UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

UTSTARCOM, INC.

(Exact name of registrant as specified in its charter)

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

As of May 5, 2005 there were 114,841,986 shares of the registrant’s common stock outstanding, par value $0.00125.

TABLE OF CONTENTS

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PART I—FINANCIAL INFORMATION

ITEM 1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UTSTARCOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

See accompanying notes to the condensed consolidated financial statements.

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UTSTARCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)

See accompanying notes to the condensed consolidated financial statements.

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UTSTARCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

See accompanying notes to the condensed consolidated financial statements.

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UTSTARCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.                             BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements include the accounts of UTStarcom, Inc. (the “Company”) and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the preparation of the condensed consolidated financial statements. The minority interests in consolidated subsidiaries and equity in affiliated companies are shown separately in the condensed consolidated financial statements.  The Company also consolidates variable interest entities (“VIE”) as defined by Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities” where the Company is the primary beneficiary.  Investments in affiliated companies are accounted for using the cost or equity method, as applicable.

The accompanying financial statements as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 2004 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company’s audited December 31, 2004 financial statements, including the notes thereto, and the other information set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair statement of the Company’s financial condition, the results of its operations and its cash flows for the periods indicated. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the operating results for the full year.

2.                             REVENUE RECOGNITION:

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

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 Emerging Issues Task Force Issue (“EITF”) No. 00-21, and SEC Staff Accounting Bulletin No. 104 (“SAB 104”). Multiple element arrangements primarily involve the sale of Personal Access Systems (“PAS”), a family of wireless access handsets, wireless consumer products and core infrastructure equipment or Internet Protocol-based PAS, (“iPAS”), wireless access systems that employ micro cell radio technology and specialized handsets, allowing service providers to offer subscribers both mobile and fixed access to telephone services. These multiple element arrangements include 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(s) has stand-alone value, there is no right of return on delivered element(s), and the Company is in control of the undelivered element(s). For arrangements that include service elements, including promotional support and installation, for which verifiable objective evidence of fair value does not exist, revenue is deferred until such services are deemed complete.

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

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

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

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

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

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

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

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

3.                             EARNINGS PER SHARE:

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

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

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Certain potential shares related to employee stock options outstanding during the three months ended March 31, 2005 and 2004 were excluded in the diluted per share computations, since their exercise prices were greater than the average market price of the Company’s common stock during the period and, accordingly, their effect is anti-dilutive under the treasury stock method. For the three months ended March 31, 2005 and 2004, these shares totaled 15.4 million with a weighted average exercise price of $24.09 per share and 1.6 million shares with a weighted average exercise price of $38.04 per share, respectively.

At March 31, 2005, the Company’s 7/8% convertible subordinated notes outstanding were eligible for conversion into shares of common stock. For each $1,000 of aggregate principal amount of notes converted, the Company will deliver approximately 42.0345 shares of common stock, if the Company’s closing stock price exceeds a specified threshold as of the last trading day of the immediately preceding fiscal quarter. At December 31, 2004, the closing price of the Company’s common stock was below the specified threshold. In September 2004, the EITF reached a consensus related to EITF No. 04-8 “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.”  The consensus requires contingently convertible debt instruments with a market price trigger to be treated the same as traditional convertible debt instruments for purposes of computed earnings per share using the “if converted” method.  The EITF pronouncement is effective and conversion is assumed in this diluted EPS computation.

The net income for the diluted EPS computation reflects the reduction in interest expense of $1.0 million and $0.9 million, net of tax, for the three months ended March 31, 2005 and 2004, respectively, that would result from an assumed conversion of the 7/8% convertible subordinated notes.

The Company entered into convertible bond hedge and call option transactions to reduce the potential dilution from conversion of the notes. Both the bond hedge and call option transactions may be settled at the Company’s option either in cash or net shares and expire on March 1, 2008.  Using the treasury stock method, under Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”), this would have the effect of decreasing the denominator for diluted earnings per share by 5.1 million shares for the bond hedge transaction, and increasing the denominator for diluted earnings per share by 1.0 million shares for the call option transaction.  However, only the dilutive effect of the 1.0 million shares with respect to the call option transaction is included in the Company’s diluted earnings per share calculation above.  The convertible bond hedge, under SFAS 128, is always anti-dilutive.

During the three months ended March 31, 2005, the average price of the Company’s stock was below the specified strike prices of both the convertible bond hedge and call option transactions and, therefore, there was no dilutive effect.  For the three months ended March 31, 2004, the average price of the Company’s stock exceeded both the specified strike prices of the convertible bond hedge and

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call option transactions and, therefore, the dilutive effect of the 1.0 million shares with respect to the call option transaction is included in the diluted earnings per share calculation.

4.                             STOCK-BASED COMPENSATION:

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

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

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):

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The following assumptions were used to calculate the fair values:

5.                             COMPREHENSIVE INCOME:

The reconciliation of net income to comprehensive income for the three months ended March 31, 2005 and 2004 is as follows (in thousands):

6.                             CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:

Cash and cash equivalents consist of instruments with maturities of three months or less at the date of purchase. There were no available-for-sale securities included in cash and cash equivalents at March 31, 2005 or December 31, 2004. Short-term investments, consisting entirely of available-for-sale securities, were $16.2 million and $136.3 million at March 31, 2005 and December 31, 2004, respectively. These available-for-sale securities consist of government-backed notes, commercial paper, floating rate corporate bonds and fixed income corporate bonds. These investments are recorded at fair value. Any unrealized holding gains or losses are reported as a component of comprehensive other income. Realized gains and losses are reported in earnings.

The Company accepts bank notes receivable with maturity dates of between three and six months from its customers in China in the normal course of business.  The Company may discount these notes with banking institutions in China. A sale of these notes is reflected as a reduction of cash and cash equivalents or short-term investments and the proceeds of the settlement of these notes are included in cash flows from operating activities in the consolidated statement of cash flows. Bank notes totaling $56.9 million were sold during the three months ended March 31, 2005 and none for the three months ended March 31, 2004. Any notes that have been sold are not included in the Company’s consolidated balance sheets as the criteria for sale treatment established by Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”), have 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 cost of settling these notes receivable was $0.5 million for the three months ended March 31, 2005.

7.                             SHORT-TERM RESTRICTED CASH AND INVESTMENTS:

At March 31, 2005, the Company had short-term restricted cash and investments of $29.6 million comprised of $21.3 million of restricted cash and $8.3 million of restricted short-term investments held for standby letters of credit and an escrow fund.  At December 31, 2004, the Company had restricted cash and short-term investments of $33.3 million primarily comprised of $24.3 million of restricted cash and $8.6 million of restricted short-term investments for standby letters of credit.

The Company issues standby letters of credit primarily to support international sales activities outside of China. When the Company

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submits a bid for a sale, often the potential customer will require that the Company issue a bid bond or a standby letter of credit to demonstrate its commitment through the bid process.  In addition, the Company may be required to issue standby letters of credit as guarantees for advance customer payments upon contract signing or performance guarantees. The standby letters of credit usually expire six to nine months from date of issuance without being drawn by the beneficiary thereof. Finally, the Company may issue commercial letters of credit in support of purchase commitments.

8.                             ACCOUNTS AND NOTES RECEIVABLE:

Allowances for doubtful accounts were $68.5 million and $51.2 million at March 31, 2005 and December 31, 2004, respectively, for total accounts receivables, including accounts receivable from related parties.

The Company accepts commercial notes receivable with maturity dates of between three and six months from its customers in China in the normal course of business. Notes receivable available for sale was $22.9 million and $27.0 million at March 31, 2005 and December 31, 2004, respectively. The Company may discount these notes with banking institutions in China. A sale of these notes is reflected as a reduction of notes receivable and the proceeds of the settlement of these notes are included in cash flows from operating activities in the consolidated statement of cash flows.  Any notes that have been sold are not included in the Company’s consolidated balance sheets as the criteria for sale treatment established by SFAS 140, has been met. There were no notes receivable sold during the three months ended March 31, 2005 and 2004.

9.                             SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

10.                          INVENTORIES

As of March 31, 2005 and December 31, 2004, total inventories consisted of the following:

11.                          ACQUISITION

Giga

On October 29, 2004, the Company entered into an asset purchase agreement with Giga Telecom, Inc., (“Giga”), a Korean corporation

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that develops and designs wireless handsets. The acquisition was intended to facilitate the Company’s expansion into the CDMA handset market. The Company completed the acquisition on January 4, 2005. At the closing, $13.0 million in cash was paid, and an additional $2.0 million was paid into an escrow account for six months.  The total consideration for the acquisition, funded from cash on hand, was approximately $18.5 million, including $2.0 million in acquisition-related transaction costs and a $1.5 million payment made previously to be applied against the purchase price.  An earn-out of up to $2.0 million may become payable upon completion of certain product design milestones.  As of March 31, 2005, no milestones have been met and no contingent payment was accrued.

The following table summarizes the allocation of the purchase price for Giga based, in part, upon an independent valuation (in thousands):

The excess of the purchase price over the fair value of the identified net assets of approximately $14.9 million was allocated to goodwill and assigned to the handsets segment.  The goodwill created in this acquisition results from the decreased time to market and design related synergies.  This goodwill is tax deductible.

In accordance with EITF 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination”, a settlement gain of $0.4 million relating to the pre-existing royalty agreement was recognized and recorded under Research and Development expense in the consolidated statements of operations. The purchased existing technology and pre-existing royalty agreement are to be amortized within a year.

The results of operations of Giga have been integrated with the “handsets” segment and included in the Company’s Consolidated Statement of Operations subsequent to the acquisition.  The pro forma effects of this acquisition on the Company’s financial statements are not significant.

HSI

The Company recorded a $2.2 million charge relating to the shut-down of the operations of HSI, which the Company acquired in April 2004.  In the fourth quarter of 2004, the Company decided to substantially abandon HSI’s legacy operation due to the difficulties encountered in integrating the operations.  The charge of $2.2 million includes fixed assets write-off, costs associated with the termination of leases and personnel.

12.                          GOODWILL AND INTANGIBLE ASSETS:

Goodwill:

As of March 31, 2005 and December 31, 2004, goodwill was $195.8 million and $180.6 million, respectively.

Effective in the first quarter of 2005, the Company realigned its business into five operating units and, accordingly, goodwill has been reallocated to the reporting units, using a relative fair value allocation approach prescribed in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  See Note 18 for further discussion.  The Company determined the relative fair value of each reporting unit based, in part, upon an independent valuation analysis.  The goodwill reallocation is reflected as follows.

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Intangible Assets:

As of March 31, 2005 and December 31, 2004, intangible assets consisted of the following (in thousands):

Amortization expense was $7.0 million and $3.0 million for the three months ended March 31, 2005 and 2004, respectively.  The estimated aggregate amortization expense for intangibles for each of the five years from the year ended December 31, 2006 through the year ended December 31, 2010 is $18.9 million, $16.0 million, $12.7 million, $6.9 million, $5.1 million and $15.7 million thereafter.

The weighted average amortization period for each class of unamortized identifiable intangible assets include the following:

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13.                          LONG-TERM INVESTMENTS:

The Company’s investments are as follows (in thousands):

Softbank China

The Company has a $5.3 million investment in Softbank China, an investment fund established by SOFTBANK CORP. focused on investments in Internet companies in China. This investment is intended to enable the Company to participate in the anticipated growth of Internet-related businesses in China. SOFTBANK CORP. and its related companies are significant stockholders of the Company. The Company’s investment constitutes 10% of the funding for Softbank China, with SOFTBANK CORP. contributing the remaining 90%. The fund has a separate management team, and none of the Company’s employees are employed by the fund. Many of the fund’s investments are and will be in privately held companies, many of which are still in the start-up or development stages. These investments are inherently risky as the markets for the technologies or products the companies have under development are typically in the early stages and may never materialize. The Company accounts for this investment under the cost method. For additional information regarding transactions with SOFTBANK CORP., refer to Note 19, Related Party Transactions. The Company did not record other than temporary impairment loss in the quarters ended March 31, 2005 and 2004.

Cellon International

In September 2001, the Company invested $2.0 million in Cellon International Holdings Corporation (“Cellon”).  Cellon designs wireless terminals and related technology for handset manufacturers and private distributors. The Company invested an additional $3.0 million in each of April and December 2002. As of March 31, 2005, the Company had a 9 % ownership interest in Cellon. This investment is accounted for under the cost method, and its carrying value is evaluated for possible impairment based on the achievement of business objectives and milestones, the financial condition and prospects of the company and other relevant factors. As of March 31, 2005, the Company has not recorded any impairment of this investment. The Company has outstanding purchase commitments with Cellon.  For additional information regarding transactions with Cellon, refer to Note 19, Related Party Transactions.

Restructuring Fund No. 1

During fiscal 2002, the Company invested $2.0 million in Restructuring Fund No. 1, a venture capital investment limited partnership established by SOFTBANK INVESTMENT CORP., an affiliate of SOFTBANK CORP. SOFTBANK America Inc., an entity affiliated with SOFTBANK CORP., is a significant stockholder of the Company. The fund focuses on leveraged buyout investments in companies in Asia undergoing restructuring or bankruptcy procedures. The total fund offering is expected to be between approximately $150.0 million and $226.0 million, with each investor contributing a minimum of $0.8 million. The fund has a separate management team, and none of the Company’s employees are employed by the fund. The Company accounts for this investment under the equity method of accounting.  The Company recorded $0.5 million equity gain and insignificant equity losses for the three

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months ended March 31, 2005 and 2004, respectively.

Global Asia Partners, L.P.

In June 2002, the Company invested $1.0 million in Global Asia Partners L.P., and an additional $1.0 million in June 2003, with a commitment to invest up to a maximum of $5.0 million. The remaining amount is due at such times and in such amounts as shall be specified in one or more future capital calls to be issued by the general partner. The fund size is anticipated to be $10.1 million and the fund was formed to make private equity investments in private or pre-IPO technology and telecommunications companies. The fund’s geographic focus is on technology investments in Asia, in particular in India and China. The Company accounts for this investment under the equity method of accounting.   No significant gains or losses recorded during the three months ended March 31, 2005 and 2004.  In April 2005, the Company received a capital call in the amount of $0.5 million.

Fiberxon Inc.

In September 2002, the Company invested $2.0 million in Fiberxon, Inc. (“Fiberxon”), a company that develops and sells optical modules and related systems. In March 2004, the Company invested an additional $1.0 million in Fiberxon. This investment is accounted for under the cost method, and its carrying value is evaluated for possible impairment based on the achievement of business objectives and milestones, the financial condition and prospects of the company and other relevant factors. As of March 31, 2005, the Company has not recorded any impairment in respect of this investment. The Company has outstanding purchase commitments with Fiberxon. For additional information regarding transactions with Fiberxon, refer to Note 19, Related Party Transactions.

ImmenStar

On September 28, 2004, the Company invested $2.0 million in the Series A Preferred Stock of ImmenStar, Inc. (“ImmenStar”).  ImmenStar is a development stage company that is designing a chip which can be used in the Company’s product.  This investment is accounted for under the cost method and there was no impairment loss recorded during the three months ended March 31, 2005.

Matsushita Joint Venture

In July, 2002, the Company entered into a joint venture agreement with Matsushita Communication Industrial Co., Ltd., a stockholder of the Company, to jointly design and develop, manufacture and sell telecommunication products. The Company has a 49% ownership interest in the joint venture company, which has a registered share capital of $10.0 million. The cash consideration of $4.9 million payable by the Company was paid in October 2002. As the Company does not have voting control over significant matters of the joint venture company, the investment in and results of operations of the joint venture company are accounted for using the equity method of accounting.  The Company recorded equity losses of $1.0 million in each of the three months ended March 31, 2005 and 2004.

During the fourth quarter of 2004, the Company contributed an additional $9.3 million (its 49% of the $19 million capital call) to the joint venture.

GCT Semiconductor

In October 2004, the Company invested $3.0 million in three million shares of GCT Semiconductor, Inc. (“GCT”) Series D Preferred Stock at $1.00 per share. The investment represents approximately a 2% interest in the company, which designs, develops and markets integrated circuit solutions for the wireless communications industry. The investment is accounted for under the cost method and there was no impairment loss recorded during the three months ended March 31, 2005 in relation to this investment.

Infinera

In July 2004, the Company invested $3.0 million in 1,339,285 shares of Infinera Corporation (“Infinera”) Series D Preferred Stock at $2.24 per share.  The investment represents an approximately 2% interest in Infinera, which develops optical telecommunications

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systems using photonic integrated circuits.  This investment is accounted for under the cost method.

In September 2004, Infinera closed a Series E Preferred Stock round at $0.60 per share.  As a result of the close proximity between the Series D and Series E preferred stock financing rounds and the decrease in the share price between rounds, Infinera and the Company entered into an exchange agreement whereby the Company exchanged 669,643 shares of Series D preferred stock for 2,500,000 shares of Series E preferred stock. After the exchange, the Company owns a total of 669,643 shares of Series D and 2,500,000 shares of Series E preferred stock.

There was no change in the carrying amount as of March 31, 2005.

14.                          DEBT:

The following represents the outstanding borrowings at March 31, 2005 and December 31, 2004 (in thousands):

Occasionally, the Company issues short-term notes payable to its vendors in lieu of trade accounts payable.  The payment terms are normally three to nine months and are typically non-interest bearing.  The Company had $1.3 million of these notes at March 31, 2005 included in short-term debt.

At March 31, 2005, the Company has loans with various banks totaling $266.0 million with interest rates ranging from 3.04% to 4.35% per annum.  These bank loans mature during 2005 and are included in short-term debt.

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

The Company has available borrowing facilities of $487.5 million as of March 31, 2005. $480.3 million of these facilities expire in 2005 and $7.2 million of these facilities expire in 2010 with interest rates ranging from 3.04% to 4.35%. The Company has not guaranteed any debt not included in the consolidated balance sheet.

On March 12, 2003, the Company completed an offering of $402.5 million of convertible subordinated notes due March 1, 2008 to qualified buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes bear interest at a rate of 7/8% per annum and are convertible into the Company’s common stock at a conversion price of $23.79 per share and are subordinated to all present and future senior debt of the Company. Holders of the notes may convert their notes only if: (i) the price of the Company’s common stock issuable upon conversion of a note reaches a specified threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the notes falls below certain thresholds. At the initial conversion price, each $1,000 principal amount of notes will be convertible into approximately 42.0345 shares of common stock. Expenses associated with the convertible subordinated notes issuance were $11.7 million and have been recorded with in other long-term assets and are being amortized over the life of the notes.

Concurrent with the issuance of the convertible notes, the Company entered into a convertible bond hedge and call option transaction at a cost of $43.8 million. The convertible bond hedge allows the company to purchase 16.9 million shares of its common stock at $23.79 per share from the other party to the agreement. The written call option allows the holder to purchase 16.9 million shares of the Company’s common stock from the Company at $32.025 per share. Both the bond hedge and call option transactions may be settled at

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the Company’s option either in cash or net shares and expire on March 1, 2008. The Company recorded these instruments at cost, and their carrying value at March 31, 2005 equaled their original cost. The convertible bond hedge and call option transactions are expected to reduce the potential dilution from conversion of the notes. The options have been included in stockholders’ equity in accordance with the guidance in Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”

15.                          WARRANTY OBLIGATIONS AND OTHER GUARANTEES:

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

Warranty obligations are as follows (in thousands):

Warranty obligations:

During the first quarter of 2005, the Company incurred special warranty coverage for certain asynchronous digital subscriber line (“ADSL”) equipment sold to Softbank BB Corporation (“SBBC”) during 2003 and 2004.  Since the agreement to repair these parts exceed the Company’s normal warranty terms, the Company has recorded a special warranty charge in the current quarter of $9.5 million. Completion of the repair of these units is expected to be completed by the end of 2005.  For additional information, refer to Note 19, Related Party Transactions.

Other guarantees:

Certain of the Company’s sales contracts include provisions under which customers would be indemnified by the Company in the event of, among other things, a third-party claim against the customer for intellectual property rights infringement related to the Company’s products. There are no limitations on the maximum potential future payments under these guarantees. The Company has not accrued any amount in relation to these provisions as no such claims have been made and the Company believes it has valid, enforceable rights to the intellectual property embedded in its products.

16.                          COMMITMENTS AND CONTINGENCIES:

Leases:

The Company leases certain facilities under non-cancelable operating leases that expire at various dates through 2023.  The minimum future lease payments under the leases at March 31, 2005 were as follows:

Rent expense for the quarters ended March 31, 2005 and 2004 were $5.6 million and $3.6 million, respectively.

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Other contractual obligations and commitments are as follows:

Notes payable

Occasionally, the Company issues short-term notes payable to its vendors in lieu of trade accounts payable.  The payment terms are normally three to nine months and are typically non-interest bearing.

Bank loans

At March 31, 2005, the Company had loans with various banks totaling $266.0 million with interest rates ranging from 3.04% to 4.35% per annum.  These bank loans mature during 2005 and are included in short-term debt.

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

Convertible subordinated notes

The Company has $402.5 million of convertible subordinated notes, due March 1, 2008, that 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.

Standby letters of credit

The Company issues standby letters of credit primarily to support international sales activities outside of China. When the Company submits a bid for a sale, often the potential customer will require that the Company issue a bid bond or a standby letter of credit to demonstrate its commitment through the bid process. In addition, the Company may be required to issue standby letters of credit as guarantees for advance customer payments upon contract signing or performance guarantees. The standby letters of credit usually expire six to twelve months from the date of issuance without being drawn by the beneficiary thereof. The Company may issue commercial letters of credit in support of purchase commitments.

Purchase commitments

The Company is obligated to purchase raw materials and work-in-process inventory under various orders from various suppliers, all of which should be fulfilled without adverse consequences material to the operations or financial condition of the Company. As of March 31, 2005, total open commitments under these purchase orders were approximately $317.9 million.

Investment commitments

As of March 31, 2005, the Company had invested a total of $2.0 million in Global Asia Partners L.P. The fund size is anticipated to be

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$10.1 million and the fund was formed to make private equity investments in private or pre-IPO technology and telecommunications companies in Asia. The Company has a commitment to invest up to a maximum of $5.0 million. The remaining amount is due at such times and in such amounts as shall be specified in one or more future capital calls to be issued by the general partner.

Intellectual property

Certain sales contracts include provisions under which customers would be indemnified by us in the event of, among other things, a third-party claim against the customer for intellectual property rights infringement related to our products. There are no limitations on the maximum potential future payments under these guarantees. The Company has not accrued any amounts in relation to these provisions as no such claims have been made and the Company believes it has valid enforceable rights to the intellectual property embedded in its products.

Litigation:

Securities Class Action Litigation

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

Four similar class action complaints were later filed in the United States District Court for the Northern District of California against the Company and several of the Company’s directors and officers.  In both the Idaho court and the California court, competing motions were filed for appointment of lead plaintiff and approval of lead plaintiffs’ counsel, and in the California court various motions for consolidation of actions were filed as well.  On March 15 and 16, 2005, the California court entered orders consolidating the cases pending in that court, appointing the lead plaintiff and approving the lead plaintiff’s counsel.  Pursuant to those orders, a consolidated complaint is to be filed in that court within 60 days thereafter.  On April 6, 2005, the Idaho court entered an order appointing the lead plaintiff and approving the lead plaintiff’s counsel.  On April 18, 2005, the parties filed a stipulation to transfer the Idaho case to the California court, and on April 21, 2005, the Idaho court approved the stipulation and ordered the transfer of the Idaho case to the California court for consolidation with the actions pending in that court.

This class action litigation is in its preliminary stages, and the Company cannot predict its outcome, as the litigation process is inherently uncertain.  However, the Company believes that the allegations and claims in this litigation are without merit and that it has valid defenses, and intends to contest such allegations and claims and defend itself vigorously.  If the outcome of the litigation is adverse to the Company and if, in addition, the Company is required to pay significant monetary damages, the Company’s business would be significantly harmed.  At a minimum, this litigation could result in substantial costs and divert the Company’s management’s attention and resources, which could seriously harm the Company’s business.  As of March 31, 2005, no loss amount has been accrued because a loss is not considered probable or estimable.

Shareholder Derivative Litigation

On August 31 and September 2, 2004, respectively, two shareholder derivative actions were filed in the Superior Court of California, Alameda County, by alleged shareholders of the Company purporting to assert, on the Company’s behalf, claims of breach of fiduciary duty against certain of the Company’s current and former directors and officers, and also naming the Company as a nominal defendant.  The complaints in these actions refer to the Company’s disclosures as to an Audit Committee investigation into revenue recognition issues and as to “significant control deficiencies” related to revenue recognition.  The complaints further allege that the individual defendants ignored problems with the Company’s accounting and internal control practices and procedures and breached

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their fiduciary duties by failing to maintain adequate internal accounting controls or to make good faith efforts to do so.  Plaintiffs claim that such alleged breaches damaged the Company, and they seek monetary recovery against the individual defendants and in favor of the Company, as well as equitable relief.  In addition, plaintiffs claim that they should be excused from pre-suit demand requirements based on allegations that the Company’s Board of Directors could not have fairly evaluated such pre-suit demand, and thus that such demand would have been futile.  On November 22, 2004, the Court entered an order consolidating the two actions and appointing lead plaintiff’s counsel.

On November 23 and December 2, 2004, two related shareholder derivative actions were filed in the same court.  On January 13, 2005, the Court consolidated these two newer cases with the previously consolidated actions, and directed plaintiffs to prepare and file an amended consolidated complaint, which plaintiffs filed on January 31, 2005.  On March 17, 2005, the Company filed a motion, joined by other defendants, seeking dismissal of the consolidated complaint for failure to adequately plead futility of the pre-suit demand.  On April 18, 2005, plaintiffs filed their opposition to that motion, and a hearing on the matter is currently set for June 3, 2005.

This derivative litigation is in its preliminary stages, and the Company cannot predict its outcome, as the litigation process is inherently uncertain.  However, the Company believes that plaintiffs’ allegations of “demand futility” are without merit, and the Company intends to contest those allegations vigorously.  At a minimum, this derivative litigation could result in substantial costs and divert the Company’s management’s attention and resources, which could seriously harm the Company’s business.  As of March 31, 2005, no loss amount has been accrued because a loss is not considered probable or estimable.

IPO Allocation

On October 31, 2001, a complaint was filed in United States District Court for the Southern District of New York against the Company, some of the Company’s directors and officers and various underwriters for the Company’s initial public offering.  Substantially similar actions were filed concerning the initial public offerings for more than 300 different issuers, and the cases were coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92.  In April 2002, a consolidated amended complaint was filed in the matter against the Company, captioned In re UTStarcom, Initial Public Offering Securities Litigation, Civil Action No. 01-CV-9604.  Plaintiffs allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 through undisclosed improper underwriting practices concerning the allocation of IPO shares in exchange for excessive brokerage commissions, agreements to purchase shares at higher prices in the aftermarket and misleading analyst reports.  Plaintiffs seek unspecified damages on behalf of a purported class of purchasers of the Company’s common stock between March 2, 2000 and December 6, 2000.  The Company’s directors and officers have been dismissed without prejudice pursuant to a stipulation.  On February 19, 2003, the Court granted in part and denied in part a motion to dismiss brought by defendants including the Company.  The order dismisses all claims against the Company except for a claim brought under Section 11 of the Securities Act of 1933, which alleges that the registration statement filed in accordance with the IPO was misleading.  In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the court for approval.  The terms of the settlement, if approved, would dismiss and release all claims against the participating defendants (including the Company).  In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters.  The settlement is subject to a number of conditions, including court approval.  If the settlement does not occur, and litigation against the Company continues, the Company believes it has valid defenses and intends to defend the case vigorously.  The total amount of the loss associated with the above litigation is not determinable at this time.  Therefore, the Company is unable to currently estimate the loss, if any, associated with the litigation.

Starent Patent Infringement Litigation

The Company sued Starent Networks Corporation (“Starent”) for patent infringement in the U.S. District Court for the Northern District of California.  On March 22, 2004, the Company filed a Complaint.  On June 3, 2004, the Company served the Complaint on Starent.  On July 30, 2004, Starent filed and served its answer and counterclaims.  On August 30, 2004, the Company served and filed an Amended Complaint.  In the Company’s Amended Complaint, the Company asserts that Starent infringes a UTStarcom patent through the manufacture, use, offer for sale, and sale of Starent’s ST-16 Intelligent Mobile Gateway.  The Company seeks inter alia, compensatory damages and injunctive relief.  Starent filed its answer to the Amended Complaint and counterclaims on September 17, 2004.  In its answer and counterclaims, Starent denies the Company’s allegations and seeks a declaration that the patent-in-suit is not infringed, is invalid and is unenforceable.  The Court held an initial case management conference on November 2, 2004 and scheduled a hearing to construe the claims of the patent-in-suit for June 30, 2005.  At that time the Court will hold an additional case management conference to schedule a date for trial.  On February 17, 2005, the Company filed a motion for a

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preliminary injunction against Starent’s use, sale, and offer for sale of products having the infringing feature.  A hearing on the Company’s motion is set for May 11, 2005.  The Company has indicated that it believes that any adverse judgment on Starent’s counterclaims will not have a material adverse effect on the business, financial condition, or results of the Company’s operations. However, an evaluation of the possibility of a favorable or unfavorable outcome or estimate of the amount or range of potential loss to the Company has not been made.

On February 16, 2005, the Company filed a second suit against Starent for patent infringement in the U.S. District Court for the Northern District of California.  On May 6, 2005, the Company served the Complaint on Starent.  In the Complaint, the Company assets that Starent infringes a UTStarcom patent through Starent’s development and testing of a software upgrade for its customer’s installed ST-16 Intelligent Mobile Gateways.  The Company seeks, inter alia, declaratory and injunctive relief.  The Court has set a case management conference for August 19, 2005.  This lawsuit is in its initial stages and Starent has not yet answered, counterclaimed, or otherwise filed a response to the Company’s Complaint.

Fenner Investments Patent Infringement Litigation

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

Other

On August 19, 2004, the Company received a letter from the new management team of Hyundai Syscomm, Inc. (“HSI”) stating that they consider the Asset Purchase Agreement, dated as of February 26, 2004, among HSI, UTSI, Dr. Seong-Ik Jang and 3R Inc. (the ”APA”), and the various ancillary agreements entered into in connection with the closing related to the APA on April 27, 2004, to be null and void due to unfulfillment of condition precedents and material breach of terms of such agreements.  Such condition precedents and material breach of terms were not specified in such letter from HSI.  In addition, HSI has made allegations and arguments before Korean governmental agencies and to the Korean press alleging that the technology that was purchased by the Company pursuant to the APA has been exported outside of Korea.  The Company believes none of such technology has been exported by the Company from Korea to any foreign country.  In addition, the Company believes that it has materially complied with all provisions of the APA and the ancillary agreements and HSI cannot void or nullify such agreements.  The Company has taken, and will continue to take, appropriate legal actions to fully enforce its rights under the APA and the ancillary agreements.  The Company believes that this dispute with HSI would not have a material adverse effect on the Company’s financial condition, results of operations or cash flow.

The Company is a party to other litigation matters and claims that are normal in the course of operations, and while the results of such litigation matters and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse impact on its financial position or results of operations.

17.                          STOCKHOLDERS’ EQUITY:

On January 14, 2004, the Company sold 12.1 million shares of common stock at $39.25 per share in a privately negotiated transaction to an institution, for net proceeds of approximately $474.6 million. The net proceeds are intended to fund strategic and general corporate activities, including, but not limited to, acquisitions, investments, working capital or capital expenditures.

On March 12, 2004, the Company’s Board of Directors approved a stock repurchase program, authorizing the Company’s repurchase of up to 5,000,000 shares of its outstanding common stock over a period of 6 months. The Board approved an additional repurchase of 1,623,000 shares in a privately negotiated transaction with an institution, which was completed in March 2004.  There were no shares repurchased in the quarter ended March 31, 2005.

For the three months ended March 31, 2005 and 2004, the Company had $0.7 million and $9.2 million, respectively, of net proceeds from the exercise of stock options.

18.                          SEGMENT REPORTING:

The Company historically managed its business as a single reportable segment. During 2004, the Company continued to expand its focus on markets and operations outside of China. Effective with the fourth quarter of 2004, it was determined that the Company’s

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chief operating decision makers, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” were evaluating performance, making operating decisions and allocating resources based on two operating segments, i) China and ii) all other regions referred to as International (“International”).

On November 1, 2004, the Company acquired selected assets of, the wireless handset division of Audiovox Corporation. The acquired business has been integrated into the Company as a separate and distinct operating division referred to as the Personal Communications Division, (“PCD”). As the Company determined to evaluate performance and allocate resources to this division, it was considered a third operating segment.

As a result, as of December 31, 2004, the Company was organized, principally based on geographical market locations, in three operating segments, China, International and PCD, and each segment consisted of one reporting unit.

Effective in the first quarter of 2005, the Company elected to reorganize its business based principally upon product lines and realigned its business into five operating units, namely Broadband Infrastructure, Wireless Infrastructure, Handsets, PCD, and Global Service Solutions.  Each operating unit represents its own reporting segment and each operating unit is responsible for its own worldwide production and sales management.

The Company currently evaluates operating performance of and allocates resources to the reporting segments based on segment gross profit.  Cost of sales and direct expenses in relation to productions are assigned to the reporting segments.  Corporate headquarter expenses and non-operating items are not allocated to the segments.  The accounting policies used in measuring segment assets and operating performance are the same as those used by corporate and are consistantly applied across all segments.

Summarized below are the Company’s segment sales revenue and gross profit for the three months ended March 31, 2005 and 2004, respectively, and long-lived assets and total assets as of March 31, 2005 and December 31, 2004, respectively, based on the new reporting segment structure.  For the three months ended March 31, 2005, the Broadband segment included related party sales and gross profit of $283.0 million and $157.0 million, respectively.  In addition, for the three months ended March 31, 2005, the Service segment included related party revenue and gross profit of $12.6 million associated with promotional services.  See Note 19.  The prior period segment results have been revised to conform to the current presentation.