5 million to ACD employees who will continue to perform
services for the Company. The acquisition has been accounted for as a purchase and the results of operations have been included in the Company's consolidated financial statements since the
acquisition.

In
association with its acquisition of ACD, the Company allocated $0.1 million to tangible net assets acquired, $4.3 million to identified intangible assets, $4.7 million of in-process
research and development costs were charged to the Company's results of operations, as no alternative future use existed at the balance sheet date and $12.2 million was charged to goodwill, as this
was the excess of costs of acquiring ACD over the fair value of identified net assets acquired.

NOTE 7INVENTORIES AND DEFERRED COSTS/INVENTORIES AT CUSTOMER SITES UNDER CONTRACTS

As of December 31, 2003 and 2002, total inventories consist of the following (in thousands):

December 31,2003

2002InventoriesRaw materials

$
66,753

$
97,086Work-in-process


51,116


37,467Finished goods


48,206


9,131Inventories at customer sites without contracts


90,963


40,003$
257,038

$
183,687Deferred costs/Inventories at customer sites under contractsFinished goods


558,977


240,979$
558,977

$
240,979


NOTE 8ACCOUNTS AND NOTES RECEIVABLE

The Company accepts bank notes receivable and commercial notes receivable, with maturity dates between three and six months, from its customers in China in the
normal course of business. The Company may discount these notes with banking institutions in China. A sale of these notes is reflected as a reduction of other current assets and the proceeds of the
settlement of these notes are included in

83

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cash
flows from operating activities in the consolidated statement of cash flows. Notes receivable sold during the years ended December 31, 2003 and 2002 were $298.8 million and
$2.5 million, respectively. These notes are not included in the Company's consolidated balance sheets as 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"), has been met. Under SFAS 140, upon a transfer, the
transferor or entity must derecognize financial assets when control has been surrendered and the transferee obtains control over the assets. In addition, the transferred assets have been isolated from
the transferor, beyond the reach of its creditors, and the transferee has the right, without conditions or constraints, to pledge or exchange the assets it has received. The costs of settling or
transferring these notes receivable were $2.3 million and immaterial for the years ended December 31, 2003 and 2002, respectively, and were included in other income (expense), net in the
Consolidated Statements of Operations. Notes receivable available for sale were $11.4 million and $12.0 million at December 31, 2003 and December 31, 2002, respectively.

NOTE 9PROPERTY, PLANT AND EQUIPMENT

As of December 31, 2003 and 2002, property, plant and equipment consists of the following:

(In thousands)

December 31, 2003

December 31, 2002Buildings

$
406

$
406Leasehold improvements


10,446


7,052Automobiles


5,587


4,846Software


14,616


10,119Equipment and furniture


118,615


61,614Construction in progress


104,548


46,527$
254,218

$
130,564Less accumulated depreciation


(68,142
)

(36,584
)$
186,076

$
93,980


Depreciation
expense was $34.2 million, $18.9 million and $10.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.

NOTE 10LONG-TERM INVESTMENTS

The Company's investments are as follows:

December 31, 2003

December 31, 2002Softbank China

$
5,308

$
5,526Cellon International


8,000


8,000Restructuring Fund No. 1


1,861


1,981Global Asia Partners L.P.


1,653


882Fiberxon Inc.


2,000


2,000InterWave Communications International Ltd.


3,319


1,546China Telecom





9,106Joint Venture with Matsushita


517


4,683Others


1,408


1,636Total

$
24,066

$
35,360


84

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Softbank China

The Company has a $5.3 million investment in Softbank China, an investment fund established by SOFTBANK CORP. focused on investments in Internet companies
in China. This investment permits the Company to participate in the anticipated growth of Internet-related businesses in China. SOFTBANK CORP. and its related companies are significant stockholders of
the Company. The Company's investment constitutes 10% of the funding for Softbank China, with SOFTBANK CORP. contributing the remaining 90%. The fund has a separate management team, and none of the
Company's employees are employed by the fund. Many of the fund's investments are and will be in privately held companies, many of which are still in the start-up or development stages.
These investments are inherently risky as the markets for the technologies or products the companies have under development are typically in the early stages and may never materialize. The Company
accounts for this investment under the cost method and recorded losses of $0.2 million, $2.8 million and $1.7 million due to an other than temporary decline in the carrying value
of this investment during the years ended December 31, 2003, 2002 and 2001, respectively.

Restructuring Fund

During the first quarter of fiscal 2002, the Company invested $2.0 million in Restructuring Fund No. 1, a venture capital investment limited
partnership established by SOFTBANK INVESTMENT CORP., an affiliate of SOFTBANK CORP. SOFTBANK America Inc., an entity affiliated with SOFTBANK CORP., is a significant stockholder of the
Company. The fund focuses on leveraged buyout investments in companies in Asia undergoing restructuring or bankruptcy procedures. The total fund offering is expected to be between approximately
$150.0 million and $226.0 million, with each investor contributing a minimum of $0.8 million.

The
fund has a separate management team, and none of the Company's employees are employed by the fund. The Company accounts for this investment under the equity method of accounting.
During
the year ended December 31, 2003 the Company recorded equity losses of $0.1 million, and recorded no losses for the year ended December 31, 2002. The balance in this investment is
$1.9 million at December 31, 2003.

Global Asia Partners, L.P.

In June 2002, the Company invested $1.0 million in Global Asia Partners L.P., and an additional $1.0 million in June 2003, with a
commitment to invest up to a maximum of $5.0 million. The remaining amount is due at such times and in such amounts as shall be specified in one or more future capital calls to be issued by the
general partner. The fund size is anticipated to be $100 million and the fund was formed to make private equity investments in private or pre-IPO technology and telecommunications
companies. The fund's geographic focus is on technology investments in Asia, in particular India and China. The Company accounts for this investment under the equity method of accounting. The Company
recorded equity losses of $0.2 million and $0.1 million for the years ended December 31, 2003 and 2002, respectively. The balance in this investment is $1.7 million at
December 31, 2003.

Interwave

During 2002, the Company purchased approximately 5.8 million shares of common stock of InterWave Communications, Inc., a technology company listed
on NASDAQ, for approximately

85

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$3.0 million.
In addition, the Company received warrants to purchase 2.0 million shares of InterWave's common stock at $0.21 per share. The Company's holdings were adjusted for a 1:10
reverse stock split on April 30, 2003, and were 0.6 million shares of common stock and warrants to purchase 0.2 million shares of InterWave's common stock at $2.10 per share. The
warrants were valued at $0.7 million at December 31, 2003, using the Black-Scholes option-pricing model. The Company recorded the increase in the carrying value of these common stock
securities of $1.3 million for the year ended December 31, 2003, in comprehensive income in equity. The Company recorded a gain of $0.4 million in other income (expense) in 2003
to reflect the change in the fair value of the warrants and a loss of $1.4 million in 2002 in other income (expenses) to reflect an other than temporary decline in the carrying value of these
marketable securities.

Matsushita

On July 5, 2002, the Company entered into a joint venture agreement with Matsushita Communication Industrial Co., Ltd., a stockholder of the
Company, to jointly design and develop, manufacture and sell telecommunication products. The Company has a 49% ownership interest in the joint venture company, which has a registered share capital of
$10.0 million. The cash consideration of $4.9 million payable by the Company was paid in October 2002. As the Company does not have voting control over significant matters of the
joint venture company, the investment in and results of operations of the joint venture company are accounted for using the equity method of accounting. The Company recorded equity losses of
$4.8 million and $0.2 million for the years ended December 31, 2003 and 2002, respectively.

China Telecom

In November 2002, the Company purchased approximately 0.5 million shares of common stock of China Telecom in its initial public offering for
approximately $10.0 million. China Telecom is listed on the New York Stock Exchange. During the first and second quarters of 2003, the Company sold these shares realizing a loss of
$0.1 million. China Telecom is the leading provider of wireline telephone, data and Internet and leased line services in four of the most economically developed regions of China, and its
affiliates are customers of the Company.

Other investments

The Company has also invested directly in a number of private technology-based companies in the early stages of development. These investments are accounted for
on the cost basis. The Company continually evaluates the carrying value of these investments for possible impairment based on the achievement of business objectives and milestones, the financial
condition and prospects of these companies and other relevant factors. During the year ended December 31, 2003, there were no impairment charges in respect of these private technology
investments. During the years ended December 31, 2002 and 2001, impairment charges in respect of these private technology investments were $3.0 million and $1.7 million,
respectively.

86

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NOTE 11GOODWILL AND INTANGIBLE ASSETS

As of December 31, 2003 and 2002, goodwill and other acquired intangible assets consisted of the following (in thousands):

December 31,2003

2002Goodwill

$
113,003

$
57,629Less accumulated amortization


(12,823
)

(12,823
)$
100,180

$
44,806Identified intangible assetsExisting technology

$
25,968

$
7,570Less accumulated amortization


(7,891
)

(2,556
)$
18,077

$
5,014Customer relationships

$
27,820

$
Less accumulated amortization


(1,623
)

$
26,197

$
Trade names

$
940

$
Less accumulated amortization


(274
)

$
666

$
Backlog

$
1,950

$
Less accumulated amortization


(1,137
)

$
813

$
Total intangible assets

$
45,753

$
5,014


Amortization
expense was $8.4 million, $2.4 million and $7.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The estimated
aggregate amortization expense for intangibles for each of the five years beginning 2004 through 2008 is $10.7 million, $7.6 million, $5.8 million, $5.6 million and
$4.0 million, respectively.

Goodwill
increased by $55.4 million and intangible assets increased by $49.1 million during the year ended December 31, 2003. The increase during the year ended
December 31, 2003 was mainly attributable to goodwill of $52.3 million and intangible assets of $44.9 million which was comprised of purchased technology of $14.2 million,
customer relationships of $27.8 million and other intangibles of $2.9 million that was recorded on the acquisition of CommWorks, based on the final purchase price allocation. The estimated
useful life of purchased technology is from one to five years, the estimated useful life of customer relationships is ten years, and the estimated useful lives of backlog and trade names are from one
to two years.

In
July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."

87

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SFAS
No. 142 was adopted by the Company on January 1, 2002. SFAS No. 142 had the effect of eliminating amortization of goodwill commencing January 1, 2002;
however, impairment reviews may result in future periodic write-downs. The Company completed the required transitional assessment of goodwill during the first quarter of fiscal 2002. Based on this
assessment, there was no transition
goodwill impairment charge. The Company performed its annual impairment review in the fourth quarter of 2003 and 2002. No impairment in goodwill was noted.

The
reconciliation of net income to adjusted net income as if there had been no goodwill amortization for the year ended December 31, 2001 is as follows (in thousands):

Year ended
December 31, 2001Reported net income

$
56,954Add back: goodwill amortization


7,365Adjusted net income

$
64,319Basic earnings per share:Reported net income

$
0.56Goodwill amortization


0.07Adjusted net income

$
0.63Diluted earnings per share:Reported net income

$
0.52Goodwill amortization


0.07Adjusted net income

$
0.59Average number of shares outstanding:Basic


101,433Diluted


108,612


NOTE 12DEBT

The following represents the outstanding borrowings at December 31, 2003 and 2002 (in thousands):

|                               |  |     |   |                  |  | December 31,
|------------------------------ |  | --- | - | ---------------- |  | ------------
|
|
|Notes Payable                  |  | N/A |   | January 31, 2004 |  | $           
|Convertible Subordinated Notes |  | 7/8 | % | March 1, 2008    |  |             
|                               |  |     |   |                  |  |             
|Total Debt                     |  |     |   |                  |  | $           
|Long-term debt                 |  |     |   |                  |  |             
|                               |  |     |   |                  |  |             
|Short-term debt                |  |     |   |                  |  | $           
|                               |  |     |   |                  |  |             

The
Company has available borrowing facilities of $583.7 million as of December 31, 2003. $529.4 million of these facilities expire in 2004 and $54.3 million
of these facilities expire between 2008 and 2010 with interest rates ranging from approximately 4.5% to 6.0%, and the Company has not guaranteed any debt not included in the consolidated balance
sheet.

88

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

Concurrent
with the issuance of the convertible notes, the Company entered into convertible bond hedge and call option transaction at a cost of $43.8 million. The convertible bond hedge
allows the company to purchase 16,918,873 shares of its common stock at $23.79 per share from the other party to the agreeement. The written call option allows the holder to purchase 16,918,873 shares
of the Company's common stock from the Company at $32.025 per share. Both the bond hedge and call option transactions may be settled at the Company's option either in cash or net shares and expire on
March 1, 2008. The Company recorded these instruments at cost, and their carrying value at December 31, 2003 approximates their original cost. The convertible bond hedge and call option
transactions are expected to reduce the potential dilution from conversion of the notes. The options have been included in stockholders' equity in accordance with the guidance in Emerging Issues Task
Force Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."

NOTE 13OTHER CURRENT LIABILITIES

Other current liabilities at December 31, 2003 and 2002 consist of the following:

December 31, 2003

December 31, 2002Accrued contract costs

$
67,950

$
45,756Accrued payroll and compensation


34,200


24,633Accrued other taxes


10,725


2,869Warranty costs


26,267


13,297Accrued construction costs


20,462


9,889Liability related to purchase of Xebeo and CommWorks


2,690


Other


10,845


8,483$
173,139

$
104,927


Other
current liabilities primarily consist of accrued contract costs, which relate to purchases of inventory, installation services and other testing and consulting work performed by
outside vendors for which the Company has not yet received payment; accrued payroll and compensation costs, which relate to wages, bonuses, and commissions earned but not yet paid; warranty costs,
which are estimated costs of equipment replacement and repair and accrued construction costs, which represent accruals for work performed and materials purchased in relation to the facility being
built in Hangzhou.

89

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NOTE 14WARRANTY OBLIGATIONS AND OTHER GUARANTEES

Warranty obligations are as follows (in thousands):

Balance at January 1, 2002

$
6,271Accruals for warranties issued during the period


15,156Settlements made during the period


(8,130
)Balance at December 31, 2002

$
13,297Accruals for warranties issued during the period


37,904Settlements made during the period


(24,934
)Balance at December 31, 2003

$
26,267


Certain
of the Company's sales contracts include provisions under which customers would be indemnified by the Company in the event of, among other things, a third-party claim against the
customer for intellectual property rights infringement related to the Company's products. There are no limitations on the maximum potential future payments under these guarantees. The Company has
accrued no amounts in relation to these provisions as no such claims have been made and the Company believes it has valid, enforceable rights to the intellectual property embedded in its products.

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 six to nine months from date of issuance without being
drawn by the beneficiary thereof.

NOTE 15PROVISION FOR INCOME TAXES

United States and foreign income (loss) before income taxes, minority interest and cumulative effect of a change in accounting principle were as follows (in
thousands):

Year ended December 31,2003

2002

2001United States

$
87,444

$
13,245

$
(12,237
)Foreign


182,325


123,027


90,336$
269,769

$
136,272

$
78,099


90

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The
components of the provision (benefit) for income taxes are as follows (in thousands):

Year ended December 31,2003

2002

2001Current:Federal

$
26,170

$
12,222

$
7,246State/Other


4,238


1,515


621Foreign


31,466


28,222


21,586Total current


61,874


41,959


29,453Deferred:Federal


8,718


(6,665
)

(8,002
)State


(4,975
)

(315
)

(172
)Foreign


1,825


(7,725
)

(1,456
)Total deferred


5,568


(14,705
)

(9,630
)Total

$
67,442

$
27,254

$
19,823


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.
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 likelihood of a material change in
the Company's expected realization of these assets is dependent on future taxable income, its ability to use foreign tax credit carryforwards and carrybacks, and the effectiveness of its tax planning
strategies in the various relevant jurisdictions. Changes to the Company's income tax provision or in the valuation of the deferred tax assets and liabilities may affect its annual effective income
tax rate.

Deferred
income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A summary of
the components of net deferred tax assets is as follows (in thousands):

|                                 |                                        | U.S.                                  |   | China |        | Other |       | Total
|-------------------------------- | -------------------------------------- | ------------------------------------- | - | ----- | ------ | ----- | ----- | -----
|December 31, 2003:               |                                        |                                       |   |       |        |       |       |      
|Current deferred tax assets:     |                                        |                                       |   |       |        |       |       |      
|                                 | Allowances and reserves                |                                       | $ | 8,969 |        | $     | 7,217 |      
|                                 | Gross profit in intercompany inventory |                                       |   | 5,070 |        |       | 924   |      
|                                 |                                        |                                       |   |       |        |       |       |      
|                                 |                                        | Total current deferred tax assets     |   | $     | 14,039 |       | $     | 8,141
|                                 |                                        |                                       |   |       |        |       |       |      
|Non-current deferred tax assets: |                                        |                                       |   |       |        |       |       |      
|                                 | Net operating loss carryforward        |                                       | $ | 1,535 |        | $     |      |      
|                                 | Fixed assets                           |                                       |   | 807   |        |       | 799   |      
|                                 | Investments                            |                                       |   | 2,578 |        |       |      |      
|                                 | Other                                  |                                       |   | 272   |        |       |      |      
|                                 |                                        |                                       |   |       |        |       |       |      
|                                 |                                        | Total non-current deferred tax assets |   | $     | 5,192  |       | $     | 799  
|                                 |                                        |                                       |   |       |        |       |       |      

91

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|                                 |                                        | U.S.                                  |        | China |        | Other |       | Total |  
|-------------------------------- | -------------------------------------- | ------------------------------------- | ------ | ----- | ------ | ----- | ----- | ----- | -
|December 31, 2002:               |                                        |                                       |        |       |        |       |       |       |  
|Current deferred tax assets:     |                                        |                                       |        |       |        |       |       |       |  
|                                 | Allowances and reserves                |                                       | $      | 8,586 |        | $     | 8,184 |       | $
|                                 | Gross profit in intercompany inventory |                                       |        | 5,052 |        |       |      |       |  
|                                 |                                        |                                       |        |       |        |       |       |       |  
|                                 |                                        | Total current deferred tax assets     |        | $     | 13,638 |       | $     | 8,184 |  
|                                 |                                        |                                       |        |       |        |       |       |       |  
|Non-current deferred tax assets: |                                        |                                       |        |       |        |       |       |       |  
|                                 | Net operating loss carryforward        |                                       | $      | 1,988 |        | $     |      |       | $
|                                 | Future period compensation deductions  |                                       |        | 1,575 |        |       |      |       |  
|                                 | Tax credit carryforwards               |                                       |        | 6,413 |        |       |      |       |  
|                                 | Fixed assets                           |                                       |        | 356   |        |       | 461   |       |  
|                                 | Other                                  |                                       |        | 3,967 |        |       |      |       |  
|                                 |                                        |                                       |        |       |        |       |       |       |  
|                                 |                                        | Total non-current deferred tax assets |        |       | 14,299 |       |       | 461   |  
|Valuation allowances             |                                        |                                       | (4,964 | )     |        |      |       |       | 
|                                 |                                        |                                       |        |       |        |       |       |       |  
|                                 | Net non-current deferred tax assets    |                                       | $      | 9,335 |        | $     | 461   |       | $
|                                 |                                        |                                       |        |       |        |       |       |       |  

Deferred
taxes have not been recognized on undistributed earnings from foreign subsidiaries because the Company does not intend to repatriate such earnings. As of December 31,
2003, undistributed earnings from investments in foreign subsidiaries amounted to $472.0 million.

As
of December 31, 2003, state net operating loss carryforwards were $1.5 million (tax effected). The state net operating loss carryforwards will expire in varying amounts
between 2004 and 2006 and could not be utilized in 2003. As of December 31, 2003, the Company had foreign net operating loss carryforwards of approximately $0.8 million (tax effected),
which do not expire and can be carried forward indefinitely. In 2003, the Company reversed all of its valuation allowances that were attributable to state research and development credits, because the
Company believes that it will more likely than not have sufficient taxable income to utilize these credits.

The
Company's subsidiaries UTSC, HUTS, CUTS and HSTC were granted tax holidays, which started to phase out in 1999. The net impact of these tax holidays was to decrease tax expense by
approximately $5.3 million, $10.0 million and $6.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.

92

---

The
difference between the Company's effective income tax rate and the federal statutory rate is reconciled below:

Year ended December 31,2003

2002

2001Federal statutory rate

35
%
34
%
34
%State taxes, net of federal income tax benefit

1

0

0Permanent differences

4

5

5Amortization of deferred compensation

0

1

2Effect of difference in foreign taxes rates

(15
)
(16
)
(14
)Tax credits and other

0

(4
)
(2
)Effective rate

25
%
20
%
25
%


In
2001, audits of the Company's federal income tax returns for the years ended December 31, 1999, 1998 and 1997 were completed. No audits of the Company's income tax returns were
underway as of December 31, 2003.

NOTE 16COMMON STOCK AND STOCK INCENTIVE PLANS

Stock Option Plans

The 1995 Stock Plan.On July 31, 1995, the Board of Directors adopted, and in
October 1995, the Company's stockholders approved, the Company's 1995 Stock Plan. Under the 1995 plan, officers, employees and consultants were eligible to acquire shares of common stock
pursuant to options or stock purchase rights. At the time of adoption, 3,705,232 shares of common stock were reserved for issuance under the 1995 plan. In 1995 and 1996, the Company's Board and
stockholders added an additional 5,400,000 shares to the 1995 plan, raising the total number of authorized shares reserved under the 1995 plan to 9,105,232. As of December 31, 2003, there were
6,711,744 shares authorized for issuance under the 1995 plan and options to purchase 88,885 shares of common stock were outstanding under the 1995 plan. On January 31, 1997, the Board of
Directors elected not to grant any further options under the 1995 plan. Upon the adoption of the 1997 plan, all remaining unissued shares under the 1995 plan not already subject to options or other
awards ceased to be reserved for issuance under the 1995 plan.

The 1997 Stock Plan.On January 31, 1997, the Board of Directors adopted, and the Company's
stockholders approved, the Company's 1997 Stock Plan. Under the 1997 plan, officers, employees and consultants are eligible to receive options to purchase shares of common stock and stock purchase
rights. In December 1999, the Board of Directors amended the 1997 plan, which the Company's stockholders approved in February 2000. As of December 31, 2003, the Company is
authorized to issue up to 25,464,775 shares subject to options. During the term of the 1997 plan, the number of shares issuable under the plan will be increased annually on the first day of each
fiscal year beginning in 2001 by an amount equal to the lesser of 6,000,000 shares or 4% of the outstanding shares of common stock on that date, or a lesser amount determined by the Board. The plan
terminates in January 2007, but may be terminated earlier by the Board of Directors. As of December 31, 2003, there were options to purchase 12,740,174 shares of common stock outstanding
under the 1997 plan. The Compensation Committee administers the 1997 plan.

93

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Options
granted under the 1997 plan may be incentive stock options, or ISOs, which are intended to qualify for favorable federal income tax treatment under the provisions of
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified stock options, or NSOs, which do not so qualify. The Compensation Committee selects the eligible
persons to whom options will be granted and determines the grant date, amounts, exercise prices, vesting periods and other relevant terms of the options, including whether the options will be ISOs or
NSOs. The exercise price of ISOs granted under the 1997 plan may not be less than 100% of the fair market value of common stock on the grant date, while the exercise price of NSOs can be determined by
the Compensation Committee in its discretion. Options are generally not transferable during the life of the optionee.

Options
vest and become exercisable as determined by the Compensation Committee, generally over four years. Options may generally be exercised at any time after they vest and before
their expiration date as determined by the Compensation Committee. However, no option may be exercised more than ten years after the grant date. Options will generally terminate
(i) 12 months after the death or permanent disability of an optionee and (ii) 90 days after termination of employment for any other reason. The aggregate fair market value
of the shares of common stock represented by ISOs that become exercisable in any calendar year by any one option holder may not exceed $100,000. Options in excess of this limit are treated as NSOs.

In
the event the Company is merged with or into another corporation, or all or substantially all of the Company's assets are sold, each outstanding option will be assumed or an
equivalent option or right will be substituted by the successor corporation or its parent or subsidiary. If the successor corporation refuses to assume or substitute for the option or right, the
option or right will automatically vest and become exercisable in full for a period of at least fifteen days, after which time the option or right will terminate.

Under
the 1997 plan, the Company may grant stock purchase rights to eligible participants. Any shares purchased pursuant to stock purchase rights will be subject to a restricted stock
purchase agreement.
Unless the Compensation Committee determines otherwise, this agreement will grant the Company a right to repurchase the stock upon the voluntary or involuntary termination of the employee for any
reason, including death or disability. The purchase price for repurchased shares will be the original price paid and may be paid by cancellation of any indebtedness owed to the Company. The shares of
stock subject to the right of repurchase lapse over time. There were no stock purchase rights granted in 2003, 2002 or 2001.

2001 Director Option Plan.On March 2, 2001, the Board of Directors adopted, and in
May 2001, the Company's stockholders approved, the Company's 2001 Director Option Plan. Under the 2001 Director Option Plan, those directors who are not employees of the Company ("Outside
Directors") are eligible to receive options to purchase shares of common stock. Directors Horner, Atkins, Son and Toy are Outside Directors. All grants of options to Outside Directors are automatic
and nondiscretionary. In July 2001, the Board of Directors amended the 2001 Director Option Plan. As of December 31, 2003, the Company is authorized to issue up to 1,200,000 shares
pursuant to options under the 2001 Director Option Plan. The plan terminates in May 2011, but may be terminated earlier by the Board of Directors. As of December 31, 2003, there were
options to purchase 320,000 shares of common stock outstanding under the 2001 Director Option Plan. The Compensation Committee administers the 2001 Director Plan.

Pursuant
to the terms of the 2001 Director Option Plan, each Outside Director is automatically granted an option to purchase eighty thousand shares of common stock (the "First Option")
on the

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---

date
on which such person first becomes an Outside Director (the "Anniversary Date"). A director who is an employee of the Company and ceases employment with the Company to become an Outside Director
receives an option to purchase twenty thousand shares of common stock (a "Subsequent Option") at the Company's first annual meeting of stockholders following such conversion to an Outside Director and
at each subsequent annual stockholder meeting thereafter, provided he or she is serving as an Outside Director on each such date. As such time as each Outside Director's First Option is fully vested,
each Outside Director is automatically granted a Subsequent Option on the Anniversary Date of each year provided he or she is then an Outside Director.

Under
the terms of the 2001 Director Option Plan, the exercise price of each option granted is equal to the market value of the common stock on the date of grant. Such options have terms
of ten years, but terminate earlier if the individual ceases to serve as a director. The First Option grants vest as to 25% of shares subject to the First Option on each of the first four
anniversaries of its date of grant. The Subsequent Option grants vest as to 100% of the shares subject to the Subsequent Option on the first anniversary of its date of grant.

Issanni Communications, Inc. Incentive Program.The Issanni plan was established for the
issuance of up to a total of 39,876 shares of UTStarcom's common stock to specified former employees of Issanni Communications, Inc. ("Issanni") who became UTStarcom's employees in connection
with UTStarcom's acquisition of Issanni. The Issanni plan is administered by the Board of Directors or a committee
appointed by the Board. A participant in the Issanni plan is eligible to earn and vest in a designated number of shares that are subject to the award of shares made to a participant under the plan,
based upon the attainment of one of six milestones related to the amount of revenue generated from Issanni products in 2002 and 2003 and subject to the participant's continued employment with Issanni,
the Company or one of their subsidiaries through the day of the determination that the applicable milestone has been satisfied. In addition, each participant is entitled to receive the unearned
shares, if any, on the fifth anniversary of the acquisition of Issanni if the employee continues to be employed with Issanni, the Company or any of their subsidiaries on such date regardless of
whether any milestone is attained. The shares subject to an award will in any event become issuable, whether or not the milestones were achieved and whether or not the five-year vesting
schedule has elapsed, upon (i) the sale or the discontinuation of the Company or UTStarcom International Products Inc., (ii) the sale of substantially all or any of the technology
acquired by UTStarcom International Products Inc. in connection with the acquisition of Issanni, or (iii) the employment termination of certain Issanni principals.

If,
prior to the date on which all of a participant's shares are earned, the participant's service with Issanni, the Company or one of their subsidiaries is terminated
(i) voluntarily or for cause, the Company may exercise its repurchase option with respect to any of the participant's unearned shares, (ii) other than voluntarily or for cause, death or
disability, the participant will be entitled to receive the shares that the participant would have otherwise earned with respect to milestones achieved within 24 months of the participant's
termination, or (iii) as a result of death or disability, the participant (or his estate) will be entitled to receive the unearned portion of his shares with respect to all milestones.

Advanced Communication Devices Corporation Incentive Program.The ACD Plan provides for the issuance
of an additional 73,637 shares of UTStarcom's common stock pursuant to awards of shares granted to designated former employees of Advanced Communication Devices Corporation ("ACD") who became
UTStarcom's employees in connection with UTStarcom's merger with ACD. The ACD

95

---

plan
is administered by the Board of Directors. The Company did not grant any shares under the plan in 2003 and granted 31,275 shares and 52,133 shares in 2002 and 2001, respectively.

A
participant in the ACD plan is entitled to earn and vest in a designated number of shares subject to the award made to the participant upon the attainment of one of five milestones and
subject to the participant's continued employment with ACD, the Company or any of their subsidiaries through the day of the determination that the applicable milestone has been satisfied. In addition,
each participant is entitled to receive the unearned shares, if any, subject to the award on the fifth anniversary of the merger if the participant has continued to perform services for ACD, the
Company or any of their subsidiaries on such date regardless of whether any milestones is obtained.

If
a participant's service with ACD, the Company or any of their subsidiaries is terminated for cause by the applicable employer, voluntarily by the participant or as a result of death
or disability, the participant will forfeit all of the shares subject to the award that were not yet earned and distributed. If
the participant's service is terminated for any other reason, the participant will be entitled to receive the shares subject to the award with respect to any milestones achieved within
12 months following the participant's termination and will forfeit all other shares that were unearned as of the date of termination.

The 2003 Non-Statutory Stock Option Plan.On April 15, 2003, the Board of
Directors adopted the Company's 2003 Non-Statutory Stock Option Plan. Under the 2003 plan, directors, officers, employees and consultants of the Company are eligible to be granted options
to purchase shares of the Company's common stock. Only non-statutory stock options, which do not qualify for favorable federal income tax treatment under the provisions of
Section 422 of the Internal Revenue Code of 1986, as amended, may be granted under the 2003 plan. As of December 31, 2003, the Company was authorized to issue up to 1,500,000 shares
pursuant to options granted under the 2003 plan, subject to adjustment in certain instances (including stock splits, stock dividends, business combinations or other changes in capitalization). As of
December 31, 2003, options to purchase 1,438,300 shares of common stock were outstanding under the 2003 plan.

The
2003 plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee is charged with selecting the eligible persons to whom options will be
granted and determines the number of shares subject to the option, exercise prices, vesting periods and other terms applicable to each option.

Options
granted under the 2003 plan generally vest and become exercisable over four years, and may be exercised at any time after they vest but before their expiration date. Options will
generally terminate (i) 12 months after the death or employment termination due to disability of an option holder and (ii) 90 days after termination of an option holder's
service for any other reason other than for disability or due to the option holder's death. However, no option may be exercised more than ten years after the grant date.

In
the event the Company is merged with or into another corporation, or all or substantially all of the Company's assets are sold, the 2003 plan provides for each outstanding option to
be assumed or an equivalent option or right to be substituted by the successor corporation or its parent or subsidiary. If the successor corporation refuses to assume or substitute for the option, the
option will automatically vest and become exercisable in full for a period determined by the compensation committee, after which time the option will terminate.

96

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A
summary of activity under the Plans follows:

|                                       |  | Shares Available
for Grant |   | Number
of shares |   | Weighted average
exercise price
|-------------------------------------- |  | -------------------------- | - | ---------------- | - | -------------------------------
|Options Outstanding, December 31, 2000 |  | 155,035                    |   | 15,174,724       |   | $                              
|Options Authorized in 2001             |  | 5,062,760                  |   |                 |   | $                              
|Options Granted                        |  | (3,326,957                 | ) | 3,326,957        |   | $                              
|Options Exercised                      |  |                           |   | (5,363,601       | ) | $                              
|Options Forfeited or Expired           |  | 559,663                    |   | (559,663         | ) | $                              
|                                       |  |                            |   |                  |   |                                
|Options Outstanding, December 31, 2001 |  | 2,450,501                  |   | 12,578,417       |   | $                              
|Options Authorized in 2002             |  | 4,372,167                  |   |                 |   | $                              
|Options Granted                        |  | (4,977,723                 | ) | 4,977,723        |   | $                              
|Options Exercised                      |  |                           |   | (1,717,899       | ) | $                              
|Options Forfeited or Expired           |  | 915,326                    |   | (915,326         | ) | $                              
|                                       |  |                            |   |                  |   |                                
|Options Outstanding, December 31, 2002 |  | 2,760,271                  |   | 14,922,915       |   | $                              
|Options Authorized in 2003             |  | 5,887,041                  |   |                  |   |                                
|Options Granted                        |  | (4,866,309                 | ) | 4,866,309        |   | $                              
|Options Exercised                      |  |                            |   | (4,490,195       | ) | $                              
|Options Forfeited or Expired           |  | 681,900                    |   | (681,900         | ) | $                              
|                                       |  |                            |   |                  |   |                                
|Options Outstanding, December 31, 2003 |  | 4,462,903                  |   | 14,617,129       |   | $                              
|                                       |  |                            |   |                  |   |                                

The
following table summarizes information with respect to stock options outstanding and exercisable as of December 31, 2003:

|  |                | Options Outstanding |            |  |   |      
|- | -------------- | ------------------- | ---------- |  | - | -----
|
|
|
|
|$ | 0.06 - $  0.06 |                     | 36,519     |  | $ | 0.06 
|$ | 0.25 - $  0.25 |                     | 27,764     |  | $ | 0.25 
|$ | 0.85 - $  0.85 |                     | 88,885     |  | $ | 0.85 
|$ | 1.71 - $  2.50 |                     | 197,303    |  | $ | 2.28 
|$ | 3.39 - $  4.71 |                     | 920,116    |  | $ | 4.30 
|$ | 5.65 - $  5.65 |                     | 5,785      |  | $ | 5.65 
|$ | 9.38 - $13.61  |                     | 1,660,131  |  | $ | 11.74
|$ | 14.23 - $21.31 |                     | 7,534,310  |  | $ | 18.34
|$ | 21.85 - $32.67 |                     | 3,657,867  |  | $ | 26.23
|$ | 34.40 - $45.21 |                     | 488,449    |  | $ | 39.23
|  |                |                     |            |  |   |      
|$ | 0.06 - $45.21  |                     | 14,617,129 |  | $ | 18.97

2000 Employee Stock Purchase Plan.In February 2000, the Company's stockholders approved the
2000 Employee Stock Purchase Plan. The purchase plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code.

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The
Company has reserved 2,000,000 shares of common stock for sale under the stock purchase plan. The number of shares reserved for sale under the plan will be increased annually on the
first day of each fiscal year beginning in 2001 by an amount equal to the lesser of 4,000,000 shares or 2% of the outstanding shares of the Company's common stock on that date, or a lesser amount
determined by the Board of Directors. The stock purchase plan will be administered by the Board or a committee appointed by the Board.

The
stock purchase plan is implemented by offering periods, the duration of which may not exceed 24 months. Offering periods may contain interim purchase periods. Shares purchased
under the stock purchase plan will be held in separate accounts for each participant. The first offering period began in March 2000 and ended on the last trading day before April 30,
2002. Subsequent consecutive overlapping offering periods begin on May 1 and November 1 annually. These offering periods end twenty-four months thereafter.

Employees
will be eligible to participate in the stock purchase plan if they are employed by the Company for more than 20 hours per week and more than five months in a calendar
year. The stock purchase plan permits eligible employees to purchase the Company's common stock through payroll deductions, which may not exceed 15% of the employee's total compensation. Stock may be
purchased under the plan at a price equal to 85% of the fair market value of the Company's stock on either the date of purchase or the first day of the offering period, whichever is lower. However,
the Board of Directors may in its discretion provide that the price at which shares of common stock are purchased under the plan shall be 85% of the fair market value of the Company's shares on the
date of purchase. Participants may not purchase shares of common stock having a value greater than $25,000 during any calendar year.

Participants
may increase or decrease their payroll deductions at any time during an offering period, subject to limits imposed by the Board of Directors. If a participant withdraws from
the stock purchase plan, any contributions that have not been used to purchase shares shall be refunded. A participant who has withdrawn may not participate in the stock purchase plan again until the
next offering period. In the event of retirement or cessation of employment for any reason, any contributions that have not yet been used to purchase shares will be refunded to the participant, or to
the participant's designated beneficiary in the case of death, and a certificate will be issued for the full shares in the participant's account.

The
Board of Directors may terminate or amend the stock purchase plan, subject to stockholder approval in some circumstances. Unless terminated earlier by the Board, the stock purchase
plan will have a term of ten years.

Total
shares purchased under the plan were 261,103, 182,437 and 118,223 in 2003, 2002 and 2001, respectively. At December 31, 2003, there were 3,272,754 shares available for
purchase under the plan.

NOTE 17DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options and restricted common stock to employees, non-employees and members of the Board of Directors
and in connection with certain acquisitions (see Note 6), the Company recorded net deferred stock compensation of $0.3 million, $8.7 million and $4.7 million for the years
ended December 31, 2003, 2002 and 2001, respectively, representing the fair value of restricted stock and the difference between the fair value of common stock and the option exercise price of
options at the date of grant. Deferred compensation is presented as a reduction of

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stockholders'
equity, with amortization recorded over the vesting period of the related restricted stock and options. The Company recorded stock compensation expense of $4.3 million,
$3.1 million and $5.2 million for the year ended December 31, 2003, 2002 and 2001, respectively. At December 31, 2003, approximately $7.8 million remained to be
amortized over the corresponding vesting period of each respective option or restricted share, generally four to five years.

NOTE 18401(K) PLAN

On January 1, 2000, the Company adopted the UTStarcom, Inc. 401(k) Savings Plan (the "401(k) Plan"), a cash-or-deferred
arrangement, which covers the Company's eligible employees who have attained the age of 21. The 401(k) Plan is intended to qualify under Sections 401(a), 401(m) and 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code"), and the 401(k) Plan trust is intended to qualify under Section 501(a) of the Code. All contributions to the 401(k) Plan by eligible employees or by the
Company, and the investment earnings thereon, are not taxable to such employees until withdrawn, and any contributions the Company may make are expected to be deductible by the Company. The Company's
eligible employees may elect to reduce their current eligible compensation by one percent (1%) up to fifty percent (50%), subject to the maximum statutorily prescribed annual limit of $12,000 for
participants under age 50 and $14,000 for participants age 50 and over for the year ended December 31, 2003 and $11,000 for participants under age 50 and $12,000 for participants age 50 and
over for the year ended December 31, 2002, and to have such salary reductions contributed on their behalf to the 401(k) Plan. The 401(k) Plan permits, but does not
require, the Company to make matching contributions on behalf of all eligible employees who make salary reduction contributions to the 401(k) Plan. Commencing with the plan year beginning
January 1, 2001, the Company elected to begin making matching contributions on behalf of qualified employees who participate in the 401(k) Plan. The Company will contribute $0.50 for each
dollar contributed by qualified employees to the 401(k) Plan, to a maximum of $5,500 and $3,000 for the 2003 and 2002 plan years, respectively. The Company's matching contributions are subject to a
five-year vesting schedule based upon longevity of employee service with the Company. Matching contributions were $2.1 million, $0.7 million and $0.4 million for 2003,
2002 and 2001, respectively.

NOTE 19COMMITMENTS AND CONTINGENCIES

Leases:

The Company leases certain facilities under non-cancelable operating leases which expire at various dates through 2008. The minimum future lease
payments under the leases at December 31, 2003 are as follows:

(in thousands)Years ending December 31:2004

$
10,1542005


8,0572006


4,9692007


2,1052008 and after


439Total minimum lease payments

$
25,724


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---

Rent
expense for the years ended December 31, 2003, 2002 and 2001 was $11.5 million, $6.5 million and $3.8 million, respectively.

Investment Commitments:

As of December 31, 2003, the Company had invested a total of $2.0 million in Global Asia Partners L.P. The fund size is anticipated to be
$100 million and the fund was formed to make private equity investments in private or pre-IPO technology and telecommunications companies in Asia. The Company has a commitment to
invest up to a maximum of $5.0 million. The remaining amount is due at such times and in such amounts as shall be specified in one or more future capital calls to be issued by the general
partner.

Purchase Commitments

The Company is obligated to purchase raw materials and work-in-process inventory under various orders from one supplier, all of which are expected to be fulfilled
with no adverse consequences material to the operations or financial condition of the Company. As of December 31, 2003 total open commitments under these purchase orders are approximately
$2.3 million.

Litigation:

On October 31, 2001, a complaint was filed in United States District Court for the Southern District of New York against the Company, some of its directors
and officers and various underwriters for its 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. 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 brought by defendants
including the Company. The order dismisses all claims against the Company except for a claim brought under Section 11 of the Securities Act of 1933, which alleges that the Company's initial
public offering registration statement contained untrue statements of material fact and omitted to state material facts required to be stated in the registration statement, or necessary to make the
statements therein not misleading. A proposal has been made for the settlement and release of claims against the issuer defendants, including UTStarcom. The settlement is subject to a number of
conditions, including approval of the proposed settling parties and the court. If the settlement does not occur, and litigation against UTStarcom continues, UTStarcom believes it has valid defenses
and intends to defend the case vigorously. The Company is unable to currently estimate the loss, if any, associated with the above litigation.

The
Company is a party to other litigation matters and claims which are normal in the course of operations, and while the results of such litigation matters and claims cannot be
predicted with

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certainty,
the Company believes that the final outcome of such matters will not have a material adverse impact on its financial position or results of operations.

NOTE 20OPERATING RISKS

Financial Risks:

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its temporary cash and short-term investments with several financial institutions. Approximately
$346.2 million and $141.7 million of the Company's cash and short term investments was on deposit in foreign accounts at December 31, 2003 and 2002, respectively. The Company
invests excess cash in highly liquid investments with original maturities of twelve months or less, such as certificates of deposit, government sponsored entities notes, commercial paper, floating
rate corporate bonds, fixed income corporate bonds, and money market funds, which the Company believes have limited exposure to risk.

Concentration of Credit Risk and Major Customers:

The table below outlines the Company's sales to and the accounts receivable balances at December 31, 2002 of its largest customers:

For the year ended December 31,

% of Net
Sales

% of
Accounts
Receivable2003Customer A

11
%
3
%2002Customer B

18
%
6
%Customer C

13
%
0
%2001Customer B

28
%
29
%Customer D

10
%
8
%


Approximately
76%, 84% and 90% of the Company's net sales during 2003, 2002 and 2001, respectively, were to entities affiliated with the government of China. Accounts receivable balances
from these China government affiliated entities or state owned enterprises were $304.0 million and $238.0 million, respectively, as of December 31, 2003 and 2002. The Company
extends credit to its
customers in China generally without requiring collateral. In global sales outside of China, the Company often requires letters of credit from its customers. The Company monitors its exposure for
credit losses and maintains allowances for doubtful accounts.

Country Risks:

Approximately 86%, 84% and 90% of the Company's sales for the year ended December 31, 2003, 2002 and 2001, 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

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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.

Approximately
10%, 13% and 3% of the Company's sales for the year ended December 31, 2003, 2002 and 2001, respectively, were made in Japan. Accordingly, the political, economic
and legal environment and the general state of Japan's economy may influence the Company's business, financial condition and results of operations.

NOTE 21SEGMENT REPORTING

The Company sells wireless, wireline and switching platforms to operators in both fast growth and established telecommunications markets around the world. The
Company primarily operates in two geographic areas, China and other regions. The chief operating decision makers evaluate performance, make operating decisions, and allocate resources based on
consolidated financial data. Gross profit, operating income, income from operations, and income taxes are not allocated to specific individual departments within the organization. In accordance with
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," the Company is considered a single reportable segment. The Company is required to disclose certain
information about product revenues, information about geographic areas, information about major customers, and information about long-lived assets.

China
sales accounted for 86% and 84% of net sales for 2003 and 2002, respectively. During 2003, the provincial-level telecommunications service entities continued to consolidate
telecommunications purchasing decisions by province. As a result of this consolidation trend, all customers were grouped together by province, and each province is treated as one customer. At
December 31, 2003 and 2002, there were approximately 31 such customers. Giving effect to this consolidation, in 2003, the Hei Long Jiang province accounted for 11% of net sales. In 2002, sales
to the Zhejiang province accounted for 18% and sales to Softbank BB Corporation ("SBBC") accounted for 13% of net sales. In 2001, sales to the Zhejiang and Guangdong provinces accounted for 28% and
10% of net sales, respectively.

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Geographical
area and product sales data are as follows (in thousands):

|                        |                 | Years ended December 31, |          
|----------------------- | --------------- | ------------------------ | ---------
|
|
|Sales by region         |                 |                          |          
|China                   |                 | $                        | 1,679,966
|Japan                   |                 |                          | 194,894  
|Other                   |                 |                          | 89,472   
|                        |                 |                          |          
|                        | TOTAL NET SALES |                          | $        
|                        |                 |                          |          
|Sales by product line   |                 |                          |          
|Wireless infrastructure |                 | $                        | 719,700  
|Subscriber handsets     |                 |                          | 968,192  
|Wireline products       |                 |                          | 276,440  
|                        |                 |                          |          
|                        | TOTAL NET SALES |                          | $        
|                        |                 |                          |          

Long-lived
assets by geography are as follows (in thousands):

|                        |  | December 31,
2003 |         | December 31,
2002
|----------------------- |  | ----------------- | ------- | -----------------
|U.S.                    |  | $                 | 156,942 |                  
|Foreign                 |  |                   | 175,067 |                  
|                        |  |                   |         |                  
|Total long-lived assets |  | $                 | 332,009 |                  
|                        |  |                   |         |                  

NOTE 22RELATED PARTY TRANSACTIONS

The Company recognized revenue of $184.4 million, $123.0 million and $13.9 million during the years ended December 31, 2003, 2002 and
2001, respectively, with respect to sales of telecommunications equipment to SBBC, an affiliate of SOFTBANK America Inc., which is a significant stockholder of the Company. SBBC offers
asynchronous digital subscriber line ("ADSL") coverage throughout Japan, which is marketed under the name "YAHOO BB!". The Company provides ADSL technology to SBBC. The contract was
competitively bid and the terms of this contract were on terms no more favorable than those with unrelated parties. Included in accounts receivable at December 31, 2003 and 2002 were
$43.9 million and $0.8 million, respectively, related to this agreement. There were no amounts included in deferred revenue in respect of this agreement at December 31, 2003 and
2002.

The
Company has invested in Softbank China and Restructuring Fund No. 1, which are investment vehicles established by SOFTBANK CORP. and its affiliates. See Note 10.

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

103

---

As
of December 31, 2003, SOFTBANK America Inc. beneficially owned approximately 14.1% of the Company's outstanding stock.

On
July 17, 2003, the Company entered into a Mezzanine Loan Agreement with BB Modem Rental PLC ("BB Modem"), an affiliate of SOFTBANK America, Inc. Under the terms of the
agreement the Company loaned BB Modem $10.1 million at an effective interest rate of 12.01% per annum, for the purposes of investing in a portfolio of ADSL modems and associated modem rental
agreements, from SOFTBANK BB CORP., formerly BB Technologies, an affiliate of SOFTBANK America, Inc. SOFTBANK BB CORP. will continue to service such modems and modem rental agreements. The Company's
loan is subordinated to certain senior lenders of BB Modem, and repayments are payable to the Company over a forty-two month period through January 31, 2007, with a substantial
portion of the principal amount of the loan schedule to be repaid during the last 16 months of this period. The Company's recourse for nonpayment of the loan is limited to the assets of BB
Modem, the account into which subscriber payments are made and its rights under the securitization transaction documents. The value of BB Modem's modems that serve as collateral for the loan may
decrease over time and may not be sufficient upon sale to pay the outstanding amounts on the loans. The Company assesses the loan for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. The Company periodically reviews the underlying quality of the asset pool securing the loan to assess whether impairment has incurred and needs to be
recorded. During 2003, the Company recorded $0.5 million in interest income in respect of this loan. The loan receivable at December 31, 2003 was approximately $11.2 million and
is included in other long-term assets.

NOTE 23SUBSEQUENT EVENT

On January 14, 2004, the Company sold 12.1 million shares of common stock at $39.25 per share to Banc of America Securities, LLC, for net proceeds
of approximately $474.2 million. The Company intends to use the net proceeds for strategic and general corporate purposes, including, but not limited to, acquisitions, investments, working
capital or capital expenditures.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Quarterly financial data for the periods indicated are as follows:

|                         |         | Quarter ended
|------------------------ | ------- | -------------
|
|
|Revenues                 |         | $            
|Gross profit             |         | $            
|Net income               |         | $            
|Net earnings per share:* |         |              
|                         | Basic   |              
|                         | Diluted |              

---

104

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ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9ACONTROLS AND PROCEDURES



PART III

ITEM 10DIRECTORS AND EXECUTIVE OFFICERS OF UTSTARCOM, INC.

The information required by Item 401 of Regulation S-K concerning our directors is incorporated by reference from the information in the
section entitled "Proposal OneElection of Directors" in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 2004 (the "Proxy Statement"). The required
information concerning our executive officers is contained in the section entitled "ManagementExecutive Officers."

Item
405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "ManagementSection 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by
reference.

We
have adopted a code of ethics that applies to our principal executive officer and all members of our finance department, including the principal financial officer and principal
accounting officer. Such code of ethics is available, free of charge, to any stockholder who sends a request for a paper copy to: UTStarcom, Inc. 1275 Harbor Bay Parkway, Alameda, California
94502, Attn: Legal Department.

We
intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such
information on our website, at www.utstar.com.

ITEM 11EXECUTIVE COMPENSATION

The information required by this section is incorporated by reference from the information in the sections entitled "Proposal OneElection of
DirectorsDirectors' Compensation," "ManagementExecutive Compensation," "ManagementEmployment Contracts and Change of Control Arrangements" and
"ManagementCompensation Committee Interlocks and Insider Participation" in the Proxy Statement.

105

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ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this section is incorporated by reference from the information in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement. The required information concerning our equity compensation plans is contained in the section entitled "Item 5Market for
UTStarcom, Inc.'s Common Equity and Related Stockholder Matters" in Part II of this Form 10-K.

ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this section is incorporated by reference from the information in the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.

ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information appearing under the heading "Principal Accountant Fees and Services" in the Proxy Statement is incorporated by reference.

PART IV

ITEM 15EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|Exhibit
Number |  | Description                                                                                                                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(16)        |  | Thirteenth Amended and Restated Certificate of Incorporation of UTStarcom, Inc., as amended.                                                                                                           
|3.2(17)        |  | First Amended and Restated Bylaws of UTStarcom, Inc., as amended.                                                                                                                                      
|4.1            |  | See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining the rights of holders of Common Stock.                                                                 
|4.2(1)         |  | Specimen Common Stock Certificate.                                                                                                                                                                     
|4.3(1)         |  | Third Amended and Restated Registration Rights Agreement dated December 14, 1999.                                                                                                                      
|4.4(12)        |  | Convertible Subordinated Notes Indenture dated as of March 12, 2003 between UTStarcom, Inc. and U.S. Bank National Association, including the form of the 7/8% Convertible Subordinated Notes due
2008.
|4.5(12)        |  | Registration Rights Agreement between UTStarcom, Inc. and the Initial Purchasers named therein dated as of March 12, 2003.                                                                             
|4.6(16)        |  | Registration Rights Agreement, dated as of June 30, 2003, by and among UTStarcom, Inc. and the shareholders of RollingStreams Systems, Ltd.                                                            
|10.1(1)        |  | Form of Indemnification Agreement.                                                                                                                                                                     
|10.2(1)        |  | 1992 Omnibus Equity Incentive Plan and form of related agreement.                                                                                                                                      
|10.3(1)        |  | 1995 Stock Plan and forms of related agreements.                                                                                                                                                       
|10.4(1)        |  | 1997 Stock Plan, as amended, and forms of related agreements.                                                                                                                                          
|10.5(1)        |  | 2000 Employee Stock Purchase Plan and forms of related agreements.                                                                                                                                     
|               |  |                                                                                                                                                                                                        

106

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|10.6(1)      |  | Common Stock Purchase Warrant dated February 5, 1998 between UTStarcom, Inc. and Lintech Limited.                                                                
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7(1)      |  | Common Stock Purchase Warrant dated September 20, 1999 between UTStarcom, Inc. and Talent Group International, Ltd.                                              
|10.17(1)*    |  | Loan Agreement dated June 15, 1998 between UTStarcom, Inc. and SOFTBANK Corp.                                                                                    
|10.18(a)(1)* |  | Loan Agreement dated March 9, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                     
|10.18(b)(1)* |  | Loan Agreement dated June 7, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                      
|10.18(c)(1)* |  | Loan Agreement dated June 29, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                     
|10.18(d)(1)* |  | Loan Agreement dated July 7, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                      
|10.18(e)(1)* |  | Loan Agreement dated July 14, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                     
|10.18(f)(1)* |  | Loan Agreement dated July 21, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                     
|10.18(g)(1)* |  | Loan Agreement dated August 5, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                    
|10.18(h)(1)* |  | Loan Agreement dated August 17, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                   
|10.18(i)(1)* |  | Loan Agreement dated September 2, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                 
|10.18(j)(1)* |  | Loan Agreement dated September 17, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd.                                                
|10.22(1)     |  | Lease dated December 23, 1997 between UTStarcom, Inc. and Tech Center Partners.                                                                                  
|10.23(1)     |  | Lease Agreement dated April 1995, as amended, between UTStarcom, Inc. and Metro Park Associates.                                                                 
|10.24(1)     |  | Lease Agreements dated December 31, 1997 and May 14, 1998 between Guangdong UTStarcom Telecom Co., Ltd. and Guangdong Southern Telecom Group Huizhou Company.    
|10.25(1)     |  | Lease Contract dated December 15, 1996 between UTStarcom (Hangzhou) Telecommunications Co., Ltd. and Yile Village, Gudang Township.                              
|10.28(1)     |  | Payment Agent Contract dated June 11, 1998 among UTStarcom, UTStarcom (China) Ltd, Softbank Corporation and Jitong Communication Co., Ltd.                       
|10.29(1)     |  | Agreement on Termination of Contract dated August 30, 1999 among UTStarcom, Inc., UTStarcom (China) Ltd., Softbank Corporation and Jitong Communication Co., Ltd.
|10.30(1)     |  | Exchange Agreement dated October 15, 1997 between UTStarcom, Inc. and certain investors.                                                                         
|10.31(1)     |  | Exchange Agreement dated October 15, 1997 between UTStarcom, Inc. and certain investors.                                                                         
|             |  |                                                                                                                                                                  

107

---

|10.39(2)* |  | Technical Collaboration Agreement between Sharp Corporation and UTStarcom, Inc., dated March 31, 2000.                                                                                                               
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.40(2)* |  | Parts Supply Agreement between Sharp Corporation and UTStarcom, Inc. undated.                                                                                                                                        
|10.41(3)* |  | Joint Venture Agreement between SOFTBANK Corporation and UTStarcom, Inc. dated May 29, 2000.                                                                                                                         
|10.42(3)* |  | Land Use Right Assignment Agreement between the Administration Committee of Hangzhou Hi-Tech Industry Development Zone of Zhejiang Province of the People's Republic of China and UTStarcom, Inc. dated May 18,
2000.
|10.43(3)* |  | Supply Agreement between Matsushita Electric Industrial Co., Ltd., Matsushita Communications Industrial Co., Ltd., and UTStarcom, Inc. dated April 1, 2000.                                                          
|10.54(8)* |  | Software License Agreement between UTStarcom, Inc. and DDI Corporation, Inc. dated October 4, 2000.                                                                                                                  
|10.55(8)* |  | Strategic Alliance, Purchase and License Agreement between UTStarcom, Inc. and Telecommunication D'Haiti S.A.M., dated December 5, 2000.                                                                             
|10.56(4)* |  | Assignment Agreement between UTStarcom, Inc. and Stable Gain International Limited dated July 24, 2000.                                                                                                              
|10.57(4)* |  | Amendment No.1 to July 24, 2000 Assignment Agreement between UTStarcom, Inc. and Stable Gain International Limited, dated March 2, 2001.                                                                             
|10.58(4)* |  | Loan Agreement between China Merchant Bank and UTStarcom (China) Co., Ltd., dated March 14, 2001.                                                                                                                    
|10.59(4)* |  | Technical Service Agreement between UTStarcom (China) Co., Ltd. and Hainan Xinhuangpu Investment Co., Ltd., dated August 18, 2000.                                                                                   
|10.60(4)* |  | Assets Transfer Agreement between Hainan Xinhuangpu Investment Co., Ltd. and UTStarcom (China) Co., Ltd., dated August 18, 2000.                                                                                     
|10.61(4)* |  | Equity Transferring Agreement between Zhe Jiang Nantian Telecommunication Development Group Share Company and UTStarcom, dated February 5, 2001.                                                                     
|10.65(6)* |  | Strategic Alliance, Purchase and License Agreement between UTStarcom, Inc. and Telecommunications D'Haiti S.A.M. dated as of April 12, 2001.                                                                         
|10.66(5)  |  | Amended 2001 Director Option Plan.                                                                                                                                                                                   
|10.67(7)* |  | Purchase Contract between UTStarcom Inc. and Softbank BB Corporation, dated October 9, 2001.                                                                                                                         
|10.68(9)  |  | Comprehensive Credit-Extension Agreement between UTStarcom (China) Ltd. and China Everbright Bank, Chaoyang Branch, Beijing, dated November 30, 2001.                                                                
|10.71(9)  |  | Lease Agreement between UTStarcom, Inc. and Legend Tech., dated September 12, 2001.                                                                                                                                  
|10.73(10) |  | Change of Control Severance Agreement between Gerald Soloway and UTStarcom, Inc. dated April 12, 2002.                                                                                                               
|10.74(10) |  | Change of Control Severance Agreement between Howard Kwock and UTStarcom, Inc. dated April 12, 2002.                                                                                                                 
|10.75(10) |  | Change of Control Severance Agreement between Michael J. Sophie and UTStarcom, Inc. dated April 12, 2002.                                                                                                            
|          |  |                                                                                                                                                                                                                      

108

---

|10.78(11)* |  | Professional Services Agreement between UTStarcom, Inc. and N. Lohr Bangle, Jr. dated as of September 10, 2002.                                                                 
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.80(11)* |  | Joint Venture Contract between UTStarcom Telecom Co., Ltd., Matsushita Electric Industrial Co., Ltd. and Matsushita Communication Industrial Co., Ltd. dated as of July 5, 2002.
|10.82(14)* |  | Joint Development Agreement between Datang Mobile Communications Equipment Co., Ltd and UTStarcom (China) Co., Ltd. dated November 22, 2002.                                    
|10.83(14)* |  | Broadband Access Network General Terms and Conditions between Reliance Infocomm Limited and UTStarcom, Inc. dated as of October 1, 2002.                                        
|10.84(14)* |  | Broadband Access Equipment Contract between Reliance Infocomm Limited and UTStarcom, Inc. dated as of October 1, 2002.                                                          
|10.85(14)* |  | Broadband Access Services Contract between Reliance Infocomm Limited and UTStarcom, Inc. dated as of October 1, 2002.                                                           
|10.86(14)* |  | Broadband Access Software Contract between Reliance Infocomm Limited and UTStarcom, Inc. dated as of October 1, 2002.                                                           
|10.87(13)* |  | Equipment Purchase Agreement, dated as of February 4, 2003, by and between Tata Teleservices Limited and UTStarcom, Inc.                                                        
|10.88(15)  |  | UTStarcom, Inc. 2003 Nonstatutory Stock Option Plan                                                                                                                             
|10.89      |  | Change of Control Severance Agreement, dated as of January 17, 2003, by and between Hong Liang Lu and UTStarcom, Inc.                                                           
|10.90      |  | Change of Control Severance Agreement, dated as of January 31, 2003, by and between Ying Wu and UTStarcom, Inc.                                                                 
|10.91      |  | Change of Control Severance Agreement, dated as of January 31, 2003, by and between Shao-Ning Chou and UTStarcom, Inc.                                                          
|10.92      |  | Change of Control Severance Agreement, dated as of January 31, 2003, by and between William X. Huang and UTStarcom, Inc.                                                        
|10.93**    |  | Distributor Agreement, dated as of October 21, 2003, by and between UTStarcom, Inc. and Multidata.                                                                              
|10.94**    |  | Amendment #1 to Distributor Agreement, dated as of December 17, 2003, by and between UTStarcom, Inc. and Multidata.                                                             
|10.95**    |  | Revenue Sharing Purchase Agreement, dated as of October 21, 2003 by and between UTStarcom, Inc. and Multidata.                                                                  
|10.96**    |  | Amendment #1 to Revenue Sharing Purchase Agreement, dated as of December 17, 2003, by and between UTStarcom, Inc. and Multidata.                                                
|21.1       |  | Subsidiaries of UTStarcom.                                                                                                                                                      
|23.1       |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                          
|24.1       |  | Power of Attorney (included on signature page).                                                                                                                                 
|           |  |                                                                                                                                                                                 

109

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|31.1 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|---- |  | -----------------------------------------------------------------------------------------------------------------------
|31.2 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.

---

110

---

See
Item 15(a)(3) above.

111

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.

|                    |  | UTSTARCOM, INC.
|------------------- |  | ---------------
|Date: March 8, 2004 |  | By:            
|                    |  | Name:          
|                    |  | Title:         

112

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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Hong Liang Lu and Michael J. Sophie, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report on
Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:

|Signature                             |  | Title                                                                                                     |  | Date         
|------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | -------------
|                                      |  |                                                                                                           |  |              
|/s/HONG LIANG LUHong Liang Lu         |  | President and Chief Executive Officer (principal executive officer), Chairman of the Board of Directors   |  | March 8, 2004
|/s/MICHAEL J. SOPHIEMichael J. Sophie |  | Senior Vice President of Finance and Chief Financial Officer (principal financial and accounting officer) |  | March 8, 2004
|/s/BETSY S. ATKINSBetsy S. Atkins     |  | Director                                                                                                  |  | March 8, 2004
|/s/LARRY D. HORNERLarry D. Horner     |  | Director                                                                                                  |  | March 8, 2004
|/s/MASAYOSHI SONMasayoshi Son         |  | Director                                                                                                  |  | March 8, 2004
|/s/THOMAS J. TOYThomas J. Toy         |  | Director                                                                                                  |  | March 8, 2004
|/s/YING WUYing Wu                     |  | Executive Vice President, Chief Executive Officer, China Operations and Director                          |  | March 8, 2004

113

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REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES

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

Our
audits of the consolidated financial statements referred to in our report dated February 27, 2004 also included an audit of the financial statement schedules in this Annual
Report on Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.

/s/
PricewaterhouseCoopers LLP

San
Francisco, California
February 27, 2004

114

---



SCHEDULE I

UTSTARCOM, INC. (UNCONSOLIDATED)        REGISTRANT BALANCE SHEETS        (in thousands, except share and per share data)

|                                                                                                                                                                 |                                                              | December 31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------ | -------
|
|ASSETS                                                                                                                                                           |                                                             
|Current assets:                                                                                                                                                  |                                                              |              |        
|                                                                                                                                                                 | Cash and cash equivalents                                    |              | $      
|                                                                                                                                                                 | Short-term investments                                       |              |        
|                                                                                                                                                                 | Accounts receivable, net of allowances for doubtful accounts |              |        
|                                                                                                                                                                 | Inventories                                                  |              |        
|                                                                                                                                                                 | Deferred costs/Inventories at customer sites under contracts |              |        
|                                                                                                                                                                 | Income tax receivable                                        |              |        
|                                                                                                                                                                 | Prepaids                                                     |              |        
|                                                                                                                                                                 | Restricted cash and short-term investments                   |              |        
|                                                                                                                                                                 | Deferred tax assets                                          |              |        
|                                                                                                                                                                 | Other current assets                                         |              |        
|                                                                                                                                                                 |                                                              |              |        
|Total current assets                                                                                                                                             |                                                              |              | 700,367
|Property, plant and equipment, net                                                                                                                               |                                                              |              | 32,031 
|Note receivable                                                                                                                                                  |                                                              |              | 11,222 
|Investment in affiliated companies                                                                                                                               |                                                              |              | 500,036
|Goodwill                                                                                                                                                         |                                                              |              | 98,015 
|Intangible assets, net                                                                                                                                           |                                                              |              | 46,651 
|Deferred tax assets                                                                                                                                              |                                                              |              | 5,192  
|Other long-term assets                                                                                                                                           |                                                              |              | 17,524 
|                                                                                                                                                                 |                                                              |              |        
|                                                                                                                                                                 | Total assets                                                 |              | $      
|                                                                                                                                                                 |                                                              |              |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                             |                                                             
|Current liabilities:                                                                                                                                             |                                                              |              |        
|                                                                                                                                                                 | Accounts payable                                             |              | $      
|                                                                                                                                                                 | Income taxes payable                                         |              |        
|                                                                                                                                                                 | Customer advances                                            |              |        
|                                                                                                                                                                 | Deferred revenue                                             |              |        
|                                                                                                                                                                 | Other                                                        |              |        
|                                                                                                                                                                 |                                                              |              |        
|Total current liabilities                                                                                                                                        |                                                              |              | 131,358
|                                                                                                                                                                 |                                                              |              |        
|Long-term debt                                                                                                                                                   |                                                              |              | 402,500
|Stockholders' equity:                                                                                                                                            |                                                              |              |        
|Common stock: $.00125 par value; authorized: 750,000,000 shares; issued and outstanding: 104,272,477 and 106,787,908 at December 31, 2003 and 2002, respectively |                                                              |              | 131    
|Additional paid-in capital                                                                                                                                       |                                                              |              | 653,624
|Deferred stock compensation                                                                                                                                      |                                                              |              | (7,761 
|Retained earnings                                                                                                                                                |                                                              |              | 229,777
|Receivable from stockholders                                                                                                                                     |                                                              |              |       
|Accumulated other comprehensive income (loss)                                                                                                                    |                                                              |              | 1,409  
|                                                                                                                                                                 |                                                              |              |        
|Total stockholders' equity                                                                                                                                       |                                                              |              | 877,180
|                                                                                                                                                                 |                                                              |              |        
|                                                                                                                                                                 | Total liabilities and stockholders' equity                   |              | $      
|                                                                                                                                                                 |                                                              |              |        

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

115

---



SCHEDULE I

UTSTARCOM, INC. (UNCONSOLIDATED)        CONDENSED INFORMATION AS TO THE  RESULTS OF OPERATIONS  OF THE REGISTRANT        (in thousands)

|                                             |                                           | Years ended December 31, |          
|-------------------------------------------- | ----------------------------------------- | ------------------------ | ---------
|
|Net sales                                    |                                           | $                        | 1,009,259
|Cost of sales                                |                                           |                          | 775,691  
|                                             |                                           |                          |          
|Gross profit                                 |                                           |                          | 233,568  
|Operating expenses:                          |                                           |                          |          
|                                             | Selling, general and administrative       |                          |          
|                                             | Research and development                  |                          |          
|                                             | In-process research and development costs |                          |          
|                                             | Amortization of intangible assets         |                          |          
|                                             |                                           |                          |          
|Total operating expenses                     |                                           |                          | 123,310  
|                                             |                                           |                          |          
|Operating income                             |                                           |                          | 110,258  
|Interest income                              |                                           |                          | 2,709    
|Interest expense                             |                                           |                          | (4,142   
|Other income (expenses), net                 |                                           |                          | (18,404  
|Equity in net income of affiliated companies |                                           |                          | 151,393  
|                                             |                                           |                          |          
|Income before income taxes                   |                                           |                          | 241,814  
|Income tax expense                           |                                           |                          | 39,563   
|                                             |                                           |                          |          
|Net income                                   |                                           | $                        | 202,251  
|                                             |                                           |                          |          

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

116

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SCHEDULE I

UTSTARCOM, INC. (UNCONSOLIDATED)  CONDENSED INFORMATION AS TO THE CASH FLOWS OF THE REGISTRANT  (In thousands)

|                                                                              |                                                    | Years ended December 31,                                     |         
|----------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------------ | --------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                         |                                                    |                                                              |         
|Net income                                                                    |                                                    | $                                                            | 202,251 
|Adjustments to reconcile net income to net cash used in operating activities: |                                                    |                                                              |         
|                                                                              | Gain or change in ownership interest in subsidiary |                                                              |         
|                                                                              | Depreciation and amortization                      |                                                              |         
|                                                                              | Non-qualified stock option exercise tax benefits   |                                                              |         
|                                                                              | In-process research and development costs          |                                                              |         
|                                                                              | Impairment of long-term investments                |                                                              |         
|                                                                              | Loss on sale of assets                             |                                                              |         
|                                                                              | Warrants adjustment to fair value                  |                                                              |         
|                                                                              | Loss on sale of investment                         |                                                              |         
|                                                                              | Amortization of debt issuance costs                |                                                              |         
|                                                                              | Deferred income taxes                              |                                                              |         
|                                                                              | Allowance for doubtful accounts                    |                                                              |         
|                                                                              | Inventory reserve                                  |                                                              |         
|                                                                              | Stock compensation expense                         |                                                              |         
|                                                                              | Equity in net income of affiliated companies       |                                                              |         
|                                                                              | Changes in operating assets and liabilities:       |                                                              |         
|                                                                              |                                                    | Accounts receivable                                          |         
|                                                                              |                                                    | Inventories                                                  |         
|                                                                              |                                                    | Deferred costs/Inventories at customer sites under contracts |         
|                                                                              |                                                    | Other current and non-current assets                         |         
|                                                                              |                                                    | Accounts payable                                             |         
|                                                                              |                                                    | Income taxes payable                                         |         
|                                                                              |                                                    | Customer advances                                            |         
|                                                                              |                                                    | Deferred revenue                                             |         
|                                                                              |                                                    | Other current liabilities                                    |         
|                                                                              |                                                    |                                                              |         
|Net cash used in operating activities                                         |                                                    |                                                              | (232,639
|                                                                              |                                                    |                                                              |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                         |                                                    |                                                              |         
|Additions to property, plant and equipment                                    |                                                    |                                                              | (29,745 
|Investment in affiliates, net of cash acquired                                |                                                    |                                                              | (8,920  
|Acquisition of business, net of cash acquired                                 |                                                    |                                                              | (111,720
|Purchase of intangible assets                                                 |                                                    |                                                              | (2,340  
|Issuance of note receivable to related party                                  |                                                    |                                                              | (10,071 
|Purchase of short-term investments                                            |                                                    |                                                              | (10,775 
|Sales of short-term investments                                               |                                                    |                                                              | 93,246  
|                                                                              |                                                    |                                                              |         
|Net cash used in investing activities                                         |                                                    |                                                              | (80,325 
|                                                                              |                                                    |                                                              |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                         |                                                    |                                                              |         
|Issuance of stock, net of expenses                                            |                                                    |                                                              | 58,878  
|Repurchase of stock                                                           |                                                    |                                                              | (139,609
|Proceeds (payments) from borrowing, net                                       |                                                    |                                                              | 391,431 
|Purchase of convertible bond hedge and call option                            |                                                    |                                                              | (43,792 
|Proceeds from stockholder notes                                               |                                                    |                                                              | 282     
|                                                                              |                                                    |                                                              |         
|Net cash provided by (used in) financing activities                           |                                                    |                                                              | 267,190 
|                                                                              |                                                    |                                                              |         
|Effects of exchange rates on cash                                             |                                                    |                                                              | 1       
|                                                                              |                                                    |                                                              |         
|Net increase (decrease) in cash and cash equivalents                          |                                                    |                                                              | (45,773 
|Cash and cash equivalents at beginning of period                              |                                                    |                                                              | 117,003 
|                                                                              |                                                    |                                                              |         
|Cash and cash equivalents at end of period                                    |                                                    | $                                                            | 71,230  
|                                                                              |                                                    |                                                              |         

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

117

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SCHEDULE I

UTSTARCOM, INC.  NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

UTStarcom, Inc., a Delaware corporation, is the parent company of all UTStarcom, Inc. subsidiaries. The accompanying condensed financial statements
reflect the financial position, results of operations and cash flows of UTStarcom, Inc. on a separate basis. All subsidiaries of UTStarcom, Inc. are reflected as investments accounted
for using the equity method. Accordingly, intercompany transactions have not been eliminated. No cash dividends were paid to UTStarcom, Inc. by its subsidiaries during the three years ended
December 31, 2003. For accounting policies and other information, see the Notes to Consolidated Financial Statements included elsewhere herein.

118

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SCHEDULE II

UTSTARCOM, INC.  Valuation and Qualifying Accounts and Reserves  For the Years Ended December 31, 2003, 2002 and 2001.

|Description                     |  | Balance at
beginning of
the period |        | Additions
charged to
costs and
expenses |   | Deductions |  | Balance at
end of
the period
|------------------------------- |  | ---------------------------------- | ------ | --------------------------------------- | - | ---------- |  | ----------------------------
|Year ended December 31, 2003    |  |                                    |        |                                         |   |            |  |                             
|Allowance for doubtful accounts |  | $                                  | 26,250 |                                         | $ | 5,025      |  | $                           
|Accrued product warranty costs  |  | $                                  | 13,297 |                                         | $ | 37,904     |  | $                           
|Tax valuation allowance         |  | $                                  | 4,964  |                                         | $ | 0          |  | $                           
|Year ended December 31, 2002    |  |                                    |        |                                         |   |            |  |                             
|Allowance for doubtful accounts |  | $                                  | 19,053 |                                         | $ | 7,434      |  | $                           
|Accrued product warranty costs  |  | $                                  | 6,271  |                                         | $ | 15,156     |  | $                           
|Tax valuation allowance         |  | $                                  | 4,787  |                                         | $ | 177        |  | $                           
|Year ended December 31, 2001    |  |                                    |        |                                         |   |            |  |                             
|Allowance for doubtful accounts |  | $                                  | 12,835 |                                         | $ | 6,218      |  | $                           
|Accrued product warranty costs  |  | $                                  | 3,133  |                                         | $ | 6,792      |  | $                           
|Tax valuation allowance         |  | $                                  | 4,153  |                                         | $ | 634        |  | $                           

119

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