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.

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.


PART I.
	Item 1.	Business	4
	Item 2.	Properties	17
	Item 3.	Legal Proceedings	18
	Item 4.	Submission of Matters to a Vote of Security Holders	18
PART II.
	Item 5.	Market for UTStarcom, Inc.'s Common Equity and Related Stockholder Matters	19
	Item 6.	Selected Consolidated Financial Data	21
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation	22
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 8.	Financial Statements and Supplementary Data	60
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	105
	Item 9A.	Controls and Procedures	105
PART III.
	Item 10.	Directors and Executive Officers of UTStarcom, Inc.	105
	Item 11.	Executive Compensation	105
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	106
	Item 13.	Certain Relationships and Related Transactions	106
	Item 14.	Principal Accountants Fees and Services	106
PART IV.
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	106
Exhibit Index		106
Signatures		112

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.

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.

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.

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:

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.

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.

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.

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 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.

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.

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

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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 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

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:

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.

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.

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.

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.

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, 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.

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.

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:

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

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.

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.

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.

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.

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."

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

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.

On October 31, 2001, a complaint was filed in United States District Court for the Southern District of New York against us, some of our directors and officers and various underwriters for our initial public offering. Substantially similar actions were filed concerning the initial public offerings for more than 300 different issuers, and the cases were coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. In April 2002, a consolidated amended complaint was filed in the matter against us, captioned In re UTStarcom, Initial Public Offering Securities Litigation, Civil Action No. 01-CV-9604. Plaintiffs allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 through undisclosed improper underwriting practices concerning the allocation of IPO shares in exchange for excessive brokerage commissions, agreements to purchase shares at higher prices in the aftermarket and misleading analyst reports. Plaintiffs seek unspecified damages on behalf of a purported class of purchasers of our common stock between March 2, 2000 and December 6, 2000. Our directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part a motion to dismiss 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 5—MARKET FOR UTSTARCOM, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

	High		Low
*Fiscal 2002*
First Quarter	$	33.95	$	20.25
Second Quarter		27.03		18.58
Third Quarter		20.82		12.57
Fourth Quarter		21.10		15.66
*Fiscal 2003*
First Quarter	$	23.90	$	16.56
Second Quarter		35.86		19.70
Third Quarter		46.45		31.18
Fourth Quarter		39.07		30.85

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.

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

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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."

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

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.

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.

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.

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

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.

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.

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

	Years ended December 31,
	2003			2002			2001
	(in thousands)
Gross profit	$	636,168		$	345,472		$	224,548
Gross profit percentage		32	%		35	%		36	%

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 Period
	Total		Less than 1 year		1-3 years		3-5 years
	(in thousands)
Contractual Obligations
Notes Payable	$	1	$	1
Convertible Subordinated Notes	$	402,500	$	—	$	—	$	402,500
Operating leases	$	25,724	$	10,154	$	15,131	$	439
Other Commercial Commitments
Standby 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.

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

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.

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.

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.

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.

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

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

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

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 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.

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.

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.

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

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.

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.

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.

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

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.

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.

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.

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

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

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.

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:

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.

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

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.

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 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.

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.

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

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.

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.

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.

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:

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:

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:

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.

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	$	373,974
Average interest rate		1.19	%
Restricted cash		3,943
Average interest rate		0.50	%
Restricted short-term investments		20,461
Average interest rate		1.19	%
Short-term investments		48,617
Average interest rate		1.36	%
Total investment securities		446,995
Average interest rate		1.20	%

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 Receivable
2003
Customer A	11	%	3	%
2002
Customer B	18	%	6	%
Customer C	13	%	0	%
2001
Customer 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.

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.

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.

Index to Consolidated Financial Statements and Financial Statement Schedules

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

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.

UTSTARCOM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

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

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)

		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	%

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))
	(a)		(b)			(c)
Equity compensation plans approved by security holders(2)	13,149,059	(3)	$	17.92		7,673,957	(4)
Equity compensation plans not approved by security holders	1,551,813	(5)	$	28.55	(6)	61,700	(7)

Total	14,700,872		$	18.97		7,735,657

		Year Ended December 31,
		2003		2002		2001		2000			1999
		(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net sales		$	1,964,332	$	981,806	$	626,840	$	368,646		$	187,516
Gross profit			636,168		345,472		224,548		128,181			74,813
Operating income			274,732		145,962		76,728		33,780			16,719
Income from continuing operations			202,251		107,862		56,954		27,993			13,119
Net income (loss) available to common stockholders			202,251		107,862		56,954		27,013			(18,514	)
Basic earnings (loss) per share:
	Income (loss) from continuing operations	$	1.95	$	0.98	$	0.56	$	0.35		$	(1.94	)
	Income (loss) from discontinued operations				—		—		—			(0.19	)
	Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"		—		—		—		(0.01	)		—

	Net income (loss)⁽¹⁾	$	1.95	$	0.98	$	0.56	$	0.34		$	(2.13	)

Diluted earnings (loss) per share:
	Income (loss) from continuing operations		1.64		0.94	$	0.52	$	0.28		$	(1.94	)
	Income (loss) from discontinued operations		—		—		—		—			(0.19	)
	Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"		—		—		—		(0.01	)		—

Net income (loss)		$	1.64	$	0.94	$	0.52	$	0.27		$	(2.13	)

Proforma amounts assuming application of SAB101 "Revenue Recognition in Financial Statements" is applied retroactively:
Net income (loss) available to common stockholders		$	202,251	$	107,862	$	56,954	$	27,993		$	(19,494	)
Earnings (loss) per share:
	Basic	$	1.95	$	0.98	$	0.56	$	0.35		$	(2.25	)

	Diluted	$	1.64	$	0.94	$	0.52	$	0.27		$	(2.25	)

Weighted average shares used in per share calculations:
	Basic		103,659		109,566		101,433		79,696			8,678

	Diluted		124,909		114,407		108,612		101,867			8,678

(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.
		As of December 31,
		2003		2002		2001		2000			1999
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	373,974	$	231,944	$	321,136	$	149,112		$	87,364
Working capital			887,200		568,215		591,103		369,861			128,973
Total assets			2,226,958		1,305,552		1,005,880		591,837			271,788
Total short-term debt			1		—		58,434		43,381			43,338
Long-term debt			402,500		—		12,048		12,048			—
Total stockholders' equity			879,191		766,395		681,887		412,319			165,720

	Years ended December 31,
	2003		% of 2003 net sales		2002		% of 2002 net sales		2001		% of 2001 net sales
	(in thousands)
Selling, general and administrative ("SG&A")	$	187,128	10	%	$	110,263	11	%	$	75,764	12	%
Research and development ("R&D")		155,252	8	%		86,182	9	%		59,809	10	%
In-process research and development ("IPR&D")		10,686	1	%		670	0	%		4,720	1	%
Amortization of intangible assets		8,370	0	%		2,395	0	%		7,527	1	%

TOTAL OPERATING EXPENSES	$	361,436	18	%	$	199,510	20	%	$	147,820	24	%

			Page
Financial Statements:
	Report of Independent Auditors		61
	Consolidated Balance Sheets at December 31, 2003 and 2002		62
	Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001		63
	Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001		64
	Condensed Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001		65
	Notes to Consolidated Financial Statements		66
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	115
		II—Valuation and Qualifying Accounts	119

		December 31, 2003			December 31, 2002
ASSETS
Current assets:
	Cash and cash equivalents	$	373,974		$	231,944
	Short-term investments		48,617			107,305
	Accounts receivable, net of allowances for doubtful accounts		324,921			221,215
	Accounts receivable, related parties		43,944			835
	Notes receivable		11,362			12,048
	Inventories		257,038			183,687
	Deferred costs/Inventories at customer sites under contracts		558,977			240,979
	Prepaids		136,262			47,220
	Restricted cash and short-term investments		24,404			21,251
	Other current assets		52,408			40,888

Total current assets			1,831,907			1,107,372
Property, plant and equipment, net			186,076			93,980
Long-term investments			24,066			35,360
Goodwill			100,180			44,806
Intangible assets, net			45,753			5,014
Other long-term assets			38,976			19,020

	Total assets	$	2,226,958		$	1,305,552

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable	$	251,176		$	256,980
	Income taxes payable		16,780			13,003
	Customer advances		458,654			156,336
	Deferred revenue		44,958			7,911
	Other		173,139			104,927

Total current liabilities			944,707			539,157
Long-term debt			402,500			—

	Total liabilities		1,347,207			539,157

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			135
	Additional paid-in capital		653,624			658,546
	Deferred stock compensation		(7,761	)		(11,766	)
	Retained earnings		229,777			120,520
	Receivable from stockholders		—			(282	)
	Accumulated other comprehensive income (loss)		3,420			(758	)

Total stockholders' equity			879,191			766,395

	Total liabilities, minority interest and stockholders' equity	$	2,226,958		$	1,305,552

		Common Stock											Retained Earnings (Accumulated Deficit			Notes Receivable from stockholders
		Common Stock					Additional Paid-in-Capital			Deferred Stock Compensation									Accumulated Other Comprehensive Income/(Loss)			Total Stockholders' Equity			Comprehensive Income
		Shares		Amount			Additional Paid-in-Capital			Deferred Stock Compensation									Accumulated Other Comprehensive Income/(Loss)			Total Stockholders' Equity			Comprehensive Income
Balances, December 31, 2000		95,032,657		$	120		$	426,665		$	(6,491	)	$	(7,808	)	$	(314	)	$	147		$	412,319
Common stock issued upon exercise of options		5,363,601			8			18,756															18,764
Common stock issued upon ESPP purchases		118,223						1,866															1,866
Common stock issued related to acquisition of Stable Gain		439,810						10,700															10,700
Common stock issued upon secondary offering, net of expenses		7,400,000			9			139,911															139,920
Common stock issued for ACD acquisition, net of expenses		948,525			1			20,733															20,734
ACD deferred compensation								5,000			(5,000	)											—
Amortization of deferred compensation related to ACD acquisition											1,250												1,250
Amortization of deferred stock compensation related to grants of stock options to employees								23			3,928												3,951
Cancellation of deferred compensation charges due to employee terminations								(268	)		268												—
Tax benefits for non-qualified stock option exercises								15,311															15,311
Issuance of notes receivable from stockholders																	(67	)					(67	)
Net income														56,954									56,954		$	56,954
Other comprehensive income:
	Unrealized holding gain (net of tax of $95)																			211			211			211
	Translation adjustment (net of tax of $25)																			(26	)		(26	)		(26	)

Total comprehensive income																							57,139		$	57,139

Balances, December 31, 2001		109,302,816			138			638,697			(6,045	)		49,146			(381	)		332			681,887
Common stock issued upon exercise of options		1,717,899			3			9,162															9,165
Common stock issued upon Softbank offering, net of expenses		1,500,000			2			28,933															28,935
Common stock issued upon ESPP purchases		182,437			—			2,828															2,828
ACD acquisition-related stock issuances		84,756																					—
Buyback of Softbank shares, net of fees		(6,000,000	)		(8	)		(36,433	)					(36,488	)								(72,929	)
Cancellation of deferred compensation charges due to employee terminations								(1,282	)		1,282												—
Amortization of deferred stock compensation								103			2,997												3,100
Acquisition-related deferred compensation								10,000			(10,000	)											—
Tax benefits for non-qualified stock option exercises								6,538															6,538
Collections on notes receivable from stockholders																	99						99
Net income														107,862									107,862		$	107,862
Other comprehensive income:
	Unrealized holding loss (net of tax of $298)																			(952	)		(952	)		(952	)
	Translation adjustment (net of tax of $25)																			(138	)		(138	)		(138	)

Total comprehensive income																							106,772		$	106,772

Balances, December 31, 2002		106,787,908			135			658,546			(11,766	)		120,520			(282	)		(758	)		766,395
Common stock issued upon exercise of options		4,490,195			6			55,053															55,059
Common stock issued upon ESPP purchases		261,103						3,839															3,839
Repurchase of Softbank Shares including fees		(8,000,000	)		(10	)		(46,605	)					(92,994	)								(139,609	)
Purchase of convertible bond hedge and call option								(43,792	)														(43,792	)
Common stock issued for RollingStreams acquisition		164,115						6,233															6,233
Shanghai Yi Yun acquisition-related stock issuance		226,302																					—
Deferred Compensation related to RollingStream acquisition											(434	)											(434	)
Cancellation of deferred compensation charges due to employee terminations								(156	)		156												—
Amortization of deferred stock compensation											4,283												4,283
Common stock issued for Shanghai Yi Yun acquisition		342,854						6,001															6,001
Tax benefits for non-qualified stock option exercises								14,505															14,505
Collections of notes receivable from stockholders																	282						282
Net income														202,251									202,251		$	202,251
Other comprehensive income:
	Unrealized holding gain (net of tax of $506)																			2,166			2,166			2,166
	Translation adjustment (net of tax of $791)																			2,012			2,012			2,012

Total comprehensive income																							206,429		$	206,429

Balances, December 31, 2003		104,272,477		$	131		$	653,624		$	(7,761	)	$	229,777		$	—		$	3,420		$	879,191

			Twelve months ended
			December 31, 2003			December 31, 2002			December 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	202,251		$	107,862		$	56,954
Adjustment to reconcile net income to net cash provided by operating activities:
	Gain on change in ownership interest in subsidiary			—			—			(277	)
	Depreciation and amortization			44,595			22,435			18,533
	Non-qualified stock option exercise tax benefits			14,505			6,537			15,311
	Loss on sale of assets			1,920			1,098			802
	Loss on sale of notes receivable			2,286			—
	In-process research and development costs			10,686			670			4,720
	Amortization of debt issuance costs			1,953			—			—
	Warrants adjustment to fair value			(424	)		—			—
	Loss on sale of investment			73			—			—
	Impairment of long-term investment			75			4,442			1,690
	Stock compensation expense			4,302			3,100			5,200
	Allowance for doubtful accounts			4,922			7,197			6,218
	Inventory reserve			14,626			18,937			11,143
	Equity in loss of affiliated companies			5,261			4,053			2,962
	Deferred income taxes			5,567			(14,704	)		(9,629	)
	Minority interest in earnings of consolidated subsidiary			76			1,156			1,322
	Changes in operating assets and liabilities:
		Accounts receivable		(151,737	)		(34,207	)		(39,196	)
		Inventories		(81,632	)		(76,056	)		(60,419	)
		Deferred costs/Inventories at customer sites under contracts		(317,998	)		(137,806	)		(60,779	)
		Other current and non-current assets		(102,583	)		(45,802	)		(42,990	)
		Accounts payable		(5,804	)		170,452			39,085
		Income taxes payable		3,777			2,470			3,366
		Customer advances		302,318			87,776			42,833
		Deferred revenue		27,379			47			1,913
		Other current liabilities		64,140			27,683			41,407

Net cash provided by operating activities				50,534			157,340			40,169

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment				(122,339	)		(75,271	)		(30,199	)
Investment in affiliates, net of cash acquired				(661	)		(28,933	)		(9,779	)
Issuance of note receivable to related party				(10,071	)		—			—
Purchase of minority interest				—			—			(705	)
Purchase of businesses, net of cash acquired				(111,720	)		(17,706	)		—
Proceeds from disposal of property, plant and equipment				21			175		&nbs

		Years ended December 31,
		2003				2002				2001
		(in thousands)
Sales by region
China		$	1,679,966	86	%	$	822,299	84	%	$	565,880	90	%
Japan			194,894	10	%		130,104	13	%		16,303	3	%
Other			89,472	4	%		29,403	3	%		44,657	7	%

	TOTAL NET SALES	$	1,964,332	100	%	$	981,806	100	%	$	626,840	100	%

Sales by product line
Wireless infrastructure		$	719,700	37	%	$	447,096	46	%	$	376,538	60	%
Subscriber handsets			968,192	49	%		376,805	38	%		187,902	30	%
Wireline products			276,440	14	%		157,905	16	%		62,400	10	%

	TOTAL NET SALES	$	1,964,332	100	%	$	981,806	100	%	$	626,840	100	%