item 14 exhibits financial statement schedules reports form 8k 1 financial statementssee index consolidated financial statements financial statement schedules page 53 form 10k 2 financial statement schedulessee index consolidated financial statements financial statement schedules page 53 form 10k 3 exhibitssee exhibit index page 85 form 10k exhibits index portions exhibit omitted pursuant order granted securities exchange commission confidential treatment 1 incorporated reference registrants registration statement form s1 33393069 became effective march 2 2000 2 incorporated reference registrants quarterly report form 10q quarter ended march 31 2000 3 incorporated reference registrants quarterly report form 10q quarter ended june 30 2000 4 incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 b reports form 8k reports form 8k filed year c exhibits see item 14a 3 financial statement schedules see index consolidated financial statements financial statement schedules page 53 form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day february 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day february 2001 condensed financial information december 31 1999 2000 three years ended december 31 2000 independent accountants report financial statement schedules board directors stockholders utstarcom inc audits consolidated financial statements referred report dated january 24 2001 included audit financial statement schedules form 10k opinion financial statement schedules present fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp pricewaterhousecoopers llp san francisco california january 24 2001 schedule utstarcom inc unconsolidated registrant balance sheets thousands except share per share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidated condensed information results operations registrant thousands except share per share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidated condensed information cash flows registrant thousands accompanying notes integral part financial statements schedule utstarcom inc notes condensed financial statements note 1 basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated cash dividends paid utstarcom inc subsidiaries three years ended december 31 2000 accounting policies information see notes consolidated financial statements included elsewhere herein schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2000 1999 1998nanitem 14 controls procedures evaluation disclosure controls procedures chief executive officer chief financial officer evaluating effectiveness companys disclosure controls procedures defined rules 13a14c 15d14c securities exchange act 1934 date evaluation date within 90 days filing date quarterly report believe evaluation date companys disclosure controls procedures adequate effective ensure material information relating company would made known others within company b changes internal controls significant changes internal controls factors could significantly affect disclosure controls procedures subsequent evaluation date item 15item 14 principal accountant fees services information appearing heading principal accountant fees services proxy statement incorporated reference part iv item 15item 14 principal accountant fees services information appearing heading “pricewaterhousecoopers llp fees fiscal year ended december 31 2004” proxy statement incorporated reference part iv item 15item 14 principal accountant fees services pricewaterhousecoopers llp fees fiscal year ended december 31 2005 audit fees fiscal year ended december 31 2005 audit interim reviews approximately 11900000 fees fiscal year ended december 31 2004 audit interim reviews 8424000 auditrelated fees auditrelated fees approximately 1000000 773000 fiscal years ended december 31 2005 december 31 2004 respectively services included due diligence procedures performed surrounding certain companys acquisitions accounting consultation tax fees fiscal year ended december 31 2005 fees related tax advice compliance planning 275000 fiscal year ended december 31 2004 fees tax advice compliance planning totaled 3135000 fees year ended december 31 2005 totaled 7000 consisted entirely fees related research tools fiscal year ended december 31 2004 fees totaled 5000 consisted entirely fees related training audit committee determined provision pricewaterhousecoopers llp nonaudit services us 2005 compatible pricewaterhousecoopers llp maintaining independence audit committee preapproval policies procedures audit committee direct responsibility appointment retention evaluation compensation oversight termination independent registered public accounting firm employ october 2003 audit committee board established nonaudit services subcommittee nonaudit services subcommittee consisting mr horner authorized preapprove nonaudit services performed independent public accountants amounts exceed 50000 per engagement nonaudit services performed independent registered public accounting firm amounts exceed 50000 per engagement approved audit committee fiscal year 2005 auditrelated fees tax fees nonaudit fees approved audit committee pursuant de minimis exception regulation sx rule 201c7ic part iv item 15item 14 principal accounting fees services pricewaterhousecoopers llp fees fiscal years ended december 31 2006 2005 aggregate fees billed professional accounting services pricewaterhousecoopers llp fiscal years ended december 31 2006 2005 follows 1 comprised fees billed professional services rendered integrated audit utstarcom’s consolidated financial statements internal control financial reporting review interim consolidated financial statements included quarterly reports services normally provided pricewaterhousecoopers llp connection statutory regulatory filings engagements 2006 also includes fees incurred connection company’s review historical stock option granting practices related accounting review historical sales contracts china 2 2005 comprised due diligence procedures performed respect certain company’s acquisitions accounting consultation 3 comprised fees billed professional services tax compliance tax advice tax planning 4 comprised fees research tools audit committee determined provision us pricewaterhousecoopers llp nonaudit services listed compatible pricewaterhousecoopers llp maintaining independence audit committee preapproval policies procedures audit committee direct responsibility appointment retention evaluation compensation oversight termination independent registered public accounting firm employed us october 2003 audit committee board established nonaudit services subcommittee nonaudit services subcommittee consisting mr horner authorized preapprove nonaudit services performed independent public accountants amounts exceed 50000 per engagement nonaudit services performed independent registered public accounting firm amounts exceed 50000 per engagement approved audit committee fiscal year 2006 auditrelated fees tax fees nonaudit fees approved audit committee pursuant “de minimis” exception regulation sx rule 201c7ic part iv item 15item 14 principal accounting fees services information required item incorporated reference information contained proxy statement 2008 annual meeting stockholders part iv item 15item 14 principal accounting fees services information required item incorporated reference information contained proxy statement 2009 annual meeting stockholders part iv item 15item 14 principal accounting fees services information required item incorporated reference information contained proxy statement 2011 annual meeting stockholders part iv item 15item 14 principal accounting fees services information required item incorporated reference information contained proxy statement 2010 annual meeting stockholders part iv item 15 item 7 managements discussion analysis financial condition results operations overview provide communications equipment service providers operate wireless wireline networks rapidly growing communications markets integrated suite network access systems optical transmission products subscriber terminal products allows service providers offer efficient scalable voice data internet access services service providers easily integrate standardsbased systems existing networks deploy systems new broadband ipbased wireless network rollouts date substantially sales service providers china incorporated delaware unitech industries inc 1991 since incorporation focused resources developing products chinas communications market shipped first network access products 1993 1994 changed name unitech telecom inc 1995 acquired starcom network systems inc changed name utstarcom inc 1996 introduced advanced v51 v52 compliant multiservice network access product an2000 late 1996 introduced pas wireless access system december 1999 completed acquisition wacos inc research development subsidiary develops ipbased switching systems part business operations china established wholly owned subsidiary three joint ventures country date derived substantially revenues sales communications equipment service providers china telecommunications bureaus sell equipment china part china telecom system subject ultimate control however equipment purchasing decisions generally made individual telecommunications bureau level customers often make large initial purchase equipment followed supplemental purchases enhancements upgrades result largest revenueproducing customers typically vary periodtoperiod almost 99 sales twelve months ended december 31 2000 made china accordingly business financial condition results operations may influenced political economic legal environment china general state chinas economy operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation specifically remittances china capital nature repayment bank loans denominated foreign currencies require approval appropriate governmental authorities renminbi used purchase foreign currency although payment cash dividends permitted long subsidiaries sufficient reserves adequate amounts renminbi purchase foreign currency regulations restrict ability subsidiaries transfer funds us intercompany loans advances sell products china direct sales force evaluation period products may span year revenue sales equipment recognized delivery contractual obligations substantially complete remaining obligations inconsequential perfunctory collection resulting receivable reasonably assured revenue recognition equipment sales installations recognized final acceptance contractual obligations substantially complete remaining obligations inconsequential perfunctory collection resulting receivable reasonably assured multiple elements exist revenue allocated different elements based upon verifiable objective evidence recognized completion element cost sales consists primarily material costs third party commissions costs associated assembly testing products costs associated installation customer training overhead warranty costs cost sales also includes import taxes components gross profit affected material costs product mix average selling prices type distribution channel sell products gross profit percentage net sales varies among product families gross profits percentage net sales mobile phone handsets low expect overall gross profit percentage net sales fluctuate period result shifts product mix anticipated decreases average selling prices ability reduce product costs selling general administrative expenses include compensation benefits professional fees sales commissions provision uncollectible accounts receivable travel entertainment costs intend pursue aggressive selling marketing campaigns expand direct sales organization result sales marketing expenses increase future periods also expect support continued growth operations public company general administrative expenses continue increase foreseeable future research development expenses consist primarily salaries related costs employees engaged research design development activities cost parts prototypes equipment depreciation third party development expenses believe continued investment research development critical longterm success accordingly expect research development expenses increase future periods connection grant stock options employees recorded net deferred compensation 24 million 2000 159 million 1999 representing difference deemed fair value common stock accounting purposes option exercise price options date grant connection grants nonemployees 1999 recorded deferred compensation 74 million deferred compensation presented reduction stockholders equity amortization recorded vesting period option generally four years recorded stock compensation expense approximately 116 million 2000 56 million 1999 december 31 2000 approximately 65 million remained amortized amortization intangible assets consists primarily amortization intangible assets associated acquisitions china acquisition minority interest wacos inc subsidiary consolidated equity net income loss affiliated companies comprises share earnings guangdong manufacturing subsidiary accounted using equity method company voting control significant matters current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time active subsidiaries china accredited technologically advanced enterprises minority interest earnings loss consolidated subsidiaries represents share earnings zhejiang manufacturing joint venture owned subsidiary partner results operations following table sets forth percentage net sales represented certain items reflected consolidated statements operations comparison years ended december 31 2000 december 31 1999 net sales net sales increased 966 3686 million 2000 1875 million 1999 increase primarily due increase sales volume pas system 2000 sales hangzhou telecommunications bureau accounted 121 net sales 1999 sales xian telecommunications bureau kunming telecommunications bureau accounted 302 107 net sales respectively gross profit gross profit increased 713 1282 million 2000 748 million 1999 gross profit percentage net sales decreased 348 2000 399 1999 decrease gross profit percentage net sales primarily due increases sales lower margin handsets comprised 289 sales 2000 compared 96 1999 selling general administrative selling general administrative expenses increased 368 481 million 2000 351 million 1999 increase selling general administrative expenses primarily due increased sales administrative personnel related expenses including sales commissions associated growth net sales expansion overall level business activities selling general administrative expenses percentage net sales decreased 131 2000 187 1999 decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increases net sales expect selling general administrative expenses increase absolute dollar amounts future periods sales marketing activities increase invest infrastructure incur additional expenses related anticipated growth business operation publicly held company research development research development expenses increased 1223 415 million 2000 186 million 1999 increase research development expenses primarily due hiring additional technical personnel increased prototype expenses licensing fees support research development efforts noncash stock compensation expense increased 68 million 2000 13 million 1999 stock compensation expense related certain stock option grants employees nonemployees amortizing periods applicable options percentage net sales research development expenses increased 112 2000 100 1999 expect research development expenses increase absolute dollar amounts future periods expand research development organization support new product development amortization intangible assets amortization intangible assets increased 49 million 2000 03 million 1999 increase amortization intangible assets due increase amortization associated december 1999 acquisition portion wacos inc subsidiary owned minority shareholders inprocess research development costs inprocess research development costs resulted acquisition nonaffiliated minority interest wacos inc subsidiary december 1999 aggregate purchase price wacos inc approximately 280 million based upon independent appraisal willamette management associates assets acquired liabilities assumed allocated specifically identifiable tangible intangible assets acquired intangible assets included approximately 40 million inprocess research development charged operations december 1999 02 million assembled workforce approximately 236 million excess purchase price fair market values tangible identified intangible assets amortized periods three five years interest income expenses net interest income 89 million 2000 net interest expenses 10 million 1999 increase interest income primarily due increased interest income higher average cash balances result completion initial public offering march 2000 sale preferred stock november december 1999 income expenses net income 19 million 2000 net expenses 12 million 1999 increase income primarily due onetime gain nontrade receivables related receipts balances previously considered uncollectible equity income loss affiliated companies consolidated equity net loss affiliated companies 03 million 2000 consolidated equity net income affiliated companies 13 million 1999 change two periods primarily due decrease net income guangdong manufacturing subsidiary income tax expenses income tax expenses 140 million 2000 06 million 1999 increase income tax expenses due increasing income minority interest earnings consolidated subsidiaries minority interest earnings consolidated subsidiaries 23 million 2000 21 million 1999 change two periods primarily due increased profitability zhejiang manufacturing subsidiary beneficial conversion feature issuance series f preferred stock 1999 included beneficial conversion feature pursuant preferred shares converted common shares oneforone basis price expected offering price upon completion initial public offering resulted charge net income 1999 approximately 300 million reducing diluted earnings per share available common stockholders 345 cumulative effect effective january 1 2000 adopted staff accounting bulletin 101 sab 101 issued securities exchange commission december 1999 result adopting sab 101 changed way recognize revenue certain contracts previously led revenue recognized contract stages completed accepted light guidance issued sab 101 changed method revenue recognition point contractual final acceptance addition certain contracts include service requirements revenue previously recognized costs accrued contractual acceptance consideration sab 101 revenues associated service requirements deferred service obligations completed due changes recorded cumulative adjustment first quarter 2000 10 million net income taxes 0 001 per share basic diluted impact 2000 adopting sab 101 reduce net income cumulative effect accounting change 03 million effect basic diluted net income per share comparison years ended december 31 1999 december 31 1998 net sales net sales increased 782 1875 million 1999 1052 million 1998 increase primarily due increase sales volume pas system 1999 sales xian telecommunications bureau kunming telecommunications bureau accounted 302 107 net sales respectively 1998 customers accounted 10 net sales gross profit gross profit increased 824 748 million 1999 410 million 1998 gross profit percentage net sales increased 399 1999 390 1998 increase gross profit percentage net sales primarily due manufacturing economies scale significant increases sales higher margin network access products shift product mix toward higher margin network access products selling general administrative selling general administrative expenses increased 513 351 million 1999 232 million 1998 increase selling general administrative expenses primarily due increased sales administrative personnel related expenses including sales commissions associated growth net sales expansion overall level business activities noncash stock compensation expense increased 43 million 1999 04 million 1998 selling general administrative expenses percentage net sales decreased 187 1999 221 1998 decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increases net sales expect selling general administrative expenses increase absolute dollar amounts future periods sales marketing activities increase invest infrastructure incur additional expenses related anticipated growth business operation publicly held company research development research development expenses increased 265 186 million 1999 147 million 1998 increase research development expenses primarily due hiring additional technical personnel increased prototype expenses licensing fees support research development efforts noncash stock compensation expense increased 13 million 1999 22000 1998 percentage net sales research development expenses decreased 100 1999 139 1998 expect research development expenses increase absolute dollar amounts future periods expand research development organization support new product development amortization intangible assets amortization intangible assets increased 03 million 1999 01 million 1998 increase amortization intangible assets due increase amortization associated december 1999 acquisition portion wacos inc subsidiary owned minority shareholders inprocess research development costs inprocess research development costs resulted acquisition nonaffiliated minority interest wacos inc subsidiary december 1999 aggregate purchase price wacos inc approximately 280 million based upon independent appraisal willamette management associates assets acquired liabilities assumed allocated specifically identifiable tangible intangible assets acquired intangible assets included approximately 40 million inprocess research development charged operations december 1999 02 million assembled workforce approximately 236 million excess purchase price fair market values tangible identified intangible assets amortized periods three five years interest income expenses net interest expenses 10 million 1999 01 million 1998 increase interest expense primarily due increased interest charges higher average debt balances combined decreased interest income lower average cash balances income expenses net expenses 12 million 1999 10 million 1998 1999 expense primarily due loss asset sales 1998 expense primarily due loss one investment equity income loss affiliated companies consolidated equity net income affiliated companies 13 million 1999 consolidated equity net loss affiliated companies 08 million 1998 change two periods primarily due increase net income guangdong manufacturing subsidiary income tax expenses income tax expenses 06 million 1999 14 million 1998 decrease income tax expenses due required adjustments deferred tax asset valuation allowance also reflected tax incentives onetime tax refund 04 million china 1999 minority interest earnings loss consolidated subsidiaries minority interest earnings consolidated subsidiaries 21 million 1999 minority interest loss consolidated subsidiaries 09 million 1998 change two periods primarily due increased profitability zhejiang manufacturing subsidiary loss discontinued operations loss discontinued operations 17 million 1999 compared 09 million 1998 beneficial conversion feature issuance series f preferred stock 1999 included beneficial conversion feature pursuant preferred shares converted common shares oneforone basis price expected offering price upon completion initial public offering resulted charge net income 1999 approximately 300 million reducing diluted earnings per share available common stockholders 345 liquidity capital resources financed operations sales preferred stock bank lines credit initial public offering march 2000 november december 1999 secured private equity financing totaling 550 million march 2000 raised 1894 million net proceeds initial public offering april 2000 made payment 87 million softbank repay stockholder loan july 2000 established line credit commercial bank hangzhou borrow 241 million december 31 2000 borrowed 120 million line credit classified 120 million borrowings longterm debt december 31 2000 working capital 3699 million including 1491 million cash equivalents 839 million shortterm investments 434 million renminbidenominated bank borrowings invested 80 million may invest additional 70 million investment fund established softbank focused investments internet companies china investment constitutes 10 funding softbank china holdings pte ltd softbank china softbank contributing remaining 90 passive investor decisionmaking authority respect investments fund separate management team none employees employed fund one directors serves chief executive officer fund chief executive officer chairman board fund obligated pay receive fees connection services provided fund know material fees paid softbank parties connection services provided fund many funds investments privately held companies many still considered startup development stages investments inherently risky market technologies products companies development typically early stages may never materialize result may experience losses connection investment softbank china net cash used operations 2000 462 million primarily due increase inventories accounts receivable current noncurrent assets 607 million 811 million 49 million respectively uses cash partially offset depreciation amortization expense 95 million amortization deferred stock compensation expense 116 million increase accounts payable income taxes payable current liabilities deferred revenue 141 million 59 million 280 million respectively net cash used investing activities 2000 1114 million primarily due acquisition property plant equipment 195 million 80 million investment softbank china purchase shortterm investments 838 million net cash provided financing activities 2000 2193 million primarily due net proceeds 1982 million issuance common stock initial public offering exercise stock options net proceeds 208 million borrowing lines credit international sales generally denominated local currencies due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations date insignificant cannot guarantee fluctuations currency exchange rates future material adverse effect revenues international sales correspondingly business financial condition results operations also contracts negotiated japanese yen purchasing portions inventories supplies multicurrency bank account japanese yen purchasing portions inventories supplies balance japanese yen account december 31 2000 approximately 106 million believe existing cash equivalents shortterm investments cash operations sufficient finance operations least next 12 months additional financing needed assurance financing available us commercially reasonable terms recent accounting pronouncements june 1998 financial accounting standards board fasb issued sfas 133 accounting derivatives hedging activities sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities july 1999 fasb issued sfas 137 accounting derivative instruments hedging activitiesdeferral effective date fasb statement 133 sfas 137 deferred effective date sfas 133 fiscal years beginning june 15 2000 adopted sfas 133 january 1 2001 adoption expected materially impact financial statements september 2000 fasb issued sfas 140 sfas 140 accounting transfers servicing financial assets extinguishments liabilities revises standards accounting securitizations transfers financial assets collateral requires entities securitized financial assets provide specific disclosures sfas 140 effective transfers servicing financial assets extinguishments liabilities occurring march 31 2001 adopted sfas 140 january 1 2001 adoption expected materially impact financial statements factors affecting future operating results future sales unpredictable operating results likely fluctuate quarter fail meet expectations securities analysts investors stock price could decline significantly quarterly annual operating results fluctuated past likely fluctuate future due variety factors outside control result period comparisons operating results necessarily meaningful indicative future performance furthermore likely future quarters operating results fall expectations securities analysts investors occurs trading price common stock could decline factors may affect future operating results include timing number size orders products well relative mix orders products particularly volume lower margin telephone handsets evolving unpredictable nature economic regulatory political environments china countries market plan market products aggressive price reductions competitors currency fluctuations market acceptance products product enhancements lengthy unpredictable sales cycles associated sales products combined impact variability suppliers ability provide us components timely basis longer collection periods accounts receivable china countries limited performance history products limited forecasting experience processes emerging nature target markets make forecasting future sales operating results difficult expense levels based part expectations regarding future sales expenses largely fixed particularly short term addition enable us promptly fill orders maintain inventories finished goods components raw materials result commit considerable costs advance anticipated sales past substantial portion sales quarter resulted orders received shipped quarter operated limited backlog unfilled orders accordingly may able reduce costs timely manner compensate unexpected shortfall forecasted actual sales significant shortfall sales may require us maintain higher levels inventories finished goods components raw materials require thereby increasing risk inventory obsolescence corresponding inventory writedowns writeoffs although reserved inventory obsolescence cannot guarantee reserves adequate offset writedowns writeoffs history losses accumulated deficit december 31 2000 accumulated deficit approximately 78 million anticipate continuing incur significant sales marketing research development general administrative expenses result need generate higher revenues sustain profitability numerous factors could negatively impact results operations including decrease sales price pressures fixed cost structure could limit ability respond declining revenues although sales grown recent quarters past results relied indications future performance cannot assure able remain profitable future periods competition markets may lead reduced prices revenues market share face intense competition target markets expect competition increase principal competitors various product lines include pas lucent technologies inc zhongxing telecommunications equipment an2000 advanced fibre communications inc alcatel alsthom cge sa huawei technology co ltd lucent nec corporation zhongxing wacos system alcatel cisco systems inc clarent corporation ericsson lm telephone co huawei lucent motorola inc nokia corporation nortel networks corporation nuera communications inc siemens ag vienna systems corp increasingly facing competition domestic companies china believe strongest competition future may come companies many operate lower cost structures favorable governmental policies much larger sales forces furthermore companies presently offering competing products may also enter target markets many competitors significantly greater financial technical product development sales marketing resources result competitors may able respond quickly new emerging technologies changes service provider requirements competitors may also able devote greater resources development promotion sale new products competitors may also able offer significant financing arrangements service providers cases facilitated government policies competitive advantage selling systems service providers limited financial currency resources increased competition likely result price reductions reduced gross profit percentage net sales loss market share one could materially harm business financial condition results operations moreover current potential competitors established may establish cooperative relationships among third parties including telecommunications administrations telecommunications bureaus local organizations increase ability products address needs prospective customers target markets accordingly alliances among competitors third parties may emerge rapidly acquire significant market share remain competitive believe must continue partner telecommunications administrations local organizations maintain high level investment research development sales marketing manufacture deliver products service providers timely basis without significant defects fail meet objectives business financial condition results operations could harmed introduction inexpensive wireless telephone service competitive services china may also adverse impact sales pas system china cannot assure able compete successfully current future competitors competitive pressures future materially adversely effect business financial condition results operations believe principal competitive factors affecting market network access products include total initial cost solution short delivery installation intervals design installation support ease integration backbone network flexibility supporting multiple interfaces services lifecycle cost determined reliability manageability solution scalability believe past generally competed favorably offerings competitors basis factors however may able compete effectively current future competitors based competitive factors future failure would material adverse effect business financial condition results operations success business depends relatively small number large system deployments cancellation reduction delay deployments could harm business characterized large system deployments relatively small number service providers 2000 one customer hangzhou telecommunications bureau accounted 121 net sales dependence large system deployments makes ability provide systems timely costeffective manner critically important business past experienced delays encountered difficulties installation implementation systems various factors could cause future delays including technical problems shortage qualified technicians delays difficulties deploying systems cancellation orders service providers could significantly harm business licenses required sell network access products china beginning january 1 1999 chinas government required telecommunications equipment connected public private telecommunications networks within china approved ministry information industry manufacturer equipment obtain network access license products sellers prohibited selling advertising sale equipment manufacturer obtained network access license may liable penalties amount three times earnings sale equipment sold beginning january 1 1999 without license addition unlicensed equipment may required removed network failure obtain required licenses could require us remove previously installed equipment would prohibit us making sales unlicensed products china would substantially harm business regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways accordingly obtained opinion counsel china licenses required obtain based upon counsels advice believe obtained required network access licenses an2000 system bundled omux product standard omux product applied network access license pas system june 2000 ministry information industry issued internal notice concluding review phsbased equipment pas system continue allowed chinas countylevel cities counties primary markets pas system large mediumsized cities pas system may used limited basis high concentration population communities commercial buildings special development zones new citywide pas system deployments allowed large mediumsize cities evaluation group access networks ministry information industry recommended ministry information industry issue license pas system however yet network access license cannot provide assurance license issued pas system addition assurance ministry information industry conduct reviewevaluation phsbased equipment change order regarding phsbased systems future also applied network access licenses products longer manufacturing previously sold service providers china network access licenses required additional products may develop sale china including wacos system based upon verbal inquiries made counsel china ministry information industry believe products sold january 1 1999 pas system penalties imposed ministry information industry sales made make period application network access license pending however counsel china advised us chinas governmental authorities may interpret apply regulations respect licenses required ability sell product application network access license pending manner inconsistent verbal representation received counsel china either could material adverse effect business financial condition state council issued telecommunications regulations peoples republic china september 25 2000 telecom regulations telecom regulations restate government implements license systems telecommunications terminal equipment wireless communications equipment used network interconnection connected public telecommunications networks equipment must meet government standards network access license must obtained telecom regulations require telecommunications equipment producers must ensure quality telecommunications equipment obtained network access license stable reliable may lower quality performance products state councils product quality supervision department concert ministry information industry shall perform spot checks track supervise quality telecommunications equipment network access license obtained publish results spot checks telecom regulations new quite general interpreted government unable ascertain detailed guidance license system telecommunications equipment connected network business may suffer unable collect payments customers timely basis customers often must make significant commitment capital purchase products result downturn customers business affected customers ability pay us could harm financial condition moreover accounts receivable collection cycles historically tend much longer china markets failure customers make timely payments could require us writeoff accounts receivable increase accounts receivable reserves either could adversely affect financial condition decline business activity chinas lunar new year may result decreased sales first quarter business activity china declines considerably first quarter year observance lunar new year result sales first quarter fiscal year past typically lower sales fourth quarter preceding year expect trend continue future continue face seasonality future ability forecast degree certainty impact decreased business activity lunar new year sales operating results market subject rapid technological change compete effectively must continually introduce new products achieve market acceptance emerging market communications equipment developing countries characterized rapid technological developments frequent new product introductions evolving industry regulatory standards success depend large part ability enhance network access switching technologies develop introduce new products product enhancements anticipate changing service provider requirements technological developments may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail timely develop introduce new products enhancements existing products effectively respond technological change business financial condition results operations could materially adversely affected time competitors may announce new products product enhancements services technologies potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory obsolescence future technological advances communications industry may diminish inhibit market acceptance existing future products render products obsolete even able develop introduce new products cannot assure gain market acceptance market acceptance products depend various factors including ability obtain necessary approvals regulatory organizations perceived advantages new products competing products ability attract customers existing relationships competitors product cost relative performance level customer service available support new products specifically sales an2000 system outside china depend part adoption v52 standard markets additionally sales personal access system pas mobile component pas wireless system depend part upon consumer acceptance mobility limitations service introduction inexpensive wireless telephone service competitive services china may material adverse effect sales pas systems china existing new products fail achieve market acceptance reason business could seriously harmed business suffer unable deliver quality products timely cost effective basis operating results depend ability manufacture products timely cost effective basis past experienced reductions yields result various factors including defects component parts human error assembly experience deterioration manufacturing performance delay production products could experience delays shipments cancellations orders moreover networking products frequently contain undetected software hardware defects first introduced new versions released addition products often embedded deployed conjunction service providers products incorporate variety components produced third parties result problem occurs may difficult identify source problem problems may cause us incur significant warranty repair costs divert attention engineering personnel product development efforts cause significant customer relation problems loss customers one could harm business future demand products requires additional manufacturing capacity may invest build additional manufacturing facilities likely china however cannot assure new manufacturing facilities attain quality level efficiencies existing facilities alternatively addition may contract third party manufacturing facilities may unable exercise degree quality control facilities currently arrangements independent manufacturing facility may able obtain independent manufacturing sources commercially attractive terms needed depend sole source key suppliers handsets components materials used products suppliers fail provide us adequate supplies high quality products competitive prices competitive position reputation business could harmed components materials used products purchased single supplier limited group suppliers supplier unwilling unable provide us high quality components materials quantities required costs specified us may able find alternative sources favorable terms timely manner inability obtain develop alternative sources required could result delays reductions manufacturing product shipments moreover suppliers may delay product shipments supply us inferior quality products events occur competitive position reputation business could suffer ability source sufficient quantity high quality handsets components used products may limited chinas import restrictions duties well ability obtain sufficient domestic manufacturing capacity require significant number imported components manufacture products china imported electronic components imported goods used operation business subject variety permit requirements approval procedures import duties failure obtain necessary permits approvals administrative actions chinas government limit imports certain components nonpayment required import duties could subject us penalties fines could adversely affect ability manufacture sell products china addition import duties increase cost products may make less competitive particular integral component pas system handset used subscribers make receive mobile telephone calls inability obtain sufficient number high quality handsets could severely harm business worldwide shortage handsets existed 2000 continues shortage lowpriced handsets found popular many consumers china although contracted japanese vendors manufacture handsets utstarcom label cannot assure able supply adequate quantities handsets moreover must pay import duty handset import china may result competitive cost advantage competitors produce handsets china result evaluating various manufacturing alternatives within china early stages utilizing third parties manufacture handsets us china however manufacturers may unable produce adequate quantities highquality handsets meet demand customers continue develop capacity manufacture handsets however may unsuccessful efforts additionally comply manufacturing regulations china need obtain components handsets local sources may able produce adequate quantities components meet quality standards unable expand direct sales operation china indirect distribution channels elsewhere successfully manage expanded sales organization operating results may suffer distribution strategy focuses primarily developing expanding direct sales organization china indirect distribution channels outside china may able successfully expand direct sales organization china cost expansion may exceed revenue generated efforts even successful expanding direct sales organization china may able compete successfully significantly larger betterfunded sales marketing operations current potential competitors addition fail develop relationships significant international resellers manufacturers representatives resellers representatives successful sales marketing efforts may unsuccessful expansion efforts outside china expect average selling prices products decrease may reduce revenues result must introduce new products reduce costs order maintain profitability average selling prices communications access switching systems subscriber terminal products handsets china declining result number factors including increased competition aggressive price reductions competitors rapid technological change price performance enhancements past experienced expect future experience substantial periodtoperiod fluctuations operating results due declining average selling prices anticipate average selling prices products decrease future response product introductions us competitors factors including price pressures customers therefore must continue develop introduce new products enhancements existing products incorporate features sold higher average selling prices failure could cause revenues gross profit percentage net sales decline cost reduction efforts may allow us keep pace competitive pricing pressures lead improved gross profit percentage net sales order competitive must continually reduce cost manufacturing products design engineering changes may successful redesigning products delivering products market timely manner cannot assure redesign result sufficient cost reductions allow us reduce prices products remain competitive improve maintain gross profit percentage net sales shifts product mix may result declines gross margin percentage net sales gross profit margin percentage net sales varies among product groups gross margin percentage net sales generally higher access network system products gross margin percentage net sales significantly lower handset products also anticipate gross margin percentage net sales may lower newly developed products due startup costs may improve unit volumes increase efficiency realized overall gross margin percentage net sales fluctuated period result shifts product mix introduction new products decreases average selling prices older products ability reduce product costs result growth sales handset products past quarters experienced sustained product shift toward greater percentage handset products resulting decline overall gross margin percentage net sales addition expect introduce new products future periods result recent trends potential decrease overall gross margin percentage net sales may experienced service providers sometimes evaluate products long unpredictable periods causes timing purchases results operations unpredictable period time initial contact service provider receipt actual purchase order may span year time service providers may subject products extensive lengthy evaluation process making purchase length qualification processes may vary substantially product service provider making results operations unpredictable may incur substantial sales marketing expenses expend significant management effort process ultimately may result sale qualification processes often make difficult obtain new customers service providers reluctant expend resources necessary qualify new supplier one existing qualified sources inability exercise complete control subsidiaries may detrimental business considerable portion operations continue conducted direct indirect subsidiaries example 88 interest joint venture operates zhejiang manufacturing facility 51 interest joint venture operates guangdong manufacturing facility even though may majority interest joint ventures sole power control policies decisions jointlyowned subsidiaries law china governing sinoforeign joint ventures equity holders exercise rights primarily board directors constitutes highest authority joint venture although majority guangdong joint venture entitled appoint minority directors joint ventures board directors prevents us controlling actions board moreover even though hold majority board seats zhejiang joint venture china law requires unanimous approval board directors significant corporate actions including amendment articles association joint venture liquidation dissolution joint venture increase decrease transfer equity interests party joint venture merger joint venture another economic entity operating results cash flow depend operating results cash flow subsidiaries payment funds subsidiaries us subsidiaries separate distinct legal entities obligation contingent otherwise pay dividends otherwise provide financial benefits us moreover respect guangdong manufacturing joint venture payment dividends us must agreed joint venture partner whose interests receiving dividend distributions may coincide addition applicable law countries including china limits ability subsidiary pay dividends various reasons including absence sufficient distributable reserves event insolvency bankruptcy similar proceedings creditors subsidiaries would generally entitled priority us respect assets affected subsidiary addition joint venture partners zhejiang guangdong provinces affiliated provincial telecommunications administrations operate telecommunication networks areas fail maintain joint ventures sales customers located areas may decrease multinational operations subject us various economic political regulatory legal risks market sell products china markets expansion existing multinational operations entry additional international markets require significant management attention financial resources multinational operations subject inherent risks including difficulties designing products compatible varying international communications standards longer accounts receivable collection periods greater difficulty accounts receivable collection unexpected changes regulatory requirements changes import export regulations including quotas tariffs trade barriers delays difficulties obtaining export import licenses potential foreign exchange controls repatriation controls foreign earnings exchange rate fluctuations currency conversion restrictions burdens complying variety foreign laws regulations difficulties costs staffing managing multinational operations reduced protection intellectual property rights countries potentially adverse tax consequences political economic instability multinational companies required establish intercompany pricing transactions separate legal entities operating different taxing jurisdictions intercompany transactions subject audit taxing authorities jurisdictions multinational companies operate additional tax liability may incurred determined intercompany pricing done arms length believe adequately estimated recorded liability arising intercompany pricing cannot assure additional tax liability result audits intercompany pricing policies markets outside china rely number original equipment manufacturers oems thirdparty distributors agents market sell network access products oems distributors agents fail provide support effort necessary service developing markets effectively ability maintain expand operations outside china negatively impacted cannot assure successfully compete markets products accepted successfully overcome risks associated international operations international sales generally denominated local currencies due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations date insignificant fluctuations currency exchange rates future may material adverse effect results operations multicurrency bank account japanese yen purchasing portions inventories supplies december 31 2000 japanese yen bank account valued 106 million failure meet international governmental product standards could detrimental business many products required comply numerous government regulations standards vary market standards products continue evolve need modify products develop support new versions products meet emerging industry standards comply government regulations satisfy requirements necessary obtain approvals inability obtain regulatory approval meet established standards could delay prevent entrance force departure markets recent growth strained resources unable manage sustain growth operating results negatively affected recently experienced period rapid growth anticipate must continue expand operations address potential market opportunities fail implement improve systems controls manage future growth expansion effectively business could suffer expansion placed continue place significant strain management operational financial resources many members management team limited experience management rapidly growing companies manage growth effectively need take various actions including enhancing management information systems forecasting procedures developing operating administrative financial accounting systems controls maintaining close coordination among engineering accounting finance marketing sales operations organizations expanding training managing employee base expanding finance administrative operations staff success dependent continuing hire retain qualified personnel successful attracting retaining personnel business would harmed success business depends significant part upon continued contributions key technical senior management personnel many would difficult replace particular success depends large part knowledge expertise services hong liang lu president chief executive officer ying wu executive vice president chief executive officer china operations loss key employee failure key employee perform satisfactorily current position failure attract retain key technical senior management employees could significant negative impact operations effectively manage recent growth well future growth need recruit train assimilate motivate retain qualified employees competition qualified employees intense process recruiting personnel combination skills attributes required execute business strategy difficult timeconsuming expensive actively searching research development engineers sales marketing personnel short supply additionally need experienced difficulty finding qualified accounting personnel knowledgeable us china accounting standards fail attract hire assimilate retain qualified personnel business would harmed competitors others past may future attempt recruit employees addition companies communications industry whose employees accept positions competitors frequently claim competitors engaged unfair hiring practices may subject types claims future seek hire qualified personnel claims may result material litigation disruption operations could incur substantial costs defending claims regardless merits acquisitions undertake could difficult integrate disrupt business dilute stockholders harm operating results continually evaluate acquisition prospects would complement existing product offerings augment market coverage enhance technological capabilities may otherwise offer growth opportunities acquisitions companies may result dilutive issuances equity securities incurrence debt amortization expenses related goodwill intangible assets addition acquisitions involve numerous risks including difficulties assimilation operations technologies products personnel acquired company diversion managements attention business concerns risks entering markets direct limited prior experience potential loss key employees acquired company may experience difficulty identifying forming maintaining new business ventures important development business investments ventures may generate returns invested expect continue invest significant capital new business ventures important development business cannot assure able continue identify suitable parties new ventures investments future failure form maintain new ventures identify suitable investment opportunities could significantly limit ability expand operations many investments privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize moreover new ventures investments require significant management time present significant challenges cannot assure activities successful realize returns activities additionally venture investment fails business could negatively impacted may unable adequately protect intellectual property may subject claims infringe intellectual property others either could substantially harm business rely combination patents copyrights trade secret laws contractual obligations protect technology although applied several patents united states one issued well countries cannot assure additional patents issued result pending patent applications issued patents upheld moreover yet obtained patents china give assurance able obtain patents china products technology use manufacture products subsidiaries joint ventures china rely upon trademarks technology knowhow manufacture sell products cannot guarantee intellectual property protection measures sufficient prevent misappropriation technology competitors independently develop technologies substantially equivalent superior addition legal systems many foreign countries including china protect intellectual property rights extent legal system united states unable adequately protect proprietary information business financial condition results operations could materially adversely affected increasing dependence communications industry proprietary technology resulted frequent litigation based allegations infringement patents intellectual property future may subject litigation defend claimed infringements rights others determine scope validity proprietary rights others future litigation also may necessary enforce protect trade secrets intellectual property rights intellectual property litigation could costly could cause diversion managements attention operation business adverse determinations litigation could result loss proprietary rights subject us significant liabilities require us seek licenses third parties may available commercially reasonable terms could also subject court orders preventing us manufacturing selling products business interruptions could adversely affect business operations vulnerable interruption fire earthquake power loss telecommunications failure events beyond control detailed disaster recovery plan headquarters facility state california currently subject electrical blackouts consequence shortage available electrical power event blackouts continue increase severity could disrupt operations headquarters addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business risks relating conducting operations china sales china account substantially sales approximately 3640 million 988 sales 2000 1861 million 993 sales 1999 1029 million 979 sales 1998 occurred china additionally substantial portion fixed assets located china total fixed assets approximately 694 december 31 2000 537 december 31 1999 464 december 31 1998 china expect make investments china future therefore business financial condition results operations significant degree subject economic political social events china devaluation value renminbi fluctuations exchange rates could adversely affect financial results exchange rate fluctuations could substantial negative impact financial condition results operations purchase substantially materials united states japan significant portion cost goods sold incurred us dollars japanese yen significant portion operating expenses incurred us dollars time sales denominated renminbi value renminbi subject changes chinas governmental policies international economic political developments although official exchange rate conversion renminbi us dollars remained stable renminbi appreciating slightly us dollar since 1994 exchange rate experienced significant volatility prior 1994 including periods sharp devaluation assurance exchange rates become volatile renminbi devalue us dollar past financial markets many asian countries experienced severe volatility result asian currencies experienced significant devaluation time devaluation asian currencies may effect rendering exports china expensive less competitive therefore place pressure chinas government devalue renminbi devaluation renminbi could result increase volatility asian currency capital markets future volatility asian financial markets could adverse impact ability expand product sales asian markets outside china moreover due limitations convertibility renminbi limited ability engage currency hedging activities china currently engage currency hedging activities respect international sales outside china currency restrictions china may limit ability subsidiaries joint ventures china obtain remit foreign currency necessary purchase imported components may limit ability obtain remit foreign currency exchange renminbi earnings chinas government imposes controls convertibility renminbi foreign currencies certain cases remittance currency china current foreign exchange control system sufficient foreign currency may available satisfy currency needs shortages availability foreign currency may restrict ability chinese subsidiaries obtain remit sufficient foreign currency pay dividends us otherwise satisfy foreign currency denominated obligations payments us components export technology licensing fees may also experience difficulties completing administrative procedures necessary obtain remit needed foreign currency moreover cannot assure chinas government continue policy making renminbi convertible current accounts inability convert remit sales received renminbi us dollars make necessary remittances could material adverse effect business financial condition results operations business could substantially harmed unable convert sales received renminbi us dollars existing foreign exchange laws renminbi held china subsidiaries converted foreign currencies remitted china pay current account items payments suppliers imports labor services payment interest foreign exchange loans distributions dividends long subsidiaries adequate amounts renminbi purchase foreign currency expenses capital nature repayment bank loans denominated foreign currencies however require approval appropriate governmental authorities renminbi used purchase foreign currency remitted china system could changed time executive decision state council impose limits current account convertibility renminbi similar restrictions moreover even though renminbi intended freely convertible current account state administration foreign exchange responsible administering chinas foreign currency market significant degree administrative discretion implementing laws time state administration foreign exchange used discretion ways effectively limit convertibility current account payments restrict remittances china furthermore many circumstances state administration foreign exchange must approve foreign currency conversions remittances current foreign exchange control system sufficient foreign currency may available given exchange rate satisfy currency demands changes within chinas communications market could harm business derive substantially sales local telecommunications service providers china utilize network access equipment continued expansion upgrading chinas communications infrastructure continued development communications infrastructure china correspondingly depends part demand voice data services china chinas governmental policy although industry grown rapidly past cannot assure continue grow future reduced demand voice data services downturn adverse changes china communications industry adoption enforcement government policies limit prohibit ability manufacture market sell products could severely harm business chinas telecommunications industry subject extensive government regulation recently restructured led uncertainty chinas telecommunications industry heavily regulated ministry information industry ministry information industry controls 33 provincial telecommunications administrations exercise regulatory responsibility telecommunications industries respective provinces ministry information industry broad discretion authority regulate aspects telecommunications information technology industry china including managing spectrum bandwidths setting network equipment specifications standards drafting laws regulations related electronics telecommunications industries part chinese governments industry restructuring initiatives regulatory functions ministry information industry telecommunications administrations separated operational functions stateowned companies control following separation ministry information industry acts exclusively industry regulator longer manage daytoday operations telecommunications service providers china yet national telecommunications law ministry information industry direction state council currently preparing draft telecommunications law peoples republic china ultimate submission national peoples congress review adoption unclear telecommunications law adopted telecommunications law adopted expect become basic telecommunications statute source telecommunications regulations china although expect telecommunications law would positive effect overall development telecommunications industry china know nature scope regulation would create accordingly cannot predict whether positive negative effect us aspects business telecom regulations deemed basic telecommunications regulations covering telecommunications services market regulations pricing interconnection connection well telecommunications construction security issues although expect telecom regulations would positive effect overall development telecommunications industry china enforcement interpretation regulations government authorities may negatively affect business ministry information industry broad discretion apply standards deciding types equipment may connected national telecommunications networks forms types services may offered public content material available china internet ministry information industry sets standards unable comply ability sell product china may limited resulting substantial harm operations example end may 2000 became aware internal notice circulated within ministry information industry announcing review phsbased telecommunications equipment future installation chinas telecommunications infrastructure ministry information industry requested service providers temporarily halt new deployments phsbased telecommunications equipment including pas system pending conclusion ministry information industry review subsequently end june 2000 learned ministry information industry issued internal notice concluding review phsbased equipment allowing continued deployment pas system chinas countylevel cities counties primary markets pas system addition deployments large mediumsized cities allowed limited basis high concentration population campuses commercial buildings special development zones however new citywide deployments pas system allowed large mediumsized cities failure ministry information industry allow deployment pas system future could material adverse effect business financial condition china closely restricts activities foreign investors telecommunications industry chinas government agencies including ministry information industry state council regulate foreign investment telecommunications industry promulgation various laws regulations issuance various administrative orders decisions foreign investment enterprises companies individuals prohibited investing participating operation management telecommunications networks without special approval state council cannot assure china promulgate new laws regulations issue administrative judicial decisions interpretations would restrict bar foreigners engaging telecommunicationsrelated activities promulgation laws regulations issuance administrative orders judicial decisions interpretations restricting prohibiting telecommunications activities foreigners could substantial impact ongoing operations customers china part china telecom system subject ultimate control local telecommunications bureaus china comprise existing potential customers part china telecom system subject ultimate control accordingly china telecom may issue policy statements make decisions govern equipment purchasing decisions customers china example late 1999 china telecom prohibited telecommunications bureaus purchasing phs systems pas systems classified lowmobility wireless access systems implementation large cities june 2000 ministry information industry issued internal notice concluding review phsbased equipment pas system continue allowed chinas countylevel cities counties primary markets pas system large mediumsized cities pas system may used limited basis high concentration population new citywide pas system deployments allowed large mediumsize cities virtually sales generated operations china change decision china telecom ministry information industry decisions china telecom ministry information industry could cause substantial harm business changes telecommunications tariffs may result decreased demand products november 2000 ministry information industryannounced significant changes telephone rates china long distance international leased line internet connection fees cut 70 rates wireless access services delivered pas system increased approximately 001 per minute approximately 002 per minute increase rates wireless access services may result reduced demand pas system wireless access products additionally ministry information industry may implement future rate changes wireline wireless services china may lead reduced demand systems products result material adverse effect business results operations chinas government policies could impact business since 1978 chinas government expected continue reforming economic political systems reforms resulted expected continue result significant economic social development china many reforms unprecedented experimental may subject change readjustment due number political economic social factors believe basic principles underlying political economic reforms continue implemented provide framework chinas political economic system new reforms readjustment previously implemented reforms could significant negative effect operations changes chinas political economic social conditions governmental policies could substantial impact business include new laws regulations interpretation laws regulations introduction measures control inflation stimulate growth changes rate method taxation imposition additional restrictions currency conversion remittances abroad actions limit ability develop manufacture import sell products china finance operate business china chinas economic policies could impact business economy china differs economies countries belonging organization economic cooperation development various respects structure government involvement level development growth rate capital reinvestment allocation resources selfsufficiency rate inflation balance payments position past economy china primarily planned economy subject one fiveyear state plans adopted central government authorities largely implemented provincial local authorities set production development targets since 1978 increasing emphasis placed decentralization utilization market forces development chinas economy economic reform measures adopted chinas government may inconsistent ineffectual may cases able capitalize reforms measures may adjusted modified ways could result economic liberalization measures inconsistent time industry across different regions country chinas economy experienced significant growth past decade growth however accompanied imbalances chinas economy resulted significant fluctuations general price levels including periods inflation chinas government implemented policies time increase restrain rate economic growth control periods inflation otherwise regulate economic expansion may able benefit effects policies measures taken chinas government regulate economy could also significant overall impact economic conditions china resulting negative impact business chinas expected entry wto creates uncertainty future economic business environments china expected enter wto early time 2001 although china reducing tariff levels past several years entry wto require china reduce tariffs eliminate trade restrictions chinas entry wto related relaxation trade restrictions may lead increased foreign investment may also lead increased competition chinas markets international companies whether china accepted wto impact chinas economy business uncertain tax benefits available subsidiaries located china reduced repealed business could suffer subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time active subsidiaries china accredited technologically advanced enterprises tax incentives may repealed reduced future tax incentives abolished subsidiaries china take full advantage tax liability subsidiaries increase negatively impact financial condition results operations chinas legal system embodies uncertainties could negatively impact business china civil law legal system although often used judges guidance decided court cases binding legal effect future decisions since 1979 many new laws regulations covering general economic matters promulgated china despite activity develop legal system chinas system laws yet complete even adequate law exists china enforcement existing laws contracts based existing law may uncertain sporadic may difficult obtain swift equitable enforcement obtain enforcement judgment court another jurisdiction relative inexperience chinas judiciary many cases creates additional uncertainty outcome litigation interpretation statutes regulations may subject government policies reflecting domestic political changes china adopted broad range related laws administrative rules regulations govern conduct operations foreign investment enterprises restrict ability foreign companies conduct business china laws rules regulations provide incentives encourage flow investment china also subject foreign companies foreign investment enterprises including subsidiaries china set restrictions may always apply domestic companies china although china increasingly according foreign companies foreign investment enterprises established china rights privileges chinese domestic companies anticipation chinas entry wto special laws administrative rules regulations governing foreign companies foreign investment enterprises may still place us subsidiaries disadvantage relation chinese domestic companies may adversely affect competitive position moreover chinas legal system develops promulgation new laws changes existing laws preemption local regulations national laws may adversely affect foreign investors companies many activities products china subject administrative review approval various national local agencies chinas government changes occurring chinas legal regulatory structure assurance able secure requisite governmental approval activities products failure obtain requisite government approval activities products could substantially harm business stock performance stock price highly volatile trading price common stock fluctuated significantly since initial public offering march 2000 stock price could subject wide fluctuations future response many events factors including discussed preceding risk factors relating operations well actual anticipated fluctuations operating results changes expectations future financial performance changes financial estimates buysell recommendations securities analysts competitors announcement new products services technological innovations operating stock price performance comparable companies general market conditions domestic international macroeconomic factors unrelated performance may also affect stock price reasons investors rely recent trends predict future stock prices financial results addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources item 7aitem 7 managements discussion analysis financial condition results operations forwardlooking statements annual report form 10k contains forwardlooking statements within meaning federal securities laws statements based information currently available management intend forwardlooking statements covered safe harbor provisions private securities litigation reform act 1995 including statement purposes complying provisions forwardlooking statements include concerning following expectation regarding continued growth business operations expectation pas network access system continue allowed chinas countylevel cities counties expectation penalties fines noncompliance licensing requirements china pas system products expectation fluctuations overall gross profit gross margin product mix selling prices plans expanding direct sales organization selling marketing campaigns activities expectation may use part net proceeds initial follow public offerings acquire invest complementary businesses technologies product offerings expectation increases selling marketing research development general administrative expenses expectation continue invest significantly research development expectation fill majority current backlog orders expectation regarding future investments particularly softbank china expectation existing cash equivalents sufficient finance operations least next 12 months additional forwardlooking statements may identified words anticipate expect believe intend similar expressions relate us management investors cautioned forwardlooking statements inherently uncertain statements subject risks uncertainties may cause actual results events differ materially detailed discussion risks uncertainties see factors affecting future operating results section form 10k guarantee future results undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k overview design manufacture market wireline wireless broadband access switching equipment enables migration next generation ipbased networks operations conducted primarily foreign subsidiaries manufacture distribute support products principally china systems products allow service providers offer costefficient expandable voice data internet access services systems based widely adopted international communications standards service providers easily integrate systems existing networks deploy systems new broadband internet protocol wireless network rollouts incorporated delaware 1991 since incorporation focused resources developing products chinas communications market shipped first network access products 1993 1995 acquired starcom network systems inc changed name utstarcom inc 1996 introduced advanced v51 v52 compliant multiservice network access platform an2000 late 1996 introduced pas wireless access system december 1999 completed acquisition portion wacos inc subsidiary owned minority shareholders wacos inc research development subsidiary develops ipbased switching systems november 2001 completed acquisition advanced communications devices corporation acd 213 million addition issued shares restricted common stock valued 50 million acd employees continue perform services us vesting period five years upon achievement certain performance milestones first milestone met december 2001 resulting charge 13 million operations acd system onchip soc semiconductor company focusing lan ip switching technology conduct operations china wholly owned subsidiaries two joint ventures derived substantially revenues sales telecommunications equipment service providers china however currently expanding sales service providers growing communications markets outside china customers often make large initial purchase equipment followed supplemental purchases enhancements upgrades result largest revenueproducing customers typically vary period evaluation period products potential customers may span year business generally depends relatively small number large deployments sell products china direct sales force approximately 903 net sales year ended december 31 2001 approximately 988 net sales year ended december 31 2000 made china accordingly business financial condition results operations likely influenced political economic legal environment china general state chinas economy results may adversely affected among things changes political economic competitive social conditions china including changes governmental policies respect laws regulations changes telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation first second largest customers accounted 66 59 net sales year ended december 31 2001 90 50 accounts receivable respectively december 31 2001 first second largest customers accounted 121 60 net sales respectively year ended december 31 2000 70 02 accounts receivable respectively december 31 2000 first second largest customers accounted 302 107 net sales respectively 1999 390 60 accounts receivable respectively december 31 1999 899 net sales 2001 entities affiliated government china accounts receivable balances entities state owned enterprises 1928 million december 31 2001 extend credit customers china without requiring collateral monitor exposure credit losses maintain allowances doubtful accounts chinas current regulatory structure communications products offer china must meet government industry standards network access license equipment must obtained without license equipment allowed connected public telecommunications networks sold china moreover must ensure quality telecommunications equipment obtained network access license stable reliable may lower quality performance installed licensed products state councils product quality supervision department concert ministry information industry performs spot checks track supervise quality licensed telecommunications equipment publishes results spot checks regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways obtained required network access licenses an2000 platform applied yet received network access license pas systems handsets based upon conversations ministry information industry understand pas systems handsets considered still trial period sales pas systems handsets may continue made us trial period license ultimately required network access licenses also required additional products selling may sell china including mswitch platform fail obtain required licenses could prohibited making sales unlicensed products including pas systems handsets china would substantially harm business financial condition results operations counsel china advised us chinas governmental authorities may interpret apply regulations respect licenses required ability sell product trial period manner inconsistent information received counsel china either could material adverse effect business financial condition results operations remittances china capital nature repayment bank loans denominated foreign currencies require approval appropriate governmental authorities renminbi used purchase foreign currency although payment cash dividends permitted long subsidiaries sufficient reserves adequate amounts renminbi purchase foreign currency regulations restrict ability subsidiaries transfer funds us intercompany loans advances additionally business activity china many countries asia declines considerably first quarter year observance lunar new year result sales first quarter fiscal year typically lower sales fourth quarter preceding year expect trend continue ability forecast degree certainty impact decreased business activity lunar new year sales operating results revenues sales telecommunications equipment recognized persuasive evidence agreement exists delivery product occurred evidenced customer acceptance fee fixed determinable collectibility reasonably assured multiple elements exist arrangement revenue allocated different elements based upon verifiable objective evidence fair value elements revenues sales telecommunications equipment involving significant production modification customization product services provided deemed essential functionality product recognized using percentage completion method project cost reasonably estimated cost cannot reasonably estimated completed contract method applied payments received prior revenue recognition recorded deferred revenue revenues sales telecommunications equipment incorporating software considered incidental product whole software contracts recognized persuasive evidence agreement exists product delivered evidenced customer acceptance fee fixed determinable collectability probable revenues software contracts multiple elements recognized using residual method vendor specific objective evidence fair value undelivered elements arrangement vendor specific objective evidence fair value exist one delivered elements arrangement residual method fair value undelivered elements indicated vendor specific objective evidence deferred difference total arrangement fee amount deferred undelivered elements recognized revenue related delivered elements regardless separate prices stated within contract element fee due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met revenues engineering service contracts recognized upon completion project using percentage completion method project costs reasonably estimated effective january 1 2000 adopted staff accounting bulletin 101 sab 101 issued securities exchange commission december 1999 light guidance issued sab 101 changed method recognizing revenue contracts previously recognized revenue contract stages completed accepted recognize revenue upon final acceptance contract addition contracts include service requirements revenue previously recognized costs accrued contractual acceptance consideration sab 101 revenues associated service requirements deferred service obligations completed recorded cumulative adjustment first quarter fiscal 2000 10 million impact cumulative adjustment decrease net income 10 million 001 per share basic diluted year ended december 31 2000 cost sales consists primarily material costs third party commissions costs associated manufacturing assembly testing products costs associated installation customer training overhead warranty costs cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers china manufacture assemble handsets gross profit affected product mix average selling prices material costs gross profit percentage net sales varies among product families gross profit percentage net sales handsets low compared products expect overall gross profit percentage net sales fluctuate period result shifts product mix anticipated decreases average selling prices ability reduce cost sales selling general administrative expenses include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs large percentage costs fixed difficult quickly reduce periods reduced sales intend pursue aggressive selling marketing campaigns expand direct sales organization result sales marketing expenses increase future periods also expect support continued growth general administrative expenses continue increase foreseeable future research development expenses consist primarily salaries related costs employees engaged research design development activities cost parts prototypes equipment depreciation third party development expenses large percentage costs fixed difficult quickly reduce periods reduced sales believe continued investment research development critical longterm success accordingly expect research development expenses increase future periods net deferred stock compensation represents difference fair value common stock option exercise price options date grant deferred compensation presented reduction stockholders equity amortization recorded vesting period option generally four years connection grant stock options employees recorded 50 million 24 million 159 million net deferred stock compensation years ended december 31 2001 2000 1999 respectively connection grants nonemployees 1999 recorded deferred compensation 74 million recorded stock compensation expense approximately 52 million year ended december 31 2001 116 million year ended december 31 2000 56 million year ended december 31 1999 december 31 2001 approximately 60 million deferred stock compensation remained amortized amortization intangible assets consists primarily amortization intangible assets associated acquisitions china acquisition minority interest wacos inc acquisitions stable gain international ltd acd consolidated equity net income loss affiliated companies comprises 510 share earnings guangdong manufacturing subsidiary accounted using equity method voting control significant matters entered agreement purchase remaining 490 equity interest process applying relevant governmental approvals current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time active subsidiaries china accredited technologically advanced enterprises tax holidays applicable whollyowned subsidiary utstarcom china joint venture hangzhou utstarcom together accounted approximately 901 revenues 2001 expire end 2002 time tax rates two subsidiaries increase 75 15 10 15 respectively negatively impact financial condition results operations increasing tax rate additionally chinese government considering imposition unified corporate income tax would phase time preferential tax treatment foreignfunded enterprises utstarcom currently entitled certain whether government implement unified tax structure implemented whether adversely affect financial results minority interest earnings loss consolidated subsidiaries represents share earnings hangzhou utstarcom zhejiang manufacturing joint venture owned joint venture partner results operations following table sets forth percentage net sales represented certain items reflected consolidated statements operations comparison years ended december 31 2001 december 31 2000 net sales net sales increased 700 6268 million 2001 3686 million 2000 increase primarily due increase sales volume pas ipbased pas systems sales telecommunications equipment year ended december 31 2001 4389 million increase 1769 million 675 compared corresponding period 2000 sales subscriber handsets year ended december 31 2001 1879 million increase 813 million 763 compared corresponding period 2000 sales telecommunications equipment subscriber handsets increased due continued growth spending telecommunications infrastructure china continues modernize infrastructure 2001 customer accounted 10 net sales 2000 sales hangzhou telecommunications bureau accounted 121 net sales gross profit gross profit increased 752 2245 million 2001 1282 million 2000 gross profit percentage net sales increased 358 2001 348 2000 increase gross profit percentage net sales primarily due increased margins handsets comprised 300 net sales 2001 compared 289 2000 selling general administrative selling general administrative expenses increased 577 758 million 2001 481 million 2000 increase selling general administrative expenses primarily due increased sales administrative personnel related expenses including sales commissions associated growth net sales expansion overall level business activities increase partly offset decrease noncash stock compensation expense decreased 25 million 2001 47 million 2000 selling general administrative expenses percentage net sales decreased 121 2001 131 2000 decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increases net sales expect selling general administrative expenses increase absolute dollar amounts future periods sales marketing activities increase invest infrastructure incur additional expenses related anticipated growth business operations research development research development expenses increased 443 598 million 2001 415 million 2000 increase research development expenses primarily due hiring additional technical personnel increased prototype expenses licensing fees support research development efforts partly offset decrease noncash stock compensation expense decreased 27 million 2001 68 million 2000 percentage net sales research development expenses decreased 95 2001 112 2000 reduction attributable decrease noncash compensation expense increase sales 2001 expect research development expenses increase absolute dollar amounts future periods expand research development organization support new product development amortization intangible assets amortization intangible assets increased 75 million 2001 49 million 2000 increase amortization intangible assets primarily due amortization additional goodwill associated acquisition stable gain software development company 110 million first quarter 2001 inprocess research development costs inprocess research development costs resulted acquisition acd november 2001 aggregate purchase price acd approximately 213 million based upon independent appraisal willamette management associates assets acquired liabilities assumed allocated specifically identifiable tangible intangible assets acquired connection acd acquisition 47 million inprocess research development costs charged operations november 2001 inprocess research development charges 2000 interest income expense net interest income 86 million 2001 compared interest income 122 million 2000 interest expense 39 million 2001 compared 33 million 2000 interest income decreased 2001 due lower interest rates partially offset higher average cash balances result completion followon public offering july 2001 interest expense increased due higher borrowings 2001 compared 2000 income expenses net expense 20 million 2001 net income 19 million 2000 decrease income 2001 primarily due impairment writedowns 34 million relating investment portfolio equity net income loss affiliated companies consolidated equity net loss affiliated companies 13 million 2001 03 million 2000 change two periods primarily due increase losses guangdong manufacturing subsidiary income tax expense income tax expense 198 million 2001 140 million 2000 increase income tax expense due increasing income effective tax rate improved 32 2000 25 2001 primarily due favorable settlement internal revenue service upon examination corporate income tax returns filed years 1997 1998 1999 minority interest earnings consolidated subsidiaries minority interest earnings consolidated subsidiaries 13 million 2001 23 million 2000 change two periods primarily due increased profitability zhejiang manufacturing subsidiary comparison years ended december 31 2000 december 31 1999 net sales net sales increased 966 3686 million 2000 1875 million 1999 increase primarily due increase sales volume pas system sales telecommunications equipment year ended december 31 2000 2621 million increase 927 million 547 compared corresponding period 1999 sales subscriber handsets year ended december 31 2000 1066 million increase 885 million 4890 compared corresponding period 1999 2000 sales hangzhou telecommunications bureau accounted 121 net sales 1999 sales xian telecommunications bureau kunming telecommunications bureau accounted 302 107 net sales respectively gross profit gross profit increased 713 1282 million 2000 748 million 1999 gross profit percentage net sales decreased 348 2000 399 1999 decrease gross profit percentage net sales primarily due increases sales lower margin handsets comprised 289 net sales 2000 compared 96 1999 selling general administrative selling general administrative expenses increased 368 481 million 2000 351 million 1999 increase selling general administrative expenses primarily due increased sales administrative personnel related expenses including sales commissions associated growth net sales expansion overall level business activities selling general administrative expenses percentage net sales decreased 131 2000 187 1999 decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increases net sales research development research development expenses increased 1223 415 million 2000 186 million 1999 increase research development expenses primarily due hiring additional technical personnel increased prototype expenses licensing fees support research development efforts noncash stock compensation expense increased 68 million 2000 13 million 1999 percentage net sales research development expenses increased 112 2000 100 1999 amortization intangible assets amortization intangible assets increased 49 million 2000 03 million 1999 increase amortization intangible assets due increase amortization associated december 1999 acquisition portion wacos inc subsidiary owned minority shareholders inprocess research development costs inprocess research development charges 2000 inprocess research development costs 1999 resulted acquisition portion wacos inc subsidiary owned minority shareholders december 1999 aggregate purchase price wacos inc approximately 280 million based upon independent appraisal willamette management associates assets acquired liabilities assumed allocated specifically identifiable tangible intangible assets acquired connection wacos acquisition 40 million inprocess research development costs charged operations december 1999 interest income expense net interest income 89 million 2000 net interest expense 10 million 1999 increase interest income primarily due increased interest income higher average cash balances result completion initial public offering march 2000 sale preferred stock november december 1999 income expenses net income 19 million 2000 net expenses 12 million 1999 increase income primarily due onetime gain nontrade receivables related receipts balances previously considered doubtful equity net income loss affiliated companies consolidated equity net loss affiliated companies 03 million 2000 consolidated equity net income affiliated companies 13 million 1999 change two periods primarily due decrease net income guangdong manufacturing subsidiary income tax expense income tax expense 140 million 2000 06 million 1999 increase income tax expense due increasing income minority interest earnings consolidated subsidiaries minority interest earnings consolidated subsidiaries 23 million 2000 21 million 1999 change two periods primarily due increased profitability zhejiang manufacturing subsidiary beneficial conversion feature issuance series f preferred stock 1999 included beneficial conversion feature pursuant preferred shares converted common shares oneforone basis price expected offering price upon completion initial public offering resulted charge net income 1999 approximately 300 million reducing diluted earnings per share available common stockholders 345 liquidity capital resources prior initial public offering financed operations sales preferred stock lesser extent bank lines credit november december 1999 secured private equity financing totaling 550 million march 2000 raised 1894 million net proceeds initial public offering sold 11500000 shares common stock august 3 2001 completed followon public offering sold aggregate 7400000 shares common stock raised net proceeds 1399 million december 31 2001 lines credit totaling 2602 million total borrowings 705 million remainder available future borrowings amount borrowed 120 million included longterm debt guarantor debt included consolidated balance sheet december 31 2001 working capital 5911 million including 3211 million cash equivalents 862 million shortterm investments 584 million renminbidenominated bank borrowings 2000 invested 80 million 2001 invested additional 20 million softbank china fund investment fund established softbank corp focused investments internet companies china investment permits us participate anticipated growth internetrelated businesses china entity affiliated softbank corp softbank america inc significant stockholder company investment constitutes 100 funding softbank china softbank corp contributing remaining 900 passive investor decisionmaking authority respect investments fund separate management team none employees employed fund one directors serves chief executive officer fund chief executive officer chairman board fund participated daytoday management fund many funds investments privately held companies many still considered startup development stages investments inherently risky market technologies products companies development typically early stages may never materialize year ended december 31 2001 based upon review carrying value investment impairment charge 17 million recognized provide temporary decline fair value carrying value investment balance remaining investment december 31 2001 83 million also invested directly number private technologybased companies early stages development continually evaluate carrying value investments possible impairment based achievement business objectives milestones financial condition prospects companies relevant factors fourth quarter 2001 based upon review carrying value investments impairment charge 17 million recognized provide temporary decline fair value carrying value investments due risky nature investments may experience losses connection investment softbank china investments private technology companies net cash provided operations 2001 402 million primarily due net income 570 million adjusted depreciation amortization expense 185 million amortization deferred stock compensation expense 52 million nonqualified stock option exercise tax benefits 153 million inventory reserve 111 million allowance doubtful accounts 62 million increase accounts payable income taxes payable current liabilities deferred revenue 391 million 34 million 862 million respectively partially offset increase inventories accounts receivable current noncurrent assets 1212 million 392 million 526 million respectively net cash used operations 2000 462 million primarily due increase inventories accounts receivable current noncurrent assets 635 million 872 million 49 million respectively uses cash partially offset net income 270 million plus depreciation amortization expense 95 million nonqualified stock option exercise tax benefits 76 million amortization deferred stock compensation expense 116 million inventory reserve 28 million allowance doubtful accounts 60 million increase accounts payable current liabilities deferred revenue 141 million 280 million respectively net cash used investing activities 2001 437 million primarily due purchases property plant equipment 302 million investments affiliates 98 million net purchases shortterm investments 21 million net cash used investing activities 2000 1114 million primarily due acquisition property plant equipment 195 million investment affiliates 82 million included 80 million investment softbank china net purchases shortterm investments 838 million purchased rights use 49 acres land located zhejiang science technology industry garden hangzhou hitech industry development zone completed design layout new manufacturing facility construction new facility expected completed 2003 projected cost 700 million entered agreements purchase remaining minority interests two joint ventures december 2001 agreed acquire remaining 49 ownership guangdong utstarcom ltd total 36 million cash payable 2002 january 2002 agreed acquire remaining 12 ownership utstarcom hangzhou telecommunication company ltd total 145 million cash payable 2002 net cash provided financing activities 2001 1755 million primarily due 1606 million proceeds followon public offering common stock august 2001 exercise stock options net proceeds borrowings line credit arrangements 151 million net cash provided financing activities 2000 2193 million primarily due net proceeds 1982 million issuance common stock initial public offering exercise stock options net proceeds 208 million borrowing lines credit international sales generally denominated local currencies due limitations converting renminbi limited ability engage currency hedging activities china december 31 2001 engaged hedging activities hold derivative financial instruments although impact currency fluctuations date insignificant cannot guarantee fluctuations currency exchange rates future material adverse effect revenues international sales correspondingly business financial condition results operations also contracts negotiated japanese yen purchasing portions inventories supplies multicurrency bank account japanese yen purchasing portions inventories supplies balance japanese yen account december 31 2001 approximately 67 million believe existing cash equivalents shortterm investments cash operations sufficient finance operations least next 12 months additional financing needed assurance financing available us commercially reasonable terms recent accounting pronouncements june 1998 financial accounting standards board fasb issued statement financial accounting standards sfas 133 accounting derivatives hedging activities amended sfas 138 sfas 133 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities adopted sfas 133 january 1 2001 adoption impact consolidated financial statements july 2001 fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires purchase method accounting used business combinations initiated completed june 30 2001 sfas 141 also specifies criteria intangible assets acquired business combination must meet recognized reported apart goodwill sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized instead tested impairment least annually sfas 142 also requires intangible assets definite useful lives amortized respective estimated useful lives estimated residual values reviewed impairment accordance sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 sfas 141 effective immediately except regard business combinations initiated prior july 1 2001 accounted using purchase method accounting sfas 142 effective fiscal years beginning december 15 2001 adopted us january 1 2002 adoption accounting standards eliminate amortization goodwill commencing january 1 2002 however impairment reviews may result future periodic writedowns expect due elimination goodwill amortization expense effective january 1 2002 net income increase approximately 73 million 2002 existing goodwill wacos acquisition longer amortized sfas 142 also require us perform transitional assessment june 30 2002 determine whether impairment goodwill transitional impairment loss recognized change accounting principle consolidated statement operations yet performed initial goodwill impairment test prescribed sfas 142 however anticipate test result significant impairment charge october 3 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 effective financial statements issued fiscal years beginning december 15 2001 interim periods within fiscal years statement supercedes sfas 121 amends apb 30 reporting results operationsreporting effects disposal segment business sfas 144 requires longlived assets disposed sale measured lower book value fair value less cost sell additionally sfas 144 expands scope discontinued operations include components entity operations 1 distinguished rest entity 2 eliminated ongoing operations entity disposal transaction expect adoption sfas 144 significant impact consolidated financial statements risks relating company future product sales unpredictable operating results likely fluctuate quarter fail meet expectations securities analysts investors stock price could decline significantly quarterly annual operating results fluctuated past likely fluctuate future due variety factors outside control result periodtoperiod comparisons operating results necessarily meaningful indicative future performance furthermore likely future quarters operating results fall expectations securities analysts investors occurs trading price common stock could decline factors may affect future operating results include timing number size orders products well relative mix orders products particularly volume lower margin handsets cancellation deferment delay implementation large contracts evolving unpredictable nature economic regulatory competitive political environments china countries market plan market products price reductions competitors changes customers subscriber growth rate currency fluctuations market acceptance products product enhancements lengthy unpredictable sales cycles associated sales products combined impact variability suppliers ability provide us components timely basis longer collection periods accounts receivable china countries decline business activity typically experience lunar new year leads decreased sales first fiscal quarter limited performance history products limited forecasting experience processes emerging nature target markets make forecasting future sales operating results difficult expense levels based part expectations regarding future sales expenses largely fixed particularly short term addition enable us promptly fill orders maintain inventories finished goods components raw materials result commit considerable costs advance anticipated sales past substantial portion sales quarter resulted orders received shipped quarter operated limited backlog unfilled orders accordingly may able reduce costs timely manner compensate unexpected shortfall forecasted actual sales significant shortfall sales may require us maintain higher levels inventories finished goods components raw materials require thereby increasing risk inventory obsolescence corresponding inventory writedowns writeoffs competition markets may lead reduced prices revenues market share increasingly facing intense competition target markets especially domestic companies china believe strongest competition future may come companies many operate lower cost structures favorable governmental policies much larger sales forces furthermore companies presently offering competing products may also enter target markets particularly reduction trade restrictions result chinas admission world trade organization wto many competitors significantly greater financial technical product development sales marketing resources result competitors may able respond quickly new emerging technologies changes service provider requirements competitors may also able devote greater resources development promotion sale new products competitors may also able offer significant financing arrangements service providers cases facilitated government policies competitive advantage selling systems service providers limited financial currency resources increased competition likely result price reductions reduced gross profit percentage net sales loss market share one could materially harm business financial condition results operations moreover current potential competitors established may establish cooperative relationships among third parties including telecommunications administrations telecommunications bureaus local organizations increase ability products address needs prospective customers target markets accordingly alliances among competitors third parties may emerge rapidly acquire significant market share remain competitive believe must continue partner telecommunications administrations local organizations maintain high level investment research development sales marketing manufacture deliver products service providers timely basis without significant defects fail meet objectives business financial condition results operations could harmed introduction inexpensive wireless telephone service competitive services china may also adverse impact sales pas systems handsets china may able compete successfully current future competitors competitive pressures future may materially adversely affect business financial condition results operations contracts purchase orders generally subject cancellation delay customers limited penalty backlog necessarily indicative future revenues earnings december 31 2001 backlog totaled approximately 3607 million compared approximately 1912 million december 31 2000 include backlog contracts purchase orders anticipate delivery occur within 12 months products delivered final acceptance yet received contracts purchase orders generally subject cancellation delay customers limited penalty backlog necessarily indicative future revenues earnings addition number large contracts realization backlog dependent successful implementation products customers cases successful development regional infrastructures business may suffer unable collect payments customers timely basis customers often must make significant commitment capital purchase products result downturn customers business affects customers ability pay us could harm financial condition moreover accounts receivable collection cycles historically tend much longer china markets failure customers make timely payments could require us writeoff accounts receivable increase accounts receivable reserves either could adversely affect financial condition market subject rapid technological change compete effectively must continually introduce new products achieve market acceptance emerging market communications equipment developing countries characterized rapid technological developments frequent new product introductions evolving industry regulatory standards success depend large part ability enhance network access switching technologies develop introduce new products product enhancements anticipate changing service provider requirements technological developments may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail timely develop introduce new products enhancements existing products effectively respond technological change business financial condition results operations could materially adversely affected time competitors may announce new products product enhancements technologies services potential replace shorten life cycles products may cause customers defer purchasing existing products including possible adoption implementation third generation 3g systems resulting inventory obsolescence future technological advances communications industry may diminish inhibit market acceptance existing future products render products obsolete even able develop introduce new products may gain market acceptance market acceptance products depend various factors including ability obtain necessary approvals regulatory organizations perceived advantages new products competing products ability attract customers existing relationships competitors product cost relative performance level customer service available support new products specifically sales pas wireless access system depend part upon consumer acceptance mobility limitations service relative wireless service systems gsm cdma existing new products fail achieve market acceptance reason business could seriously harmed business suffer unable deliver quality products timely cost effective basis operating results depend ability manufacture products timely cost effective basis past experienced reductions yields result various factors including defects components human error assembly experience deterioration manufacturing performance delay production products could experience delays shipments cancellations orders moreover networking products frequently contain undetected software hardware defects first introduced new versions released addition products often embedded deployed conjunction service providers products incorporate variety components produced third parties result problem occurs may difficult identify source problem problems may cause us incur significant warranty repair costs divert attention engineering personnel product development efforts cause significant customer relation problems loss customers one could harm business contract third parties china undertake high volume manufacturing assembly handsets addition sometimes use third parties high volume assembly circuit boards long term contracts third party manufacturers event manufacturers unable unwilling continue manufacture products may unable secure alternative manufacturers could experience delays qualifying new manufacturers currently manufacture internally limited quantity handsets however future demand handsets requires additional manufacturing capacity may invest build additional manufacturing facilities likely china however new manufacturing facilities may attain quality level efficiencies existing third party manufacturers depend sole source key suppliers handsets components materials used products suppliers fail provide us adequate supplies high quality products competitive prices competitive position reputation business could harmed components materials used products purchased single supplier limited group suppliers supplier unwilling unable provide us high quality components materials quantities required costs specified us may able find alternative sources favorable terms timely manner inability obtain develop alternative sources required could result delays reductions manufacturing product shipments moreover suppliers may delay product shipments supply us inferior quality products events occur competitive position reputation business could suffer ability source sufficient quantity high quality components used products may limited chinas import restrictions duties require significant number imported components manufacture products china imported electronic components imported goods used operation business subject variety permit requirements approval procedures import duties registration requirements nonpayment required import duties could subject us penalties fines could adversely affect ability manufacture sell products china addition import duties increase cost products may make less competitive particular integral component pas system handset used subscribers make receive mobile telephone calls inability obtain sufficient number high quality components assemblies handsets could severely harm business time worldwide shortage handsets currently exists shortage lowpriced handsets found popular many consumers china used third parties assemble manufacture handsets china us limited period time manufacturers may unable produce adequate quantities highquality handsets meet demand customers unable expand direct sales operation china indirect distribution channels elsewhere successfully manage expanded sales organization operating results may suffer distribution strategy focuses primarily developing expanding direct sales organization china indirect distribution channels outside china may able successfully expand direct sales organization china cost expansion may exceed revenue generated efforts even successful expanding direct sales organization china may able compete successfully significantly larger betterfunded sales marketing operations current potential competitors addition fail develop relationships significant international resellers manufacturers representatives resellers representatives successful sales marketing efforts may unsuccessful expansion efforts outside china expect average selling prices products decrease may reduce revenues result must introduce new products reduce costs order maintain profitability average selling prices communications access switching systems subscriber terminal products handsets china declining result number factors including increased competition aggressive price reductions competitors rapid technological change anticipate average selling prices products decrease future response product introductions us competitors factors including price pressures customers therefore must continue develop introduce new products enhancements existing products incorporate features sold higher average selling prices failure could cause revenues gross profit percentage net sales decline cost reduction efforts may allow us keep pace competitive pricing pressures lead improved gross profit percentage net sales order competitive must continually reduce cost manufacturing products design engineering changes may successful efforts delivering products market timely manner redesign may result sufficient cost reductions allow us reduce prices products remain competitive improve maintain gross profit percentage net sales shifts product mix may result declines gross profit percentage net sales gross profit percentage net sales varies among product groups gross profit percentage net sales generally higher access network system products significantly lower handsets also anticipate gross profit percentage net sales may lower newly developed products due startup costs may improve unit volumes increase efficiencies realized overall gross profit percentage net sales fluctuated period result shifts product mix introduction new products decreases average selling prices older products ability reduce manufacturing costs result growth sales lower margin handsets experienced decline overall gross profit percentage net sales likely continue experience downward pressure gross profit percentage net sales service providers sometimes evaluate products long unpredictable periods causes timing purchases results operations unpredictable period time initial contact service provider receipt actual purchase order may span year time service providers may subject products extensive lengthy evaluation process making purchase length qualification processes may vary substantially product service provider making results operations unpredictable may incur substantial sales marketing expenses expend significant management effort process ultimately may result sale qualification processes often make difficult obtain new customers service providers reluctant expend resources necessary qualify new supplier one existing qualified sources inability exercise complete control subsidiary may detrimental business considerable portion operations continue conducted direct indirect subsidiaries example currently 510 interest joint venture operates guangdong manufacturing facility however even though majority interest joint venture sole power control policies decisions jointlyowned subsidiary law china governing sinoforeign joint ventures equity holders exercise rights primarily board directors constitutes highest authority joint venture although majority guangdong joint venture entitled appoint minority directors joint ventures board directors prevents us controlling actions board china law requires unanimous approval board directors significant corporate actions including amendment articles association joint venture liquidation dissolution joint venture increase decrease transfer equity interests party joint venture merger joint venture another economic entity operating results cash flow depend operating results cash flow subsidiaries payment funds subsidiaries us subsidiaries separate distinct legal entities obligation contingent otherwise pay dividends otherwise provide financial benefits us moreover respect guangdong manufacturing joint venture payment dividends us must agreed joint venture partner whose interests receiving dividend distributions may coincide addition applicable law countries including china limits ability subsidiary pay dividends various reasons including absence sufficient distributable reserves event insolvency bankruptcy similar proceedings creditors subsidiaries would generally entitled priority us respect assets affected subsidiary multinational operations subject us various economic political regulatory legal risks market sell products china markets including taiwan india expansion existing multinational operations entry additional international markets require significant management attention financial resources multinational operations subject inherent risks including difficulties designing products compatible varying international communications standards longer accounts receivable collection periods greater difficulty accounts receivable collection unexpected changes regulatory requirements regulatory environment changes governmental control influence customers changes import export regulations including quotas tariffs trade barriers delays difficulties obtaining export import licenses potential foreign exchange controls repatriation controls foreign earnings exchange rate fluctuations currency conversion restrictions burdens complying variety foreign laws regulations difficulties costs staffing managing multinational operations reduced protection intellectual property rights countries potentially adverse tax consequences political economic instability multinational companies required establish intercompany pricing transactions separate legal entities operating different taxing jurisdictions intercompany transactions subject audit taxing authorities jurisdictions multinational companies operate additional tax liability may incurred determined intercompany pricing done arms length believe adequately estimated recorded liability arising intercompany pricing additional tax liability may result audits intercompany pricing policies markets outside china rely number original equipment manufacturers oems thirdparty distributors agents market sell network access products oems distributors agents fail provide support effort necessary service developing markets effectively ability maintain expand operations outside china negatively impacted may successfully compete markets products may accepted may successfully overcome risks associated international operations subject risks relating currency exchange rate fluctuations exposed foreign exchange rate risk sales china denominated renminbi portions accounts payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date insignificant fluctuations currency exchange rates future may material adverse effect results operations failure meet international governmental product standards could detrimental business many products required comply numerous government regulations standards vary market standards products continue evolve need modify products develop support new versions products meet emerging industry standards comply government regulations satisfy requirements necessary obtain approvals inability obtain regulatory approval meet established standards could delay prevent entrance force departure particular markets recent growth strained resources unable manage sustain growth operating results negatively affected recently experienced period rapid growth anticipate must continue expand operations address potential market opportunities fail implement improve systems controls manage future growth expansion effectively business could suffer expansion placed continue place significant strain management operational financial resources manage growth effectively need take various actions including enhancing management information systems forecasting procedures developing operating administrative financial accounting systems controls maintaining close coordination among engineering accounting finance marketing sales operations organizations expanding training managing employee base expanding finance administrative operations staff recently become profitable may able sustain profitability recently become profitable may able remain profitable future periods anticipate continuing incur significant sales marketing research development general administrative expenses result need generate higher revenues remain profitable numerous factors could negatively impact results operations including decrease sales price pressures significant fixed costs past results relied indication future performance success dependent continuing hire retain qualified personnel successful attracting retaining personnel business would harmed success business depends significant part upon continued contributions key technical senior management personnel many would difficult replace particular success depends large part knowledge expertise services hong liang lu president chief executive officer ying wu executive vice president chief executive officer china operations loss key employee failure key employee perform satisfactorily current position failure attract retain key technical senior management employees could significant negative impact operations effectively manage recent growth well future growth need recruit train assimilate motivate retain qualified employees competition qualified employees intense process recruiting personnel combination skills attributes required execute business strategy difficult timeconsuming expensive actively searching research development engineers sales marketing personnel short supply additionally need experienced difficulty finding qualified accounting personnel knowledgeable us china accounting standards resident china fail attract hire assimilate retain qualified personnel business would harmed competitors others past may future attempt recruit employees addition companies communications industry whose employees accept positions competitors frequently claim competitors engaged unfair hiring practices may subject types claims future seek hire qualified personnel claims may result material litigation disruption operations could incur substantial costs defending claims regardless merit acquisitions undertake could difficult integrate disrupt business dilute stockholders harm operating results may acquire complementary businesses products technologies example november 2001 acquired advanced communication devices corporation system chip semiconductor company anticipated benefits acquisition may realized past continue evaluate acquisition prospects would complement existing product offerings augment market coverage enhance technological capabilities may otherwise offer growth opportunities acquisitions companies may result dilutive issuances equity securities incurrence debt amortization expenses related goodwill intangible assets addition acquisitions involve numerous risks including difficulties assimilation operations technologies products personnel acquired company diversion managements attention business concerns risks entering markets direct limited prior experience potential loss key employees acquired company may unable adequately protect intellectual property may subject claims infringe intellectual property others either could substantially harm business rely combination patents copyrights trademarks trade secret laws contractual obligations protect technology applied patents united states three issued also filed patent applications countries additional patents may issued pending patent applications issued patents may upheld addition time chosen abandon previously filed applications moreover yet obtained may able obtain patents china products technology use manufacture products subsidiaries joint ventures china rely upon trademarks technology knowhow manufacture sell products cannot guarantee intellectual property protection measures sufficient prevent misappropriation technology competitors independently develop technologies substantially equivalent superior addition legal systems many foreign countries including china protect intellectual property rights extent legal system united states unable adequately protect proprietary information technology business financial condition results operations could materially adversely affected increasing dependence communications industry proprietary technology resulted frequent litigation based allegations infringement patents intellectual property future may subject litigation defend claimed infringements rights others determine scope validity proprietary rights others future litigation also may necessary enforce protect trade secrets intellectual property rights intellectual property litigation could costly could cause diversion managements attention operation business adverse determinations litigation could result loss proprietary rights subject us significant liabilities require us seek licenses third parties may available commercially reasonable terms could also subject court orders preventing us manufacturing selling products business interruptions could adversely affect business operations vulnerable interruption fire earthquake power loss telecommunications failure events beyond control detailed disaster recovery plan headquarters facility state california currently subject electrical blackouts consequence shortage available electrical power event blackouts continue increase severity could disrupt operations headquarters addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business named defendant securities litigation october 31 2001 putative stockholder class action lawsuit filed company directors officers various underwriters initial public offering complaint alleges undisclosed improper underwriting practices concerning allocation ipo shares violation federal securities laws similar complaints filed concerning ipos 300 companies litigation coordinated federal court southern district new york initial public offering securities litigation 21 mc 92 believe meritorious defenses claims us intend defend litigation vigorously however litigation nature uncertain unfavorable resolution lawsuit could material adverse effect business results operations financial condition risks relating structure regulation chinas telecommunications industry chinas telecommunications industry subject extensive government regulation chinas telecommunications industry heavily regulated ministry information industry ministry information industry broad discretion authority regulate aspects telecommunications information technology industry china including managing spectrum bandwidths setting network equipment specifications standards drafting laws regulations related electronics telecommunications industries additionally ministry information industry decide types equipment may connected national telecommunications networks forms types services may offered public rates charged subscribers services content material available china internet ministry information industry sets standards unable comply render products noncompetitive ability sell products china may limited resulting substantial harm operations end may 2000 became aware internal notice circulated within ministry information industry announcing review phsbased telecommunications equipment future installation chinas telecommunications infrastructure ministry information industry requested service providers temporarily halt new deployments phsbased telecommunications equipment including pas systems handsets pending conclusion review ministry information industry subsequently end june 2000 ministry information industry issued notice stating concluded review phsbased equipment continued deployment phsbased systems pas systems handsets chinas countylevel cities towns villages would permitted addition notice stated deployments within large mediumsized cities would allowed limited areas dense population campuses commercial buildings special development zones notice confirmed however new citywide deployments pas system large medium cities would permitted failure ministry information industry permit sale deployment pas systems handsets sale deployment products imposition additional limitations sale future could material adverse effect business financial condition ministry information industry may conduct reviews evaluations phsbased telecommunications equipment may change position regarding phsbased systems future chinas telecommunications regulatory framework process developed led uncertainties regarding conduct business china yet national telecommunications law however chinas recent admission wto ministry information industry direction state council must shortly present first draft telecommunications law peoples republic china ultimate submission national peoples congress review adoption know nature scope regulation telecommunications law would create accordingly cannot predict whether positive negative effect us aspects business chinas telecommunications regulatory framework process developed september 2000 state council issued telecommunications regulations peoples republic china known telecom regulations telecom regulations cover telecommunications services market regulations pricing interconnection connection well telecommunications construction security issues may 2001 ministry information industry issued administrative measures network access licenses implement telecom regulations area often require subjective interpretation given relative infancy telecom regulations implementing regulations know regulations interpreted enforced result attempts comply regulations may deemed insufficient appropriate regulatory agencies could subject us penalties adversely affect business may suffer result recent restructuring china telecom february 1999 state council approved restructuring plan china telecom system telecommunications operations china telecom system separated along four business lines fixed line mobile paging satellite communications services following announcement observed reduction orders telecommunications bureaus attributed uncertainties surrounding restructuring ultimate impact restructuring would telecommunications bureaus december 11 2001 chinese government announced china telecom would split two entities region northern southern 10 northern provinces municipalities autonomous regions china telecom merged china netcom co ltd china jitong network communications co ltd form new company refer new cnc remaining 21 provinces municipalities autonomous regions constitute southern entity keep name china telecom new cnc inherit 30 old china telecoms national backbone network rest going new china telecom change recent implementation ongoing cannot certain impact restructuring business operations however may experience another decline orders related revenues similar experienced following 1999 restructuring resulting uncertainty among telecommunications bureau customers associated restructuring moreover following restructuring new cnc new china telecom entity may replace result subsequent restructuring may restrict prohibit sales products could cause substantial harm business licenses required sell network access products china chinas current regulatory structure communications products offer china must meet government industry standards network access license equipment must obtained without license equipment allowed connected public telecommunications networks sold china moreover must ensure quality telecommunications equipment obtained network access license stable reliable may lower quality performance installed licensed products state councils product quality supervision department concert ministry information industry performs spot checks track supervise quality licensed telecommunications equipment publishes results spot checks regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways obtained required network access licenses an2000 platform applied yet received network access license pas systems handsets based upon conversations ministry information industry understand pas systems handsets considered still trial period sales pas systems handsets may continue made us trial period license ultimately required network access licenses also required additional products selling may sell china including mswitch platform fail obtain required licenses could prohibited making sales unlicensed products including pas systems handsets china would substantially harm business financial condition results operations counsel china advised us chinas governmental authorities may interpret apply regulations respect licenses required ability sell product trial period manner inconsistent information received counsel china either could material adverse effect business financial condition software incorporated products registered accordance relevant chinese regulations ability sell products incorporating software may affected october 2000 ministry information industry issued regulations prohibit production sale software products incorporating software china unless software registered government process applying registration software based upon verbal advice received ministry information industry believe able continue sell products incorporating software period regulations implemented applications pending however implementation period may last long enough us complete registration software moreover chinese government may interpret apply regulations way prohibit sales products incorporating unregistered software prior registration government prohibits sales pending registration fail efforts register software could prohibited making sales products incorporating unregistered software china could substantially harm business financial condition customers china part china telecom system subject ultimate control following restructuring china telecom part new china telecom new cnc subject ultimate control main customers china local telecommunications bureaus operate china telecom chinas stateowned fixed line operator subject ultimate control telecommunications bureaus operate ultimate control new china telecom new cnc restructuring china telecom policy statements may issued decisions may made entities govern equipment purchasing decisions customers china example late 1999 china telecom prohibited telecommunications bureaus purchasing phs systems pas systems implementation large cities even sales prohibited ministry information industry sales generated operations china decisions china telecom thereafter new china telecom new cnc restricting prohibiting sales deployment products could cause substantial harm business ability sell pas wireless systems handsets could significantly impaired china telecom resulting organizations following reorganization china telecom granted otherwise acquire mobile licenses allow china telecom resulting entities deliver cellular services china telecom holds operates restructuring new china telecom new cnc hold operate fixed line telephone data communications assets china prohibited offering cellular services offer wireless services end users telecommunications bureaus must offer services delivered wireline networks delivered pas wireless systems handsets chinas media sources widely reported restructuring china telecom ministry information industry may grant mobile licenses either one new cnc new china telecom ministry information industry grant mobile license new china telecom new cnc entities otherwise acquire mobile licenses local telecommunications bureaus free offer cellular services gsm cdma customers may therefore elect deploy pas systems handsets occur could lose current potential customers pas systems handsets financial condition results operations could harmed changes telecommunications rates pricing policies may result decreased demand products november 2000 ministry information industry announced significant changes rates telecommunications services china long distance international leased line internet connection fees cut 70 rates local telephone services include certain types wireless access services offered pas systems handsets increased approximately 001 per minute approximately 002 per minute increase rates may result reduced demand end users wireless services delivered pas system corresponding decline demand products additionally ministry information industry may implement future rate changes wireline wireless services china change telecommunications pricing policies including allowing carriers set prices based market conditions may lead reduced demand systems products result material adverse effect business results operations risks relating conducting operations china sales china accounted sales therefore business financial condition results operations significant degree subject economic political social events china approximately 5659 million 903 net sales fiscal 2001 3640 million 988 net sales fiscal 2000 1836 million 979 net sales fiscal 1999 occurred china additionally substantial portion fixed assets located china total fixed assets approximately 753 december 31 2001 750 december 31 2000 537 december 31 1999 china expect make investments china future therefore business financial condition results operations significant degree subject economic political social events china devaluation value renminbi fluctuations exchange rates could adversely affect financial results exchange rate fluctuations could substantial negative impact financial condition results operations purchase substantially materials united states japan significant portion cost goods sold incurred us dollars japanese yen significant portion operating expenses incurred us dollars time sales denominated renminbi value renminbi fixed chinas national government subject changes chinas governmental policies international economic political developments china may choose devalue renminbi us dollar additionally chinas government considered time whether partially fully abandon official exchange rate renminbi us dollar abandonment official exchange rate policy may lead sharp depreciation renminbi us dollar foreign currencies significantly volatility renminbi exchange rate future would adversely affect financial results make future results subject fluctuation past financial markets many asian countries experienced severe volatility result asian currencies experienced significant devaluation time devaluation asian currencies may effect rendering exports china expensive less competitive therefore place pressure chinas government devalue renminbi devaluation renminbi could result increase volatility asian currency capital markets future volatility asian financial markets could adverse impact ability expand product sales asian markets outside china moreover due limitations convertibility renminbi limited ability engage currency hedging activities china currently engage currency hedging activities respect international sales outside china currency restrictions china may limit ability subsidiaries joint ventures china obtain remit foreign currency necessary purchase imported components may limit ability obtain remit foreign currency exchange renminbi earnings chinas government imposes controls convertibility renminbi foreign currencies certain cases remittance currency china current foreign exchange control system sufficient foreign currency may available satisfy currency needs shortages availability foreign currency may restrict ability chinese subsidiaries obtain remit sufficient foreign currency pay dividends us otherwise satisfy foreign currency denominated obligations payments us components export technology licensing fees may also experience difficulties completing administrative procedures necessary obtain remit needed foreign currency business could substantially harmed unable convert remit sales received renminbi us dollars existing foreign exchange laws renminbi held china subsidiaries converted foreign currencies remitted china pay current account items payments suppliers imports labor services payment interest foreign exchange loans distributions dividends long subsidiaries adequate amounts renminbi purchase foreign currency expenses capital nature repayment bank loans denominated foreign currencies however require approval appropriate governmental authorities renminbi used purchase foreign currency remitted china system could changed time executive decision state council impose limits current account convertibility renminbi similar restrictions moreover even though renminbi intended freely convertible current account state administration foreign exchange responsible administering chinas foreign currency market significant degree administrative discretion implementing laws time state administration foreign exchange used discretion ways effectively limit convertibility current account payments restrict remittances china furthermore many circumstances state administration foreign exchange must approve foreign currency conversions remittances current foreign exchange control system sufficient foreign currency may available given exchange rate satisfy currency demands china subjects foreign investors telecommunications industry ownership geographic limitations chinas government agencies including ministry information industry state council regulate foreign investment telecommunications industry promulgation various laws regulations issuance various administrative orders decisions currently foreign investors may engage activities accordance certain ownership geographic limitations china may promulgate new laws regulations issue administrative judicial decisions interpretations would restrict bar foreigners engaging telecommunicationsrelated activities promulgation laws regulations issuance administrative orders judicial decisions interpretations restricting prohibiting telecommunications activities foreigners could substantial impact ongoing operations governmental policies china could impact business since 1978 chinas government expected continue reforming economic political systems reforms resulted expected continue result significant economic social development china many reforms unprecedented experimental may subject change readjustment due number political economic social factors believe basic principles underlying political economic reforms continue implemented provide framework chinas political economic system new reforms readjustment previously implemented reforms could significant negative effect operations changes chinas political economic social conditions governmental policies could substantial impact business include new laws regulations interpretation laws regulations introduction measures control inflation stimulate growth changes rate method taxation imposition additional restrictions currency conversion remittances abroad actions limit ability develop manufacture import sell products china finance operate business china economic policies china could impact business economy china differs economies countries belonging organization economic cooperation development various respects structure government involvement level development growth rate capital reinvestment allocation resources selfsufficiency rate inflation balance payments position past economy china primarily planned economy subject one fiveyear state plans adopted central government authorities largely implemented provincial local authorities set production development targets since 1978 increasing emphasis placed decentralization utilization market forces development chinas economy economic reform measures adopted chinas government may inconsistent ineffectual may cases able capitalize reforms measures may adjusted modified ways could result economic liberalization measures inconsistent time industry across different regions country chinas economy experienced significant growth past decade growth however accompanied imbalances chinas economy resulted significant fluctuations general price levels including periods inflation chinas government implemented policies time increase restrain rate economic growth control periods inflation otherwise regulate economic expansion may able benefit effects policies measures taken chinas government regulate economy could also significant negative impact economic conditions china resulting negative impact business chinas entry world trade organization creates uncertainty future economic business environments china chinas entry wto approved september 2001 entry wto require china reduce tariffs eliminate nontariff barriers include quotas licenses restrictions 2005 latest chinas entry wto related relaxation trade restrictions may lead increased foreign investment may also lead increased competition chinas markets international companies chinas entry wto could negative impact chinas economy resulting negative impact business tax benefits available subsidiaries located china reduced repealed business could suffer subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time active subsidiaries china accredited technologically advanced enterprises two principal subsidiaries utstarcom china hangzhou utstarcom accounted approximately 901 revenues 2001 tax holidays applicable utstarcom china expire end 2002 time tax rate increase 75 15 negatively impact financial condition results operations tax holiday applicable principal subsidiary hangzhou utstarcom expired 2001 subject annual review consequently tax rate could increase 10 15 unable maintain tax holiday 2002 unable extend tax holiday 2002 financial condition results operations may negatively impacted additionally chinese government considering imposition unified corporate income tax would phase time preferential tax treatment foreignfunded enterprises utstarcom currently entitled certain whether government implement unified tax structure whether implemented utstarcom grandfathered new tax structure new tax structure implemented adversely affect financial condition may exposed contingent tax liabilities china resulting failure withhold sufficient amounts chinas income tax purposes employ number us citizens work full time basis china expatriate employees participate stock option plans exercised number options granted plans option exercises generated income may subject personal income taxes chinas income tax laws withhold china income taxes option exercises employees yet paid taxes china may due employees fail pay income taxes may liable taxes capacity withholding agent event determined taxes due china behalf employees apply refund us tax authorities corresponding amount foreign tax credit would applicable refund amounts required paid us employees receive addition failure collect remit china withholding tax may also subject us penalties chinas legal system embodies uncertainties could negatively impact business china civil law system decided court cases binding legal effect future decisions since 1979 many new laws regulations covering general economic matters promulgated china despite activity develop legal system chinas system laws yet complete even adequate law exists china enforcement existing laws contracts based existing law may uncertain sporadic may difficult obtain swift equitable enforcement obtain enforcement judgment court another jurisdiction relative inexperience chinas judiciary many cases creates additional uncertainty outcome litigation interpretation statutes regulations may subject government policies reflecting domestic political changes moreover government policies internal rules promulgated governmental agencies may published time result may operate business violation new rules policies without knowledge existence china adopted broad range related laws administrative rules regulations govern conduct operations foreign investment enterprises restrict ability foreign companies conduct business china laws rules regulations provide incentives encourage flow investment china also subject foreign companies foreign investment enterprises including subsidiaries china set restrictions may always apply domestic companies china result admission wto china increasingly according foreign companies foreign investment enterprises established china rights privileges chinese domestic companies special laws administrative rules regulations governing foreign companies foreign investment enterprises may still place us subsidiaries disadvantage relation chinese domestic companies may adversely affect competitive position moreover chinas legal system develops promulgation new laws changes existing laws preemption local regulations national laws may adversely affect foreign investors companies many activities products china subject administrative review approval various national local agencies chinas government changes occurring chinas legal regulatory structure may able secure requisite governmental approval activities products failure obtain requisite government approval activities products could substantially harm business risks relating stock performance stock price highly volatile trading price common stock fluctuated significantly since initial public offering march 2000 stock price could subject wide fluctuations future response many events factors including discussed preceding risk factors relating operations well actual anticipated fluctuations operating results changes expectations future financial performance changes financial estimates buysell recommendations securities analysts changes governmental regulations policies china temporary suspension sales pas systems occurred may june 2000 caused stock price drop competitors announcement new products services technological innovations operating stock price performance comparable companies general market conditions domestic international macroeconomic factors unrelated performance may also affect stock price reasons investors rely recent trends predict future stock prices financial results addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources softbank corp related entities including softbank america inc significant influence management affairs could exercise best interests softbank corp related entities including softbank america inc beneficially 4085 outstanding stock result softbank corp related entities including softbank america inc ability exercise significant influence matters submitted stockholders approval exert significant influence management affairs concentration ownership may delay prevent change control discourage potential acquiror making tender offer otherwise attempting obtain control company could decrease market price common stock matters could require stockholder approval include election removal directors merger consolidation company sale substantially assets interests softbank america inc may always coincide interests softbank america inc acting designees board directors ownership voting securities ability exercise significant influence actions irrespective desires stockholders directors delaware law charter documents contain provisions could discourage prevent potential takeover even transaction would benefit stockholders companies may seek acquire merge us acquisition merger company could result benefits stockholders including increase value common stock provisions certificate incorporation bylaws well provisions delaware law may discourage delay prevent merger acquisition stockholder may consider favorable provisions include authorizing board directors issue additional preferred stock prohibiting cumulative voting election directors limiting persons may call special meetings stockholders prohibiting stockholder action written consent creating classified board directors pursuant directors elected staggered three year terms establishing advance notice requirements nominations election board directors proposing matters acted stockholders stockholder meetings item 7aitem 7 managements discussion analysis financial condition results operation forwardlooking statements annual report form 10k contains forwardlooking statements within meaning federal securities laws statements based information currently available management intend forwardlooking statements covered safe harbor provisions private securities litigation reform act 1995 including statement purposes complying provisions forwardlooking statements include without limitation concerning following expectations nature possible trends manner customers chinese provinces negotiate purchase products expectation regarding continued growth business operations expectation pas ipas network access systems continue allowed chinas countylevel cities counties expectation penalties fines noncompliance licensing requirements china pas system products expectation concerning anticipated cost completion date new hangzhou manufacturing facility expectation fluctuations overall gross profit gross margin product mix quarter results customer base selling prices plans expanding direct sales organization selling marketing campaigns activities expectation may use part net proceeds initial follow public offerings acquire invest complementary businesses technologies product offerings expectation increases selling marketing research development general administrative expenses expectation continue invest significantly research development expectation fill majority current backlog orders expectation regarding future investments expectation existing cash equivalents sufficient finance operations least next 12 months additional forwardlooking statements may identified words anticipate expect believe intend similar expressions relate us management investors cautioned forwardlooking statements inherently uncertain statements subject risks uncertainties may cause actual results events differ materially detailed discussion risks uncertainties see factors affecting future operating results section form 10k guarantee future results undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k overview incorporated 1991 utstarcom designs manufactures markets leading broadband narrowband wireless softswitch 3g products support fixedline mobility local loop offering clean migration path nextgeneration ipbased networks operations conducted primarily foreign subsidiaries manufacture distribute support products principally china systems products allow service providers offer costefficient expandable voice data internet access services systems based widely adopted international communications standards service providers easily integrate systems existing networks deploy systems new broadband internet protocol wireless network rollouts since incorporation focused resources developing products chinas communications market shipped first network access products 1993 1995 acquired starcom network systems inc changed name utstarcom inc 1996 introduced advanced v51 v52 compliant multiservice network access platform an2000 late 1996 introduced pas wireless access system december 1999 completed acquisition portion wacos inc subsidiary owned minority shareholders wacos inc research development subsidiary develops ipbased switching systems november 2001 completed acquisition advanced communications devices corporation acd 213 million acd system chip semiconductor company focusing lan ip switching technology april 19 2002 company completed purchase issanni communications inc issanni investment issanni 20 million prior acquisition purchase consideration outstanding shares issanni already held us prior acquisition 21 million addition 20 million payable form earnout issanni shareholders record closing subject completion certain performance milestones 2002 2003 2004 december 18 2001 entered agreement acquire remaining 49 ownership interest guts one two primary manufacturing facilities china total consideration 36 million cash order achieve 100 ownership joint venture january 21 2002 entered agreement acquire remaining 12 ownership interest huts manufacturing facility total consideration 145 million cash result guts huts transactions closed second quarter 2002 conduct operations china wholly owned subsidiaries derived revenues sales telecommunications equipment service providers china however continue expand sales service providers growing communications markets outside china including japan taiwan vietnam india latin america customers often make large initial purchase equipment followed supplemental purchases enhancements upgrades result largest revenueproducing customers typically vary period evaluation period products potential customers may span year business generally depends relatively small number large deployments sell products china direct sales force approximately 838 903 988 net sales years ended december 31 2002 2001 2000 respectively china accordingly business financial condition results operations likely influenced political economic legal environment china general state chinas economy results may adversely affected among things changes political economic competitive social conditions china including changes governmental policies respect laws regulations changes telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation extend credit customers china without requiring collateral monitor exposure credit losses maintain allowances doubtful accounts historically considered local telecommunications service providers serving municipalities counties primary customers china recently however provinciallevel telecommunications service entity zhejiang province china begun consolidate telecommunications purchasing decisions province result trend zhejiang province grouped customers zhejiang province together treated one customer giving effect treatment year ended december 31 2002 sales zhejiang province bb technologies corporation accounted 18 13 net sales respectively year ended december 31 2001 zhejiang province accounted 24 net sales year ended december 31 2000 sales hangzhou ptt accounted 12 net sales december 31 2002 approximately thirtythree customers zhejiang province whether represents beginning greater trend throughout china towards increased consolidation negotiations purchasing decisions control provinciallevel telecommunications service entities unclear knowledge telecommunications service entities chinese provinces operate centralized process time however nature negotiations china still evolving trend toward consolidation purchasing decisions control provinciallevel telecommunications service entities china emerge could possibly take variety forms example provinciallevel telecommunications service entities could simply coordinate purchase decisions made local telecommunications service providers local service providers retaining ultimate control purchasing decisions cases however provinciallevel entities could wield greater control decision whether purchase products event trend could streamline negotiation process within chinese provinces could also place downward pressure prices charge products continue monitor business practices china closely extent changes affect manner customers make decisions whether purchase products reevaluate entities may best described customers chinas current regulatory structure communications products offer china must meet government industry standards network access license equipment must obtained without license equipment allowed connected public telecommunications networks sold china moreover must ensure quality telecommunications equipment obtained network access license stable reliable may lower quality performance installed licensed products state councils product quality supervision department concert ministry information industry performs spot checks track supervise quality licensed telecommunications equipment publishes results spot checks regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways obtained required network access licenses an2000 platform applied yet received network access license pas systems handsets based upon conversations ministry information industry understand pas systems handsets considered still trial period sales pas systems handsets may continue made us trial period license ultimately required network access licenses also required additional products selling may sell china including mswitch platform fail obtain required licenses could prohibited making sales unlicensed products including pas systems handsets china would substantially harm business financial condition results operations counsel china advised us chinas governmental authorities may interpret apply regulations respect licenses required ability sell product trial period manner inconsistent information received counsel china either could material adverse effect business financial condition results operations remittances china capital nature repayment bank loans denominated foreign currencies require approval appropriate governmental authorities renminbi used purchase foreign currency although payment cash dividends permitted long subsidiaries sufficient reserves adequate amounts renminbi purchase foreign currency regulations restrict ability subsidiaries transfer funds us intercompany loans advances business activity china many countries asia declines considerably first quarter year observance lunar new year result sales first quarter fiscal year typically lower sales fourth quarter preceding year expect trend continue revenues sales telecommunications equipment recognized persuasive evidence agreement exists delivery product occurred evidenced customer acceptance fee fixed determinable collectibility reasonably assured fee due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met majority revenue recognized upon receipt final acceptance certificates multiple elements exist arrangement fee allocated different elements based upon verifiable objective evidence fair value elements revenue recognized element earned provided undelivered elements essential functionality delivered elements revenues engineering services contracts sales telecommunications equipment involving significant production modification customization product services provided deemed essential functionality product recognized using percentage completion method project cost reasonably estimated cost cannot reasonably estimated completed contract method applied payments received prior revenue recognition recorded deferred revenue november 2002 emerging issues task force reached consensus issue 0021 revenue arrangements multiple deliverables eitf 0021 issue addresses revenue arrangements multiple deliverables divided separate units accounting arrangement consideration allocated identified separate accounting units eitf 0021 effective fiscal periods beginning june 15 2003 yet determined impact adopting eitf 0021 consolidated results operations financial position cost sales consists primarily material costs third party commissions costs associated manufacturing assembly testing products costs associated installation customer training overhead warranty costs cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers china manufacture assemble handsets gross profit affected product mix average selling prices material costs gross profit percentage net sales varies among product families gross profit percentage net sales handsets lower compared products believe handset sales 2003 could represent approximately 35 45 net sales expect overall gross profit percentage net sales fluctuate period result shifts product mix anticipated decreases average selling prices ability reduce cost sales selling general administrative expenses include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs large percentage costs fixed difficult quickly reduce periods reduced sales intend pursue aggressive selling marketing campaigns expand direct sales organization result sales marketing expenses increase future periods also expect support continued growth general administrative expenses continue increase foreseeable future research development expenses consist primarily salaries related costs employees engaged research design development activities cost parts prototypes equipment depreciation third party development expenses large percentage costs fixed difficult quickly reduce periods reduced sales believe continued investment research development critical longterm success accordingly expect research development expenses increase future periods amortization intangible assets consists primarily amortization intangible assets associated acquisitions china outside china acquisition minority interest wacos inc acquisitions stable gain international ltd issanni acd consolidated equity net income loss affiliated companies comprised 51 share earnings guangdong utstarcom ltd guts guangdong manufacturing subsidiary accounted using equity method prior acquisition remaining 49 ownership interest guts may 2002 previously accounted equity method voting control significant matters current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time active subsidiaries china accredited technologically advanced enterprises tax holidays applicable whollyowned subsidiaries utstarcom china utstarcom telecom co ltd huts together accounted approximately 838 revenues 2002 expired end 2002 2001 respectively unless tax holidays extended entities 2003 tax rates two subsidiaries increase 75 15 10 15 respectively could negatively impact financial condition results operations increasing tax rate fourth quarter 2002 formed new entity hangzhou utstarcom telecom co ltd manufacture sell handsets entity benefit two year income tax exemption 50 income tax reduction following three years chinese government considering imposition unified corporate income tax would phase time preferential tax treatment foreignfunded enterprises utstarcom currently entitled cannot certain whether government implement unified tax structure implemented whether adversely affect financial results minority interest earnings loss consolidated subsidiaries represented share earnings huts zhejiang manufacturing joint venture attributable joint venture partner prior acquisition remaining 12 ownership interest huts may 2002 critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations business concentrated china therefore material adverse change economic political social conditions china could adverse effect accounting estimates result additional charges income revenue recognition allowances doubtful accounts product warranty recognize revenue sales telecommunications equipment persuasive evidence arrangement exists delivery product occurred fee fixed determinable collectibility reasonably assured transactions yet obtain customer acceptance revenue deferred terms acceptance satisfied sales reserve established based historical trends sales returns actual future sales returns reflect historical data revenue could affected historically level sales returns collection history within expectations also maintain allowances doubtful accounts based assessment collectibility accounts receivable continually monitor collections customers maintain allowances doubtful accounts based upon age outstanding invoices specific customer collection issues historically doubtful accounts credit losses within expectations doubtful account allowances adequate provide warranty equipment handset sales period generally ranging twelve eighteen months provide expected cost product warranties time recognize revenue based assessment past warranty experience continually monitor level warranty expenses however material adverse change product failure rates additional warranty provision would required historically warranty experience within expectations inventories stated lower cost net realizable value net writedowns excess slow moving obsolete inventory writedowns based assumptions future market conditions customer demand continually monitor inventory valuation historically level inventory writedowns inventory turnover obsolescence experience within expectations research development software development costs research development costs charged expense incurred capitalize costs incurred development software ultimately sold technological feasibility attained andor development related product completed management judgment required assessing expected future revenues changes product technologies ultimate recoverability capitalized software development costs deferred income taxes recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period goodwill intangibles recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets historically circumstances resulted revised assumptions impairment charges completed required transitional assessment goodwill first quarter fiscal 2002 based assessment transition goodwill impairment charge completed annual goodwill impairment review 2002 fourth quarter 2002 charge required plan carry annual goodwill impairment review future years fourth quarter year longterm investments invested fund focused investments internet companies china fund focused investments companies asia undergoing restructuring bankruptcy procedures also invested directly number private technologybased companies early stages development publicly listed technology companies traded nasdaq nyse quoted market prices readily available determine fair value investments publicly traded companies management judgment required evaluating carrying value private company investments possible impairment private technology company investments assess impairment based evaluation achievement business objectives milestones financial condition prospects companies relevant factors continually monitor investments impairment charge income impairment amounts period determination made related party transactions recognized revenue 1230 million 139 million 00 years ended december 31 2002 2001 2000 respectively respect sales telecommunications equipment bb technologies corporation bbtc affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder bbtc offers asynchronous digital subscriber line adsl coverage throughout japan marketed name yahoo provide adsl technology bbtc contract competitively bid terms contract terms favorable unrelated parties included accounts receivable december 31 2002 08 million related agreement amounts included deferred revenue respect agreement december 31 2002 included accounts receivable respect agreement december 31 2001 135 million amounts included deferred revenue respect agreement december 31 2001 invested 100 million softbank china investment fund established softbank corp focused investments internet companies china investment permits us participate anticipated growth internetrelated businesses china softbank corp related companies significant stockholders utstarcom investment constitutes 10 funding softbank china softbank corp contributing remaining 90 fund separate management team none employees employed fund many funds investments privately held companies many still considered startup development stages investments inherently risky market technologies products companies development typically early stages may never materialize recorded losses investment 28 million 17 million 00 million 2002 2001 2000 respectively balance remaining investment december 31 2002 55 million first quarter fiscal 2002 invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder utstarcom fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy procedures total fund offering expected approximately 1500 million 2260 million investor contributing minimum 08 million fund separate management team none companys employees employed fund balance investment 20 million december 31 2002 august 29 2002 completed repurchase six million shares common stock 729 million largest shareholder softbank corp part transaction softbank signed voluntary lock upagreement stipulating sell common stock within next six months lock agreement end march 1 2003 coincides start blackout period insiders permitted buy sell shares blackout period begins march 1 2003 ends commencing close business second trading day following public release first quarter fiscal 2003 results april 2003 may make additional repurchases common stock softbank corp order continue mitigate softbank corps ownership influence results operations following table sets forth percentage net sales represented certain items reflected consolidated statements operations comparison years ended december 31 2002 december 31 2001 net sales net sales increased 566 9818 million 2002 6268 million 2001 sales telecommunications equipment includes pas ipbased pas products wireline products 6050 million 2002 increase 1661 million 38 compared 2001 sales subscriber handsets 3768 million 2002 increase 1889 million 101 compared 2001 handset sales increased result higher anticipated subscriber growth increased popularity pas system china sales remained strong increasing 45 2002 compared 2001 china sales accounted 84 90 net sales 2002 2001 respectively international sales telecommunications equipment increased 1592 million 2002 compared 600 million 2001 primarily driven sales equipment bbtc japan support adsl rollout third quarter 2002 provinciallevel telecommunications service entity zhejiang province china began consolidate telecommunications purchasing decisions province result trend zhejiang province grouped customers zhejiang province together treated one customer december 31 2002 approximately 33 customers zhejiang province 2002 sales zhejiang province accounted 178 sales bbtc accounted 125 net sales 2001 sales zhejiang province accounted 237 net sales gross profit gross profit increased 539 3455 million 2002 2245 million 2001 gross profit percentage net sales 352 2002 compared 358 2001 decrease gross profit percentage net sales primarily due increased sales lower margin handsets comprised 384 net sales 2002 compared 300 2001 increasing margins handset sales averaged 270 2002 compared 155 2001 partially offset believe handset sales 2003 could represent approximately 35 45 net sales addition believe continued competitive market pricing pressures products line current trends industry however believe cost efficiencies arising manufacturing efficiencies redesign pas products partially offset impact factors gross profit percentage net sales selling general administrative selling general administrative expenses increased 455 1103 million 2002 758 million 2001 increase selling general administrative expenses primarily due increase 450 sales administrative personnel related expenses including sales commissions associated growth net sales expansion overall level business activities selling general administrative expenses percentage net sales decreased 112 2002 121 2001 decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increase net sales expect selling general administrative expenses increase absolute dollar amounts future periods sales marketing activities increase invest infrastructure incur additional expenses related anticipated growth business operations research development research development expenses increased 441 862 million 2002 598 million 2001 increase research development expenses primarily due hiring additional 303 technical personnel increased prototype expenses licensing fees support research development efforts percentage net sales research development expenses decreased 88 2002 95 2001 reduction attributable decrease noncash compensation expense increase sales 2002 expect research development expenses increase absolute dollar amounts future periods expand research development organization support new product development amortization intangible assets amortization intangible assets decreased 24 million 2002 75 million 2001 decrease amortization intangible assets primarily due elimination goodwill amortization upon adoption sfas 142 january 1 2002 70 million offset increase amortization intangibles 20 million sfas 142 effect year ended december 31 2001 amortization expense would 02 million inprocess research development costs inprocess research development costs 07 million 2002 resulted acquisition issanni april 19 2002 inprocess research development costs 47 million 2001 resulted acquisition acd november 2001 charges based upon independent appraisals interest income expense net interest income 55 million 2002 compared interest income 86 million 2001 interest expense 13 million 2002 compared 39 million 2001 decrease interest income primarily due reduction cash equivalents shortterm investments 583 million reduction interest rates deposits decrease 27 million interest expense related debt balances paid september 2002 december 31 2002 debt income expense net expense 99 million 2002 compared net expense 03 million 2001 net expense 2002 primarily comprised impairment writedowns 44 million relating investment portfolio foreign exchange losses 54 million equity net income loss affiliated companies consolidated equity net loss affiliated companies 41 million 2002 30 million 2001 included equity losses 29 million 17 million 2002 2001 respectively related interest investment funds may 2002 acquired remaining 49 ownership interest guts whollyowned subsidiary results operations included consolidated financial statements beginning june 1 2002 prior may 2002 guts accounted using equity method accounting july 5 2002 entered joint venture agreement matsushita communication industrial co ltd matsushita electric industrial co ltd jointly design develop manufacture sell telecommunication products 49 ownership interest joint venture company investment results operations joint venture company accounted using equity method accounting commencing october 2002 material year ended december 31 2002 income tax expense income tax expense 273 million 2002 198 million 2001 increase income tax expense due increased income effective tax rate 20 2002 compared 25 2001 reduction effective tax rate attributed increased portion net income derived operations chinese jurisdictions granted us temporary tax holidays future rate may vary due variety factors including limited relevant income contribution domestic foreign operations changes statutory tax rates expiration tax holidays amount tax exempt interest income generated year ability utilize foreign tax credits nondeductible items relating acquisitions nonrecurring charges minority interest earnings consolidated subsidiaries minority interest earnings consolidated subsidiaries 12 million 2002 13 million 2001 decrease due acquisition remaining 12 ownership interest huts may 2002 huts whollyowned subsidiary utstarcom expected decrease offset increase huts net income four months ended april 30 2002 compared corresponding period 2001 comparison years ended december 31 2001 december 31 2000 net sales net sales increased 700 6268 million 2001 3686 million 2000 increase primarily due increase sales volume pas ipbased pas systems sales telecommunications equipment year ended december 31 2001 4389 million increase 1769 million 675 compared corresponding period 2000 sales subscriber handsets year ended december 31 2001 1879 million increase 813 million 763 compared corresponding period 2000 sales telecommunications equipment subscriber handsets increased due continued growth spending telecommunications infrastructure china continues modernize infrastructure 2002 provinciallevel telecommunications service entity zhejiang province china began consolidate telecommunications purchasing decisions province result trend zhejiang province grouped customers zhejiang province together treated one customer comparison purposes december 31 2001 approximately eight customers zhejiang province 2001 zhejiang province accounted 237 net sales 2000 sales hangzhou ptt accounted 121 net sales gross profit gross profit increased 752 2245 million 2001 1282 million 2000 gross profit percentage net sales increased 358 2001 348 2000 increase gross profit percentage net sales primarily due increased margins handsets comprised 300 net sales 2001 compared 289 2000 margins handset sales averaged 155 2001 compared 53 2000 selling general administrative selling general administrative expenses increased 577 758 million 2001 481 million 2000 increase selling general administrative expenses primarily due increase 388 sales administrative personnel related expenses including sales commissions associated growth net sales expansion overall level business activities increase partly offset decrease noncash stock compensation expense decreased 25 million 2001 47 million 2000 selling general administrative expenses percentage net sales decreased 121 2001 131 2000 decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increases net sales research development research development expenses increased 443 598 million 2001 415 million 2000 increase research development expenses primarily due hiring additional 396 technical personnel increased prototype expenses licensing fees support research development efforts partly offset decrease noncash stock compensation expense decreased 27 million 2001 68 million 2000 percentage net sales research development expenses decreased 95 2001 112 2000 reduction attributable decrease noncash compensation expense increase sales 2001 amortization intangible assets amortization intangible assets increased 75 million 2001 49 million 2000 increase amortization intangible assets primarily due amortization additional goodwill associated acquisition stable gain software development company 110 million first quarter 2001 inprocess research development costs inprocess research development costs resulted acquisition acd november 2001 aggregate purchase price acd approximately 213 million based upon independent appraisal assets acquired liabilities assumed allocated specifically identifiable tangible intangible assets acquired connection acd acquisition 47 million inprocess research development costs charged operations november 2001 inprocess research development charges 2000 interest income expense net interest income 86 million 2001 compared interest income 122 million 2000 interest expense 39 million 2001 compared 33 million 2000 interest income decreased 2001 due lower interest rates partially offset higher average cash balances result completion followon public offering july 2001 interest expense increased due higher borrowings 2001 compared 2000 income expense net expense 03 million 2001 net income 19 million 2000 decrease income 2001 primarily due impairment writedowns 17 million relating investment portfolio equity net income loss affiliated companies consolidated equity net loss affiliated companies 30 million 2001 03 million 2000 change two periods due 17 million loss related interest investment funds increase losses guangdong manufacturing subsidiary guts income tax expense income tax expense 198 million 2001 140 million 2000 increase income tax expense due increasing income effective tax rate decreased 32 2000 25 2001 primarily due favorable settlement internal revenue service upon examination corporate income tax returns filed years 1997 1998 1999 minority interest earnings consolidated subsidiaries minority interest earnings consolidated subsidiaries 13 million 2001 23 million 2000 change two periods primarily due decreased profitability zhejiang manufacturing subsidiary huts liquidity capital resources december 31 2002 lines credit totaling 3143 million available future borrowings december 31 2002 guaranteed debt included consolidated balance sheet december 31 2002 working capital 5682 million including 2319 million cash equivalents 1073 million shortterm investments net cash generated operating activities 2002 1573 million compared 402 million 2001 increase 1171 million primarily due improved operating performance accounts receivable collection efficiency continue focus efforts improving operating performance cost efficiencies arising continued cost reduction manufacturing efficiencies efficient accounts receivable collection resulted improvement day sales outstanding dso 66 days december 31 2002 compared 88 days december 31 2001 dso ratio shows average time takes us turn receivables cash age terms days accounts receivable ratio measure effectiveness convert receivables cash dso calculated follows net accounts receivablesales × number days period analyzed also continuing focus efforts efficient management inventory 4247 million december 31 2002 inventory turnover ratio fourth quarter 2002 23 line corresponding period 2001 inventory turnover ratio shows often turn inventory course year inventory turnover calculated follows cost goods sold average inventory half inventory customer locations signed contracts 2002 strategic uses cash included retirement 705 million debt 729 million stock buyback 1225 per share capital expenditures 386 million new manufacturing facility hangzhou believe new facility contribute cost manufacturing efficiencies higher revenue profits future net cash provided operations 2002 1573 million primarily due net income 1079 million adjusted non cash charges including depreciation amortization expense 224 million amortization stock compensation expense 31 million nonqualified stock option exercise tax benefits 65 million investment impairment write downs 44 million inventory writedowns 124 million allowance doubtful accounts 72 million addition cash increased due growth accounts payable 1705 million accrued liabilities 277 million deferred revenue 878 million income taxes payable 25 million offset increase inventories accounts receivable current noncurrent assets 2073 million 342 million 605 million respectively net cash provided operations 2001 402 million primarily due net income 570 million adjusted depreciation amortization expense 185 million amortization deferred stock compensation expense 52 million nonqualified stock option exercise tax benefits 153 million inventory writedowns 111 million allowance doubtful accounts 62 million increase accounts payable income taxes payable current liabilities deferred revenue 391 million 34 million 862 million respectively partially offset increase inventories accounts receivable current noncurrent assets 1212 million 392 million 526 million respectively net cash used investing activities 2002 1442 million primarily due purchases property plant equipment 753 million 386 million related new manufacturing facility hangzhou business acquisitions 177 million including 141 million relating purchase remaining interest huts investment affiliates 289 million primarily comprised investments public private technology companies offset net sales shortterm investments 224 million net cash used investing activities 2001 437 million primarily due purchases property plant equipment 302 million investments affiliates 98 million net purchases shortterm investments 21 million net cash used financing activities 2002 1024 million primarily due repurchase shares related transaction costs 729 million net payments 705 million borrowings lines credit paid short longterm debt september december 31 2002 debt uses cash partially offset 409 million proceeds sale common stock connection softbank resale issuance common stock exercise stock options net cash provided financing activities 2001 1755 million primarily due 1606 million proceeds followon public offering common stock august 2001 exercise stock options net proceeds borrowings line credit arrangements 151 million 2001 purchased rights use 49 acres land located zhejiang science technology industry garden hangzhou hitech industry development zone december 31 2002 completed foundation ground work commenced construction building expect construction new facility completed 2003 projected cost approximately 956 million capital expenditures facility 386 million 2002 principal commitments december 31 2002 consist obligations operating leases commitment invest additional 40 million one investments lease certain facilities noncancelable operating leases expire various dates 2007 borrowings lines credit december 31 2002 engaged transactions arrangements unconsolidated entities persons reasonably likely materially affect liquidity availability requirements capital resources china sales generally denominated local currency due limitations converting renminbi limited ability engage currency hedging activities china sales outside china generally denominated us dollars december 31 2002 engaged hedging activities hold derivative financial instruments cannot guarantee fluctuations currency exchange rates future material adverse effect revenues international sales correspondingly business financial condition results operations contracts negotiated japanese yen multicurrency bank account japanese yen purchasing portions inventories supplies balance japanese yen account december 31 2002 approximately 71 million december 31 2002 engaged hedging activities hold derivative financial instruments respect japanese yen purchases believe existing cash equivalents shortterm investments cash operations sufficient finance operations least next 12 months december 31 2002 cash restricted cash investments 3490 million lines credit totaling 3143 million available future borrowings 2601 million available lines credit expire 2003 542 million available lines credit expire 2008 2010 however event current cash balances future cash flows operations current lines credit sufficient meet obligations strategic needs event market conditions favorable would consider raising additional funds capital equity markets additional financing needed assurance financing available us commercially reasonable terms contractual obligations commercial commitments obligations contractual obligations commercial commitments primarily regards leasing arrangements standby letters credit follows investment commitments june 2002 invested 10 million global asia partners lp fund size anticipated 100 million formed make private equity investments private preipo technology telecommunications companies asia commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner recent accounting pronouncements july 2002 financial accounting standards board fasb issued sfas 146 accounting costs associated exit disposal activities addresses measurement timing recognition reporting costs associated exit disposal activities restructuring activities sfas 146 requires liability costs associated exit restructuring activities recognized liability incurred opposed time company formally approves commits exit plan set forth eitf issue 943 liability recognition certain employee termination benefits costs exit activity sfas 146 effective exit disposal activities initiated december 31 2002 expect adoption impact consolidated financial statements november 2002 fasb issued fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including reconciliation changes entitys product warranty liabilities initial recognition initial measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements fin 45 effective financial statements interim annual periods ending december 15 2002 believe adoption standard material impact consolidated financial statements november 2002 eitf reached consensus issue 0021 revenue arrangements multiple deliverables issue addresses revenue arrangements multiple deliverables divided separate units accounting arrangement consideration allocated identified separate accounting units eitf 0021 effective fiscal periods beginning june 15 2003 yet determined impact adopting eitf 0021 results operations financial position december 2002 fasb issued sfas 148 accounting stockbased compensation coststransition disclosure statement amends sfas 123 accounting stockbased compensation provides alternative methods transition entity voluntarily changes fair valuebased method accounting stockbased compensation also requires additional disclosures effects reported net income entitys accounting policy respect stockbased employee compensation account stockbased compensation accordance apb opinion 25 accounting stock issued employees adopted disclosureonly alternative sfas 123 adopted disclosure provisions sfas 148 december 2002 factors affecting future operating results risks relating company future product sales unpredictable operating results likely fluctuate quarter fail meet expectations securities analysts investors stock price could decline significantly quarterly annual operating results fluctuated past likely fluctuate future due variety factors outside control result periodtoperiod comparisons operating results necessarily meaningful indicative future performance furthermore likely future quarters operating results fall expectations securities analysts investors occurs trading price common stock could decline factors may affect future operating results include •the timing number size orders products well relative mix orders products particularly volume lower margin handsets •cancellation deferment delay implementation large contracts •the evolving unpredictable nature economic regulatory competitive political environments china countries market plan market products •price reductions competitors •competitive market pressures resulting decreased gross margins increased inventory levels •changes customers subscriber growth rate •currency fluctuations •market acceptance products product enhancements •the lengthy unpredictable sales cycles associated sales products combined impact variability suppliers ability provide us components timely basis •longer collection periods accounts receivable china countries •the decline business activity typically experience lunar new year leads decreased sales first fiscal quarter limited performance history products limited forecasting experience processes emerging nature target markets make forecasting future sales operating results difficult expense levels based part expectations regarding future sales expenses largely fixed particularly short term addition enable us promptly fill orders maintain inventories finished goods components raw materials result commit considerable costs advance anticipated sales past substantial portion sales quarter resulted orders received shipped quarter operated limited backlog unfilled orders accordingly may able reduce costs timely manner compensate unexpected shortfall forecasted actual sales significant shortfall sales may require us maintain higher levels inventories finished goods components raw materials require thereby increasing risk inventory obsolescence corresponding inventory writedowns writeoffs competition markets may lead reduced prices revenues market share increasingly facing intense competition target markets especially domestic companies china believe strongest competition future may come companies many operate lower cost structures favorable governmental policies much larger sales forces furthermore companies presently offering competing products may also enter target markets particularly reduction trade restrictions result chinas admission world trade organization wto many competitors significantly greater financial technical product development sales marketing resources result competitors may able respond quickly new emerging technologies changes service provider requirements competitors may also able devote greater resources development promotion sale new products competitors may also able offer significant financing arrangements service providers cases facilitated government policies competitive advantage selling systems service providers limited financial currency resources increased competition likely result price reductions reduced gross profit percentage net sales loss market share one could materially harm business financial condition results operations moreover current potential competitors established may establish cooperative relationships among third parties including telecommunications administrations telecommunications bureaus local organizations increase ability products address needs prospective customers target markets accordingly alliances among competitors third parties may emerge rapidly acquire significant market share remain competitive believe must continue partner telecommunications administrations local organizations maintain high level investment research development sales marketing manufacture deliver products service providers timely basis without significant defects fail meet objectives business financial condition results operations could harmed introduction inexpensive wireless telephone service competitive services china may also adverse impact sales pas systems handsets china may able compete successfully current future competitors competitive pressures future may materially adversely affect business financial condition results operations contracts purchase orders generally subject cancellation delay customers limited penalty backlog necessarily indicative future revenues earnings december 31 2002 backlog totaled approximately 6054 million compared approximately 3607 million december 31 2001 include backlog contracts purchase orders anticipate delivery occur within 12 months products delivered final acceptance yet received contracts purchase orders generally subject cancellation delay customers limited penalty backlog necessarily indicative future revenues earnings addition number large contracts realization backlog dependent successful implementation products customers cases successful development regional infrastructures business may suffer unable collect payments customers timely basis customers often must make significant commitment capital purchase products result downturn customers business affects customers ability pay us could harm financial condition moreover accounts receivable collection cycles historically tend much longer china markets failure customers make timely payments could require us writeoff accounts receivable increase accounts receivable reserves either could adversely affect financial condition market subject rapid technological change compete effectively must continually introduce new products achieve market acceptance emerging market communications equipment developing countries characterized rapid technological developments frequent new product introductions evolving industry regulatory standards success depend large part ability enhance network access switching technologies develop introduce new products product enhancements anticipate changing service provider requirements technological developments may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail timely develop introduce new products enhancements existing products effectively respond technological change business financial condition results operations could materially adversely affected time competitors may announce new products product enhancements technologies services potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory obsolescence future technological advances communications industry may diminish inhibit market acceptance existing future products render products obsolete even able develop introduce new products may gain market acceptance market acceptance products depend various factors including •our ability obtain necessary approvals regulatory organizations •the perceived advantages new products competing products •our ability attract customers existing relationships competitors •product cost relative performance •the level customer service available support new products specifically sales pas wireless access system depend part upon consumer acceptance mobility limitations service relative wireless service systems gsm cdma existing new products fail achieve market acceptance reason business could seriously harmed business suffer unable deliver quality products timely cost effective basis operating results depend ability manufacture products timely cost effective basis past experienced reductions yields result various factors including defects components human error assembly experience deterioration manufacturing performance delay production products could experience delays shipments cancellations orders moreover networking products frequently contain undetected software hardware defects first introduced new versions released addition products often embedded deployed conjunction service providers products incorporate variety components produced third parties result problem occurs may difficult identify source problem problems may cause us incur significant warranty repair costs divert attention engineering personnel product development efforts cause significant customer relation problems loss customers one could harm business contract third parties china undertake high volume manufacturing assembly handsets addition sometimes use third parties high volume assembly circuit boards longterm contracts third party manufacturers event manufacturers unable unwilling continue manufacture products may unable secure alternative manufacturers could experience delays qualifying new manufacturers depend sole source key suppliers handsets base stations components materials used products suppliers fail provide us adequate supplies high quality products competitive prices competitive position reputation business could harmed components materials used products purchased single supplier limited group suppliers supplier unwilling unable provide us high quality components materials quantities required costs specified us may able find alternative sources favorable terms timely manner inability obtain develop alternative sources required could result delays reductions manufacturing product shipments moreover suppliers may delay product shipments supply us inferior quality products events occur competitive position reputation business could suffer ability source sufficient quantity high quality components used products may limited chinas import restrictions duties require significant number imported components manufacture products china imported electronic components imported goods used operation business subject variety permit requirements approval procedures import duties registration requirements nonpayment required import duties could subject us penalties fines could adversely affect ability manufacture sell products china addition import duties increase cost products may make less competitive particular components pas system include handset used subscribers make receive mobile telephone calls base station unit inability obtain sufficient number high quality components assemblies handsets base stations could severely harm business time worldwide shortage handsets currently exists shortage lowpriced handsets found popular many consumers china used third parties assemble manufacture handsets china us limited period time manufacturers may unable produce adequate quantities highquality handsets meet demand customers addition may unable obtain adequate quantities base stations may unable find alternative sources favorable terms timely manner inability obtain develop alternative sources required could result delays reductions manufacturing product shipments unable expand direct sales operation china indirect distribution channels elsewhere successfully manage expanded sales organization operating results may suffer distribution strategy focuses primarily developing expanding direct sales organization china indirect distribution channels outside china may able successfully expand direct sales organization china cost expansion may exceed revenue generated efforts even successful expanding direct sales organization china may able compete successfully significantly larger betterfunded sales marketing operations current potential competitors addition fail develop relationships significant international resellers manufacturers representatives resellers representatives successful sales marketing efforts may unsuccessful expansion efforts outside china expect average selling prices products decrease may reduce revenues gross margin percentage net sales result must introduce new products reduce costs order maintain profitability average selling prices communications access switching systems subscriber terminal products handsets china declining result number factors including •increased competition •aggressive price reductions competitors •rapid technological change anticipate average selling prices products decrease future response product introductions us competitors factors including price pressures customers therefore must continue develop introduce new products enhancements existing products incorporate features sold higher average selling prices failure could cause revenues gross profit percentage net sales decline cost reduction efforts may allow us keep pace competitive pricing pressures lead improved gross profit percentage net sales order competitive must continually reduce cost manufacturing products design engineering changes may successful efforts delivering products market timely manner redesign may result sufficient cost reductions allow us reduce prices products remain competitive improve maintain gross profit percentage net sales shifts product mix may result declines gross profit percentage net sales gross profit percentage net sales varies among product groups gross profit percentage net sales generally higher access network system products significantly lower handsets also anticipate gross profit percentage net sales may lower newly developed products due startup costs may improve unit volumes increase efficiencies realized overall gross profit percentage net sales fluctuated period result shifts product mix introduction new products decreases average selling prices older products ability reduce manufacturing costs service providers sometimes evaluate products long unpredictable periods causes timing purchases results operations unpredictable period time initial contact service provider receipt actual purchase order may span year time service providers may subject products extensive lengthy evaluation process making purchase length qualification processes may vary substantially product service provider making results operations unpredictable may incur substantial sales marketing expenses expend significant management effort process ultimately may result sale qualification processes often make difficult obtain new customers service providers reluctant expend resources necessary qualify new supplier one existing qualified sources multinational operations subject us various economic political regulatory legal risks market sell products china markets including taiwan japan vietnam india latin america expansion existing multinational operations entry additional international markets require significant management attention financial resources multinational operations subject inherent risks including •difficulties designing products compatible varying international communications standards •longer accounts receivable collection periods greater difficulty accounts receivable collection •unexpected changes regulatory requirements regulatory environment •changes governmental control influence customers •changes import export regulations including quotas tariffs trade barriers •delays difficulties obtaining export import licenses •potential foreign exchange controls repatriation controls foreign earnings •exchange rate fluctuations currency conversion restrictions •the burdens complying variety foreign laws regulations •difficulties costs staffing managing multinational operations including limited internal control compliance •reduced protection intellectual property rights countries •potentially adverse tax consequences •political economic instability multinational companies required establish intercompany pricing transactions separate legal entities operating different taxing jurisdictions intercompany transactions subject audit taxing authorities jurisdictions multinational companies operate additional tax liability may incurred determined intercompany pricing done arms length believe adequately estimated recorded liability arising intercompany pricing additional tax liability may result audits intercompany pricing policies markets outside china rely number original equipment manufacturers oems thirdparty distributors agents market sell network access products oems distributors agents fail provide support effort necessary service developing markets effectively ability maintain expand operations outside china negatively impacted may successfully compete markets products may accepted may successfully overcome risks associated international operations moreover less developed markets may face additional risks inconsistent infrastructure support unstable political economic environments lack secure environment personnel facilities equipment past experienced cases vandalism armed theft equipment installed field disruptions reasons become severe particular market may become necessary us terminate contracts withdraw market suffer associated costs lost revenue due multinational nature business operations subject regulation multiple governmental jurisdictions furthermore result heavily regulated nature markets operate continually subject risk governmental investigations regarding compliance rules regulations jurisdictions become subject investigations may significant unanticipated expenses risks distraction key employees disruptions operations expenses risks may result even event investigations decided favor instances noncompliance found subject risks relating currency exchange rate fluctuations exposed foreign exchange rate risk sales china denominated renminbi portions accounts payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date insignificant fluctuations currency exchange rates future may material adverse effect results operations failure meet international governmental product standards could detrimental business many products required comply numerous government regulations standards vary market standards products continue evolve need modify products develop support new versions products meet emerging industry standards comply government regulations satisfy requirements necessary obtain approvals inability obtain regulatory approval meet established standards could delay prevent entrance force departure particular markets recent growth strained resources unable manage sustain growth operating results negatively affected recently experienced period rapid growth anticipate must continue expand operations address potential market opportunities fail implement improve systems controls manage future growth expansion effectively business could suffer expansion placed continue place significant strain management operational financial resources manage growth effectively need take various actions including •enhancing management information systems forecasting procedures •further developing operating administrative financial accounting systems controls •maintaining close coordination among engineering accounting finance marketing sales operations organizations •expanding training managing employee base •expanding finance administrative operations staff may able sustain profitability may able remain profitable future periods anticipate continuing incur significant sales marketing research development general administrative expenses result need generate higher revenues remain profitable numerous factors could negatively impact results operations including decrease sales price pressures significant fixed costs past results relied indication future performance success dependent continuing hire retain qualified personnel successful attracting retaining personnel business would harmed success business depends significant part upon continued contributions key technical senior management personnel many would difficult replace particular success depends large part knowledge expertise services hong liang lu president chief executive officer ying wu executive vice president chief executive officer china operations loss key employee failure key employee perform satisfactorily current position failure attract retain key technical senior management employees could significant negative impact operations effectively manage recent growth well future growth need recruit train assimilate motivate retain qualified employees competition qualified employees intense process recruiting personnel combination skills attributes required execute business strategy difficult timeconsuming expensive actively searching research development engineers sales marketing personnel short supply additionally need experienced difficulty finding qualified accounting personnel knowledgeable us china accounting standards resident china fail attract hire assimilate retain qualified personnel business would harmed competitors others past may future attempt recruit employees addition companies telecommunications industry whose employees accept positions competitors frequently claim competitors engaged unfair hiring practices may subject types claims future seek hire qualified personnel claims may result material litigation disruption operations could incur substantial costs defending claims regardless merit acquisitions undertake could difficult integrate disrupt business dilute stockholders harm operating results may acquire complementary businesses products technologies example november 2001 acquired advanced communication devices corporation system chip semiconductor company april 19 2002 company completed purchase issanni communications inc ras remote access server local access technology company providing broadband adsl october 16 2002 acquired assets intellectual property shanghai yi yun telecom technology co ltd provider synchronous digital hierarchy sdh transmission equipment anticipated benefits acquisition may realized past continue evaluate acquisition prospects would complement existing product offerings augment market coverage enhance technological capabilities may otherwise offer growth opportunities acquisitions companies may result dilutive issuances equity securities incurrence debt amortization expenses related intangible assets addition acquisitions involve numerous risks including difficulties assimilation operations technologies products personnel acquired company diversion managements attention business concerns risks entering markets direct limited prior experience potential loss key employees acquired company may unable adequately protect intellectual property may subject claims infringe intellectual property others either could substantially harm business rely combination patents copyrights trademarks trade secret laws contractual obligations protect technology applied patents united states three issued also filed patent applications countries additional patents may issued pending patent applications issued patents may upheld addition time chosen abandon previously filed applications moreover yet obtained may able obtain patents china products technology use manufacture products subsidiaries joint ventures china rely upon trademarks technology knowhow manufacture sell products cannot guarantee intellectual property protection measures sufficient prevent misappropriation technology competitors independently develop technologies substantially equivalent superior addition legal systems many foreign countries including china protect intellectual property rights extent legal system united states furthermore connection acquisitions time obtain intellectual property rights including patents intellectual property rights could found infringe third parties rights situation occur would endeavor obtain licenses allow us continue use intellectual property however assurances provided intellectual property acquire infringe rights third parties able successfully negotiate licenses use intellectual property terms acceptable us unable adequately protect proprietary information technology business financial condition results operations could materially adversely affected increasing dependence communications industry proprietary technology resulted frequent litigation based allegations infringement patents intellectual property future may subject litigation defend claimed infringements rights others determine scope validity proprietary rights others future litigation also may necessary enforce protect trade secrets intellectual property rights intellectual property litigation could costly could cause diversion managements attention operation business adverse determinations litigation could result loss proprietary rights subject us significant liabilities require us seek licenses third parties may available commercially reasonable terms could also subject court orders preventing us manufacturing selling products business interruptions could adversely affect business operations vulnerable interruption fire earthquake power loss telecommunications failure events beyond control detailed disaster recovery plan headquarters facility state california subject electrical blackouts consequence shortage available electrical power event blackouts resume could disrupt operations headquarters addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business exposed fluctuations values portfolio investments maintain investment portfolio various holdings types maturities part portfolio includes equity investments publicly traded companies value subject market price volatility recent events adversely affected public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary may become necessary us take impairment charge also invested several privately held companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize could lose entire initial investment companies investment funds seek secure additional financing may able secure additional financing stockholders may experience dilution ownership interest may subject limitations operations currently anticipate available cash resources include existing cash equivalents shortterm investments cash operations sufficient meet anticipated needs working capital expenditure next 12 months unable generate sufficient cash flows operations meet anticipated needs working capital expenditures may need raise additional funds develop new enhanced products respond competitive pressures take advantage acquisition opportunities raise capital strategic purposes raise additional funds issuance equity securities stockholders may experience dilution ownership interest newly issued securities may rights superior common stock raise additional funds issuing debt may subject limitations operations named defendant securities litigation various underwriters initial public offering defendants putative shareholder class action complaint alleges undisclosed improper underwriting practices concerning allocation ipo shares violation federal securities laws similar complaints filed concerning ipos 300 companies litigation coordinated federal court southern district new york initial public offering securities litigation 21 mc 92 believe meritorious defenses claims us intend defend litigation vigorously however litigation nature uncertain unfavorable resolution lawsuit could material adverse effect business results operations financial condition risks relating structure regulation chinas telecommunications industry chinas telecommunications industry subject extensive government regulation chinas telecommunications industry heavily regulated ministry information industry ministry information industry broad discretion authority regulate aspects telecommunications information technology industry china including managing spectrum bandwidths setting network equipment specifications standards drafting laws regulations related electronics telecommunications industries additionally ministry information industry unilaterally concert relevant authorities decide types equipment may connected national telecommunications networks forms types services may offered public rates charged subscribers services content material available china internet ministry information industry sets standards unable comply render products noncompetitive ability sell products china may limited resulting substantial harm operations end may 2000 became aware internal notice circulated within ministry information industry announcing review phsbased telecommunications equipment future installation chinas telecommunications infrastructure ministry information industry requested service providers temporarily halt new deployments phsbased telecommunications equipment including pas systems handsets pending conclusion review ministry information industry subsequently end june 2000 ministry information industry issued notice stating concluded review phsbased equipment continued deployment phsbased systems pas systems handsets chinas countylevel cities towns villages would permitted addition notice stated deployments within large mediumsized cities would allowed limited areas dense population campuses commercial buildings special development zones notice confirmed however new citywide deployments pas system large medium cities would permitted failure ministry information industry permit sale deployment pas systems handsets sale deployment products imposition additional limitations sale future could material adverse effect business financial condition ministry information industry may conduct reviews evaluations phsbased telecommunications equipment may change position regarding phsbased systems future chinas telecommunications regulatory framework process developed led uncertainties regarding conduct business china yet national telecommunications law however provide uniform regulatory framework telecommunication industry chinese government currently preparing draft law telecommunication law telecommunication law adopted national peoples congress standing committee expected provide new regulatory framework telecommunications regulation china yet know final nature scope regulation would created telecommunications law passed accordingly cannot predict whether positive negative effect us aspects business chinas telecommunications regulatory framework process developed september 2000 state council issued telecommunications regulations peoples republic china known telecom regulations telecom regulations cover telecommunications services market regulations pricing interconnection connection well telecommunications construction security issues may 2001 ministry information industry issued administrative measures network access licenses implement telecom regulations area often require subjective interpretation given relative infancy telecom regulations implementing regulations know regulations interpreted enforced result attempts comply regulations may deemed insufficient appropriate regulatory agencies could subject us penalties adversely affect business may suffer result recent restructuring china telecom february 1999 state council approved restructuring plan china telecom system telecommunications operations china telecom system separated along four business lines fixed line mobile paging satellite communications services following announcement observed reduction orders telecommunications companies attributed uncertainties surrounding restructuring ultimate impact restructuring would telecommunications companies effective may 2002 china telecom split two entities region northern southern 10 northern provinces municipalities autonomous regions china telecom merged china netcom co ltd china jitong network communications co ltd form new company known china netcom china netcom remaining 21 provinces municipalities autonomous regions constitute southern entity kept name china telecom new china telecom china netcom inherited 30 old china telecoms national backbone network rest going new china telecom change recent cannot certain impact restructuring china telecom business operations however may experience another decline orders related revenues similar experienced following 1999 restructuring resulting uncertainty among telecommunications company customers associated restructuring additionally china telecom completed initial public offering november 2002 publicly listed new york stock exchange moreover following restructuring china netcom new china telecom entity may replace result subsequent restructuring may restrict prohibit sales products could cause substantial harm business licenses required sell network access products china chinas current regulatory structure communications products offer china must meet government industry standards network access license equipment must obtained without license equipment allowed connected public telecommunications networks sold china moreover must ensure quality telecommunications equipment obtained network access license stable reliable may lower quality performance installed licensed products state councils product quality supervision department concert ministry information industry performs spot checks track supervise quality licensed telecommunications equipment publishes results spot checks regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways obtained required network access licenses an2000 platform applied yet received network access license pas systems handsets based upon conversations ministry information industry understand pas systems handsets considered still trial period sales pas systems handsets may continue made us trial period license ultimately required network access licenses also required additional products selling may sell china including mswitch platform fail obtain required licenses could prohibited making sales unlicensed products including pas systems handsets china would substantially harm business financial condition results operations counsel china advised us chinas governmental authorities may interpret apply regulations respect licenses required ability sell product trial period manner inconsistent information received counsel china either could material adverse effect business financial condition required register software incorporated products accordance relevant chinese regulations october 2000 ministry information industry issued regulations prohibit production sale software products incorporating software china unless software registered government accomplished necessary registration regards software incorporated an2000 pas mswitch products however additional registration required software incorporated additional products selling may sell china based upon verbal advice received ministry information industry believe able sell products incorporating software applications registration may pending however chinese government may interpret apply regulations way prohibit sales products incorporating unregistered software prior registration government prohibits sales pending registration fail efforts register software required registered could prohibited making sales products incorporating unregistered software china could substantially harm business financial condition customers china historically part china telecom system china telecoms ultimate control following recent restructuring china telecom customers china part new china telecom china netcom subject ultimate control main customers china local telecommunications companies formerly known telecommunications bureaus historically operated china telecom chinas stateowned fixed line operator subject ultimate control following recent restructuring china telecom telecommunications companies operate ultimate control either new china telecom china netcom china telecom completed initial public offering november 2002 listed new york stock exchange policy statements may issued decisions may made new china telecom china netcom govern equipment purchasing decisions customers china example late 1999 china telecom prohibited telecommunications companies purchasing phs systems pas systems implementation large cities even sales prohibited ministry information industry sales generated operations china decisions new china telecom china netcom restricting prohibiting sales deployment products could cause significant harm business customer base china could effectively become increasingly concentrated purchasing decisions coordinated made provincial greater regional telecommunications service entities rather local telecommunications service providers historically considered local telecommunications service providers serving municipalities counties primary customers china recently however provinciallevel telecommunications service entity zhejiang province china begun consolidate telecommunications purchasing decisions province result trend zhejiang province grouped customers zhejiang province together treated one customer 2002 comparative periods presented 2002 2001 zhejiang province accounted 10 net sales december 31 2002 approximately thirtythree customers zhejiang province whether represents beginning greater trend throughout china towards increased consolidation negotiations purchasing decisions control provinciallevel telecommunications service entities unclear increasing number purchasing decisions negotiations controlled larger regional level china provinciallevel telecommunications service entities would effectively result concentration companys customer base companys financial results may increasingly depend significant part upon success major customers companys ability meet future capital equipment needs although composition group comprising companys largest customers may vary period loss significant customer reduction orders significant customer including reductions due market economic competitive conditions telecommunications industry may material adverse effect companys business financial condition results operations addition business risks associated dependence major customers significant customer concentration may also result significant concentrations accounts receivable significant concentrated receivables would expose company additional risks including risk default one customers representing significant portion companys total receivables company required take additional accounts receivable reserves business financial condition results operations would materially adversely affected ability sell pas wireless systems handsets could significantly impaired new china telecom china netcom granted otherwise acquire mobile licenses allowing new china telecom china netcom deliver cellular services new china telecom china netcom hold operate fixed line telephone data communications assets china currently licenses necessary offer cellular services offer wireless services end users telecommunications companies must offer services delivered wireline networks delivered pas wireless systems handsets chinas media sources widely reported restructuring china telecom ministry information industry may grant mobile licenses new china telecom china netcom ministry information industry grant mobile license new china telecom china netcom entities otherwise acquire mobile licenses local telecommunications companies free offer cellular services gsm cdma customers may therefore elect deploy pas systems handsets occur could lose current potential customers pas systems handsets financial condition results operations could materially adversely affected changes telecommunications rates pricing policies may result decreased demand products november 2000 ministry information industry announced significant changes rates telecommunications services china long distance international leased line internet connection fees cut 70 rates local telephone services include certain types wireless access services offered pas systems handsets increased approximately 001 per minute approximately 002 per minute increase rates may result reduced demand end users wireless services delivered pas system corresponding decline demand products addition mobile operators offering price incentive plans could impact demand products additionally ministry information industry may implement future rate changes wireline wireless services china change telecommunications pricing policies including allowing carriers set prices based market conditions may lead reduced demand systems products result material adverse effect business results operations risks relating conducting operations china sales china accounted sales therefore business financial condition results operations significant degree subject economic political social events china approximately 8223 million 838 net sales fiscal 2002 5659 million 903 net sales fiscal 2001 3640 million 988 net sales fiscal 2000 occurred china additionally substantial portion fixed assets located china total fixed assets approximately 878 december 31 2002 753 december 31 2001 750 december 31 2000 china expect make investments china future therefore business financial condition results operations significant degree subject economic political social events china devaluation value renminbi fluctuations exchange rates could adversely affect financial results exchange rate fluctuations could substantial negative impact financial condition results operations purchase substantially materials united states japan significant portion cost goods sold incurred us dollars japanese yen significant portion operating expenses incurred us dollars time sales denominated renminbi value renminbi fixed chinas national government subject changes chinas governmental policies international economic political developments china may choose devalue renminbi us dollar additionally chinas government considered time whether partially fully abandon official exchange rate renminbi us dollar abandonment official exchange rate policy may lead sharp depreciation renminbi us dollar foreign currencies significantly volatility renminbi exchange rate future would adversely affect financial results make future results subject fluctuation past financial markets many asian countries experienced severe volatility result asian currencies experienced significant devaluation time devaluation asian currencies may effect rendering exports china expensive less competitive therefore place pressure chinas government devalue renminbi devaluation renminbi could result increase volatility asian currency capital markets future volatility asian financial markets could adverse impact ability expand product sales asian markets outside china moreover due limitations convertibility renminbi limited ability engage currency hedging activities china currently engage currency hedging activities respect international sales outside china currency restrictions china may limit ability subsidiaries joint ventures china obtain remit foreign currency necessary purchase imported components may limit ability obtain remit foreign currency exchange renminbi earnings chinas government imposes controls convertibility renminbi foreign currencies certain cases remittance currency china current foreign exchange control system sufficient foreign currency may available satisfy currency needs shortages availability foreign currency may restrict ability chinese subsidiaries obtain remit sufficient foreign currency pay dividends us otherwise satisfy foreign currency denominated obligations payments us components export technology licensing fees may also experience difficulties completing administrative procedures necessary obtain remit needed foreign currency business could substantially harmed unable convert remit sales received renminbi us dollars existing foreign exchange laws renminbi held china subsidiaries converted foreign currencies remitted china pay current account items payments suppliers imports labor services payment interest foreign exchange loans distributions dividends long subsidiaries adequate amounts renminbi purchase foreign currency expenses capital nature repayment bank loans denominated foreign currencies however require approval appropriate governmental authorities renminbi used purchase foreign currency remitted china system could changed time executive decision state council impose limits current account convertibility renminbi similar restrictions moreover even though renminbi intended freely convertible current account state administration foreign exchange responsible administering chinas foreign currency market significant degree administrative discretion implementing laws time state administration foreign exchange used discretion ways effectively limit convertibility current account payments restrict remittances china furthermore many circumstances state administration foreign exchange must approve foreign currency conversions remittances current foreign exchange control system sufficient foreign currency may available given exchange rate satisfy currency demands china subjects foreign investors telecommunications industry ownership geographic limitations chinas government agencies including ministry information industry state council regulate foreign investment telecommunications industry promulgation various laws regulations issuance various administrative orders decisions currently foreign investors may engage activities accordance certain ownership geographic limitations china may promulgate new laws regulations issue administrative judicial decisions interpretations would restrict bar foreigners engaging telecommunicationsrelated activities promulgation laws regulations issuance administrative orders judicial decisions interpretations restricting prohibiting telecommunications activities foreigners could substantial impact ongoing operations governmental policies china could impact business since 1978 chinas government expected continue reforming economic political systems reforms resulted expected continue result significant economic social development china many reforms unprecedented experimental may subject change readjustment due number political economic social factors believe basic principles underlying political economic reforms continue implemented provide framework chinas political economic system new reforms readjustment previously implemented reforms could significant negative effect operations changes chinas political economic social conditions governmental policies could substantial impact business include •new laws regulations interpretation laws regulations •the introduction measures control inflation stimulate growth •changes rate method taxation •the imposition additional restrictions currency conversion remittances abroad •any actions limit ability develop manufacture import sell products china finance operate business china economic policies china could impact business economy china differs economies countries belonging organization economic cooperation development various respects structure government involvement level development growth rate capital reinvestment allocation resources selfsufficiency rate inflation balance payments position past economy china primarily planned economy subject one fiveyear state plans adopted central government authorities largely implemented provincial local authorities set production development targets since 1978 increasing emphasis placed decentralization utilization market forces development chinas economy economic reform measures adopted chinas government may inconsistent ineffectual may cases able capitalize reforms measures may adjusted modified ways could result economic liberalization measures inconsistent time industry across different regions country chinas economy experienced significant growth past decade growth however accompanied imbalances chinas economy resulted significant fluctuations general price levels including periods inflation chinas government implemented policies time increase restrain rate economic growth control periods inflation otherwise regulate economic expansion may able benefit effects policies measures taken chinas government regulate economy could also significant negative impact economic conditions china resulting negative impact business chinas entry world trade organization creates uncertainty future economic business environments china chinas entry wto approved september 2001 entry wto require china reduce tariffs eliminate nontariff barriers include quotas licenses restrictions 2005 latest chinas entry wto related relaxation trade restrictions may lead increased foreign investment may also lead increased competition chinas markets international companies chinas entry wto could negative impact chinas economy resulting negative impact business tax benefits available subsidiaries located china reduced repealed business could suffer subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time active subsidiaries china accredited technologically advanced enterprises tax holidays applicable whollyowned subsidiaries utstarcom china huts together accounted approximately 838 revenues 2002 expired end 2002 2001 respectively unless tax holidays extended entities 2003 tax rates increase 75 15 10 15 respectively could negatively impact financial condition results operations fourth quarter 2002 formed new entity hangzhou utstarcom telecom co ltd manufacture sell handsets entity benefit two year income tax exemption 50 income tax reduction following three years chinese government considering imposition unified corporate income tax would phase time preferential tax treatment foreignfunded enterprises utstarcom currently entitled certain whether government implement unified tax structure whether implemented utstarcom grandfathered new tax structure new tax structure implemented adversely affect financial condition chinas legal system embodies uncertainties could negatively impact business china civil law system decided court cases binding legal effect future decisions since 1979 many new laws regulations covering general economic matters promulgated china despite activity develop legal system chinas system laws yet complete even adequate law exists china enforcement existing laws contracts based existing law may uncertain sporadic may difficult obtain swift equitable enforcement obtain enforcement judgment court another jurisdiction relative inexperience chinas judiciary many cases creates additional uncertainty outcome litigation interpretation statutes regulations may subject government policies reflecting domestic political changes moreover government policies internal rules promulgated governmental agencies may published time result may operate business violation new rules policies without knowledge existence china adopted broad range related laws administrative rules regulations govern conduct operations foreign investment enterprises restrict ability foreign companies conduct business china laws rules regulations provide incentives encourage flow investment china also subject foreign companies foreign investment enterprises including subsidiaries china set restrictions may always apply domestic companies china result admission wto china increasingly according foreign companies foreign investment enterprises established china rights privileges chinese domestic companies special laws administrative rules regulations governing foreign companies foreign investment enterprises may still place us subsidiaries disadvantage relation chinese domestic companies may adversely affect competitive position moreover chinas legal system develops promulgation new laws changes existing laws preemption local regulations national laws may adversely affect foreign investors companies many activities products china subject administrative review approval various national local agencies chinas government changes occurring chinas legal regulatory structure may able secure requisite governmental approval activities products failure obtain requisite government approval activities products could substantially harm business new manufacturing facility purchased rights use 49 acres land located zhejiang science technology industry garden hangzhou hitech industry development zone december 31 2002 completed foundation ground work commenced construction building capital expenditures 386 million 2002 expect construction new facility completed 2003 projected cost approximately 956 million unable complete construction timely basis business may harmed risks relating stock performance stock price highly volatile trading price common stock fluctuated significantly since initial public offering march 2000 stock price could subject wide fluctuations future response many events factors including discussed preceding risk factors relating operations well •actual anticipated fluctuations operating results actual anticipated gross profit percentage net sales levels inventory actual anticipated rate growth actual anticipated earnings per share •changes expectations future financial performance changes financial estimates buysell recommendations securities analysts •changes governmental regulations policies china temporary suspension sales pas systems occurred may june 2000 caused stock price drop •our competitors announcement new products services technological innovations •the operating stock price performance comparable companies •news commentary emanating media securities analysts government bodies china relating utstarcom industry general market conditions domestic international macroeconomic factors unrelated performance may also affect stock price reasons investors rely recent trends predict future stock prices financial results addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources softbank corp related entities including softbank america inc significant influence management affairs could exercise best interests softbank corp related entities including softbank america inc beneficially 212 outstanding stock result softbank corp related entities including softbank america inc ability exercise significant influence matters submitted stockholders approval exert significant influence management affairs concentration ownership may delay prevent change control discourage potential acquirer making tender offer otherwise attempting obtain control company could decrease market price common stock matters could require stockholder approval include •election removal directors •merger consolidation company •sale substantially assets interests softbank america inc may always coincide interests softbank america inc acting designees board directors ownership voting securities ability exercise significant influence actions irrespective desires stockholders directors august 29 2002 completed repurchase six million shares common stock 729 million softbank corp reducing beneficial ownership 212 may make additional stock repurchases future order continue mitigate ownership influence delaware law charter documents contain provisions could discourage prevent potential takeover even transaction would benefit stockholders companies may seek acquire merge us acquisition merger company could result benefits stockholders including increase value common stock provisions certificate incorporation bylaws well provisions delaware law may discourage delay prevent merger acquisition stockholder may consider favorable provisions include •authorizing board directors issue additional preferred stock •prohibiting cumulative voting election directors •limiting persons may call special meetings stockholders •prohibiting stockholder action written consent •creating classified board directors pursuant directors elected staggered three year terms •establishing advance notice requirements nominations election board directors proposing matters acted stockholders stockholder meetings item 7aitem 7 managements discussion analysis financial condition results operation forwardlooking statements annual report form 10k contains forwardlooking statements within meaning federal securities laws statements based information currently available management intend forwardlooking statements covered safe harbor provisions private securities litigation reform act 1995 including statement purposes complying provisions forwardlooking statements include without limitation concerning following expectations nature possible trends expectations regarding continued growth business operations expectation fluctuations overall gross profit gross margin product mix quarter results customer base selling prices plans expanding direct sales organization selling marketing campaigns activities expectation may use cash debt securities acquire invest complementary businesses technologies product offerings expectation increases selling marketing research development general administrative expenses expectations regarding future growth business operations expectation continue invest significantly research development expectations regarding status products development expectations regarding future investments expectations regarding future levels cash equivalents well expectation existing cash equivalents sufficient finance operations foreseeable future expectations regarding licensing requirements ability receive licenses china pas system products expectations regarding development 3g network china expectations regarding impact reorganization china netcom expectation business continue significantly influenced political economic legal environment china well expectations nature political economic legal reform china expectations regarding future allocation net sales product group expectations regarding efficiencies hope achieve supply chain inventory purchasing well trends inventory growth expectations regarding expansion new markets around world additional forwardlooking statements may identified words anticipate expect believe intend similar expressions relate us management investors cautioned forwardlooking statements inherently uncertain statements subject risks uncertainties may cause actual results events differ materially detailed discussion risks uncertainties see factors affecting future operating results section form 10k guarantee future results undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k executive summary design manufacture sell telecommunications equipment products provide services associated operation products deployed installed exclusively telecommunications wireless wireline service providers provide extensive range products transportation voice data video traffic service providers around world business conducted globally china japan india central latin american region north america european middle eastern african region southeastern northern asia objective leading global provider internet protocol ip networking products services differentiate products designed developed commercialized reduce network complexity integrate high performance capabilities allow simple transition next generation networks results deployment maintenance upgrades economical efficient allowing operators earn high return investment technologies products fall three major categories •wireless technology enables end users subscribers send receive voice data mobile using wireless devices •wireline technology satisfies customer demand highspeed cost effective data voice media transport carriage •switching diverse assembly software hardware based networking elements designed replace central office telephone switches products within categories include multiple hardware software subsystems offered various combinations suit individual subscriber needs system technologies products based widely adopted global communications standards designed allow service providers quickly costefficiently integrate systems existing networks deploy systems new broadband internet protocol ip wireless network rollouts system technologies also designed allow timely cost efficient transition future nextgeneration network technologies enabling service provider customers protect initial infrastructure investments historically substantially sales service providers china 86 sales year ended december 31 2003 derived china 10 sales japan however currently expanding sales efforts include communications markets central latin american region european middle eastern african region north america southeastern northern asia intend penetrate markets direct sales offices located key market regions licensing technology local manufacturers import taxation favorable developing local sales agency distributor relationships within specific market regions establishing sales relationships original equipment manufacturers sales division began establishing regional offices local direct sales representative offices provide support expanding global sales operations telecommunications industry experienced period contraction last years experienced significant growth revenue profit period 2003 approximately 20 billion revenue 100 increase 2002 growth revenue driven chinas growing telecommunications market china believe one fastest growing telecommunications markets world continued experience increasing fixedline mobile telephone internet subscriber growth 4801 million subscribers 2002 6115 million subscribers 2003 according chinas ministry information industry believe subscriber growth led increased demand pas services handsets use subscriber growth statistics gauge future inventory purchasing requirements well forecast anticipated revenue growth expect subscriber growth trend continue 2004 chinas teledensity rates remain low comparison developed countries number competitors communications access switching systems handsets china grew 2003 line chinas growing telecommunications market growth led competitive pricing pressure causing average selling prices decrease 2003 relative 2002 levels time larger percentage revenue derived handsets sales generally lower margin communications access switching systems contributing decreased margins overall 2001 2003 continued develop products advanced features enhance features existing products 2003 believe enable us offer customers advanced product higher average selling price otherwise would possible addition worked 2003 intend continue strive reduce cost manufacturing products streamlining design engineering functions effort penetrate new markets around world support growing business expand product offerings continued invest resources selling administrative research development groups 2003 costs increased significantly 2001 2003 line increased business levels reduced costs percentage revenues period operating costs percentage revenue 18 2003 compared 20 2002 continued operate positive cash flow basis 2003 despite increased accounts receivable inventory balances increased inventory levels part attributable increased backlog typically funded inventory requirements customer advances received upon signing new contracts accounts receivable balance continued increase 2003 time cash collections customers increased days sales outstanding continued improve enabling us continue obtain net cash provided operations acquisitions key transactions acquisitions inprocess research development iprd since incorporation focused resources developing products global communications market emphasis china communications market made several key strategic acquisitions acquire additional resources development acquisitions accounted purchases results operations included consolidated financial statements closing dates acquisitions prior 2003 including huts guts issanni advanced communications devices corporation significant ongoing impact consolidated results operations acquisitions often result onetime charge operating expenses related products development yet reached technological feasibility inprocess research development iprd project classified iprd significant risks associated completing development acquired technology including technological commercial risks assessing iprd projects consider key project characteristics well future prospects rate technology changes telecommunications equipment industry product life cycles products development stage connection acquisitions often issue stockbased incentives vest according terms established acquisition agreement historically stockbased incentives vested based upon achievement product development milestones meeting revenue targets duration employment commworks may 23 2003 completed acquisition 3com corporation delaware corporation 3com selected assets liabilities 3coms commworks division commworks funded consideration acquisition cash hand paid 1000 million cash incurred related transaction related costs 93 million selected assets acquired included commworkss portfolio carrierfocused voice data networking products customer support professional services addition acquired licensed 3com intellectual property used commworks develops deploys carrierclass ipbased multiservice access servicecreation platforms telecommunications service providers amount purchase price allocated iprd 13 million based independent valuation charged companys results operations alternative future uses existed acquisition date acquisition commworks two projects development qualified iprd slap high density voice hdv 20 slap iprd project wireless division commworks interface connects products radio switch manufacturers products china order connect cellular network internet hdv 20 iprd project wireline product line commworks hdv 20 utilizes software technology increase data capacity voice internet protocol voip solutions significant risks associated technologies technological risks stem fact new technologies early stage development closing date commworks slap iprd project approximately 60 complete hdv 20 approximately 40 complete therefore significant risks associated reaching technological milestones time budget commercial risks associated competitive nature telecommunications equipment market additional costs required complete iprd projects slap product expected commercialized first quarter fiscal 2004 remaining costs required complete project estimated 01 million hdv 20 product expected commercialized first quarter fiscal 2004 remaining costs required complete project estimated 02 million rollingstreams june 30 2003 completed acquisition rollingstreams systems ltd rollingstreams developmentstage company pursuant share exchange agreement rollingstreams designs streaming endtoend tvoverinternetprotocol tvoip products services telecommunications operators broadband service providers investment rollingstreams 04 million prior acquisition purchase consideration outstanding shares rollingstreams already held us prior acquisition 301074 shares common stock addition assumed outstanding rollingstreams options became options purchase aggregate 12742 shares common stock valued 05 million 301074 shares 164115 shares valued 58 million issued closing 28696 held escrow undisclosed liabilities contingencies incurred rollingstreams prior closing breach share exchange agreement shares distributed former shareholders rollingstreams within ten days sixmonth anniversary closing deducting claims 136959 301074 shares payable form earnout period expiring 18 months closing subject achievement certain revenue milestones earnout period amount purchase price allocated inprocess research development 62 million based independent valuation amount charged results operations alternative future uses existed acquisition date acquisition rollingstreams one project development qualified inprocess research development mediaswitch endtoend solution designed telecom operators broadband service providers deliver broadcast quality tv ondemand entertainment services internet protocol networks mediaswitch considered iprd project significant risks associated development technology risks include technological commercial risks technological risks stem fact technology 70 complete therefore significant risks associated reaching technological milestones time budget commercial risks associated lack market acceptance tvoip concept addition technological commercial risks stated significant additional costs required complete iprd project mediaswitch expected commercialized second quarter 2004 remaining costs required complete project estimated 45 million remaining engineering tasks include productization complete solution involves adding new features functionalities stabilizing software code xebeo may 7 2003 completed purchase assets xebeo communications inc xebeo 24 million cash xebeo develops manufactures optical packet switches enable telecommunications carriers provide single fiber multiservice access customers addition amount 07 million may payable based future contingencies related employment amount purchase price allocated inprocess research development 19 million based independent valuation charged results operations alternative future uses existed acquisition date acquisition xebeo focusing resources development first product metrobridge optical packet switching solution considered development stage development metrobridge 60 complete closing date technological feasibility technology established technology future alternative uses therefore development metrobridge considered iprd product achieved technical milestones november 2003 available customer trials evaluations expected marketed sold third quarter 2004 commercial risks associated lack market acceptance product features use tvoip implementations shanghai yi yun october 16 2002 acquired assets intellectual property shanghai yi yun telecom technology co ltd shanghai yi yun provider synchronous digital hierarchy equipment consideration 02 million cash 342854 shares restricted stock valued 60 million connection acquisition shanghai yi yun stockholders received 342854 shares restricted stock executed indemnity escrow agreement favor shares restricted stock placed escrow addition issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one subsidiaries shares restricted stock vest five years accelerated vesting upon achievement specified milestones treated 514290 shares restricted stock deferred compensation debt issuance march 12 2003 completed offering 4025 million convertible subordinated notes due march 1 2008 qualified institutional buyers pursuant rule 144a securities act 1933 notes bear interest rate 78 per annum convertible common stock conversion price 2379 per share subordinated present future senior debt holders notes may convert notes price common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible approximately 420345 shares common stock concurrent issuance convertible notes entered convertible bond hedge call option transactions respect common stock bond hedge call option transactions may settled option either cash net shares expire march 1 2008 convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders equity accordance guidance emerging issues task force issue 0019 accounting derivative financial instruments indexed potentially settled companys stock transactions softbank recognized revenue 1844 million 1230 million 139 million years ended december 31 2003 2002 2001 respectively respect sales telecommunications equipment softbank bb corporation sbbc affiliate softbank corp softbank america inc significant stockholder sbbc offers asynchronous digital subscriber line adsl coverage throughout japan marketed name yahoo bb majority products provide sbbc associated adsl technology contract competitively bid terms contract terms favorable unrelated parties included accounts receivable december 31 2003 2002 439 million 08 million respectively related agreement amounts included deferred revenue respect agreement december 31 2003 2002 2000 invested 100 million softbank china investment fund established softbank corp focused investments internet companies china investment permits us participate anticipated growth internetrelated businesses china investment constitutes 10 funding softbank china softbank corp contributing remaining 90 fund separate management team none employees employed fund many funds investments privately held companies many still startup development stages investments inherently risky market technologies products companies development typically early stages may never materialize account investment cost method recorded losses 02 million 28 million 17 million due otherthantemporary decline carrying value investment 2003 2002 2001 respectively balance investment 53 million december 31 2003 first quarter fiscal 2002 invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy proceedings total fund offering expected approximately 1500 million 2260 million investor contributing minimum 08 million fund separate management team none employees employed fund account investment equity method accounting year ended december 31 2003 recorded equity losses 01 million recorded losses year ended december 31 2002 balance investment 19 million december 31 2003 august 29 2002 completed repurchase 60 million shares common stock 729 million largest shareholder softbank america inc part transaction softbank signed voluntary lock agreement stipulating would sell common stock within next six months lock agreement ended march 1 2003 coincided start blackout period insiders permitted sell shares blackout period began march 1 2003 ended commencing close business second trading day following public release first quarter fiscal 2003 results april 16 2003 april 5 2003 repurchased 80 million shares common stock beneficially owned softbank america inc purchase price 17385 per share total cost repurchase 1396 million including transaction fees connection repurchase transaction softbank america inc entered agreement us offer sell otherwise dispose common stock period one year subject number exceptions december 31 2003 softbank america inc beneficially owned approximately 141 outstanding stock july 17 2003 entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank corp terms agreement loaned bb modem 101 million purposes investing portfolio adsl modems associated modem rental agreements softbank bb corp formerly bb technologies affiliate softbank corp softbank bb corp continue service modems modem rental agreements loan subordinated certain senior lenders bb modem repayments payable us fortytwo month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loans assess loan impairment whenever events changes circumstances indicate carrying amount may recoverable periodically review underlying quality asset pool securing loan assess whether impairment incurred needs recorded 2003 recorded 05 million interest income respect loan receivable december 31 2003 approximately 112 million based foreign exchange rate approximately 107 100 japanese yen subsequent event january 14 2004 sold 121 million shares common stock 3925 per share banc america securities llc net proceeds approximately 4742 million intend use net proceeds strategic general corporate purposes including limited acquisitions investments working capital expenditures results operations approximately 86 84 90 net sales years ended december 31 2003 2002 2001 respectively china accordingly business financial condition results operations likely influenced political economic legal environment china general state chinas economy foreseeable future results may adversely affected among things changes political economic competitive social conditions china including changes governmental policies respect laws regulations changes telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation extend credit customers china without requiring collateral monitor exposure credit losses maintain allowances doubtful accounts business activity china many countries asia declines considerably first quarter year observance lunar new year result sales first quarter fiscal year typically lower sales fourth quarter preceding year expect trend continue cost sales consists primarily material costs payments agents costs associated manufacturing assembly testing products costs associated installation customer training overhead warranty costs cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers china manufacture assemble handsets gross profit affected product mix average selling prices material costs gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate period result shifts product mix anticipated decreases average selling prices ability reduce cost sales selling general administrative expenses include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs large percentage costs fixed difficult quickly reduce periods reduced sales intend pursue aggressive selling marketing campaigns expand direct sales organization result sales marketing expenses increase future periods also expect support continued growth general administrative expenses continue increase foreseeable future research development expenses consist primarily salaries related costs employees engaged research design development activities cost parts prototypes equipment depreciation third party development expenses large percentage costs fixed difficult quickly reduce periods reduced sales believe continued investment research development critical longterm success accordingly expect research development expenses increase future periods net sales following table summarizes net sales geographic region product line fiscal 2003 vs 2002 increase sales primarily attributable increased demand products services continued strength sales china well increase global sales net sales growth due increase subscribers required telecommunication providers expand telecommunication infrastructures result sales customers expanding existing networks 2003 approximately 30 sales 2003 attributable new customers compared 54 sales new customers 2002 addition increasing amount infrastructure sales increase subscribers also led increase customer demand handsets 2003 china provinciallevel telecommunications service entities continued consolidate telecommunications purchasing decisions province result consolidation trend grouped china customers together province treat province one customer december 31 2003 2002 approximately 31 customers giving effect consolidation 2003 hei long jiang province accounted 11 net sales 2002 sales zhejiang province accounted 18 sales sbbc accounted 13 net sales expect sales grow moderate rate 2004 global sales growing higher rate china sales handset sales increased result increased subscribers approximately 12 million subscribers 2002 approximately 35 million subscribers 2003 expect growth rate continue 2004 expect 2004 net sales comprised approximately 35 40 wireless infrastructure sales approximately 40 50 subscriber handset sales approximately 10 20 wireline products fiscal 2002 vs 2001 international sales telecommunications equipment increased primarily due sales equipment sbbc japan support adsl rollout 2002 sales zhejiang province accounted 18 sales sbbc accounted 13 net sales 2001 sales zhejiang guangdong provinces accounted 28 10 net sales respectively handset sales increased result subscriber growth increased popularity pas system gross profit following table summarizes gross profit fiscal 2003 vs 2002 gross profit varies across different product lines affected product mix average selling prices cost materials decrease gross profit percent net sales 2003 2002 attributable increased competitive market pricing pressures lower margins ipas pas systems well higher volume sales lower margin handset products telecommunications market experienced continued pricing pressures 2003 anticipate pricing pressure continue ipas pas systems handset products gross profit also decreased 2003 due increased cost sales foreign exchange losses resulting purchasing significant amounts inventory denominated japanese yen believe overall gross profit percentage net sales continue fluctuate period result shifts product mix anticipated decreases average selling prices ability reduce cost sales expect continued competitive market pricing pressures products line current trends industry additionally expect handsets continue represent 40 50 net sales fiscal 2002 vs 2001 decrease gross profit percentage net sales primarily due increased sales lower margin handsets comprised 38 net sales 2002 compared 30 2001 operating expenses following table summarizes operating expenses selling general administrative fiscal 2003 vs 2002 selling general administrative expenses include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs increase absolute dollars selling general administrative expenses due expanding overall business activities china globally support expanding global business hired approximately 1150 additional selling general administrative employees 2003 also contributed increased selling general administrative expenses decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increase net sales fiscal 2002 vs 2001 increase selling general administrative expenses primarily due growth net sales expansion overall level business activities globally decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increase net sales research development fiscal 2003 vs 2002 increase absolute dollars research development expenses primarily due hiring approximately 950 additional technical personnel support increased business levels decrease research development expenses percentage net sales due majority new personnel hired china labor costs less expensive united states well increased economies scale associated increased business levels fiscal 2002 vs 2001 increase research development expenses primarily due hiring additional 303 technical personnel increased prototype expenses licensing fees support research development efforts percentage net sales research development expenses decreased 9 2002 10 2001 reduction research development expenses percent net sales attributable increased economies scale associated increased business levels inprocess research development costs fiscal 2003 vs 2002 iprd charge 2003 resulted acquisition commworks former division 3com three smaller acquisitions rollingstreams xebeo shanghai yi yun telecom technology co ltd accounted 13 million 62 million 19 million 13 million respectively based independent valuations charge 2002 arose acquisition issanni communications inc april 19 2002 based independent valuation refer acquisitions key transactions section mda additional detail iprd costs incurred 2003 fiscal 2002 vs 2001 2002 iprd costs resulted acquisition issanni april 19 2002 2001 inprocess research development costs resulted acquisition acd november 2001 charges based upon independent valuations amortization intangible assets fiscal 2003 vs 2002 increase amortization intangible assets primarily due additional 449 million intangibles recorded upon acquisition commworks may 2003 estimated useful lives purchased intangibles one ten years estimated amortization expense next five years beginning year ended december 31 2004 107 million 76 million 58 million 56 million 40 million respectively fiscal 2002 vs 2001 decrease amortization intangible assets primarily due elimination goodwill amortization upon adoption sfas 142 january 1 2002 74 million offset increase amortization intangibles 20 million sfas 142 effect year ended december 31 2001 amortization expense would 02 million income expenses interest income expense net fiscal 2003 vs 2002 interest income 32 million 2003 compared interest income 55 million 2002 interest income decreased due lower average cash shortterm investment balances 3192 million 2003 compared 3725 million 2002 well due reduction interest rates deposits interest expense 43 million 2003 compared 13 million 2002 increase 30 million interest expense primarily attributable interest associated convertible debt issued march 2003 accrues rate approximately 14 million per quarter 06 million interest capitalized 2003 fiscal 2002 vs 2001 interest income 55 million 2002 compared interest income 86 million 2001 interest expense 13 million 2002 compared 39 million 2001 decrease interest income primarily due reduction cash equivalents shortterm investments 583 million reduction interest rates deposits decrease 27 million interest expense related debt balances paid september 2002 december 31 2002 debt income expense net fiscal 2003 vs 2002 net income 14 million 2003 compared net expense 99 million 2002 net income 2003 primarily comprised reinvestment incentive payment received china 39 million incentive payment exports value added taxes china 26 million government incentive related operations japan 62 million offset foreign exchange losses approximately 87 million expenses attributable selling transferring notes receivable 23 million fiscal 2002 vs 2001 net expense 99 million 2002 compared net expense 03 million 2001 net expense 2002 primarily comprised impairment writedowns 44 million relating investment portfolio foreign exchange losses 54 million equity net income loss affiliated companies fiscal 2003 vs 2002 consolidated equity net loss affiliated companies 53 million 2003 41 million 2002 equity loss 2003 primarily comprised share losses relating joint venture one stockholders matsushita communication industrial co ltd jointly design develop manufacture sell telecommunications products 49 ownership interest joint venture company registered share capital 100 million equity loss 2002 related losses relating interests investment funds share losses generated guts prior acquisition remaining 49 ownership interest entity fiscal 2002 vs 2001 consolidated equity net loss affiliated companies 41 million 2002 30 million 2001 included equity losses 29 million 17 million 2002 2001 respectively related interest investment funds may 2002 acquired remaining 49 ownership interest guts whollyowned subsidiary results operations included consolidated financial statements beginning june 1 2002 prior may 2002 guts accounted using equity method accounting july 5 2002 entered joint venture agreement matsushita communication industrial co ltd matsushita electric industrial co ltd jointly design develop manufacture sell telecommunication products 49 ownership interest joint venture company investment results operations joint venture company accounted using equity method accounting commencing october 2002 income tax expense fiscal 2003 vs 2002 income tax expense 674 million 2003 273 million 2002 primary reason increase income tax expense income increased 100 2003 2002 secondarily income tax expense increased due higher tax rate 2003 effective tax rate 25 2003 compared 20 2002 primarily due higher tax rates globally china subsidiaries tax holidays expired 2003 expect income tax expense grow absolute dollars line anticipated increases pretax income however expect income tax rate decrease 25 2004 due implementation various global tax planning strategies fiscal 2002 vs 2001 income tax expense 273 million 2002 198 million 2001 increase income tax expense due increased income effective tax rate 20 2002 compared 25 2001 reduction effective tax rate attributed increased portion net income derived operations chinese jurisdictions granted us temporary tax holidays minority interest earnings consolidated subsidiaries fiscal 2003 vs 2002 minority interest earnings consolidated subsidiaries 01 million year ended 2003 12 million year ended 2002 decrease due acquisition remaining 12 ownership interest huts 2002 minority interest earnings consolidated subsidiaries 2003 represented 10 share earnings cuts chongqing manufacturing joint venture attributable joint venture partner minority interest earnings consolidated subsidiaries 2002 represented share earnings huts zhejiang manufacturing joint venture attributable joint venture partner prior acquisition remaining 12 ownership interest huts may 2002 huts whollyowned subsidiary fiscal 2002 vs 2001 minority interest earnings consolidated subsidiaries 12 million 2002 13 million 2001 decrease due acquisition remaining 12 ownership interest huts may 2002 huts whollyowned subsidiary expected decrease offset increase huts net income four months ended april 30 2002 compared corresponding period 2001 liquidity capital resources operating activities net cash provided operating activities year ended december 31 2003 505 million operating cash affected changes accounts receivable inventory accounts payable assets offset changes deferred revenue 1517 million increase accounts receivable balance attributable 100 increase sales 2003 reduced net cash provided operations 2003 sold 2988 million notes receivable associated expenses 23 million cash provided operating activities also reduced 816 million 3180 million increase inventory deferred costs respectively inventory deferred costs increased absolute dollars 2003 2002 support increased backlog operating cash also decreased due 58 million decrease accounts payable historically majority accounts payables comprised inventory related payables mid2003 implemented time inventory process increase efficiencies inventory purchasing going forward expect continue improve efficiencies surrounding supply chain inventory process inventory grow slower rate historically experienced decrease operating cash 2003 offset increase customer advances deferred revenue 3023 million 274 million respectively collected approximately 25 billion cash customers 2003 customer advances comprised cash collected customers yet recognized revenue increase attributable increase customer contracts net cash provided operating activities fiscal 2002 1573 million net cash provided operations mainly due 1705 million 878 million increase accounts payable customer advances respectively offset increases inventories deferred costs accounts receivable assets 761 million 1378 million 342 million 458 million respectively net cash provided operating activities fiscal 2001 402 million net cash provided operations mainly due 391 million 428 million 414 million increase accounts payable customer advances liabilities respectively offset increases inventories deferred costs accounts receivable assets 604 million 608 million 392 million 430 million respectively investing activities net cash used investing activities 1775 million year ended december 31 2003 net cash used investing activities affected increased business acquisitions property plant equipment purchases spent 1117 million business acquisitions 2003 primarily attributable may 2003 commworks acquisition 1093 million including transaction transition fees addition business acquisitions net cash used investing activities increased due 1223 million property plant equipment purchases 455 million property plant equipment purchases construction costs incurred hangzhou manufacturing facility net cash used investing activities also increased due 1475 million purchases shortterm investments offsetting net cash used investing activities 2172 million proceeds sale shortterm investments net cash used investing activities fiscal 2002 1442 million mainly due 753 million property plant equipment purchases 177 million business acquisitions primarily attributable purchase remaining interest huts 289 million investments affiliates primarily comprised investments public private technology companies offset 224 million net purchases shortterm investments net cash used investing activities fiscal 2001 437 million primarily due 302 million property plant equipment purchases 98 million investments affiliates primarily comprised investments public private technology companies offset 21 million net purchases shortterm investments financing activities net cash provided financing activities 2672 million year ended december 31 2003 due proceeds raised convertible subordinated notes issuance stock option exercises offset repurchase common stock purchase bond hedge call option net cash provided financing activities primarily attributable 3914 million net proceeds received issuing convertible subordinated notes march 2003 addition proceeds received notes issuance received 589 million issuance common stock option espp exercises offsetting cash provided financing activities used portion capital raised repurchase 80 million shares common stock beneficially owned softbank america inc purchase price 17385 per share total cost repurchase 1396 million including transaction fees used remainder funds raised fund 2003 business acquisitions net cash provided financing activities also offset purchase call spread 438 million purchased minimize shareholder dilution upon conversion convertible subordinated notes net cash used financing activities fiscal 2002 1024 million primarily due repurchase shares related transaction costs 729 million net payments 705 million borrowings lines credit offset 409 million proceeds underwritten sale common stock time softbank america inc sold 100 million shares common stock underwriter issuance common stock option exercises net cash provided financing activities 1755 million primarily due 1606 million proceeds followon public offering common stock august 2001 stock option exercises net proceeds borrowings line credit arrangements 151 million liquidity working capital 8872 million 5682 million december 31 2003 2002 respectively increase working capital due increased cash hand 2319 million cash equivalents 1073 shortterm investments 2002 3740 million cash equivalents 486 million shortterm investments working capital also increased due larger accounts receivable inventory balances offset larger customer advances deferred revenue balances anticipate working capital cash hand 2004 result 4742 million equity offering january 2004 going forward cash position us take advantage strategic investment opportunities lines credit totaling 5837 million available future borrowings expiring 2004 2010 interest rates ranging approximately 45 60 guaranteed debt included consolidated balance sheet income taxes subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time tax holidays discussed applicable utstarcom chongqing co ltd cuts utstarcom telecom co ltd huts hangzhou utstarcom telecom co ltd hstc utstarcom china co ltd utsc active subsidiaries china entities qualify accredited technologically advanced enterprises specifically huts currently enjoys 15 tax rate continue indefinitely provided remain technologically advanced enterprise government change tax laws utsc currently enjoys 10 holiday tax rate expires december 31 2005 hstc cuts currently exempt income tax december 31 2004 point subject 75 tax rate expire december 31 2007 contractual obligations commercial commitments obligations contractual obligations commercial commitments primarily regard leasing arrangements standby letters credit follows certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products 4025 million convertible subordinated notes due march 1 2008 bear interest rate 78 per annum payable semiannually may 1 september 1 convertible companys common stock conversion price 2379 per share subordinated present future senior debt company principal due maturity notes issue standby letters credit primarily support international sales activities outside china submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof accounts receivable transferred notes receivable accept bank notes receivable commercial notes receivable maturity dates three six months customers china normal course business may discount notes banking institutions china sale notes reflected reduction current assets proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes receivable sold years ended december 31 2003 2002 2988 million 25 million respectively notes included consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 accounting transfers servicing financial assets extinguishment liabilities sfas 140 met sfas 140 upon transfer transferor entity must derecognize financial assets control surrendered transferee obtains control assets addition transferred assets isolated transferor beyond reach creditors transferee right without conditions constraints pledge exchange assets received costs settling transferring notes receivable 23 million immaterial years ended december 31 2003 2002 respectively included income expense net consolidated statements operations notes receivable available sale 114 million 120 million december 31 2003 december 31 2002 respectively investment commitments december 31 2003 invested total 20 million global asia partners lp recorded longterm investment fund size anticipated 100 million fund formed make private equity investments private preipo technology telecommunications companies asia commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner purchase commitments obligated purchase raw materials workinprocess inventory various orders one supplier expected fulfilled adverse consequences material operations financial condition december 31 2003 total open commitments purchase orders approximately 23 million critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition product warranty recognize revenues sales telecommunications equipment persuasive evidence arrangement exists delivery product occurred customer acceptance obtained fee fixed determinable collectability reasonably assured payment due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region shipping handling costs recorded revenues costs revenues expected losses contracts recognized immediately final acceptance required complex multiple element contractual arrangements since installation stretches time frame six twelve months terms deliverables finalized project completion customers extensively test systems installation final acceptance indicates customer fully accepted delivery equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction additionally recognize revenue cash payments received customers transactions customers final acceptance record cash receipts customer advances defer revenue recognition final acceptance received sales may generated complex contractual arrangements require significant revenue recognition judgments particularly areas multiple element arrangements multiple elements exist arrangement fee allocated different elements based upon verifiable objective evidence fair value elements governed eitf 0021 sec staff accounting bulletin 104 sab 104 multiple element arrangements primarily involve sale pas ipas equipment handsets installation training provision equipment different locations customer revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered element standalone value right return delivered elements control delivery undelivered elements multiple elements exist arrangement includes software considered incidental equipment services arrangement software softwarerelated elements recognized provisions statement position 972 amended emerging issues task force issue 0305 company allocates revenues element software arrangements based vendorspecific objective evidence vsoe element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion arrangement fee recognized revenue evidence fair value one undelivered elements exist revenue deferred recognized delivery elements occurs fair value established also sell products primarily handsets resellers revenue generally recognized standard price protection period lapsed ranges 30 90 days collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash china may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards 48 revenue recognition right return exists developed reasonable estimates stock exchanges estimates derived historical experience similar types sales similar products recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue related maintenance support contracts recognized ratably contract term assessment collectability also factor determining whether revenue recognized assess collectability based number factors including payment history creditworthiness customer request collateral customers china global sales outside china often require letters credit drawn demand customer defaults payment determine collection fee reasonably assured recognize revenue upon receipt cash nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms complex multipleelement arrangements prior final acceptance accordingly accounts receivable booked recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue provide warranty equipment handset sales period generally ranging twelve eighteen months time final acceptance provide expected cost product warranties time recognize revenue based assessment past warranty experience continually monitor level warranty expenses however material adverse change product failure rates additional warranty provision would required historically warranty experience within expectations receivables required estimate collectability trade receivables notes receivable maintain allowance doubtful accounts estimated losses trade receivables notes receivable assess collectability receivable determining whether creditworthiness customer deteriorated could result inability collect payment collectability doubtful record allowance receivable financial condition customers deteriorate ability make payments suffers result may need increase allowances receivables inventories consist inventories held manufacturing facility warehouses customer sites prior signing contracts may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost net realizable value net writedowns excess slow moving obsolete inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites deferred costsinventories customer sites contracts inventories customer sites contracts awaiting final acceptance classified deferred costs separate historically considered inventory stated lower cost net realizable value net reserves based upon assessment potential losses obsolescence lengthy acceptance process title risk loss inventory transferred customer upon delivery revenue cost sales recorded receive final acceptance customer research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs deferred income taxes recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary record valuation allowance reduce deferred tax assets amount management believes likely realized goodwill intangibles recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets perform annual goodwill impairment review fourth quarter year changes circumstances indicate potential impairment currently operate single reportable segment without reporting units management evaluates performance make operating decisions allocates resources based consolidated financial data determine whether impairment goodwill necessary consolidated basis assessing potential impairment goodwill compare book value fair market value fair market value market capitalization date impairment assessed historically fair market value exceeded book value impairment necessary longterm investments invested fund focused investments internet companies china fund focused investments companies asia undergoing restructuring bankruptcy procedures also invested directly number private technologybased companies early stages development publicly listed technology companies traded nasdaq nyse quoted market prices readily available determine fair value investments publicly traded companies management judgment required determine losses temporary furthermore management judgment required evaluating carrying value private company investments possible impairment private technology company investments assess impairment based evaluation achievement business objectives milestones financial condition prospects companies relevant factors continually monitor investments impairment charge income impairment amounts period determination made recent accounting pronouncements january 2003 financial accounting standards board issued interpretation 46 consolidation variable interest entities fin 46 fin 46r issued december 2003 fin 46 provides accounting guidance consolidation variable interest entities vie fin 46 applies public private business enterprises controlling interest business contractual relationship vie fin 46 requires consolidation existing noncontrolled affiliates vie unable finance operations without investor support investors exposure significant risks rewards ownership company adopted fin 46 quarter ended december 31 2003 adoption fin 46 impact consolidated financial statements april 2003 financial accounting standards board issued statement financial accounting standards 149 amendment statement 133 derivative instruments hedging activities sfas 149 statement amends sfas 133 provide clarification financial accounting reporting derivative instruments hedging activities adoption sfas 149 effective contracts entered modified june 30 2003 material effect companys consolidated financial condition results operations may 2003 financial accounting standards board issued statement financial accounting standards 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances many instruments previously classified equity company financial instruments adoption fas 150 expected impact companys consolidated financial statements december 17 2003 staff sec issued staff accounting bulletin 104 sab 104 revenue recognition supercedes sab 101 revenue recognition financial statements sab 104s primary purpose rescind accounting guidance contained sab 101 related multiple element revenue arrangements superceded result issuance eitf 0021 accounting revenue arrangements multiple deliverables additionally sab 104 rescinds secs revenue recognition financial statements frequently asked questions answers faq issued sab 101 codified sab 101 topic 13 selected portions faq incorporated sab 104 wording sab 104 changed reflect issuance eitf 0021 revenue recognition principles sab 101 remain largely unchanged issuance sab 104 adoption sab 104 materially affect revenue recognition policies results operations financial position cash flows factors affecting future operating results risks related company future product sales unpredictable result operating results likely fluctuate quarter quarterly annual operating results fluctuated past likely fluctuate future due variety factors outside control factors may affect future operating results addition described include •the timing size orders products •changes customers subscriber growth rate •the lengthy unpredictable sales cycles associated sales products •cancellation deferment delay implementation large contracts •revenue recognition based acceptance unpredictable •a seasonal reoccurrence outbreak severe acute respiratory syndrome sars illnesses •the decline business activity typically experience lunar new year leads decreased sales first fiscal quarter •changes accounting rules recording expenses related employee stock option compensation plans result factors periodtoperiod comparisons operating results necessarily meaningful indicative future performance furthermore possible future quarters operating results fall expectations securities analysts investors occurs trading price common stock could decline competition markets may lead reduced prices revenues market share believe continue face intense competition domestic international companies target markets many may operate lower cost structures may given preferential treatment applicable governmental regulators policies much larger sales forces additionally companies presently offering competing products may also enter target markets many competitors significantly greater financial technical product development sales marketing resources result competitors may able respond quickly new emerging technologies changes service provider requirements competitors may also able devote greater resources development promotion sale new products competitors may able offer significant financing arrangements service providers may give competitive advantage selling systems service providers limited financial currency resources many developing markets operate intend operate relationships local governmental telecommunications agencies important establish maintain many markets competitors may able establish better relationships local governmental telecommunications agencies could result ability influence governmental policy formation interpretation advantage additionally competitors might better relationships thirdparty suppliers obtain component parts reduced rate allowing offer end products reduced prices increased competition likely result price reductions reduced gross profit percentage net sales loss market share one could materially harm business financial condition cash flows results operations average selling prices products may decrease may reduce revenues gross profit result must introduce new products reduce costs order maintain profitability average selling prices communications access switching systems handsets historically declined result number factors including •increased competition •aggressive price reductions competitors •rapid technological change average selling prices products may continue decrease future response product introductions us competitors factors including price pressures customers therefore must continue develop introduce new products enhancements existing products incorporate features sold higher average selling prices failure could cause revenues gross profit decline cost reduction efforts may allow us keep pace competitive pricing pressures lead improved gross profit percentage net sales order competitive must continually reduce cost manufacturing products design engineering changes may successful efforts delivering products market timely manner addition redesign may result sufficient cost reductions allow us reduce prices products remain competitive improve maintain gross profit percentage net sales would cause financial results suffer sales china accounted total sales business financial condition results operations significant degree subject economic political social events china approximately 17 billion 86 8223 million 84 net sales year ended december 31 2003 2002 respectively occurred china anticipate expansion foreign markets significant majority net sales derived china foreseeable future addition plan continue make investments china future therefore business financial condition results operations significant degree subject economic political legal social developments events china please read risks detailed heading risks related conducting business china additional information risks face connection china operations market subject rapid technological change compete effectively must continually introduce new products product enhancements achieve market acceptance market communications equipment characterized rapid technological developments frequent new product introductions evolving industry regulatory standards success depend large part ability enhance network broadband access switching technologies develop introduce new products product enhancements anticipate changing service provider requirements technological developments may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail develop introduce new products enhancements existing products effectively respond technological change timely basis business financial condition results operations could materially adversely affected moreover time competitors may announce new products product enhancements technologies services potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory obsolescence future technological advances communications industry may diminish inhibit market acceptance existing future products render products obsolete even able develop introduce new products may gain market acceptance market acceptance products depend various factors including •our ability obtain necessary approvals regulatory organizations within countries operate new technologies introduce •the length time takes service providers evaluate products causing timing purchases unpredictable •our products compatible legacy technologies standards existing previously deployed network equipment •our ability attract customers may preexisting relationships competitors •product cost relative performance •the level customer service available support new products •if products fail obtain market acceptance timely manner business could suffer depend sole source key suppliers well international sources handsets base stations components materials used products cannot obtain adequate supplies high quality products competitive prices timely manner suppliers sources competitive position reputation business could harmed contracts single supplier limited group suppliers purchase components materials used products supplier unwilling unable provide us highquality components materials quantities required costs specified us may able find alternative sources favorable terms timely manner inability obtain develop alternative sources required could result delays reductions manufacturing product shipments time could shortages different products components example 2001 2002 worldwide shortage handset components resulting thirdparty manufacturers inability assemble manufacture sufficient quantity handsets keep pace consumer demand moreover suppliers may supply us inferior quality products inferior product supplied third party embedded end product causes problem might difficult identify source problem due component parts events occur competitive position reputation business could suffer ability source sufficient quantity highquality costeffective components used products may also limited import restrictions duties foreign countries manufacture products require significant number imported components manufacture products imported electronic components imported goods used operation business may limited variety permit requirements approval procedures import duties registration requirements moreover import duties components increase cost products may make less competitive seek secure additional financing able ability expand strategically may limited able secure additional financing stockholders may experience dilution ownership interest may subject limitations operations increased leverage currently anticipate available cash resources include existing cash equivalents shortterm investments cash operations sufficient meet anticipated needs working capital expenditures foreseeable future unable generate sufficient cash flows operations may need raise additional funds develop new enhanced products respond competitive pressures take advantage acquisition opportunities raise capital strategic purposes raise additional funds issuance equity securities stockholders experience dilution ownership interest newly issued securities may rights superior common stock raise additional funds issuing debt may subject limitations operations increase leverage example connection sale convertible debt securities march 2003 incurred 4025 million indebtedness result indebtedness principal interest payment obligations increased substantially degree leveraged could materially adversely affect ability obtain financing working capital acquisitions purposes could make us vulnerable industry downturns competitive pressures ability meet debt service obligations dependent upon future performance subject financial business factors affecting operations many beyond control finally additional sources financing may available reasonable terms require could harm business recent growth strained resources unable manage sustain growth operating results negatively affected recently experienced period rapid growth anticipate must continue expand operations address potential market opportunities expansion placed continue place significant strain management operational financial resources manage growth effectively need take various actions including •enhancing management information systems forecasting procedures •further developing operating administrative financial accounting systems controls •managing working capital sources financing fund expansion •maintaining close coordination among engineering accounting finance marketing sales operations organizations •expanding training managing employee base •managing expansion direct indirect sales channels costefficient competitive manner •fully review new customers credit histories ensure financial stability finalizing contracts fail implement improve systems controls manage future growth expansion effectively business could suffer success dependent continuing hire retain qualified personnel successful attracting retaining personnel business suffer success business depends significant part upon continued contributions key technical senior management personnel many would difficult replace particular success depends large part knowledge expertise services hong liang lu chairman board president chief executive officer ying wu chairman chief executive officer china operations loss key employee failure key employee perform satisfactorily current position failure attract retain key technical senior management employees could significant negative impact operations effectively manage recent growth well future growth need recruit train assimilate motivate retain qualified employees locally internationally competition qualified employees intense process recruiting personnel combination skills attributes required execute business strategy difficult timeconsuming expensive grow globally must implement hiring training processes capable quickly deploying qualified local residents knowledgeably support products services alternatively insufficient number qualified local residents available might incur substantial costs importing expatriates service new global markets example historically experienced difficulty finding qualified accounting personnel knowledgeable us chinese accounting standards chinese residents fail attract hire assimilate retain qualified personnel business would harmed competitors others past may future attempt recruit employees addition companies telecommunications industry whose employees accept positions competitors frequently claim competitors engaged unfair hiring practices may subject types claims future seek hire qualified personnel claims may result material litigation disruption operations could incur substantial costs defending claims regardless merit acquisitions undertake could difficult integrate disrupt business dilute stockholders harm operating results may acquire businesses products technologies example may 23 2003 purchased certain assets liabilities commworks division 3com corporation 1000 million cash incurred related transaction related costs 93 million anticipated benefits acquisition may realized past continue evaluate acquisition prospects would complement existing product offerings augment market coverage enhance technological capabilities may otherwise offer growth opportunities acquisitions may result dilutive issuances equity securities use cash resources incurrence debt amortization expenses related intangible assets addition acquisitions involve numerous risks including difficulties assimilation operations technologies products personnel acquired company diversion managements attention business concerns risks entering markets direct limited prior experience potential loss key employees acquired company may unable adequately protect loss misappropriation intellectual property could substantially harm business rely combination patents copyrights trademarks trade secret laws contractual obligations protect technology applied patents united states internationally additional patents may issued pending patent applications issued patents may upheld addition time chosen abandon previously filed applications moreover may face difficulties registering existing trademarks new jurisdictions operate cannot guarantee intellectual property protection measures taken sufficient prevent misappropriation technology trademarks competitors independently develop technologies substantially equivalent superior addition legal systems many foreign countries protect honor intellectual property rights extent legal system united states example china legal system general intellectual property regime particular still development stage may difficult timeconsuming costly us attempt enforce intellectual property rights jurisdictions may subject claims infringe intellectual property rights others could substantially harm business industry compete moving towards aggressive assertion licensing litigation patents intellectual property rights time become aware possibility notified may infringing certain patents intellectual property rights others regardless merit responding claims could time consuming divert managements attention resources cause us incur significant expenses addition although supplier contracts provide indemnification supplier respect losses expenses incurred connection infringement claim contracts provide protection moreover certain sales contracts provide must indemnify customers claims third parties intellectual property rights infringement related products limitations maximum potential future payments guarantees therefore may incur substantial costs related infringement claim may substantially harm results operations financial condition may future become subject litigation defend claimed infringements rights others determine scope validity proprietary rights others future litigation may also necessary enforce protect trade secrets intellectual property rights intellectual property litigation threatened intellectual property litigation could costly adverse determinations settlements could result loss proprietary rights subject us significant liabilities require us seek licenses pay royalties third parties may available commercially reasonable terms andor prevent us manufacturing selling products could cause disruptions operations event successful claim infringement us fail develop noninfringing technology license propriety rights commercially reasonable terms conditions business results operations financial condition could materially adversely impacted multinational operations subject us various economic political regulatory legal risks market sell products globally majority sales made china expansion existing multinational operations entry new markets require significant management attention financial resources multinational operations subject variety risks •the burden complying variety foreign laws regulations •the burden complying united states laws regulations foreign operations including foreign corrupt practices act •difficulty complying continually evolving changing global product communications standards regulations end products component technology •market acceptance new products including longer product acceptance periods new markets enter •reliance local original equipment manufacturers oems thirdparty distributors agents effectively market sell products •unusual contract terms required customers developing markets •changes local governmental control influence customers •changes import export regulations including quotas tariffs licensing restrictions trade barriers •evolving unpredictable nature economic regulatory competitive political environments •reduced protection intellectual property rights countries •longer accounts receivable collection periods •difficulties costs staffing managing multinational operations including limited internal control compliance business markets fully developed subjects us various economic political regulatory legal risks unique developing economies less developed markets present additional risks following •customers may unable pay products timely manner •new unproven markets products telecommunications services products enable •inconsistent infrastructure support •lack large highly trained workforce •difficulty controlling local operations headquarters •variable ethical standards increased potential fraud •unstable political economic environments •a lack secure environment personnel facilities equipment particular factors create potential physical loss inventory operating assets past experienced cases vandalism armed theft equipment installed field disruptions reasons become severe particular market may become necessary us terminate contracts withdraw market suffer associated costs lost revenue subject risks relating currency rate fluctuations exchange controls sales made foreign countries exposed market risk changes foreign exchange rates foreign currencydenominated accounts notes receivable balances currently hedge foreign currencydenominated transactions historically majority sales made china denominated renminbi impact currency fluctuations renminbi thus far insignificant fixed us dollar however future china could choose devalue renminbi versus us dollar renminbius dollar exchange rate could float renminbi could depreciate relative us dollar fluctuations currency exchange rates future may material adverse effect results operations enter transactions may expose us foreign currency rate fluctuation risk historically largest component foreign currency exchange loss resulted purchasing inventory denominated foreign currencies continue purchase inventory foreign currencies may incur additional foreign currency exchange losses causing operating results suffer moreover foreign countries business might impose currency restriction may limit ability subsidiaries joint ventures countries obtain remit foreign currency necessary purchase imported components may limit ability obtain remit foreign currency exchange foreign earnings example china employs currency controls restricting renminbi conversion limiting ability engage currency hedging activities china various foreign exchange controls may also make difficult us repatriate earnings could material adverse effect ability conduct business globally business interruptions could adversely affect business operations vulnerable interruption fire earthquake power loss telecommunications failure external interference information technology systems incidents terrorism events beyond control example hangzhou manufacturing facilitys ability produce sufficient products dependent upon continuous power supply power required source manufacturing operations inconsistent hangzhou facility past subject power shortages affected ability produce ship sufficient products detailed disaster recovery plan occurrence events like disrupt business could harm operating results may suffer losses respect equipment held customer sites could harm business face risk loss relating equipment held customer sites cases equipment held customer sites contract pending final acceptance customer generally hold title risk loss equipment title risk loss typically transferred customer upon delivery equipment however recognize revenue accounts receivable respect sale equipment obtain acceptance customer obtain final acceptance may able collect contract price recover equipment associated costs cases particularly china governmental approval required finalize certain contracts inventory contract may held customer sites hold title risk loss inventory contracts finalized subject losses incurred resulting damage loss inventory contract negotiations fail government china otherwise delays approving contracts may recover receive payment inventory moreover insurance may cover losses incurred inventory customer sites contracts damaged prior contract finalization incur loss relating inventory reasons operating results could harmed named defendant securities litigation various underwriters initial public offering defendants purported shareholder class action complaint alleges undisclosed improper underwriting practices concerning allocation ipo shares violation federal securities laws similar complaints filed concerning ipos 300 companies litigation coordinated united states district court southern district new york initial public offering securities litigation 21 mc 92 although believe valid defenses claims us intend defend litigation vigorously matter resolved necessary us continue expend time financial resources matter moreover adverse judgment litigation could materially harm operations recently enacted proposed changes securities laws regulations likely increase costs sarbanesoxley act 2002 required continue require changes corporate governance securities disclosure compliance practices act also requires sec promulgate new rules variety subjects addition rule proposals already made nasdaq national market revised requirements companies nasdaqlisted expect developments require us devote additional resources operational financial management information systems procedures controls ensure continued compliance current future laws regulations expect developments make difficult expensive us obtain director officer liability insurance may required accept reduced coverage increase level selfinsurance incur substantially higher costs obtain coverage developments could make difficult us attract retain qualified members board directors qualified executive officers presently evaluating monitoring regulatory developments cannot estimate timing magnitude additional costs may incur result risks related conducting business china chinas governmental regulatory reforms may impact ability business china chinese government ministry information industry chinese telecommunication industrys regulating body broad discretion authority aspects telecommunications information technology industry china power permit prohibit sales products since 1978 chinese government state evolution reform reforms resulted expected continue result significant economic social development china many reforms unprecedented experimental may subject change readjustment due variety political economic social factors anticipate basic principles underlying reforms remain unchanged following changes chinas political economic conditions governmental policies could substantial impact business •the promulgation new laws regulations interpretation laws regulations •inconsistent enforcement application telecommunications industrys rules regulations chinese government foreign domestic companies •the introduction measures control inflation stimulate growth •the introduction new guidelines tariffs service rates affect ability competitively price products services •changes rate method taxation •the imposition additional restrictions currency conversion remittances abroad •any actions limit ability develop manufacture import sell products china finance operate business china example year 2000 ministry information industry temporarily halted deployment pas systems handsets pending review personal handyphone system phsbased telecommunications equipment microcellular wireless communications technology ministry information industry later allowed continued deployment phsbased systems pas systems handsets chinas countylevel cities towns villages limited deployments within large mediumsized cities limited areas dense population campuses commercial buildings special development zones future ministry information industry determines prohibit sale deployment pas systems handsets products imposes additional limitations sale business financial condition could suffer addition modifying existing telecommunications regulatory framework chinese government currently preparing draft standard national telecommunications law telecommunications law provide uniform regulatory framework telecommunications industry yet know final nature scope regulation would created telecommunications law passed accordingly cannot predict whether positive negative effect us aspects business chinas changing economic environment may impact ability business china since 1978 chinese government reforming economic system china increase emphasis placed decentralization utilization market forces development chinas economy reforms resulted significant economic growth however economic reform policies measures china may time modified revised chinese government may able benefit effects policies measures taken chinese government regulate economy could also significant negative impact economic conditions china would result negative impact business recently chinas economic environment changing result chinas entry world trade organization wto effective december 2001 entry wto requires china reduce tariffs eliminate nontariff barriers including quotas licenses restrictions 2005 latest cannot predict impact changes chinas economy moreover although chinas entry wto related relaxation trade restrictions may lead increased foreign investment may also lead increased competition chinas markets foreign companies chinas entry wto results increased competition negative impact chinas economy business could suffer addition although china increasingly according foreign companies foreign investment enterprises established china rights privileges chinese domestic companies result admission wto special laws administrative rules regulations governing foreign companies foreign investment enterprises china may still place foreign companies disadvantage relation chinese domestic companies may adversely affect competitive position uncertainties respect chinese legal system may adversely affect us conduct business china primarily whollyowned subsidiaries incorporated china subsidiaries generally subject laws regulations applicable foreign investment china accordingly business might affected chinas developing legal system since 1978 many new laws regulations covering general economic matters promulgated china government policies internal rules promulgated governmental agencies may published time result may operate business violation new rules policies without knowledge existence addition uncertainties regarding interpretation enforcement laws rules policies china chinese legal system based written statutes prior court decisions limited precedential value many laws regulations relatively new chinese legal system still evolving interpretations many laws regulations rules always uniform moreover relative inexperience chinas judiciary many cases creates additional uncertainty outcome litigation interpretation statutes regulations may subject government policies reflecting domestic political changes finally enforcement existing laws contracts based existing law may uncertain sporadic may difficult obtain swift equitable enforcement obtain enforcement judgment court another jurisdiction litigation china may protracted result substantial costs diversion resources management attention trial licenses sell certain network access products china chinas current regulatory structure communications products offer china must meet government industry standards network access license equipment must obtained without license telecommunications equipment allowed connected public telecommunications networks sold china moreover must ensure quality telecommunications equipment obtained network access license stable reliable lower quality performance installed licensed products chinas state councils product quality supervision department concert chinas ministry information industry performs spot checks track supervise quality licensed telecommunications equipment publishes results spot checks obtained probationary network access license mswitch product trial period anticipate official network access license issued trial demonstrates mswitch satisfies applicable government industry standards however cannot certain receive license moreover trial licenses pas systems handsets applied yet received final official network access license pas systems handsets based upon conversations chinas ministry information industry understand pas systems handsets considered still trial period sales pas systems handsets may continue made us trial period license ultimately required fail obtain required licenses could prohibited making sales unlicensed products including pas systems handsets china would substantially harm business financial condition results operations regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways counsel china advised us chinas governmental authorities may interpret apply regulations respect licenses required ability sell product trial period manner inconsistent information received counsel china either conditions could material adverse effect business financial condition results operations china telecom china netcom obtain licenses allowing deliver mobile services ability sell pas mobile systems handsets could impaired china telecom china netcom hold operate fixed line telephone data communications assets china currently licenses necessary offer mobile services however chinas media sources widely reported chinas ministry information industry may grant mobile licenses new china telecom china netcom toward end 2004 furthermore anticipated mobile license granted government used 3g mobile network deployments china telecom china netcom obtain 3g mobile licenses may direct capital expenditures buildout 3g networks capital expenditures buildout pas networks utilize existing products may decline moreover may elect deploy pas systems handsets mobile services may offer future addition possible current pas frequency bands utilized pas networks may reallocated use 3g networks would effect restricting shutting pas networks occur could lose current potential future customers products financial condition results operations could significantly harmed promotional incentive programs offered mobile operators china mobile china unicom may adversely impact competitiveness pricing pas systems related products official tariffs perminute usage rates charged mobile users china generally set ministry information industry national development reform commission usually adhered mobile operators however time certain mobile operators china mobile china unicom offered special promotional pricing incentives customers free incoming calls free mobiletomobile calls continued use incentive programs mobile operators may adversely impact competitiveness pricing pas systems related products rollout new china telecom china netcom incentive programs may continue expanded future cannot certain impact incentive programs may financial condition however possible continuation expansion programs may material adverse effect business results operations tax benefits available subsidiaries located china reduced repealed business could suffer chinese government considering imposition unified corporate income tax would phase time preferential tax treatment foreign investment enterprises company currently entitled certain whether government implement unified tax structure whether company grandfathered new tax structure new tax structure implemented new tax structure may adversely affect financial condition moreover certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises tax benefits reduced repealed due changes tax laws business could suffer risks related stock performance convertible debt securities stock price highly volatile trading price common stock fluctuated significantly since initial public offering march 2000 stock price could subject wide fluctuations future response many events factors including discussed preceding risk factors relating operations well •actual anticipated fluctuations operating results actual anticipated gross profit percentage net sales levels inventory actual anticipated rate growth actual anticipated earnings per share •changes expectations future financial performance changes financial estimates buysell recommendations securities analysts •changes governmental regulations policies china temporary suspension sales pas systems occurred may june 2000 caused stock price drop •our competitors announcement new products services technological innovations •the operating stock price performance comparable companies •news commentary emanating media securities analysts government bodies china relating us industry general market conditions domestic international macroeconomic factors unrelated performance may also affect stock price reasons investors rely recent trends predict future stock prices financial results addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources addition public announcements china telecom china netcom exert significant influence many major customers china may contribute volatility price stock 2002 china telecom completed initial public offering caused entity issue press releases frequently prior years price stock may react announcements recently reported china netcom restructuring operations initial public offering frequent public announcements china netcom relating resulting initial public offering could cause price stock become even volatile softbank corp related entities including softbank america inc significant influence management affairs could exercise best interests softbank corp related entities including softbank america inc collectively softbank beneficially owned approximately 141 outstanding stock december 31 2003 result softbank ability influence matters submitted stockholders approval well management affairs matters could require stockholder approval include •election removal directors •merger consolidation company •sale substantially assets concentration ownership may delay prevent change control discourage potential acquirer making tender offer otherwise attempting obtain control company could decrease market price common stock delaware law charter documents contain provisions could discourage prevent potential takeover even transaction would benefit stockholders companies may seek acquire merge us acquisition merger company could result benefits stockholders including increase value common stock provisions certificate incorporation bylaws well provisions delaware law may discourage delay prevent merger acquisition stockholder may consider favorable provisions include •authorizing board directors issue additional preferred stock •prohibiting cumulative voting election directors •limiting persons may call special meetings stockholders •prohibiting stockholder action written consent •creating classified board directors pursuant directors elected staggered three year terms •establishing advance notice requirements nominations election board directors proposing matters acted stockholders stockholder meetings holders convertible subordinated notes due 2008 face variety risks related notes holders convertible subordinated notes due 2008 notes face variety risks respect notes including following •we may limited ability purchase notes event change control either cash stock could result defaulting notes time change control purchases stock would subject market risk •an event default senior debt including one subsidiaries could restrict ability purchase pay amounts due notes paying senior debt full may sufficient assets remaining pay amounts due notes •there listed trading market notes could negative impact market price notes •we significantly increased leverage result sale notes could adverse impact ability obtain additional financing working capital •hedging transactions related notes common stock transactions well changes interest rates creditworthiness may affect value notes common stock •the notes might rated may receive lower rating anticipated investors ultimately negative affect price notes common stock item 7aitem 7 management’s discussion analysis financial condition results operations forwardlooking statements annual report form 10k contains forwardlooking statements within meaning federal securities laws statements based information currently available management intend forwardlooking statements covered safe harbor provisions private securities litigation reform act 1995 including statement purposes complying provisions forwardlooking statements include without limitation concerning following expectations nature possible trends expectations regarding continued growth business operations expectation fluctuations overall gross profit gross margin product mix quarter results customer base selling prices plans expanding direct sales organization selling marketing campaigns activities expectation may use cash debt securities acquire invest complementary businesses technologies product offerings expectation increases selling marketing research development general administrative expenses expectations regarding future growth business operations expectation continue invest significantly research development expectations regarding status products development expectations regarding future investments expectations regarding future levels cash equivalents well expectation existing cash equivalents sufficient finance operations foreseeable future expectations regarding licensing requirements ability receive licenses china pas system products expectations regarding development 3g network china expectations regarding impact reorganization china telecommunication companies expectations regarding growth china’s telecom markets expectation business continue significantly influenced political economic legal environment china well expectations nature political economic legal reform china international markets expectations regarding market share percentages products expectations regarding future allocation net sales product group expectations regarding efficiencies hope achieve supply chain capability expectations regarding expansion new markets around world additional forwardlooking statements may identified words “anticipate” “expect” “believe” “intend” “will” similar expressions relate us management investors cautioned forwardlooking statements inherently uncertain statements subject risks uncertainties may cause actual results events differ materially detailed discussion risks uncertainties see “factors affecting future operating results” section form 10k guarantee future results undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k restatement consolidated financial statements year ended december 31 2003 filed amendment 1 annual report form 10k year ended december 31 2003 reflect restatement consolidated financial statements year ended december 31 2003 quarters ended march 31 2003 june 30 2003 september 30 2003 certain corresponding changes described part financial closing process year ended december 31 2004 identified certain errors resulting restatement decreased provision income taxes increased net income 207 million year ended december 31 2003 addition result correction tax provision retained earnings increased 207 million additional paidin capital increased 09 million income taxes payable decreased 25 million longterm assets increased 216 million prepaids increased 28 million current assets reduced 53 million net effect cash provided operating activities result error evaluation errors related income tax provision determined additional reclassification reported 2003 results required specifically cost sales income increased 35 million year ended december 31 2003 properly classify certain incentive payments received exports valueadded taxes china addition errors 2003 tax provision correctly identify related party deemed variable interest entity considered primary beneficiary accordance fasb interpretation 46 “fin 46” corrected 2003 financial statements reflect consolidation variable interest entity mdc holding limited “mdc holding” affiliated entities mdc holding affiliated entities referred collectively “mdc” december 31 2003 consolidation resulted 55 million increase total assets 07 million increase total liabilities effect net income result consolidation furthermore impairment charge 74 million net taxes 13 million recorded reflect impairment mdc equipment subject revenue sharing arrangement due uncertainties surrounding customer’s subscriber income ability pay arrangement determined impairment charge recorded 2003 conditions identified accordingly impairment charge 74 million net tax recorded decreased total assets equity 74 million december 31 2003 addition identified following revisions classification preparation restated consolidated financial statements 1 cost sales related party revenue transactions presented separately cost sales nonrelated party revenue transactions years presented 2 certain longterm assets increased intangible assets decreased 17 million december 31 2003 3 changes restricted cash incorrectly categorized part operating cash flows instead investing cash flows accordance statement financial accounting standards 95 “statement cash flows” “sfas 95” accordingly reflected change categorization consolidated statement cash flows three years period ended december 31 2003 change 2003 2002 increase cash flows operating activities decrease cash flows investing activities 32 million 213 million respectively change 2001 4 related party 31 owned individual related member board directors associated transactions identified see note 22 consolidated financial statements executive summary design manufacture sell telecommunications equipment products provide services associated installation operation maintenance products deployed installed primarily telecommunications wireless wireline service providers provide extensive range products transportation voice data video traffic service providers around world business conducted globally china japan india central latin american region north america european middle eastern african region southeastern northern asia objective leading global provider internet protocol “ip” networking products services differentiate products designed developed commercialized reduce network complexity integrate high performance capabilities allow simple transition next generation networks results deployments maintenance upgrades economical efficient believe allow operators earn high return investment technologies products fall three major categories · wireless infrastructure technologies products enable end users subscribers send receive voice data communication either fixed mobile environment using wireless devices · broadband infrastructure technologies products enable end users access highspeed cost effective fixed data voice media communication · handsets customer premise equipment consumer devices allow customers access wireless broadband networks products within categories include multiple hardware software subsystems offered various combinations suit individual subscriber needs system technologies products based widely adopted global communications standards designed allow service providers quickly costefficiently integrate systems existing networks deploy systems new broadband ip wireless network rollouts system technologies also designed allow timely costefficient transition future nextgeneration network technologies enabling service provider customers protect initial infrastructure investments 2004 approximately 27 billion revenue 38 increase 2003 cost sales 21 billion increased 57 compared 2003 growth revenue driven globalization efforts gaining sales revenue outside china well 2774 million incremental revenue acquisition acc november 2004 believe china remains one fastest growing telecommunications markets world china continued growth fixedline mobile telephone internet subscribership approximately 6472 million subscribers 2004 6 increase 2003 according report published january 2005 china’s mii believe subscriber growth continued support demand pas services handsets use subscriber growth statistics gauge future inventory purchasing requirements well forecast anticipated revenue growth historically substantially sales service providers china derived 79 sales year ended december 31 2004 china comparison 86 2003 2004 earned 13 sales north america north america replaced japan second largest market 2004 result global expansion efforts acc acquisition continued expanding sales efforts include communications markets central latin american region european middle eastern african region north american region southeast north asia region intend penetrate markets direct sales offices located key market regions licensing technology local manufacturers import taxation favorable developing local sales agency distributor relationships within specific market regions establishing sales relationships original equipment manufacturers sales division continued establish regional offices local direct sales representative offices provide support expanding global sales operations following table summarizes net sales geographic region number competitors communications access switching systems handsets china grew 2004 line china’s growing telecommunications market growth led competitive pricing pressure causing average selling prices decrease 10 20 2004 relative 2003 levels continued develop products advanced features enhance features existing products 2004 believe enable us offer customers advanced product higher average selling price future periods addition intend continue work reduce cost manufacturing products streamlining design engineering functions effort penetrate new markets around world support growing business expand product offerings continued invest resources selling administrative research development groups 2004 costs expected increase near future proceed expansion markets operating costs percentage revenue 20 2004 compared 18 2003 2004 negative net cash flow operating activities mainly due increases accounts receivable inventory balances accounts receivable inventory balances increased december 31 2004 compared 2003 attributed global expansion efforts including sales generated personal communications division “pcd” new division formed connection acc acquisition key acquisitions transactions since incorporation focused resources developing products global communications market particular made several key strategic acquisitions acquire additional resources development recent years acquisitions accounted purchases results operations acquired companies included consolidated financial statements closing dates acquisitions often result onetime charge operating expenses related products development yet reached technological feasibility inprocess research development “iprd” project classified iprd significant risks associated completing development acquired technology including technological commercial risks assessing iprd projects consider key project characteristics well future prospects rate technology changes telecommunications equipment industry product life cycles product’s development stage connection acquisitions often issue stockbased incentives vest according terms established acquisition agreement historically stockbased incentives vested based upon achievement product development milestones meeting revenue targets duration employment giga telecom inc october 29 2004 utstarcom cdma technologies korea limited liability company organized laws korea wholly owned subsidiary “utstarcom korea” entered asset purchase agreement giga telecom inc “giga” korean corporation develops manufactures wireless handsets pursuant asset purchase agreement related ancillary agreements utstarcom korea pay 186 million certain assets relating research development cdma wireless products 130 million paid cash closing ii 16 million pursuant separate arrangement respect certain services rendered giga relating design wireless handsets utstarcom korea applied purchase price iii 40 million paid three separate installments tied certain product design production milestones completed acquisition january 4 2005 closing 130 million cash paid additional 20 million paid escrow account held us period six months audiovox communications corporation november 1 2004 completed acquisition acc wireless handset division audiovox corporation acquired select assets liabilities including inventories prepaids payables accrued expenses right hire approximately 250 employees 1651 million cash acquired acc’s sales service support infrastructure cdma handset brand access supplychain channels product marketing expertise key relationships cdma operators north south america consummating acquisition obtain access acc’s distribution channel cdma handset market particularly north america believe distribution channel strengthens position handset market providing additional volume benefit economies scale manufacturing sourcing development also plan improve gross margins sale acc’s cdma handsets supplying products manufacture acc based part independent valuation allocation purchase price intangible assets comprised customerdealer relationships 244 million supplier relationships 53 million noncompete agreement 108 million backlog 32 million trade name 40 million goodwill 741 million amount allocated iprd telos technology inc may 19 2004 completed acquisition substantially assets certain liabilities telos technology inc subsidiaries “telos” telos provider mobile switching products services voice data communication networks developing rural enterprise emerging wireless markets total consideration acquisition funded cash hand approximately 300 million paid 290 million cash addition 10 million acquisitionrelated transaction costs within one year acquisition date additional payments totaling maximum 190 million may become payable based upon revenue recognized sale telos products event revenue milestones met original purchase price adjusted amount contingent payment accordance statement financial accounting standards 141 “sfas 141” “business combinations” december 31 2004 additional payments accruals required existing technology acquired included entire telos product family cdma softswitch technology products supporting servers operations maintenance centers cdma technology common platform second thirdgeneration wireless data services applications built assigning unique codes communication differentiate others spectrum cdma technology allows many users occupy time frequency allocations given band space amount purchase price allocated existing technology 159 million telos product line integrated suite cdma products strengthening existing cdma product portfolio addition developed product technology acquired fixed assets iprd assembled workforce approximately 60 employees customer relationships recorded goodwill amount purchase price allocated iprd 14 million charged results operations alternative future uses existed acquisition date assessing telos iprd projects considered key product characteristics including product’s development stage acquisition date product’s life cycle product’s future prospects also considered rate technology changes telecommunications equipment industry’s competitive environment economic outlook local global markets recorded 64 million goodwill related acquisition date telos two projects development qualified iprd sonata se product family icell product objective projects enhance functionality products designed comply cdma2000 technology standard specifically objective sonata se product family provide additional features operation maintenance center products objective icell product enhance icell base station features projects development enhancements existing products affect functionality existing products december 31 2004 one project completed project estimated completion date june 2005 estimated remaining costs complete 06 million hyundai syscomm inc april 27 2004 completed acquisition assets substantially intellectual property certain employees certain contracts related hsi’s cdma infrastructure business markets outside korea subject attainment certain milestones transfer certain knowhow total consideration transaction approximately 123 million excluding transaction costs 18 million approximately 73 million cash paid closing date additional 30 million cash payable one year closing date remaining purchase price comprised 20 million paid us upon completion hsi’s training manufacturing employees china terms training services agreement included purchase price 20 million payable upon completion certain revenue milestones event revenue milestones met original purchase price adjusted amount contingent payment accordance sfas 141 conjunction transaction loaned hsi 32 million effective interest rate 12 per annum used hsi satisfy outstanding debt obligations principal amount loan due april 2005 may offset hsi’s payment obligations outstanding 30 million purchase price liabilities terms transaction hsi acquired existing technologies entered noncompete licensing agreements existing technologies acquired base transceiver station “bts” base station controller “bsc” product lines bts antenna radio equipment enables wireless devices communicate landbased transmission network given range bsc performs radio signal management functions bts managing functions frequency assignment handoff part asset purchase agreement entered training services agreement hsi whereby hsi employees provide technical training manufacturing staff china ninthmonth period subsequent acquisition technology technological knowhow strengthen existing cdma product portfolio development future cdma technology addition acquiring existing technology entered noncompete licensing agreements hsi noncompete agreement prohibits hsi competing us countries except korea four years valuation date licensing agreement requires hsi pay us 1 revenue royalty usage intellectual property acquired terms acquisition fifteen years subsequent valuation date iprd projects acquired initially recorded goodwill 68 million connection acquisition subsequently increased amount goodwill 02 million upon completion purchase price allocation encountered difficulties integrating hsi operations acquisition fourth quarter 2004 decided winddown legacy operations transfer employees tangible assets support handset engineering operations korea first quarter 2005 decision abandon operations occurred within nine months acquisition hsi operations integrated company therefore accordance sfas 142 written entire goodwill 70 million associated acquisition also written remaining values intangible assets associated acquisition including 31 million purchased technologies 06 million related noncompete agreements 08 million related license agreement hsi december 31 2004 believed would utilize hsi’s tangible assets support new handset design center assets utilized support handset design center net book value assets written expect complete evaluation decision second quarter 2005 commworks may 23 2003 completed acquisition 3com corporation delaware corporation “3com” selected assets liabilities 3com’s commworks division “commworks” funded consideration acquisition cash hand paid 1000 million cash incurred transaction related costs 93 million selected assets acquired included commwork’s portfolio carrierfocused voice data networking products customer support professional services addition acquired licensed 3com intellectual property used commworks develops deploys carrierclass ipbased multiservice access servicecreation platforms telecommunications service providers based independent valuation 13 million purchase price allocated iprd charged results operations alternative future uses existed acquisition date acquisition commworks two projects development qualified iprd slap high density voice “hdv” 20 slap iprd project wireless division commworks interface connects products radio switch manufacturers’ products china order connect cellular network internet hdv 20 iprd project broadband infrastructure product line commworks hdv 20 utilizes software technology increase data capacity voip solutions slap hdv 20 projects completed commercialized 2004 rollingstreams june 30 2003 completed acquisition rollingstreams systems ltd “rollingstreams” developmentstage company pursuant share exchange agreement rollingstreams designs streaming endtoend tvoip products services telecommunications operators broadband service providers investment rollingstreams 04 million prior acquisition purchase consideration outstanding shares rollingstreams already held us prior acquisition 301074 shares common stock addition assumed outstanding rollingstreams options became options purchase aggregate 12742 shares common stock valued 05 million 301074 shares 164115 shares valued 58 million issued closing 28696 held escrow undisclosed liabilities contingencies incurred rollingstreams prior closing breach share exchange agreement 28696 shares held escrow released issued 2004 136959 301074 shares payable form earnout period expiring 18 months closing subject achievement certain revenue milestones earnout period shares issued pursuant earnout march 31 2005 amount purchase price allocated iprd 62 million based independent valuation amount charged results operations alternative future uses existed acquisition date acquisition rollingstreams one project development qualified iprd mediaswitch endtoend solution designed telecom operators broadband service providers deliver broadcast quality tv ondemand entertainment services internet protocol networks mediaswitch considered iprd project significant risks associated development technology risks include technological commercial risks technological risks stem fact technology 70 complete december 31 2003 december 31 2004 project completed cost anticipated shanghai yi yun october 16 2002 acquired assets intellectual property shanghai yi yun telecom technology co ltd “shanghai yi yun” provider synchronous digital hierarchy equipment consideration 02 million cash 342854 shares restricted stock valued 60 million connection acquisition shanghai yi yun stockholders received 342854 shares restricted stock executed indemnity escrow agreement favor shares restricted stock placed escrow addition issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one subsidiaries shares restricted stock vest five years accelerated vesting upon achievement specified milestones treated 514290 shares restricted stock deferred compensation equity transactions january 14 2004 sold 121 million shares common stock 3925 per share privately negotiated transaction institution net proceeds approximately 4746 million net proceeds intended fund strategic general corporate activities including limited acquisitions investments working capital expenditures first second quarters 2004 used portion capital raised repurchase total 36 million shares common stock average price 3025 per share total cost 1076 million including transaction fees april 5 2003 repurchased 80 million shares common stock beneficially owned softbank america inc purchase price 17385 per share total cost repurchase 1396 million including transaction fees connection repurchase transaction softbank america inc entered agreement us offer sell otherwise dispose common stock period one year subject number exceptions debt issuance march 12 2003 completed offering 4025 million convertible subordinated notes due march 1 2008 qualified institutional buyers pursuant rule 144a securities act 1933 notes bear interest rate 78 per annum convertible common stock conversion price 2379 per share subordinated present future senior debt holders notes may convert notes price common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible approximately 420345 shares common stock concurrent issuance convertible notes entered convertible bond hedge call option transaction respect common stock bond hedge call option transactions may settled option either cash net shares expire march 1 2008 convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders’ equity accordance guidance emerging issues task force issue 0019 “accounting derivative financial instruments indexed potentially settled company’s stock” results operations net sales consist product service sales within three broad telecommunications product lines wireless infrastructure broadband infrastructure handsets customer premise equipment wireless infrastructure primarily comprised pas cdma products broadband infrastructure primarily comprised an2000 ian8000 ipdslam gepon netring™ wireline products handsets customer premise equipment products include pas handsets cpe cdma handsets introduced fourth quarter 2004 many product sales provide installation services additionally provide maintenance services products years ended december 31 2004 2003 2002 total services sales accounted less 10 net sales approximately 79 86 84 net sales years ended december 31 2004 2003 2002 respectively china accordingly business financial condition results operations likely influenced political economic legal environment china general state china’s economy foreseeable future example experienced lower demand products china fourth quarter 2004 resulting slowdown china’s economy well maturation pas market results may adversely affected among things changes political economic competitive social conditions china including changes governmental policies respect laws regulations changes telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation extend credit customers china without requiring collateral monitor exposure credit losses maintain allowances doubtful accounts business activity china many countries asia decline considerably first quarter year observance lunar new year result sales first quarter fiscal year typically lower sales fourth quarter preceding year expect trend continue cost sales consists primarily materials costs fees agents costs associated manufacturing assembly testing products costs associated installation customer training overhead warranty costs cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers manufacture assemble handsets gross profit affected product mix average selling prices material costs gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate period result shifts product mix anticipated decreases average selling prices ability reduce cost sales selling general administrative expenses include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs large percentage costs fixed difficult quickly reduce periods reduced sales intend pursue aggressive selling marketing campaigns expand direct sales organization result sales marketing expenses increase future periods also expect support continued growth general administrative expenses continue increase foreseeable future research development expenses consist primarily salaries related costs employees engaged research design development activities cost parts prototypes equipment depreciation third party development expenses large percentage costs fixed difficult quickly reduce periods lower sales believe continued investment research development critical longterm success accordingly expect research development expenses increase future periods income tax expense based upon blended effective tax rate based upon expectation amount income earned tax jurisdiction primary drivers income tax expense include total amount geographic source income earned use credits tax incentives minimize income tax expense income tax expense percentage income taxes increase relatively income earned higher tax jurisdictions net sales following table summarizes net sales product line fiscal 2004 vs 2003 38 increase sales 20 billion 2003 27 billion 2004 primarily attributable increased demand products services results geographic expansion markets new customer wins prior years continued contribute increased demand products services addition recent acquisitions also attributed growth sales example pcd division contributed 2774 million sales since acquisition november 1 2004 net sales growth excluding pcd primarily due increase subscribers requiring telecommunication providers expand telecommunication infrastructures wireless infrastructure revenues generally affected timing customer acceptance 2004 percentage total sales wireless product line increased 37 52 generally result international customers undertook number wireless infrastructure expansion projects including broadband fibertothehome projects japan experienced increase wireless infrastructure revenue 2004 2003 handset revenue remained relatively flat result combination factors one handset revenue china decreased approximately 2259 million due primarily lower average selling prices resulting increased competition 10 20 depending products units shipment remained level last year secondly decline china handset revenue offset 2774 million handset revenue recognized fourth quarter 2004 pcd believe 2005 maintain approximately 55 60 percent market share china pas wireless infrastructure 50 55 percent market share pas handsets smaller competitive handset vendors exit market additionally expect addition pcd total handset revenue represent 50 60 net sales 2005 sales related parties decreased 94 2003 54 2004 total net sales see “related parties” discussion chinese carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier group china customers together province treat province one customer since level purchasing decisions made december 31 2004 2003 31 customers china 2004 guangdong jiangsu provinces accounted 12 10 net sales respectively 2003 hei long jiang province accounted 11 net sales case pas systems china netcom contracts negotiated entered provincial operators company however thecentral headquarters china telecom recently began exerting influence purchasing decisionmaking process negotiating contractual terms purchase price payment terms acceptance clauses central level provincial operator negotiates contract based guidelines provided headquarters final contracts entered provincial operator company however trend centralized decisionmaking expands unified purchasing resulting negotiation execution contracts central headquarter level may concentration customers could significant impact business three months ended december 31 2004 2003 fourth quarter 2004 net sales increased 103 million 16 fourth quarter 2003 increase driven pcd division contributed 2774 million sales fourth quarter 2004 excluding impact pcd acquisition sales declined fourth quarter 2004 27 compared prior year revenue wireless products experienced decline fourth quarter 2004 primarily due delay revenue recognition pas infrastructure products due extended period product acceptance due certain new contract terms addition revenue growth continued impacted negatively maturity pas market infrastructure percentage revenue generated outside china exceeded 53 total sales fourth quarter 2004 versus 13 total sales fourth quarter 2003 excluding pcd 37 increase sales 83 million fourth quarter 2003 114 million fourth quarter 2004 primarily due telecommunication providers expanding infrastructure requirements addition increase broadband product sales due introduction gepon netring™ products fiscal 2003 vs 2002 100 increase sales 9818 million 2002 19652 million 2003 primarily attributable increased demand products services continued strength sales china well increase global sales net sales growth due increase subscribers required telecommunication providers expand telecommunication infrastructures result sales customers expanding existing networks 2003 approximately 30 sales 2003 attributable new customers compared 54 sales new customers 2002 addition increasing amount infrastructure sales increase subscribers also led increase customer demand handsets sales related parties decreased 13 2002 9 2003 total net sales see “related parties” discussion 2003 china provinciallevel telecommunications service entities continued consolidate telecommunications purchasing decisions province result consolidation trend grouped china customers together province treat province one customer december 31 2003 2002 approximately 31 customers giving effect consolidation 2003 hei long jiang province accounted 11 net sales 2002 sales zhejiang province accounted 18 sales sbbc accounted 13 net sales gross profit following table summarizes gross profit fiscal 2004 vs gross profit varies across different product lines affected product mix average selling prices cost materials gross profit percentage declined approximately 10 due several factors international segment experienced largest drop gross profit declining 58 2003 34 2004 decrease driven decline broadband product experienced shift product mix traditional dslam product newer optical broadband products broadband products experienced lower initial margins upon product introduction addition gross profit percentage recognized handset sales made pcd business approximately 4 significantly lower realized handset sales related pas systems pcd acquired november 2004 contributed 119 million gross profit lower pcd gross margin resulted decrease consolidated gross margin 21 china segment also experienced decline gross margin percentage declining 27 23 primarily attributable handset products experienced increased competitive market pricing pressure expect continued competitive market pricing pressures products line current trends industry addition gross profit negatively impacted 39 million increase provision inventory reserves three months ended december 31 2004 2003 gross profit three months ended december 31 2004 1122 million 15 sales compared 1881 million 29 significant factor related decline inclusion two months pcd sales approximately 4 gross profit lower pcd gross profit percentage decreased consolidated gross profit 6 three months ended december 31 2004 majority remaining decline gross profit related international segment fourth quarter 2004 international segment sold newer optical broadband products lower margin dslam product addition fourth quarter gross profit negatively impacted provision inventory warranty reserves 344 million compared 126 million fourth quarter 2003 fiscal 2003 vs decrease gross profit percentage net sales 2003 2002 attributable increased competitive market pricing pressures lower margins pas systems well higher volume sales lower margin handset products telecommunications market experienced continued pricing pressures 2003 gross profit decreased 2003 also due increased cost sales foreign exchange losses resulting purchasing significant amounts inventory denominated japanese yen operating expenses following table summarizes operating expenses selling general administrative fiscal 2004 vs selling general administrative expenses increased 1274 million 2 percentage net sales compared 2003 increase 2003 2004 primarily due hiring additional personnel support increased business activities china globally selling general administrative headcount increased approximately 49 average 2033 employees 2003 average 3038 employees 2004 additionally professional services fees increased approximately 317 million 2004 2003 due expansion overall global activities also driven part expenses approximately 133 million related systems implementations sarbanesoxley compliance supply chain management consulting fees 2004 allowance doubtful accounts increased 312 million december 31 2003 512 million december 31 2004 due primarily increased size receivable balances china net increase allowance doubtful accounts partially offset refinement estimation methodology assumptions fourth quarter 2004 revision allowance doubtful accounts assumptions reflect changing 2004 collection experience analysis collectibility trends within china accounts receivable balances throughout 2004 experienced slower collections cycles slowdown attributed variety reasons principally changes customer’s business practices surrounding payment lesser degree maturation telecommunications sector however believe lengthening collections cycle coincide reduction overall recoverability associated receivables lengthening collection cycle caused us reevaluate provisioning methodology change estimation resulted 101 million lower provision doubtful accounts would provided previous assumptions finally incurred asset impairment charge approximately 115 million relating goodwill intangible assets impairment hsi acquisition fiscal 2003 vs increase selling general administrative expenses due expansion overall business activities china globally support expanding global business hired approximately 1150 additional selling general administrative employees 2003 also contributed increased selling general administrative expenses decrease selling general administrative expenses percentage net sales primarily due economies scale associated significant increase net sales research development fiscal 2004 vs research development expense remained 8 total net sales 2004 compared 2003 research development expenses increased 638 million primarily due hiring additional technical personnel support product enhancements new product development research development headcount increased approximately 52 average 1809 employees 2003 average 2757 employees 2004 significant majority increase research development expenses 2003 2004 attributable higher payroll payrollrelated costs resulting continued expansion research development teams china full year salaries commworks personnel compared seven month’s salaries period prior year approximately 100 employees hired conjunction acquisitions telos hsi 2004 fiscal 2003 vs increase absolute dollars research development expenses primarily due hiring approximately 950 additional technical personnel 2003 support increased business levels decrease research development expenses percentage net sales due majority new personnel hired china labor costs less expensive united states well increased economies scale associated increased business levels inprocess research development expenses fiscal 2004 vs iprd charge 14 million 2004 resulted acquisition telos based part independent valuation please see “acquisitions key transactions” details iprd expenses incurred 2004 fiscal 2003 vs iprd charge 2003 resulted acquisition commworks three smaller acquisitions rollingstreams xebeo shanghai yi yun telecom technology co ltd accounted 13 million 62 million 19 million 13 million respectively based independent valuations charge 2002 arose acquisition issanni communications inc april 19 2002 based independent valuation amortization intangible assets fiscal 2004 vs amortization intangible assets increased 72 million 2004 primarily due addition 686 million intangible assets recorded upon acquisitions selected assets acc telos 2004 estimated amortization expenses next five years beginning year ended december 31 2005 231 million 189 million 160 million 127 million 69 million respectively fiscal 2003 vs increase amortization intangible assets primarily due additional 449 million intangibles recorded upon acquisition commworks may 2003 estimated useful lives purchased intangibles range one ten years income expense interest income expense net fiscal 2004 vs interest income 62 million 2004 compared interest income 32 million 2003 interest income increased due higher average cash balances 2004 compared 2003 primarily due cash generated financing activities interest expense 69 million 2004 compared 47 million 2003 increase 22 million interest expense part attributable interest associated convertible debt issued march 2003 accrues rate approximately 14 million per quarter addition 2004 incurred interest expense relating shortterm borrowings china increases interest expense offset increase capitalized interest approximately 08 million relating construction new manufacturing facility hangzhou china fiscal 2003 vs interest income 32 million 2003 compared interest income 55 million 2002 interest income decreased due lower average cash shortterm investment balances 3192 million 2003 compared 3725 million 2002 well due reduction interest rates deposits interest expense 47 million 2003 compared 13 million 2002 increase 34 million interest expense primarily attributable interest associated convertible debt issued march 2003 capitalized 06 million interest 2003 income expense net fiscal 2004 vs net income 154 million 2004 compared 49 million 2003 net income 2004 primarily consisted 103 million financial subsidies received local chinese government first two quarters 2004 expect receive additional financial subsidies payments near future subsidies encourage investment local research development manufacturing activities net income also included japanese consumption tax refunds approximately 53 million net investment gains dividends approximately 09 million offset foreign exchange losses approximately 07 million fiscal 2003 vs net income 49 million 2003 compared net expense 99 million 2002 net income 2003 primarily consisted reinvestment incentive payment received china 39 million incentives payment exports value added taxes china 61 million government incentives related operations japan 62 million offset foreign exchange losses approximately 87 million expenses attributable selling transferring notes receivable 23 million equity net loss affiliated companies fiscal 2004 vs consolidated equity net loss affiliated companies 13 million 2004 compared 53 million 2003 equity loss 2004 primarily consisted share losses relating joint venture matsushita communications industrial co ltd matsushita electric industrial co ltd jointly develop manufacture sell telecommunications products 49 ownership interest joint venture equity losses fiscal 2003 related losses joint venture fiscal 2003 vs 2002 consolidated equity net loss affiliated companies 53 million 2003 41 million 2002 equity loss 2003 primarily consisted share losses relating joint venture matsushita communications industrial co ltd matsushita electric industrial co ltd equity loss 2002 related losses relating interests investment funds share losses generated guts prior acquisition remaining 49 ownership interest entity income tax benefit expense fiscal 2004 vs recorded income tax benefit 98 million 2004 expense 454 million 2003 negative 15 effective income tax rate 2004 three principal reasons negative income tax rate 2004 first reason relates mix income loss income tax jurisdictions united states 35 tax jurisdiction incurred loss 197 million taxes therefore recorded tax benefit approximately 69 million related 2004 domestic losses international jurisdictions recognized approximately 830 million income 2004 however net statutory tax rate international locations principally china substantially lower 35 us statutory rate secondly company experienced significant tax benefit resulting increase tax rate applied temporary differences within china companies 2003 company recorded deferred tax assets china jurisdiction 15 rate based upon location within “high tech zone” moved new facility china fourth quarter 2004 longer qualified lower rate consequently rate applied deferred tax assets liabilities increased 24 resulting benefit higher rate applied deferred tax assets 196 million currently reapplying “high tech zone” certification however assurance receive certification receive approval 15 tax rate reinstated tax benefit would reversed third reason income tax benefit utilization tax credits primarily within united states resulted reduction effective income tax rate approximately 9 fiscal 2003 vs 2002 income tax expense 454 million 2003 273 million 2002 primary reason increase income tax expense income increased 91 2003 2002 effective tax rate 17 2003 compared 20 2002 minority interest losses earnings consolidated subsidiaries fiscal 2004 vs minority interest losses consolidated subsidiaries 03 million 2004 10 million 2003 minority interest losses consolidated subsidiaries represents minority interest losses mdc holding limited “mdc holding” affiliated entities mdc holding affiliated entities referred collectively “mdc” variable interest entity consolidated accordance financial accounting standards board “fasb” interpretation 46 net 10 share earnings chongqing manufacturing joint venture utstarcom co ltd “cuts” attributable joint venture partner fiscal 2003 vs minority interest losses earnings consolidated subsidiaries 10 million 2003 12 million 2002 change due primarily minority interest losses 2003 mdc variable interest entity included consolidated financials fourth quarter 2003 acquisition remaining 12 ownership interest zhejiang manufacturing joint venture utstarcom telecom co ltd “huts” 2002 minority interest losses consolidated subsidiaries 2003 represented minority interest losses mdc net 10 share earnings cuts attributable joint venture partner minority interest earnings consolidated subsidiaries 2002 represented share earnings huts attributable joint venture partner prior acquisition remaining 12 ownership interest huts may 2002 huts whollyowned subsidiary related parties softbank recognized revenue 1437 million 1844 million 1230 million years ended december 31 2004 2003 2002 respectively respect sales telecommunications equipment softbank bb corporation “sbbc” affiliate softbank corp softbank america inc significant stockholder company sbbc offers asynchronous digital subscriber line “adsl” coverage throughout japan marketed name “yahoo bb” addition support sbbc’s new fibertothehome service sales carrier class gigabit ethernet passive optical network “gepon” product well multiservice optical transport product “netring™” revenue recognized gepon netring™ products twelve months ended december 31 2004 934 million gepon netring contracts obtained form auction included accounts receivable december 31 2004 2003 868 million 439 million respectively related contracts 2000 invested 100 million softbank china investment fund established softbank corp focused investments internet companies china investment permits us participate anticipated growth internetrelated businesses china investment constitutes 10 funding softbank china softbank corp contributing remaining 90 fund separate management team none employees employed fund many fund’s investments privately held companies many still startup development stages investments inherently risky market technologies products companies development typically early stages may never materialize account investment cost method recorded insignificant losses 2004 losses 02 million 28 million due otherthantemporary decline carrying value investment 2003 2002 respectively balance investment 53 million december 31 2004 first quarter fiscal 2002 invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy proceedings total fund offering expected approximately 1500 million 2260 million investor contributing minimum 08 million fund separate management team none employees employed fund account investment equity method accounting recorded immaterial equity losses years ended december 31 2004 2003 balance investment 18 million december 31 2004 august 29 2002 completed repurchase 60 million shares common stock 729 million softbank america inc april 5 2003 repurchased 80 million shares common stock beneficially owned softbank america inc purchase price 17385 per share total cost repurchase 1396 million including transaction fees connection repurchase transaction softbank america inc entered agreement us offer sell otherwise dispose common stock period one year subject number exceptions december 31 2004 2003 softbank america inc beneficially owned approximately 128 141 respectively outstanding stock july 17 2003 entered mezzanine loan agreement bb modem rental plc “bb modem” affiliate softbank corp terms agreement loaned bb modem 101 million purpose investing portfolio adsl modems associated modem rental agreements softbank bb corp formerly bb technologies affiliate softbank corp softbank bb corp continue service modems modem rental agreements loan subordinated certain senior lenders bb modem repayments payable us 42month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modem’s modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loans assess loan impairment whenever events changes circumstances indicate carrying amount may recoverable periodically review underlying quality asset pool securing loan assess whether impairment incurred needs recorded 13 million 05 million interest income respect loan 2004 2003 respectively loan receivable december 31 2004 2003 approximately 118 million 112 million respectively august 2004 entered several agreements japan telecom co ltd “jt” wholly owned subsidiary softbank corp related sale telecommunication equipment promotional services nature agreements contemplate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt determined service activities revenue recorded net expected promotional spending provided activities past cannot estimate fair value services determined guidance sab 104 revenue related agreements deferred included customer advance abovementioned promotional activities complete delivered majority equipment third fourth quarters 2004 promotional services discussed involve contracting third party promotional vendors turn facilitate marketing subscriber recruitment jt fibertothehome program fourth quarter 2004 determined would end involvement jt promotional program completion contract discussed accordingly late fourth quarter 2004 end first quarter 2005 either cancelled assigned another party third party contracts promotional vendors related jt contract expect satisfy equipment promotional obligations end first quarter 2005 terms agreements specify jt remit 50 percent contract value cash us within one month execution contract august 20 2004 remaining 50 percent due shortly delivery equipment december 31 2004 approximately 73 total expected cash received cash received jt advance revenue recognition accounted customer advance spend cash promotional activities spending accounted reduction customer advance december 31 2004 2175 million included customer advance related agreements also entered agreement third quarter 2004 jt supply chassis equipment approximate value 75 million although equipment shipped customer third quarter considered linked ian8000 sale noted revenue contract deferred completion abovementioned promotional activities cellon september 2001 invested 20 million cellon international holdings corporation “cellon” cellon designs wireless terminals related technology handset manufacturers private distributors invested additional 30 million april december 2002 december 31 2004 9 ownership interest cellon october 2002 entered license royalty agreement cellon international holding corporation “cellon” paid 08 million license certain technology development certain handset products china per terms royalty agreement required pay cellon 3 per unit shipped minimum 01 million units agreement material overall financial results cellon fiberxon september 2002 invested 20 million fiberxon inc “fiberxon” company develops sells optical modules related systems march 2004 invested additional 10 million fiberxon outstanding purchase commitment fiberxon 11 ownership interest purchase component parts optical networking products addition provided letter credit 50 million purchase raw materials manufacture component parts commitment fulfilled without adverse consequences material operations financial condition purchases fiberxon totaled 151 million 2004 133 million accounts payable fiberxon december 31 2004 mitsubishi recognized revenue 10 million year ending december 31 2004 melco affiliated member mitsubishi insignificant shareholder company purchased mitsubishi components associated base station units used produce pas products totaling approximately 974 million 2004 3631 million 2003 1572 million 2002 addition 64 million accounts payable mitsubishi december 31 2004 127 million december 31 2003 starcom products inc obtain engineering consulting employee placement services starcom products inc “starcom” 31 owned individual related member board directors paid starcom 11 million 2004 14 million 2003 07 million 2002 engineering consulting employee placement services provided starcom segment disclosures 2004 continued expand focus markets operations outside china effective fourth quarter 2004 determined chief operating decision makers accordance sfas 131 “disclosures segments enterprise related information” evaluating performance making operating decisions allocating resources based two operating segments china ii regions referred international “international” november 1 2004 acquired selected assets acc wireless handset division audiovox corporation acquired business integrated company separate distinct operating division referred personal communications division determined evaluate performance allocate resources division considered third operating segment result december 31 2004 organized three operating segments china international pcd segment consisted one reporting unit year ended december 31 2003 first three quarters 2004 managed business single reportable segment evaluate operating performance allocate resources operating segments based segment gross profit certain corporate headquarters expenses allocated rather included international segment addition none nonoperating items allocated segment following table sets forth certain financial information operating segments described 1 adjustments reflect elimination intersegment transactions investments subsidiaries effective first quarter 2005 realigned business four units namely broadband infrastructure wireless infrastructure terminal products reported handsets pcd global service solutions unit represent reporting segment exception terminal products consist two reporting segments fiscal 2004 vs revenues external customers china segment increased 17 billion 2003 21 billion 2004 continued benefit increased demand due expansion wireless infrastructure china revenues external customers international segment increased slightly 2003 2004 revenues external customers pcd segment increased 2774 million 2004 due acquisition acc creation pcd segment 2004 gross profit percentage declined 10 due several factors international segment experienced largest drop gross profit declining 58 2003 34 2004 decrease driven decline broadband product experienced shift product mix traditional dslam product newer optical broadband products typically experience lower margins early stages product life cycle addition gross profit percentage recognized handset sales made pcd business approximately 4 significantly lower realized handset sales related pas systems pcd acquired november 2004 contributed 119 million gross profit china segment also experienced 4 decline gross margin percentage primarily attributable handset products experienced increased competitive market pricing pressure addition gross profit negatively impacted 390 million increase provision inventory reserves fiscal 2003 vs revenues external customers china segment increased 8223 million 2002 16808 million 2003 attributable increased demand products resulting strong growth china telecommunication market revenues external customers international segment increased 1595 million 2002 2844 million 2003 primarily attributed sales growth japan gross profit china segment increased 3018 million 2002 4604 million 2003 increased sales contributed increase gross profit gross profit international segment increased 437 million 2002 1640 million 2003 liquidity capital resources operating activities net cash used operating activities year ended december 31 2004 950 million operating cash affected changes accounts receivable inventory customer advances offset changes accounts payable deferred costsinventories customer sites contract 4559 million increase accounts receivable attributable increased sales longer collection periods experienced 2004 increase accounts receivable part due addition acc sales revenue approximately 144 accounts receivable balance outstanding december 31 2004 attributable pcd inventory increased 1976 million 2004 includes 1560 million inventory pcd customer advances decreased 1342 million year ended december 31 2004 customer advances represent cash deposits received customers orders yet received final acceptance upon receipt final acceptances customer advance reduced revenue cost sales recorded reduction customer advances deferred costs inventory customer sites 2004 largely result customers china transitioning new system installations system expansions generally requires shorter period customer advance acceptance working capital 11 billion increased proportion growth business addition 1750 million increase associated acquisition acc offsetting activity decreased operating cash period net income noncash charges including 127 million provision asset impairment writedowns 762 million depreciation amortization 390 million inventory provision 213 million provision doubtful accounts payable increased 983 million consistent increased inventory purchasing inventories customer sites contracts awaiting final acceptance classified deferred costs separate historically considered inventory title risk loss inventory transferred customer revenue costs sales recorded final acceptance received customer deferred costsinventories customer sites contracts decreased 2999 million december 31 2003 december 31 2004 decrease deferred costs resulted greater number customer acceptances corresponding decrease customer advances net cash provided operating activities year ended december 31 2003 452 million operating cash affected changes accounts receivable inventory accounts payable assets offset changes deferred revenue 1519 million increase accounts receivable balance attributable 100 increase sales 2003 reduced net cash provided operations 2003 sold 2988 million notes receivable associated expenses 23 million cash provided operating activities also reduced 816 million 3011 million increase inventory deferred costs respectively operating cash also decreased due 59 million decrease accounts payable decrease operating cash 2003 offset increase customer advances deferred revenue 2942 million 274 million respectively collected approximately 25 billion cash customers 2003 net cash provided operating activities fiscal 2002 1786 million net cash provided operations mainly due 1705 million 878 million increase accounts payable customer advances respectively offset increases inventories deferred costs accounts receivable assets 761 million 1378 million 342 million 246 million respectively investing activities net cash used investing activities 4680 million year ended december 31 2004 significant components investing activities business acquisitions additions property plant equipment net investment shortterm securities cash used business acquisitions totaled 2178 million 2004 including approximately 1783 million selected assets acc 300 million substantially assets liabilities telos 91 million hsi cash used purchase property plant equipment including 571 million construction hangzhou facility totaled 1356 million net cash used purchase shortterm investments 828 million net cash used investing activities 1765 million year ended december 31 2003 change mainly due 1232 million property plant equipment purchases 1067 million business acquisitions offset 696 million net proceeds sale shortterm investments net cash used investing activities fiscal 2002 1654 million mainly due 753 million property plant equipment purchases 177 million business acquisitions primarily attributable purchase remaining interest huts 289 million investments affiliates primarily comprised investments public private technology companies offset 224 million net purchases shortterm investments financing activities net cash provided financing activities 7427 million year ended december 31 2004 primarily due proceeds raised sale 121 million shares common stock 3925 per share banc america securities llc january 2004 net proceeds approximately 4746 million addition incurred net borrowing 3500 million year existing lines credit china fund operations needs china also received 257 million issuance common stock option warrant exercises offsetting cash provided financing activities first second quarter 2004 used portion capital raised repurchase total 36 million shares common stock average price 3025 per share total cost 1076 million including transaction fees net cash provided financing activities 2753 million year ended december 31 2003 primarily due 589 million proceeds issuance common stock espp stock option exercises 3996 million proceeds net borrowing offset repurchase shares related transaction costs 1396 million purchase convertible bond hedge call option totaling 438 million net cash used financing activities fiscal 2002 1024 million primarily due repurchase shares related transaction costs 729 million net payments 705 million borrowings lines credit offset 409 million proceeds underwritten sale common stock time softbank america inc sold 100 million shares common stock underwriter issuance common stock option exercises liquidity working capital 11175 million 8833 million december 31 2004 2003 respectively increase working capital due increased cash hand cash hand increased 3777 million cash equivalents 486 million shortterm investments 2003 5625 million cash equivalents 1363 million shortterm investments 2004 working capital also increased due larger accounts receivable inventory balances offset increases accounts payable notes payable balances believe existing credit facilities cash equivalents shortterm investments cash operations sufficient finance operations least next 12 months december 31 2004 cash shortterm restricted cash investments 7322 million also credit facilities excluding 82 million bank loan resulting consolidation mdc totaling 7804 million 3880 million remained available future borrowings 3880 million available credit facilities 3808 million expires 2005 72 million expires 2010 proceeding extension renewal credit facilities however renewal certain interest rates borrowings credit facilities range approximately 258 621 guaranteed debt included consolidated balance sheet total cash shortterm investment balance 3426 million held china currency exchange controls exist result ability make payments jurisdictions could limited ability transfer money china jurisdictions event current cash balances future cash flows operations current credit facilities sufficient meet obligations strategic needs event market conditions favorable would consider raising additional funds capital equity markets due delinquent filing annual report form 10k year ended december 31 2004 eligible register equity securities using form s3 could impact ability raise additional funds additional financing needed assurance financing available us commercially reasonable terms addition delayed filing resulted technical default company’s 7¤8 convertible subordinated notes due 2008 upon filing form 10k technical default cured income taxes certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time tax holidays discussed applicable potentially applicable cuts huts hangzhou utstarcom telecom co ltd “hstc” utstarcom china co ltd “utsc” active subsidiaries china entities may qualify accredited technologically advanced enterprises hstc cuts exempt income tax year ended december 31 2004 currently process applying knowledge intensive technology intensive certificate “certificate” new hangzhou manufacturing facility granted certificate huts continue subject 24 tax rate hstc cuts subject 12 tax rate year ending december 31 2005 granted certificate huts subject 15 tax rate addition hstc cuts subject 75 tax rate expire december 31 2007 utsc currently enjoys 10 holiday tax rate expires december 31 2005 point subject 15 tax rate provided remain advanced hightech enterprise government change tax laws working implement research development cost sharing arrangement among key worldwide entities purpose cost sharing enable participants jointly develop intangibles research development cost sharing total research development expense paid costsharing participants proportion participant’s future sales benefit greater certainty respect transfer pricing defined ownership ip cost sharing china new concept working closely china tax regulatory authorities gain approval cost sharing balance sheet arrangements definition contained item 303a4iii regulation sk balance sheet arrangements contractual obligations commercial commitments obligations contractual obligations commercial commitments primarily regard leasing arrangements standby letters credit follows certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products notes payable occasionally issue shortterm notes payable vendors lieu trade accounts payable payment terms normally three nine months typically noninterest bearing bank loans december 31 2004 loans various banks totaling 3500 million interest rates ranging 258 621 per annum bank loans mature 2005 included shortterm debt company bank loan connection equipment purchase resulting consolidation mdc january 10 2003 third party established bank loan shanghai pudong development bank purchase equipment obligations bank loan related equipment assumed company january 23 2003 subsequently transferred mdc january 31 2003 bank loan 82 million bears interest rate 494 per annum expires january 10 2006 company serve legal obligor loan convertible subordinated notes 4025 million convertible subordinated notes due march 1 2008 bear interest rate 7¤8 per annum payable semiannually may 1 september 1 convertible common stock conversion price 2379 per share subordinated present future senior debt company principal due maturity notes operating leases lease certain facilities noncancelable operating leases expire various dates 2023 standby letters issue standby letters credit primarily support international sales activities outside china submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof purchase commitments obligated purchase raw materials workinprocess inventory various orders suppliers expected fulfilled adverse consequences material operations financial condition december 31 2004 total open commitments purchase orders approximately 5783 million entered various earnout agreements related certain acquisitions subject completion performance milestones see “note 5 consolidated financial statements” accounts receivable transferred notes receivable accept commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months notes receivable available sale 270 million 114 million december 31 2004 december 31 2003 respectively may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes receivable sold year ended december 31 2004 2988 million notes receivable sold year ended december 31 2003 notes sold included consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishment liabilities” “sfas 140” met costs settling transferring notes receivable 23 million years ended december 31 2003 included income expense net consolidated statements operations investment commitments december 31 2004 invested total 20 million global asia partners lp recorded longterm investment fund size anticipated 100 million fund formed make private equity investments private preipo technology telecommunications companies asia commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner joint venture funding pursuant joint venture agreement matsushita communications industrial co ltd matsushita electric industrial co ltd jointly liable losses incurred operations joint venture maximum investment entity december 31 2004 2003 recorded losses 13 million 48 million respectively fourth quarter 2004 made additional capital contribution 93 million intellectual property certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery product occurred customer acceptance obtained fee fixed determinable collectability reasonably assured payment due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region shipping handling costs recorded revenues costs revenues expected losses contracts recognized identified sales may generated complex contractual arrangements require significant revenue recognition judgments particularly areas multiple element arrangements multiple elements exist arrangement fee allocated different elements based upon verifiable objective evidence fair value elements governed emerging issues task force issue “eitf” 0021 sab 104 multiple element arrangements primarily involve sale pas family wireless access handsets wireless consumer products core infrastructure equipment internet protocolbased pas “ipas” wireless access systems employ micro cell radio technology specialized handsets allowing service providers offer subscribers mobile fixed access telephone services multiple element arrangements include sale pas ipas equipment handsets installation training provision equipment different locations customer revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered element control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction additionally recognize revenue cash payments received customers transactions customer’s final acceptance record cash receipts customer advances defer revenue recognition final acceptance received multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 amended eitf 0305 allocate revenues element software arrangements based vendor specific objective evidence “vsoe” vsoe element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion arrangement fee recognized revenue evidence fair value one undelivered elements exist revenue deferred recognized delivery elements occurs fair value established recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue related maintenance support contracts recognized ratably contract term revenues services less 10 revenues years also sell products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards 48 “revenue recognition right return exists” “sfas 48” developed reasonable estimates stock exchanges estimates derived based historical experience similar types sales similar products sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material estimate amount rebate based upon terms individual arrangement historical experience future expectations price reductions record estimate rebate amount time sale also enter sales incentive programs comarketing arrangements certain wireless handset customers record incurred costs related incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized assess collectability based number factors including payment history credit worthiness customer request collateral customers international sales often require letters credit customers drawn demand customer defaults payment determine collection payment reasonably assured recognize revenue time collection becomes reasonably assured generally upon receipt cash occasionally enter revenue sharing arrangements collect revenues customer telecommunications service provider collects service revenues enter revenue sharing arrangement recognize revenue collection reasonably assured nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms prior final acceptance accordingly accounts receivable booked recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained product warranty provide warranty equipment handset sales period generally ranging one three years time final acceptance rarely entered arrangements provide limited warranty services periods longer three years longest warranty period ten years provide expected cost product warranties time revenue recognized based assessment past warranty experience variable interest entities financial accounting standards board “fasb” issued fasb interpretation 46 “fin 46” fin 46 requires entity primary beneficiary variable interest entity “vie” assets liabilities results operations vie included consolidated financial statements entity adopted fin 46 quarter ended december 31 2003 consolidated related party deemed vie primary beneficiary receivables accept bank notes commercial notes customers china normal course business estimate collectability trade receivables notes receivable notes typically noninterest bearing maturity dates three six months provide allowance doubtful accounts estimated losses trade receivables notes receivable collection may longer reasonably assured assess collectability receivable determining whether creditworthiness customer deteriorated could result inability collect payment collectability doubtful record allowance receivable financial condition customers deteriorate ability make payments suffers result may need increase allowances receivables greater concentration accounts receivable certain customers financial condition specific individual customer may result increased concentration risk exposure although evaluate customer creditworthiness prior sale generally assess collectibility individual receivable balance based upon length time receivable remained outstanding periodically reassess evaluation methodologies based upon changes facts circumstances example experience china throughout 2004 caused us review estimates throughout 2004 experienced lengthening collection cycle china based receivables however lengthening necessarily coincide change overall estimate recoverability individual receivable balance result revised estimates reflect changed environment incremental amount provided new estimate 101 million lower would provided using historical estimates fourth quarter 2004 lengthened collection cycle attributed number factors principally changes customers’ business practices surrounding payment lesser degree maturation telecommunications sector although factors result reduction overall collectibility individual receivables 2004 lengthening payment cycle could result reduction overall collectibility receivable balances future observe deterioration actual collectibility receivables allowance doubtful accounts would increase resulting additional bad debt expense inventories consist inventories held manufacturing facility warehouses customer sites prior signing contracts may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost net realizable value net writedowns excess slow moving obsolete inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites deferred costsinventories customer sites contracts inventories customer sites contracts awaiting final acceptance classified deferred costs title associated inventory transferred customer assumed risk physical loss deferred costs also include labor related third party integrators freight deferred costs stated cost periodically assesses recoverability deferred costs provide reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time inventory held customer site viability payment including assessment product demand revenue sharing arrangement exists revenue cost sales recorded final acceptance received customer greater concentration inventory customer sites contract specific individual customer financial conditions specific individual customer may result increased concentration risk exposure inventory research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs deferred income taxes recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary record valuation allowance reduce deferred tax assets amount management believes likely realized goodwill intangible assets recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets perform annual goodwill impairment review fourth quarter year changes circumstances indicate potential impairment exists fourth quarter 2004 consummation acquisition acc evaluated management operation reporting determined operated three operating segments fourth quarter 2004 segments personal communications division “pcd” china international pcd includes legacy activities acc selected assets acquisition china segment represents activities within china companies international segment includes nonchina nonpcd operations management determined segment reporting unit management reporting structures segment reporting level reallocated goodwill segments single reporting unit performed goodwill impairment analysis reporting unit level assessing potential impairment goodwill compare book value fair market value fair market value determined based present value estimated future cash flows longterm investments invested fund focused investments internet companies china fund focused investments companies asia undergoing restructuring bankruptcy procedures also invested directly number private technologybased companies early stages development publicly listed technology companies traded nasdaq new york stock exchange quoted market prices readily available determine fair value investments publicly traded companies management judgment required determine losses temporary furthermore management judgment required evaluating carrying value private company investments possible impairment private technology company investments assess impairment based evaluation achievement business objectives milestones financial condition prospects companies relevant factors continually monitor investments impairment charge income impairment amounts period determination made recent accounting pronouncements december 2004 financial accounting standards board “fasb” issued sfas 123 revised 2004 “sharebased payment” “sfas 123r” sfas 123r require us measure employee stockbased compensation awards using fair value method record expense consolidated financial statements addition adoption sfas 123r require additional accounting related income tax effects additional disclosure regarding cash flow effects resulting sharebased payment arrangements currently plans modify existing compensation programs march 2005 sec issued staff accounting bulletin 107 “sab 107” provides guidance regarding application sfas 123r sab 107 expresses views staff regarding interaction sfas 123r sharebased payment certain sec rules regulations provides staff’s views regarding valuation sharebased payment arrangements public companies particular sab 107 provides guidance related sharebased payment transactions nonemployees transition nonpublic public entity status valuation methods including assumptions expected volatility expected term accounting certain redeemable financial instruments issued sharebased payment arrangements classification compensation expense nongaap financial measures firsttime adoption sfas 123r interim period capitalization compensation cost related sharebased payment arrangements accounting income tax effects sharebased payment arrangements upon adoption sfas 123r modification employee share options prior adoption sfas 123r disclosures management’s discussion analysis “mda” subsequent adoption sfas 123r april 14 2005 sec approved new rule delays effective date sfas 123r annual periods beginning june 15 2005 adoption sfas 123r january 1 2006 expected material impact company’s consolidated results operations financial position statement cash flows company evaluating transition method pricing model alternatives upon adoption december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” sfas 153 addresses measurement exchanges nonmonetary assets redefines scope transactions measured based fair value assets exchanged sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption sfas 153 expected material effect consolidated financial position results operations november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” “sfas 151” sfas 151 clarifies abnormal inventory costs idle facilities excess freight handling costs wasted materials spoilage required recognized current period charges provisions sfas 151 effective fiscal year beginning june 15 2005 adoption sfas 151 expected material impact consolidated financial position results operations cash flows december 2004 fasb issued fasb staff position fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” “fsp fas 1092” american jobs creation act 2004 provides onetime 85 dividends received deduction certain foreign earnings repatriated plan reinvestment united states provided certain criteria met fsp fas 1092 effective immediately provides accounting disclosure guidance repatriation provision fsp fas 1092 allows companies additional time evaluate effects law unremitted earnings purpose applying “indefinite reversal criteria” apb opinion 23 “accounting income taxesspecial areas” requires explanatory disclosures companies yet completed evaluation currently evaluating effects repatriation provision impact consolidated financial statements expect complete evaluation end 2006 range possible amounts unremitted earnings considered repatriation provision zero 541 million related potential range income tax zero 28 million factors affecting future operating results risks related company future product sales unpredictable result operating results likely fluctuate quarter quarterly annual operating results fluctuated past likely fluctuate future due variety factors outside control factors may affect future operating results addition described include · timing size orders products · changes customers’ subscriber growth rate · lengthy unpredictable sales cycles associated sales products · cancellation deferment delay implementation large contracts · issues might arise integration acquired entities inability achieve expected results acquisitions · revenue recognition based acceptance unpredictable · seasonal reoccurrence outbreak severe acute respiratory syndrome “sars” illnesses · decline business activity typically experience lunar new year leads decreased sales first fiscal quarter · changes accounting rules recording expenses related employee stock option compensation plans · shift product mix market focus · quality issues resulting design manufacture products software used product result factors periodtoperiod comparisons operating results necessarily meaningful indicative future performance addition factors noted may make difficult us forecast provide timely manner public guidance including updates prior guidance related projected financial performance company furthermore possible future quarters operating results fall expectations securities analysts investors occurs trading price common stock could decline competition markets may lead reduced prices revenues market share experienced intense competition past years believe continue face intense competition domestic international companies target markets many may operate lower cost structures may given preferential treatment applicable governmental regulators policies much larger sales forces additionally companies presently offering competing products may also enter target markets many competitors significantly greater financial technical product development sales marketing resources result competitors may able respond quickly new emerging technologies changes service provider requirements competitors may also able devote greater resources development promotion sale new products competitors may able offer significant financing arrangements service providers may give competitive advantage selling systems service providers limited financial currency resources many developing markets operate intend operate relationships local governmental telecommunications agencies important establish maintain many markets competitors may able establish better relationships local governmental telecommunications agencies could result ability influence governmental policy formation interpretation advantage additionally competitors might better relationships third party suppliers obtain component parts reduced rate allowing offer end products reduced prices moreover telecommunications cable industries experienced significant consolidation expect trend continue fewer significant customers may reliant large customers bargaining position profit margins may suffer increased competition likely result price reductions reduced gross profit percentage net sales loss market share one could materially harm business financial condition cash flows results operations seek secure additional financing able ability expand strategically may limited able secure additional financing stockholders may experience dilution ownership interest may subject limitations operations increased leverage currently anticipate available cash resources include existing cash equivalents shortterm investments cash operations sufficient meet anticipated needs working capital expenditures foreseeable future unable generate sufficient cash flows operations may need raise additional funds develop new enhanced products respond competitive pressures take advantage acquisition opportunities raise capital strategic purposes raise additional funds issuance equity securities stockholders experience dilution ownership interest newly issued securities may rights superior common stock raise additional funds issuing debt may subject limitations operations increase leverage example connection sale convertible debt securities march 2003 incurred 4025 million indebtedness result indebtedness principal interest payment obligations increased substantially degree leveraged could materially adversely affect ability obtain financing working capital acquisitions purposes could make us vulnerable industry downturns competitive pressures ability meet debt service obligations dependent upon future performance subject financial business factors affecting operations many beyond control finally certain maintain existing unsecured credit line available china operations additional sources financing may available reasonable terms require could harm business average selling prices products may decrease may reduce revenues gross profit result must introduce new products reduce costs order maintain profitability average selling prices communications access switching systems handsets historically declined result number factors including · increased competition · aggressive price reductions competitors · rapid technological change · constant change customer buying behavior market trends average selling prices products may continue decrease future response product introductions us competitors factors including price pressures customers certain products including wireless handsets historically low gross profit margins deterioration profit margins products could result losses respect products therefore must continue develop introduce new products enhancements existing products incorporate features sold higher average selling prices failure could cause revenues gross profit decline cost reduction efforts may allow us keep pace competitive pricing pressures lead improved gross profit percentage net sales order competitive must continually reduce cost manufacturing products design engineering changes may successful efforts delivering products market timely manner addition redesign may result sufficient cost reductions allow us reduce prices products remain competitive improve maintain gross profit percentage net sales would cause financial results suffer sales china accounted total sales business financial condition results operations significant degree subject economic political social events china approximately 21 billion 79 17 billion 86 net sales years ended december 31 2004 2003 respectively occurred china anticipate expansion markets significant portion net sales derived china foreseeable future addition plan continue make investments china future therefore business financial condition results operations significant degree subject economic political legal social developments events china please read risks detailed heading “risks related conducting business china” additional information risks face connection china operations market subject rapid technological change compete effectively must continually introduce new products product enhancements achieve market acceptance market communications equipment characterized rapid technological developments frequent new product introductions evolving industry regulatory standards success depend large part ability enhance network broadband access switching technologies develop introduce new products product enhancements anticipate changing service provider requirements technological developments may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail develop introduce new products enhancements existing products effectively respond technological change timely basis business financial condition results operations could materially adversely affected certain products including wireless handsets short product life moreover time competitors may announce new products product enhancements technologies services potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory reserve due obsolescence future technological advances communications industry may diminish inhibit market acceptance existing future products render products obsolete even able develop introduce new products may gain market acceptance market acceptance products depend various factors including · ability obtain necessary approvals regulatory organizations within countries operate new technologies introduce · length time takes service providers evaluate products causing timing purchases unpredictable · products compatible legacy technologies standards existing previously deployed network equipment · ability attract customers may preexisting relationships competitors · product cost relative performance · level customer service available support new products · timing new product introductions meeting demand patterns products fail obtain market acceptance timely manner business results operations could suffer depend sole source key suppliers well international sources handsets base stations components materials used products cannot obtain adequate supplies high quality products competitive prices timely manner suppliers sources suppliers successfully market products directly customers competitive position reputation business could harmed contracts single supplier limited group suppliers purchase components materials used products supplier unwilling unable provide us highquality components materials quantities required costs specified us may able find alternative sources favorable terms timely manner supplier could market products directly customers particular pcd division highly dependent single supplier handset devices possibility supplier marketing products would create direct competition may affect ability obtain adequate supplies inability obtain develop alternative sources required could result delays reductions manufacturing product shipments time could shortages different products components moreover suppliers may supply us inferior quality products inferior product supplied third party embedded end product causes problem might difficult identify source problem due component parts events occur competitive position reputation business could suffer ability source sufficient quantity highquality costeffective components used products may also limited import restrictions duties foreign countries manufacture products require significant number imported components manufacture products imported electronic components imported goods used operation business may limited variety permit requirements approval procedures import duties registration requirements moreover import duties components increase cost products may make less competitive product defects performance quality issues could cause us lose customers revenue incur unexpected expenses many products highly complex may quality issues resulting design manufacture product software used product often issues identified prior shipment products may cause delays market acceptance products delays shipping products customers cancellation orders cases may identify quality issues shipment products cases may incur unexpected expenses diversion resources replace defective products correct problems preshipment postshipment quality issues could result delays recognition revenue loss revenue future orders damage reputation customer relationships addition may required pay damages failed performance certain customer contracts recent growth strained resources unable manage sustain growth operating results negatively affected recently experienced period rapid growth anticipate must continue expand operations address potential market opportunities expansion placed continue place significant strain management operational financial resources manage growth effectively need take various actions including · enhancing management information systems including forecasting procedures · developing operating administrative financial accounting systems controls · managing working capital sources financing fund expansion · maintaining close coordination among engineering accounting finance marketing sales operations organizations · expanding training managing employee base · enhancing human resource operations improving employee hiring training programs · reorganizing business structure effectively allocate utilize internal resources · improving sustaining supply chain capability · managing expansion direct indirect sales channels costefficient competitive manner · fully reviewing new customers’ credit histories ensure financial stability finalizing contracts fail implement improve systems controls manage future growth expansion effectively business could suffer success dependent continuing hire retain qualified personnel successful attracting retaining personnel business suffer success business depends significant part upon continued contributions key technical senior management personnel many would difficult replace particular success depends large part knowledge expertise services hong liang lu chairman board president chief executive officer ying wu chairman chief executive officer china operations philip christopher president chief executive officer pcd loss key employee failure key employee perform satisfactorily current position failure attract retain key technical senior management employees could significant negative impact operations effectively manage recent growth well future growth need recruit train assimilate motivate retain qualified employees locally internationally competition qualified employees intense process recruiting personnel fields including technology research development sales marketing administration managerial personnel combination skills attributes required execute business strategy difficult timeconsuming expensive grow globally must implement hiring training processes capable quickly deploying qualified local residents knowledgeably support products services alternatively insufficient number qualified local residents available might incur substantial costs importing expatriates service new global markets example historically experienced difficulty finding qualified accounting personnel knowledgeable us chinese accounting standards chinese residents fail attract hire assimilate retain qualified personnel business would harmed competitors others past may future attempt recruit employees addition companies telecommunications industry whose employees accept positions competitors frequently claim competitors engaged unfair hiring practices may subject types claims future seek hire qualified personnel claims may result material litigation disruption operations could incur substantial costs defending claims regardless merit acquisitions undertake could difficult integrate disrupt business dilute stockholders harm operating results acquired businesses products technologies example second quarter 2004 completed acquisitions telos hsi 300 million 141 million respectively november 1 2004 completed selected asset acquisition acc 1651 million additionally october 2004 entered asset purchase agreement giga telecom inc acquire certain assets related research development various products anticipated benefits acquisitions may realized past continue evaluate acquisition prospects would complement existing product offerings augment market coverage enhance technological capabilities may otherwise offer growth opportunities acquisitions may result dilutive issuances equity securities use cash resources incurrence debt amortization expenses related intangible assets addition acquisitions involve numerous risks including difficulties assimilation operations technologies products personnel acquired company diversion management’s attention business concerns risks entering markets direct limited prior experience potential loss key employees acquired company unanticipated costs case acquisition financially troubled businesses challenges validity acquisitions third party creditors businesses example fourth quarter 2004 encountered difficulties integrating hsi’s legacy operations determined abandon hsi’s legacy operations result fourth quarter 2004 wrote entire goodwill intangibles associated hsi addition acquisitions businesses involved manufacturing sales handset products could introduce specific litigation risk potential harmful effects electric magnetic fields “emf” may unable adequately protect loss misappropriation intellectual property could substantially harm business rely combination patents copyrights trademarks trade secret laws contractual obligations protect technology applied patents united states internationally additional patents may issued pending patent applications issued patents may upheld addition time chosen abandon previously filed applications moreover may face difficulties registering existing trademarks new jurisdictions operate cannot guarantee intellectual property protection measures taken sufficient prevent misappropriation technology trademarks competitors independently develop technologies substantially equivalent superior addition legal systems many foreign countries protect honor intellectual property rights extent legal system united states example china legal system general intellectual property regime particular still development stage may difficult timeconsuming costly us attempt enforce intellectual property rights jurisdictions may subject claims infringe intellectual property rights others could substantially harm business industry compete moving towards aggressive assertion licensing litigation patents intellectual property rights time become aware possibility notified may infringing certain patents intellectual property rights others regardless merit responding claims could time consuming divert management’s attention resources cause us incur significant expenses addition although supplier contracts provide indemnification supplier respect losses expenses incurred connection infringement claim certain contracts key suppliers provide protection moreover certain sales contracts provide must indemnify customers claims third parties intellectual property rights infringement related products limitations maximum potential future payments guarantees therefore may incur substantial costs related infringement claim may substantially harm results operations financial condition may future become subject litigation defend claimed infringements rights others determine scope validity proprietary rights others future litigation may also necessary enforce protect trade secrets intellectual property rights intellectual property litigation threatened intellectual property litigation could costly adverse determinations settlements could result loss proprietary rights subject us significant liabilities require us seek licenses pay royalties third parties may available commercially reasonable terms andor prevent us manufacturing selling products could cause disruptions operations event successful claim infringement us fail develop noninfringing technology license propriety rights commercially reasonable terms conditions business results operations financial condition could materially adversely impacted multinational operations subject us various economic political regulatory legal risks market sell products globally majority sales made china expansion existing multinational operations entry new markets require significant management attention financial resources multinational operations subject variety risks · burden complying variety foreign laws regulations · burden complying united states laws regulations foreign operations including foreign corrupt practices act · difficulty complying continually evolving changing global product communications standards regulations end products component technology · market acceptance new products including longer product acceptance periods new markets enter · reliance local original equipment manufacturers “oems” third party distributors agents effectively market sell products · unusual contract terms required customers developing markets · changes local governmental control influence customers · changes import export regulations including quotas tariffs licensing restrictions trade barriers · evolving unpredictable nature economic regulatory competitive political environments · reduced protection intellectual property rights countries · longer accounts receivable collection periods · difficulties costs staffing managing multinational operations including limited internal controls compliance business markets fully developed subjects us various economic political regulatory legal risks unique developing economies less developed markets present additional risks following · customers may unable pay products timely manner · new unproven markets products telecommunications services products enable · inconsistent infrastructure support · lack large highly trained workforce · difficulty controlling local operations headquarters · variable ethical standards increased potential fraud · unstable political economic environments · lack secure environment personnel facilities equipment particular factors create potential physical loss inventory operating assets past experienced cases vandalism armed theft equipment installed field disruptions reasons become severe particular market may become necessary us terminate contracts withdraw market suffer associated costs lost revenue subject claims possible health risks wireless handsets claims made alleging link use wireless handsets development aggravation certain cancers including brain cancer scientific community divided whether risk wireless handset use magnitude risk even link established wireless handset use cancer negative publicity possible litigation could material adverse effect business past several plaintiffs’ groups brought class actions wireless handset manufacturers distributors alleging wireless handsets caused cancer date named actions none actions successful future could incur substantial costs defending similar claims regardless merit also claims may successful future material adverse effect business subject risks relating currency rate fluctuations exchange controls sales made foreign countries exposed market risk changes foreign exchange rates foreign currency denominated accounts notes receivable balances historically majority sales made china denominated renminbi impact currency fluctuations renminbi thus far insignificant fixed us dollar however future china could choose revalue renminbi versus us dollar renminbius dollar exchange rate could float renminbi could depreciate relative us dollar additionally 2004 made significant sales japanese yen euros fluctuations currency exchange rates future may material adverse effect results operations enter transactions may expose us foreign currency rate fluctuation risk historically largest component foreign currency exchange loss resulted purchasing inventory denominated foreign currencies continue purchase inventory foreign currencies may incur additional foreign currency exchange losses causing operating results suffer may time enter foreign exchange forward contracts hedge certain translation exposures due fluctuation us dollar japanese yen resulting japanese yendominated balance sheet accounts however management limited prior experience engaging types transactions hedging may effective limiting exposure decline operating results moreover foreign countries business might impose currency restriction may limit ability subsidiaries joint ventures countries obtain remit foreign currency necessary purchase imported components may limit ability obtain remit foreign currency exchange foreign earnings example china employs currency controls restricting renminbi conversion limiting ability engage currency hedging activities china various foreign exchange controls may also make difficult us repatriate earnings could material adverse effect ability conduct business globally business interruptions could adversely affect business operations vulnerable interruption fire earthquake power loss telecommunications failure external interference information technology systems incidents terrorism events beyond control example hangzhou manufacturing facility’s ability produce sufficient products dependent upon continuous power supply however hangzhou facility past subject power shortages affected ability produce ship sufficient products detailed disaster recovery plan occurrence events like disrupt business could harm operating results may suffer losses respect equipment held customer sites could harm business face risk loss relating equipment held customer sites cases equipment held customer sites contract pending final acceptance customer generally hold title risk loss equipment title risk loss typically transferred customer upon delivery equipment however recognize revenue accounts receivable respect sale equipment obtain acceptance customer obtain final acceptance may able collect contract price recover equipment associated costs cases particularly china governmental approval required finalize certain contracts inventory contract may held customer sites hold title risk loss inventory contracts finalized subject losses incurred resulting damage loss inventory contract negotiations fail government china otherwise delays approving contracts may recover receive payment inventory moreover insurance may cover losses incurred inventory customer sites contracts damaged prior contract finalization incur loss relating inventory reasons financial condition cash flows operating results could harmed named defendant securities litigation lawsuits well lawsuits ordinary course business currently defendant several securities litigation class actions lawsuits well lawsuits ordinary course business future may subject similar litigation defense lawsuits may divert management’s attention may incur significant expenses defending lawsuits including substantial fees lawyers professional advisors potential obligations indemnify officers directors may parties actions addition may required pay judgments settlements could material adverse effect results operations financial condition liquidity restrictions use handsets driving could affect future growth several foreign governments us state local governments adopted considering legislation would restrict prohibit use wireless handsets driving widespread legislation restricts prohibits use wireless handsets driving could negatively affect future growth failure achieve maintain effective internal controls accordance section 404 sarbanesoxley act 2002 could material adverse effect business stock price section 404 sarbanesoxley act 2002 “the sarbanesoxley act” requires establish maintain adequate internal control structure procedures financial reporting include report management internal control financial reporting annual report form 10k report must contain assessment management effectiveness internal control financial reporting must include disclosure material weaknesses internal control financial reporting identified addition independent registered public accounting firm must attest report management’s assessment effectiveness internal control financial reporting requirements first apply annual report identified material weaknesses internal controls financial reporting see “item 9a controls proceduresmanagement’s report internal control financial reporting” discussion material weaknesses date annual report form 10k still process implementing remedial measures related material weaknesses identified discussed item 9a “controls proceduresmanagement’s report internal control financial reporting” efforts remedy weaknesses identified successful business operating results could harmed reliability financial statements could impaired could adversely affect stock price requirements section 404 sarbanesoxley act ongoing also apply future years addition 2005 apply requirements sarbanesoxley act november 2004 acquisition acc exempted 2004 assessment permitted sarbanesoxley act expect internal controls financial reporting continue evolve continue efforts grow expand business future although committed continue improve internal control processes continue diligently vigorously review internal controls financial reporting order ensure compliance section 404 requirements control system regardless well designed operated evaluated provide reasonable absolute assurance objectives met therefore cannot assure future additional material weaknesses significant deficiencies exist otherwise discovered recently enacted proposed changes securities laws regulations likely increase costs sarbanesoxley act required continue require changes corporate governance securities disclosure compliance practices sarbanesoxley act also requires sec promulgate new rules variety subjects addition rule proposals already made nasdaq revised requirements companies quoted developments required may continue require us devote additional resources operational financial management information systems procedures controls ensure continued compliance current future laws regulations ii make difficult expensive us obtain director officer liability insurance may required accept reduced coverage increase level selfinsurance incur substantially higher costs obtain coverage iii could make difficult us attract retain qualified members board directors qualified executive officers ensure compliance section 404 sarbanesoxley act related security rules incurred costs approximately 46 million 2004 relating implementation plans designed ensure compliance continue evaluate monitor regulatory developments cannot estimate timing magnitude additional costs may incur result developments changes accounting rules prepare financial statements conformity accounting principles generally accepted united states america principles subject interpretation sec various bodies formed interpret create appropriate accounting policies change policies significant effect reported results may even retroactively affect previously reported transactions example recent changes fasb guidelines relating accounting stockbased compensation increase compensation expense could make net income less predictable given reporting period could change way compensate employees cause changes way conduct business risks related conducting business china’s governmental regulatory reforms may impact ability business china since 1978 chinese government state evolution reform reforms resulted expected continue result significant economic social development china many reforms unprecedented experimental may subject change readjustment due variety political economic social factors multiple government bodies involved regulating administrating affairs telecommunications industry among mii national development reform commission “ndrc” state asset supervisory administrative commission “sasac” play leading roles government agencies broad discretion authority aspects telecommunications information technology industry china including limited setting telecommunications tariff structure granting carrier licenses frequencies approving equipment products granting product licenses specifying technological standards well appointing carrier executives may impact ability business china anticipate basic principles underlying reforms remain unchanged following changes china’s political economic conditions governmental policies could substantial impact business · promulgation new laws regulations interpretation laws regulations · inconsistent enforcement application telecommunications industry’s rules regulations chinese government foreign domestic companies · restructuring telecommunications carriers china · introduction measures control inflation stimulate growth · introduction new guidelines tariffs service rates affect ability competitively price products services · changes rate method taxation · imposition additional restrictions currency conversion remittances abroad · actions limit ability develop manufacture import sell products china finance operate business china example november 1 2004 continuation restructuring telecom carriers relating initial public offering china netcom 2004 sasac decided swap senior executives china mobile china unicom china telecom china netcom effort ease competition among carriers led business interruption china telecom china netcom adverse impact delaying revenue recognition fourth quarter 2004 moreover certain whether may additional government interference including government imposed mergers spinoffs existing carriers addition modifying existing telecommunications regulatory framework chinese government currently preparing draft standard national telecommunications law “telecommunications law” provide uniform regulatory framework telecommunications industry yet know final nature scope regulations would created telecommunications law passed accordingly cannot predict whether positive negative effect us aspects business china’s current regulatory structure communications products offer china must meet government industry standards addition network access license equipment must obtained without license telecommunications equipment allowed connected public telecommunications networks sold china moreover must ensure quality telecommunications equipment obtained network access license stable reliable negatively affect quality performance installed licensed products product quality supervision department china state council concert mii performs spot checks track supervise quality licensed telecommunications equipment publishes results spot checks china’s changing economic environment may impact ability business china since 1978 chinese government reforming economic system china increase emphasis placed decentralization utilization market forces development china’s economy reforms resulted significant economic growth however economic reform policies measures china may time modified revised chinese government may able benefit effects policies measures taken chinese government regulate economy could also significant negative impact economic conditions china would result negative impact business china’s economic environment changing result china’s entry december 2001 world trade organization “wto” entry wto requires china reduce tariffs eliminate nontariff barriers including quotas licenses restrictions early 2005 latest cannot predict impact changes china’s economy moreover although china’s entry wto related relaxation trade restrictions may lead increased foreign investment may also lead increased competition china’s markets foreign companies china’s entry wto results increased competition negative impact china’s economy business could suffer addition although china increasingly according foreign companies foreign investment enterprises established china rights privileges chinese domestic companies result admission wto special laws administrative rules regulations governing foreign companies foreign investment enterprises china may still place foreign companies disadvantage relation chinese domestic companies may adversely affect competitive position uncertainties respect chinese legal system may adversely affect us conduct business china primarily wholly owned subsidiaries incorporated china subsidiaries generally subject laws regulations applicable foreign investment china accordingly business might affected china’s developing legal system since 1978 many new laws regulations covering general economic matters promulgated china government policies internal rules promulgated governmental agencies may published time result may operate business violation new rules policies without knowledge existence addition uncertainties regarding interpretation enforcement laws rules policies china chinese legal system based written statutes prior court decisions limited precedential value many laws regulations relatively new chinese legal system still evolving interpretations many laws regulations rules always uniform moreover relative inexperience china’s judiciary many cases creates additional uncertainty outcome litigation interpretation statutes regulations may subject government policies reflecting domestic political changes finally enforcement existing laws contracts based existing law may uncertain sporadic may difficult obtain swift equitable enforcement obtain enforcement judgment court another jurisdiction litigation china may protracted result substantial costs diversion resources management’s attention tax benefits available subsidiaries located china reduced repealed business could suffer chinese government considering imposition “unified” corporate income tax would phase time preferential tax treatment foreign investment enterprises company currently entitled certain whether government implement unified tax structure whether company grandfathered new tax structure new tax structure implemented new tax structure may adversely affect financial condition moreover certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises tax benefits reduced repealed due changes tax laws business could suffer ability continue successful deployment pas system sales pas handsets limited certain factors including following maturing pas market increased competition handsets tariffs market pas exceeded 66 million users end fiscal year 2004 present throughout china pas market matured believe may level near future addition increase handset competitors entering market 2004 resulted decreased average selling prices margins additional handset competitors enter market competitors decide reduce pricing sales pas handsets may adversely impacted furthermore competition mobile operators china mobile china unicom increased cities pas deployed mobile operators offering special promotional pricing incentives customers free incoming calls free mobiletomobile calls harmed ability customers china telecom china netcom compete effectively continued use incentive programs mobile operators may adversely impact china telecom china netcom’s ability increase pas subscriptions due relationships china telecom china netcom reduced subscription growth carriers may material adverse effect pricing harm business results operations pas system handsets sales may experience sharp decline china telecom china netcom obtain licenses allowing deliver mobile services china’s media sources widely reported mii may grant 3g mobile licenses china telecom china netcom 2005 china telecom china netcom obtain 3g mobile licenses may reallocate capital expenditures construct 3g networks consequence may significantly reduce capital expenditures relating pas networks utilize existing products addition possible current pas frequency bands utilized pas networks may reallocated use 3g networks resulting restriction shutting pas networks occur could lose current potential future customers products financial condition results operations could significantly harmed trial licenses pas system handsets china trial licenses pas systems handsets applied yet received final official network access license pas systems handsets based upon conversations mii understand pas systems handsets considered still trial period sales pas systems handsets may continue made us trial period licenses ultimately required fail obtain required licenses could prohibited making sales unlicensed products including pas systems handsets china would substantially harm business financial condition results operations regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways legal counsel china advised us china’s governmental authorities may interpret apply regulations respect licenses required ability sell product trial period manner inconsistent information received legal counsel china either conditions could material adverse effect business financial condition results operations increasing centralization purchasing decisionmaking carriers may lead customer concentration affect results business chinese carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal persons corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier case pas systems china netcom contracts negotiated entered provincial operators company however central headquarters china telecom recently began exerting influence purchasing decisionmaking process negotiating contractual terms purchase price payment terms acceptance clauses central level provincial operator negotiates contract based guidelines provided headquarters final contracts entered provincial operator company however trend centralized decisionmaking expands unified purchasing resulting negotiation execution contracts central headquarter level may concentration customers could significant impact business risks related stock performance convertible debt securities stock price highly volatile trading price common stock fluctuated significantly since initial public offering march 2000 stock price could subject wide fluctuations future response many events factors including discussed preceding risk factors relating operations well · actual anticipated fluctuations operating results actual anticipated gross profit percentage net sales levels inventory actual anticipated rate growth actual anticipated earnings per share · changes expectations future financial performance changes financial estimates buysell recommendations securities analysts · changes governmental regulations policies china · competitor’s announcement new products services technological innovations · operating stock price performance comparable companies · news commentary emanating media securities analysts government bodies china relating us industry general market conditions domestic international macroeconomic factors unrelated performance may also affect stock price reasons investors rely recent trends predict future stock prices financial results addition following periods volatility company’s securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management’s time resources addition public announcements china telecom china netcom china mobile china unicom exert significant influence many major customers china may contribute volatility price stock price stock may react announcements softbank corp related entities including softbank america inc significant influence management affairs could exercise best interests stockholders softbank corp related entities including softbank america inc collectively “softbank” beneficially owned approximately 128 outstanding stock december 31 2004 result softbank ability influence matters submitted stockholders approval well management affairs matters could require stockholder approval include · election removal directors · merger consolidation company · sale substantially assets concentration ownership may delay prevent change control discourage potential acquirer making tender offer otherwise attempting obtain control company could decrease market price common stock delaware law charter documents contain provisions could discourage prevent potential takeover even transaction would benefit stockholders companies may seek acquire merge us acquisition merger company could result benefits stockholders including increase value common stock provisions certificate incorporation bylaws well provisions delaware law may discourage delay prevent merger acquisition stockholder may consider favorable provisions include · authorizing board directors issue additional preferred stock · prohibiting cumulative voting election directors · limiting persons may call special meetings stockholders · prohibiting stockholder action written consent · creating classified board directors pursuant directors elected staggered three year terms · establishing advance notice requirements nominations election board directors proposing matters acted stockholders stockholder meetings together holders convertible subordinated notes due 2008 face variety risks related notes holders convertible subordinated notes due 2008 “notes” face variety risks respect notes including following · may limited ability purchase notes event change control either cash stock could result defaulting notes time change control purchases stock would subject market risk · event default senior debt including one subsidiaries could restrict ability purchase pay amounts due notes paying senior debt full may sufficient assets remaining pay amounts due notes · listed trading market notes could negative impact market price notes · significantly increased leverage result sale notes could adverse impact ability obtain additional financing working capital · hedging transactions related notes common stock transactions well changes interest rates creditworthiness may affect value notes common stock · notes might rated may receive lower rating anticipated investors ultimately negative affect price notes common stock · addition subject various covenants obligations pursuant terms indenture governing notes “indenture” default certain obligations unpaid principal accrued interest notes outstanding could become immediately due payable example april 1 2005 technical noncompliance indenture due untimely filing annual report form 10k year ended december 31 2004 failed file annual report within 60 days written notice provided us either trustee indenture holders least 25 aggregate principal amount notes outstanding event default indenture would occured event default indenture occurs payment principal accrued interest notes accelerated business could seriously harmed nasdaq informed us common stock may delisted could materially impair ability investors trade common stock could material adverse effect stock price april 5 2005 received notice staff nasdaq indicating failed comply marketplace rule 4310c14 due fact file annual report form 10k sec march 31 2005 beginning opening business april 7 2005 nasdaq appended fifth character “e” trading symbol common stock requested hearing nasdaq listing qualifications panel “panel” review nasdaq staff’s determination hearing request stayed delisting common stock pending panel’s decision assurance panel grant request continued listing event panel denies request continued listing common stock delisted nasdaq ability investors buy sell shares common stock could materially impaired addition delisting common stock nasdaq could material adverse effect stock price item 7aitem 7 managements discussion analysis financial condition results operations forwardlooking statements annual report form 10k contains forwardlooking statements within meaning federal securities laws statements based information currently available management intend forwardlooking statements covered safe harbor provisions private securities litigation reform act 1995 including statement purposes complying provisions forwardlooking statements include without limitation concerning following expectations nature possible technological industry customer market price sales trends expectations regarding continued future growth business operations expectation regarding fluctuations overall gross profit gross margin product mix annual quarterly results customer base selling prices plans regarding selling marketing campaigns activities expectations regarding ability meet customer needs expectations regarding future relationship suppliers expectation regarding positive effect recent acquisitions expectations regarding increased selling marketing research development general administrative expenses expectations regarding future amortization intangible assets expenses plans expectations regarding restructuring cost reduction efforts expectations regarding future performance certain joint ventures expectation regarding continued significant investment research development plans regarding research development ipbased access services expectations regarding development introduction new products plans expand digital product offerings expectations regarding future introduction success tdcdma products plans regarding support enhancement ipbased wireless broadband services expectations regarding integration cdma2000 mswitch platform expectations regarding future periods competition expectations regarding nature competitors expectation regarding ability competitors influence governmental policy formation interpretation expectations regarding functionality costeffectiveness performance products expectations regarding future investments expectations regarding future levels cash equivalents well expectation existing cash equivalents sufficient finance operations foreseeable future expected utilization derivative financial instruments expectations regarding demand pas products expectations regarding technological market importance pas china expectations regarding future subscriber growth china expectations regarding future importance china handset market expectations regarding development 3g network china expectations regarding licensing requirements ability receive licenses china pas system products expectations regarding sales performance products expectations regarding key markets expectations regarding consolidation telecommunications industry plans reinvest cost savings derived employee terminations expectations regarding growth chinas telecom markets expectation business continue significantly influenced political economic legal environment china well expectations nature political economic legal reform china international markets expectations regarding future receipt financial subsidies local chinese governments expectations regarding market share percentages products expectations regarding future allocation net sales product group business segment geographic region expectations regarding efficiencies hope achieve supply chain capability plans expectations regarding growth management expectations regarding expansion new markets including plans pursue opportunities cdma products multiple markets plans improve gross margins plans regarding use available funds including payment dividends plans regarding recent accounting pronouncements expectations regarding effect announcements expectations regarding timing completion cellon transaction plans respect legal proceedings expectations regarding effect proceedings expectations regarding remediation technical default 78 convertible subordinated notes due 2008 plans implement measures remediate material weaknesses expectations regarding effect remediation measures additional forwardlooking statements may identified words anticipate expect believe intend similar expressions relate us management words designed intended similar expressions relate products services investors cautioned forwardlooking statements inherently uncertain statements subject risks uncertainties may cause actual results events differ materially detailed discussion risks uncertainties see factors affecting future operating results section form 10k guarantee future results undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k restatement consolidated financial statements december 2005 discovered two previously unknown side letter agreements provided customer india side letter agreements obligated us deliver variety software bug fixes features updates upgrades additional consideration contrary policy side letter agreements withheld financial management companys independent registered public accounting firm result neither management independent registered public accounting firm able properly evaluate effect recognition revenue contracts customer discovery side letter agreements prompted investigation independent legal counsel ordered direction audit committee companys board directors result independent review conducted audit committee board directors identified accounting errors impacted certain previously issued financial statements determined previously issued financial statements related financial information years ended december 31 2004 2003 corresponding quarterly periods therein first three quarterly periods 2005 restated correct accounting errors identified periods restated financial statements include number restatement adjustments relating errors accounting revenue rebate accrual inventory reserves miscellaneous items restatement adjustments decreased net income approximately 36 million diluted earnings per share approximately 002 per share year ended december 31 2004 decreased net income approximately 57 million diluted earnings per share approximately 005 per share year ended december 31 2003 addition restatement adjustments impacted previously issued financial statements quarterly periods years ended december 31 2005 2004 2003 accordingly referenced amounts annual report form 10k prior periods mentioned restated reflect amounts restated basis additional information regarding individual restatement adjustments see note 2 restatement financial statements notes consolidated financial statements overview design manufacture sell telecommunications equipment handset products provide services associated operation telecommunication equipment products deployed installed globally primarily wireless wireline telecommunications service providers provide extensive range products transportation voice data video traffic service providers differentiate products designed reduce network complexity integrate high performance capabilities allow simple transition next generation networks personal communications division personal communications division pcd distribution channel code division multiple access cdma handset market pcd established acquisition wireless handset division audiovox corporation acc november 2004 see note 5 consolidated financial statements acquired accs sales service support infrastructure cdma handset brand access supplychain channels product marketing expertise key relationships cdma operators north south america believe distribution channel strengthens position handset market providing additional volume benefit economies scale manufacturing sourcing development 2005 pcd became largest segment basis net sales generating 47 total sales primarily due fact 2005 full year pcd operations reflected results sales wireless infrastructure segment declined significantly gross margins pcd distribution marketing services much lower margins traditionally realized operating segments plan improve pcd gross margins supplying cdma handsets design manufacture introduced one cdma handset model 2005 plan introduce four additional models 2006 historically pcd relied upon limited number manufacturers supply handset products 2005 one vendor accounted approximately 63 pcd purchases vendor continue supply pcd existing handset models plans sell new models directly customers plan extend supplier base introducing models design expanding relationships manufacturers expect see flat declining sales first half 2006 make transition wireless infrastructure handsets personal access service pas infrastructure handset products primarily sold china historically market largest believe continue important market current future technologies percentage sales generated china declined 32 total sales 2005 79 2004 decline due maturation pas market coupled proportionally increased sales outside china organic growth acquisitions 2005 sales wireless infrastructure products declined 64 primarily due customers china reducing capital spending anticipation next generation technology networks shifting pas investments geographical extension expanding capacity improving quality existing networks 2005 sales handset products declined 37 primarily due declines total market size average selling price decline handset market size result lower subscriber growth 2005 driven lower marketing efforts service providers margin rate products decreased six percentage points primarily due competitive pricing pressures believe average price per unit pas handsets continue experience rate decline due consolidation manufacturers pas handsets according market research firm gfk china average selling prices pas handsets remained approximately 60 since second quarter 2005 total market share held top 3 vendors increased 80 2005 continue focus product cost reductions increased sale handset models lower cost chipsets improve overall gross margins pas handsets despite market conditions experienced 2005 expect longterm demand pas products continue believe pas remain important technology market china foreseeable future according chinas ministry information industry mobile phone penetration rate 30 end 2005 still far behind developed countries world means almost 70 chinas 13 billion population still mobile phone service chinas economic growth urbanization continues coming years believe represents huge market demand costeffective communication services addressable market pas end fiscal year 2005 number pas subscribers exceeded 87 million users increase 31 prior year positioned extension fixedline service affordable citywide mobile phone service pas significant cost advantage 2nd 3rd generation mobile phone technologies terms existing infrastructure network lower service tariffs restructuring programs past years undertaken significant globalization program intend continue build global sales outside china intend continue improve internal supply chain inventory management processes ensure timely deliveries also intend continue implement enhance administrative infrastructure assist globalization part program reviewed corporate wide operations aim narrowing strategic focus regard market concentration product portfolio selection resources allocation second quarter fiscal 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products align investments key growth opportunities primary goal improvements optimize cost structure enable us deliver consistent sustainable profitability stockholders 2005 incurred approximately 353 million restructuring expenses consisting 152 million severance payments approximately 1595 employees terminated workforce reduction programs 145 million asset impairments writeoff equipment licenses associated discontinued products 56 million inventory writeoff discontinued products restructuring expense related severance asset impairments reported operating expense inventory writeoff reported cost sales statements operations see note 23 consolidated financial statements continue efforts evaluate certain operations actively pursue opportunities divest additional noncore assets may incur additional costs associated future actions align business operations debt extinguishment equity issuance entered agreements exchange 4988100 shares common stock fair value approximately 376 million approximately 571 million cash 1279 million aggregate principal amount outstanding 78 convertible subordinated notes due 2008 notes five note holders exchanges considered early extinguishments debt aggregate fair value common stock cash less carrying value notes accordingly recorded gains 314 million exchanges december 31 2005 reduced nearly onethird long term debt obligations compared amount obligations december 31 2004 asset impairment management held series planning meetings september 2005 assess current business forecast reporting units assessment analyzed various factors including reduction rate growth pas subscribers delay expected granting 3g licenses china japan challenges product quality primarily broadband reporting unit narrowing strategic focus related product offering greater expected revenue margin decline due continued pricing pressures several key markets determined certain circumstances changed sufficiently indicate fair value certain reporting units may book values result conducted evaluation longlived assets including goodwill intangible assets certain property plant equipment impairment recorded impairment charges based upon analysis recorded impairment charges totaling 2181 million consisting 1929 million goodwill 17 million intangible assets 235 million property plant equipment see note 10 consolidated financial statements management also evaluated expected realization deferred tax assets 2005 recorded noncash charge 2181 million provide full valuation allowance net deferred tax assets december 31 2005 united states china softbank china december 2005 sold 10 ownership interest softbank china holdings pte ltd softbank china softbank corp related party owner remaining 90 softbank china 569 million result recorded income gain 472 million management fees transaction expenses net investment carrying value see note 9 consolidated financial statements change management may 5 2006 hong liang lu notified us resignation president chief executive officer chairman board effective december 31 2006 ying wu chief executive officer china operations vice chairman board assume position chief executive officer effective january 1 2007 thomas toy currently independent director company assume position chairman board effective january 1 2007 results operations effective first quarter 2005 reorganized business based principally upon product families realigned business five operating units broadband infrastructure ii wireless infrastructure iii handsets iv pcd v service chief operating decision makers accordance sfas 131 disclosures segments enterprise related information began evaluating financial results operations five operating units broadband infrastructure primarily comprised ian8000 ipbased digital subscriber line access multiplexer gepon netring™ rollingstream™ wireline products wireless infrastructure primarily comprised pas cdma products handsets primarily comprised pas handsets pcd primarily comprised cdma handsets digital devices also provide installation certain maintenance services periods presented total services sales accounted less 10 net sales net sales fiscal 2005 vs 2004 revenues increased 9 29 billion 2005 driven higher pcd revenues united states broadband infrastructure revenues japan offset declining wireless infrastructure handsets revenue china pcd established selected assets liabilities acquired audiovox november 2004 2005 pcd revenues increased 11 billion proportionate number periods reported due pcd revenues united states almost quadrupled represent 46 total company revenues additionally verizon wireless accounted 25 pcd revenues 12 total company revenues 2005 broadband infrastructure revenues doubled 2005 driven sales ian8000 equipment japan telecom affiliate softbank corp related party softbank corp affiliates accounted 78 broadband infrastructure revenues 13 total company revenues 2005 expect revenue growth gross margins experienced japan telecom agreements 2005 continue level future experienced 64 decline wireless infrastructure revenues 37 decline handsets revenues due lower demand china market pas systems handsets pas subscriber growth declined 70 2004 31 2005 believe demand pas products weakened telecommunication service providers reduced expenditures deploying pas systems promoting pas handsets anticipation introduction new technology next generation telecommunication equipment however expect longterm demand pas products continue believe pas remain important technology market china foreseeable future due mix higher growth segments declining revenues pas dominated wireless infrastructure handsets segments revenues customers china represent 32 total company revenues 2005 sales zhejiang province jiangsu province accounted approximately 15 13 respectively sales wireless infrastructure segment individual province sales accounted 10 total company revenues 2005 fiscal 2004 vs 2003 38 increase sales 19 billion 2003 27 billion 2004 primarily attributable increased demand products services results geographic expansion markets new customer wins prior years continued contribute increased demand products services addition recent acquisitions also attributed growth sales example pcd division contributed 2774 million sales 2004 subsequent acquisition november 1 2004 net sales growth excluding pcd primarily due increase subscribers requiring telecommunication providers expand telecommunication infrastructures wireless infrastructure revenues generally affected timing customer acceptance 2004 percentage total sales wireless product line increased 36 51 generally result international customers undertook number wireless infrastructure expansion experienced increase wireless infrastructure revenue 2004 2003 handset revenue decreased 2343 million 24 due primarily lower average selling prices resulting increased competition units shipment remained level 2003 chinese carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier group china customers together province treat province one customer since level purchasing decisions made december 31 2004 2003 31 customers china 2004 guangdong jiangsu provinces accounted 12 10 net sales respectively 2003 hei long jiang province accounted 11 net sales gross profit cost sales consists primarily material labor costs associated manufacturing assembly testing products costs associated installation customer training warranty costs fees agents inventory provision overhead cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers manufacture assemble cdma handsets gross profit affected average selling prices material costs product mix impact warranty charges well inventory reserves addition acquisition pcd november 2004 resulted higher percentage revenue associated product offering lower margins gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate period result shifts product mix stage product life cycle anticipated decreases average selling prices ability reduce cost sales believe gross profit percentage net sales fluctuate future fiscal 2005 vs 2004 gross profit declined absolute dollars percentage net sales absolute decrease gross profit dollars primarily result 62 decline wireless operating segment gross profit reflective maturing pas market china offset higher absolute gross profit dollars broadband pcd primarily attribute decrease gross profit percentage sales impact pcd margins lower handsets margins due declines pas handset average selling prices offset higher broadband infrastructure gross margins achieved ian8000 products relating sales japan telecom first quarter pcd contributed 528 million gross margin 2005 contributed 119 million 2004 acquire pcd november 2004 gross profit 2005 negatively affected 56 million inventory writeoff associated discontinued products fiscal 2004 vs 2003 gross profit varies across different product lines affected product mix average selling prices cost materials gross profit percentage declined approximately ten percentage points due several factors broadband infrastructure segment declined 727 million absolute terms 53 2003 20 2004 percentage net sales segment experienced shift product mix traditional dslam product newer optical broadband products lower initial margins due costs related product introduction addition newly acquired pcd segment lower gross margins segments lower pcd gross margin resulted decrease consolidated gross margin 21 handset segment also experienced decline gross margin percentage declining 29 18 primarily attributable increased competitive market pricing pressure additionally gross profit negatively impacted 40 million increase provision inventory reserves operating expenses following table summarizes operating expenses selling general administrative expenses sga include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs research development expenses consist primarily compensation benefits employees engaged research design development activities costs parts prototypes equipment depreciation third party development expenses portion costs fixed difficult quickly reduce periods lower sales however second quarter 2005 announced initiated restructuring plan resulted reduction certain sga research development costs believe continued investment research development critical longterm success selling general administrative fiscal 2005 vs 2004 selling general administrative expenses increased 685 million 23 fiscal 2005 compared fiscal 2004 increase sga primarily due increased headcount overhead 208 million includes pcd operations exist november 2004 ii increased professional services fees 185 million 2005 2004 associated supply chain management system integration sarbanesoxley act compliance projects audit fees iii increased litigation legal costs 133 million iv increase facilities expense 124 million hangzhou china office placed service october 2004 expect actions associated 2005 restructuring plan reduce current expenditure run rate fiscal 2004 vs 2003 sga expenses increased 1150 million 2004 one percentage point net sales compared 2003 increase 2003 2004 primarily due hiring additional personnel support increased business activities china globally selling general administrative headcount increased approximately 49 average 2033 employees 2003 average 3038 employees 2004 additionally professional services fees increased approximately 317 million 2004 2003 due expansion overall global activities also driven part expenses approximately 133 million related systems implementations sarbanesoxley compliance supply chain management consulting fees 2004 allowance doubtful accounts increased 312 million december 31 2003 512 million december 31 2004 due primarily increased size receivable balances china net increase allowance doubtful accounts partially offset refinement estimation methodology assumptions fourth quarter 2004 revision allowance doubtful accounts assumptions reflect changing 2004 collection experience analysis collectibility trends within china accounts receivable balances throughout 2004 experienced slower collections cycles slowdown attributed variety reasons principally changes customers business practices surrounding payment lesser degree maturation telecommunications sector lengthening collection cycle caused us reevaluate provisioning methodology change estimation resulted 101 million lower provision doubtful accounts would provided previous assumptions research development fiscal 2005 vs 2004 research development rd expenses fiscal 2005 approximately 8 net sales 2005 compared 8 net sales 2004 absolute amounts rd expenses increased 281 million 13 compared prior year absolute increase primarily due increase personnel expenses approximately 201 million attributed 15 increase average head count 2757 3170 employees due retention personnel various acquisitions well hiring personnel support product enhancements development primarily broadband handsets segments ii increase professional costs 32 million associated outsourced projects driven numerous product development projects primarily handsets segment expect actions associated 2005 restructuring plan reduce current expenditure run rate additionally november 2005 entered agreement transfer nonpas wireless research development china cellon though average headcount rd increased 2005 total headcount rd declined 3270 end fiscal 2004 2737 end fiscal 2005 reductions occurring wireless infrastructure segment fiscal 2004 vs 2003 research development expense 2190 million 8 net sales 2004 compared 1557 million 8 net sales 2003 rd expenses increased 634 million primarily due hiring additional technical personnel support product enhancements new product development research development headcount increased approximately 52 average 1809 employees 2003 average 2757 employees 2004 significant majority increase research development expenses 2003 2004 attributable higher payroll payrollrelated costs resulting continued expansion research development teams china full year salaries commworks personnel compared seven months salaries period prior year approximately 100 employees hired conjunction acquisitions telos hsi 2004 inprocess research development fiscal 2005 vs 2004 07 million 14 million charges inprocess research development iprd 2005 2004 respectively related acquisitions pedestal networks telos charges iprd based part upon independent valuations assessing iprd projects considered key product characteristics including products development stage acquisition date products life cycle products future prospects also considered rate technology changes relevant industry industrys competitive environment economic market outlook fiscal 2004 vs 2003 iprd charge 14 million 2004 resulted acquisition telos based part independent valuation iprd charge 2003 resulted acquisition commworks three smaller acquisitions rollingstreams xebeo shanghai yi yun telecom technology co ltd accounted 13 million 62 million 19 million 13 million respectively based independent valuations amortization intangible assets fiscal 2005 vs 2004 amortization intangible assets expenses increased 103 million 2005 compared 2004 increase amortization intangible assets 2005 due intangibles recorded result acquisitions telos may 2004 acc november 2004 giga january 2005 results current year amortized portion prior year case acc telos amortization expenses next five years beginning year ended december 31 2006 expected amount 189 million 160 million 127 million 69 million 51 million respectively fiscal 2004 vs 2003 amortization intangible assets increased 72 million 2004 primarily due addition 686 million intangible assets recorded upon acquisitions selected assets acc telos 2004 restructuring costs fiscal 2005 second quarter fiscal 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products addition restructuring plan designed allow us reduce operating costs product line align investments key growth opportunities facilitate process globalization primary goal improvements optimize cost structure enable us deliver consistent sustainable profitability stockholders 2005 company incurred approximately 297 million operating expenses relation restructuring plan actions primarily consisting 152 million related severance payments 145 million asset impairments primarily related impairment equipment licenses associated discontinued products included restructuring costs 297 million noncash charges 134 million asset impairments made cash payments 166 million severance benefits 12 million accrued expenses settled 2006 part restructuring plan recorded 56 million inventory writeoff associated discontinued products 2005 restructuring expense related inventory writeoff included cost sales consolidated statements operations end 2005 approximately 1595 employees terminated placed workforce reduction programs asset impairment fiscal 2005 third quarter 2005 determined certain circumstances changed sufficiently indicate fair value certain reporting units may book values result conducted evaluation longlived assets including goodwill intangible assets certain property plant equipment impairment recorded impairment charges intangible assets classified goodwill indefinite lives amortized intangible assets determinable lives amortized estimated useful lives perform annual impairment test goodwill november 1st year also test impairment annual tests triggering event occurs may effect reducing fair value reporting unit respective carrying values conducting goodwill impairment analysis calculate impairment charges based twostep test prescribed sfas 142 goodwill intangible assets sfas 142 using estimated fair value respective reporting units use present value future cash flows respective reporting units determine estimated fair value reporting unit implied fair value goodwill also test longlived assets asset groups potential impairment accordance sfas 144 accounting impairment disposal longlived assets longlived assets tested recoverability based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values management held series planning meetings september 2005 assess current business forecast reporting units assessment analyzed various factors including reduction rate growth pas subscribers third quarter delay expected granting 3g licenses china japan challenges product quality primarily broadband reporting unit narrowing strategic focus related product offering greater expected revenue margin decline due continued pricing pressures several key markets management concluded factors combined represented triggering event due existence triggering event september 2005 determined significant adverse changes business outlook could indicate carrying value certain long lived assets groups may recoverable could indicate fair value reporting units may fair value result performed interim impairment tests goodwill certain long lived tangible intangible assets goodwill performed impairment analysis pursuant sfas 142 september 30 2005 reporting units compared fair value reporting units carrying value determined fair value reporting unit using present value comparable company techniques based part upon independent valuation fair values reporting units reconciled overall market capitalization september 30 2005 based impairment assessment noted goodwill impairment charge 1929 million estimated recorded three months ended september 30 2005 write full value goodwill wireless broadband handsets pcd business units second step goodwill impairment test broadband handsets segments completed third quarter wireless pcd units performed fourth quarter 2005 reaffirmed estimate third quarter goodwill fully impaired adjustment amount previously recorded longlived assets also tested longlived assets asset groups potential impairment third quarter 2005 accordance sfas 144 accounting impairment disposal longlived assets based analysis determined undiscounted expected future cash flows broadband handset asset groups less carrying value net assets determined relative estimated fair value tangible assets comparison similar assets wherever practical based quoted market prices taking consideration asset type age condition physical location asset result analysis recorded impairment charge 141 million longlived tangible assets related broadband asset group 94 million longlived tangible assets related handset asset group addition determined fair value technologyrelated intangible assets within broadband handset asset groups calculated using discounted future cash flows less carrying value net assets recorded net asset writeoff 17 million following table summarizes impairment charges incurred 2005 fiscal 2004 second quarter 2004 consummated acquisition hyundai syscomm inc hsi order gain foothold cdma infrastructure market encountered difficulties integrating hsi operations cdma operations acquisition fourth quarter 2004 decided winddown legacy operations transfer employees support handset engineering korea decision substantially abandon operations occurred within nine months acquisition hsi operations integrated therefore written remaining values intangible assets associated acquisition totaling 127 million year ended december 31 2004 income expense interest income fiscal 2005 vs 2004 interest income 71 million 2005 compared 62 million 2004 respectively increase average cash shortterm investment balances 2005 compared 2004 coupled increase average interest rate resulted increase interest income fiscal 2004 vs 2003 interest income 62 million 2004 compared interest income 32 million 2003 interest income increased due higher average cash balances 2004 compared 2003 primarily due cash generated financing activities interest expense fiscal 2005 vs 2004 interest expense 168 million 2005 compared 69 million 2004 increase interest expense attributable increase average shortterm borrowings china form bank loans well increase borrowing rate average borrowings outstanding 6178 million 5862 million 2005 2004 respectively average interest rates 27 12 2005 2004 respectively fiscal 2004 vs 2003 interest expense 69 million 2004 compared 47 million 2003 increase 22 million interest expense part attributable interest associated convertible debt issued march 2003 accrued rate approximately 14 million per quarter addition 2004 incurred interest expense relating shortterm borrowings china increases interest expense offset increase capitalized interest approximately 08 million relating construction new manufacturing facility hangzhou china gain extinguishment debt fiscal 2005 gain extinguishment debt net writeoff unamortized issuance expenses 314 million 2005 year ended december 31 2005 4988100 shares common stock fair value approximately 376 million approximately 571 million cash exchanged 1279 million aggregate principal amount outstanding 78 convertible subordinated notes due 2008 income expenses fiscal 2005 vs 2004 net income 437 2005 compared 154 million 2004 net income 2005 primarily consisted gain sale softbank china 472 million 60 million consumption tax refund japan partially offset foreign exchange loss 100 million december 2005 sold 10 ownership softbank china holdings pte ltd softbank china softbank corp related party owner remaining 90 softbank china 569 million accordingly recorded income gain 472 million management fees transaction expenses net investment carrying value foreign exchange losses primarily consist losses attributed appreciation us dollar japanese yen denominated cash accounts receivable offset gains companys china subsidiaries attributed appreciation chinese renminbi us dollar denominated shortterm debt payables yendenominated sales significantly higher 2005 compared 2004 fiscal 2004 vs 2003 net income 154 million 2004 compared 53 million 2003 net income 2004 primarily consisted 103 million financial subsidies received local chinese government first two quarters 2004 expect receive additional financial subsidies payments near future subsidies encourage investment local research development manufacturing activities net income also included japanese consumption tax refunds approximately 53 million net investment gains dividends approximately 09 million offset foreign exchange losses approximately 07 million income tax expense benefit fiscal 2005 vs 2004 establishing deferred income tax assets liabilities make judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income record deferred tax assets liabilities evaluate need valuation allowances reduce deferred tax assets realizable amounts 2005 believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets result review undertaken concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment accordingly recorded 2181 million noncash charge united states china income tax expense 1179 million 2005 compared benefit restated 119 million 2004 increase income tax expense primarily attributable 2181 million noncash charge provide full valuation allowance net deferred tax assets december 31 2005 united states china also recorded 95 million increase tax expense due revaluation deferred tax assets china statutory rate changes certain companys subsidiaries china addition provided tax benefit current year losses incurred tax credits generated united states china three primary reasons negative 32 effective income tax rate 2005 despite pretax loss year fiscal 2004 vs 2003 recorded income tax benefit 119 million 2004 expense 421 million 2003 negative 20 effective income tax rate 2004 three principal reasons negative income tax rate 2004 first reason relates mix income loss income tax jurisdictions united states 35 tax jurisdiction incurred loss 244 million taxes therefore recorded tax benefit approximately 85 million related 2004 domestic losses international jurisdictions recognized approximately 820 million income 2004 however net statutory tax rate international locations principally china substantially lower 35 us statutory rate second company experienced significant tax benefit resulting increase tax rate applied temporary differences within china companies 2003 company recorded deferred tax assets china jurisdiction 15 rate based upon location within high tech zone moved new facility china fourth quarter 2004 longer qualified lower rate consequently rate applied deferred tax assets liabilities increased 24 resulting benefit higher rate applied deferred tax assets 263 million third reason income tax benefit utilization tax credits primarily within united states resulted reduction effective income tax rate approximately four percentage points equity net loss affiliated companies fiscal 2005 vs 2004 equity net loss affiliated companies 55 million 2005 compared 13 million 2004 2005 incurred loss joint venture investment matsushita communication industrial co ltd matsushita 48 million gain 07 million investment restructuring fund 1 loss 2004 attributable joint venture investment matsushita december 2005 venture partners agreed liquidate venture fiscal 2004 vs 2003 equity net loss affiliated companies 13 million 2004 compared 53 million 2003 loss periods primarily attributable loss recognized joint venture investments matsushita communication industrial co ltd segment reporting historically managed business single reportable segment effective fourth quarter 2004 determined chief operating decision makers accordance sfas 131 disclosures segments enterprise related information evaluating performance making operating decisions allocating resources based two operating segments china ii regions referred international november 1 2004 acquired selected assets wireless handset division audiovox corporation acquired business integrated operation separate distinct operating division referred personal communications division pcd result december 31 2004 organized principally based geographical market locations three operating segments china international pcd segment consisted one reporting unit effective first quarter 2005 decided reorganize business based principally upon product families realigned business five operating units broadband infrastructure ii wireless infrastructure iii handsets iv pcd v service operating unit represents reporting segment operating unit responsible production sales management currently evaluate operating performance allocate resources reporting segments based segment gross profit cost sales direct expenses relation production assigned reporting segments corporate headquarters expenses nonoperating items allocated segments accounting policies used measuring segment assets operating performance used consolidated level broadband infrastructure fiscal 2005 vs 2004 largest broadband infrastructure customer softbank japan representing approximately 78 total broadband sales 2005 due customer concentration segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts 2005 broadband infrastructure net sales doubled primarily due two large transactions softbank 2720 million revenue recognized first quarter certain agreements entered japan telecom primarily ian8000 product 577 million revenue recognized fourth quarter rolling stream™ internet protocol television iptv product launched yahoo bb fourth quarter 2004 approximately 791 million revenue recognized sales primarily gepon netring™ products softbank gross profit improvement absolute dollars percentage net sales largely due margins ian8000 products relating japan telecom agreements first quarter 2005 ii low margins fourth quarter 2004 gepon netring™ products iii offset higher warranty costs 2005 adsl gepon netring™ products experienced higher warranty costs broadband infrastructure segment introduced new product may negatively impact future margins expect revenue growth gross margins experienced japan telecom agreements recognized 2005 continue level future ability continue grow broadband infrastructure operating segment dependent expansion current product base successful introduction acceptance new innovative broadband infrastructure product offerings particular believe iptv market presents meaningful growth opportunity currently offer initial market acceptance rollingstream™ iptv product china japan geographic regions addition investments made develop market innovative broadband products also loaned 124 million china based company support development technical service information networking technology venture china loan partially secured indirect ownership interest venture ventures continuing viability also heavily dependent future provisioning equipment determined primary beneficiary venture consolidated ventures results operations results december 31 2005 expect continue invest development important market future fiscal 2004 vs 2003 increase net sales due introduction gepon netring™ products fourth quarter 2004 decline gross profit driven shift product mix traditional dslam product newer optical broadband products gepon netring™ new broadband products experienced lower initial margins upon product introduction wireless infrastructure fiscal 2005 vs 2004 2005 approximately 86 wireless infrastructure sales attributed pas systems china net sales declined 64 demand decreased due product maturation resulting transition new system installations system expansions ii customers reduced current capital spending anticipation next generation technology gross margin improved two percentage points primarily due impact china customers shifting investments pas geographical extension expanding capacity improving quality existing network compared building networks new areas cost expanding capacity much lower additionally less competition pricing pressure pas network expansion contracts included cost goods sold 2005 inventory writeoff 56 million negligible effect gross profit percentage sales expect future pas subscriber growth lower rates anticipate moderate declines pas system spending plan aggressively pursue opportunities cdma products multiple markets though anticipate sales fully offset decline pas sales 2006 fiscal 2004 vs 2003 increase net sales primarily result rapid geographical extensions pas network since 2003 peaked second half 2003 first half 2004 gross margin 2004 consistent 2003 pcd fiscal 2005 vs 2004 revenue pcd operating segment 13693 million 2005 compared 2774 million 2004 revenues pcd significantly greater 2005 2004 since acquisition wireless handset division audiovox corporation creation pcd occur november 2004 revenues 2005 consistent 2004 pro forma revenues see note 5 consolidated financial statements gross profit percentage net sales recognized handset sales pcd consistent 4 2005 2004 gross profit percentage net sales typically lower realized pas systems based handsets fiscal 2005 vs 2004 net sales declined 37 primarily due decreases volume price pas handsets china units sold declined 102 million compared 140 million 2004 believe 27 volume decline primarily attributed lower demand pas handsets resulting slower subscriber growth 2005 pas subscriber growth slowed 31 70 2004 service providers reduced marketing efforts pas handsets anticipation next generation technology networks ii inability supply product customers fourth quarter due component shortages result shortages key components printed circuit boards flash memory radio frequency components fourth quarter unable fill customers orders chinese new year sales promotions believe average selling price per unit declined 18 due combination competitive pricing pressures first half year shift product mix sales lowerend models also experienced continuing pricing pressure china telecommunications market since later part 2003 driven average unit selling prices lower 2006 beyond continue expect cumulative pas subscriber growth lower rates gross profit percentage sales decreased six percentage points primarily due decline pas handset average unit price offset lower material costs renegotiated prices vendors shift product mix lowerend higher margin models continue focus product cost reductions increased sale handset models lower cost chipsets improve overall gross margins pas handsets fiscal 2004 vs 2003 decrease net sales primarily attributable declines market share several new manufacturers entered market late 2003 according market research firm gfk market share pas handsets dropped approximately 20 percentage points early 2003 late 2004 sold total 140 million pas handsets 2004 compared 143 million units 2003 average selling price per unit declined 21 decreasing unit volume along price erosion also contributed decline gross profit handsets segment 2004 absolute terms percentage sales service fiscal 2005 vs 2004 increase service segment revenue due continuing development service product offerings 126 million revenue gross profit associated promotional services japan telecom recognized first quarter 2005 increase absolute gross profit gross profit percentage sales due increase overall net sales segment performed relatively consistent headcount well increase china services lower associated costs 126 million revenue gross profit associated promotional services japan telecom recognized first quarter 2005 contributed significantly total gross profit year ended december 31 2005 fiscal 2004 vs 2003 may 2003 acquired selected assets commworks division 3com corporation including portfolio voice data networking customer support professional services increase service operating segment revenue 2003 2004 primarily due increase number periods operations reported 2004 related commworks services gross profit declined twelve percentage points due higher personnel professional services costs required support integration warrantyrelated work primarily broadband segment related parties softbank recognized revenue 3952 million 1437 million 1844 million years ended december 31 2005 2004 2003 respectively respect sales telecommunications equipment affiliates softbank corp softbank significant stockholder company softbank offers asynchronous digital subscriber line adsl coverage throughout japan marketed name yahoo bb support softbanks fibertothehome service sales carrier class gigabit ethernet passive optical network gepon product well multiservice optical transport product netring™ addition support softbanks new iptv sales rollingstream™ product included accounts receivable december 31 2005 december 31 2004 693 million 868 million respectively related transactions 2005 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period 163 million included long term deferred revenue respect agreements december 31 2005 additionally 63 million included current deferred revenue december 31 2005 insignificant amounts included deferred revenue december 31 2004 august 2004 entered several agreements japan telecom co ltd jt wholly owned subsidiary softbank agreements relate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt determined service activities revenue recorded net expected promotional spending provided activities past could estimate fair value services determined guidance sab 104 revenue related agreements could recognized goods services delivered received final acceptance equipment contemplated agreements quarter ended march 31 2005 december 31 2004 2175 million included customer advances related agreements december 31 2005 54 million included customer advances related softbank agreements promotional services discussed involved contracting third party promotional vendors turn facilitated marketing subscriber recruitment jt fibertothehome program fourth quarter 2004 determined would end involvement jt promotional program completion contract discussed accordingly late fourth quarter 2004 first quarter 2005 either cancelled assigned another party third party contracts promotional vendors related jt contract termination assignment third party promotional agreements well effective satisfaction obligations jt agreements satisfied revenue recognition criteria agreements net value promotional services value equipment delivered totaled 2048 million reported quarter ended march 31 2005 also entered agreement jt third quarter 2004 supply chassis equipment shipped agreement considered linked ian8000 sale noted also deferred completion abovementioned promotional activities revenue recognition criteria related sale ian8000 equipment satisfied first quarter 2005 revenue related chassis sale 665 million reported quarter ended march 31 2005 year ended december 31 2005 sales softbank included 2801 million respect telecommunications equipment sold jt none 2003 2004 invested softbank china restructuring fund 1 investment vehicles established softbank december 2005 sold investment softbank china softbank 569 million incurred management fee transaction costs 44 million recognized gain 472 million refer note 9 longterm investments july 17 2003 entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank corp terms agreement loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements loan subordinated certain senior lenders bb modem repayments payable us 42month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loans assess loan impairment whenever events changes circumstances indicate carrying amount may recoverable periodically review underlying quality asset pool securing loan assess whether impairment incurred needs recorded 2005 2004 recorded 13 million interest income respect loan receivable december 31 2005 2004 approximately 90 million 118 million respectively included longterm assets april 5 2003 repurchased 80 million shares common stock beneficially owned softbank purchase price 17385 per share total cost repurchase 1396 million including transaction fees connection repurchase transaction softbank entered agreement us offer sell otherwise dispose common stock period one year subject number exceptions december 31 2005 softbank beneficially owned approximately 122 outstanding stock august 29 2002 completed repurchase 60 million shares common stock 729 million softbank acoustek intl corp obtain consulting services acoustek intl corp acoustek employs individual related one officers paid acoustek 01 million 2005 consulting services provided individual cellon october 2002 entered license royalty agreement cellon international holding corporation cellonin ownership interest paid 08 million license technology development certain handset products china per terms royalty agreement required pay cellon 3 per unit shipped minimum 01 million units agreement material overall financial results cellon november 2005 entered agreement cellon expected completed first half 2006 exchange preferred shares cellon transferred fixed assets net book value 29 million lease workforce place consisting 156 engineers additionally amended license agreement prepaid 50 million royalties future product developments evaluated relationship cellon fin 46 determined consolidation required fiberxon outstanding purchase commitment fiberxon 7 ownership interest purchase component parts optical networking products addition provided letter credit 2004 50 million purchase raw materials manufacture component parts letter credit expired 2005 purchases fiberxon totaled 97 million 2005 151 million 2004 03 million 133 million accounts payable fiberxon december 31 2005 2004 respectively matsushita joint venture july 2002 entered joint venture agreement matsushita communication industrial co ltd jointly design develop manufacture sell telecommunication products 49 ownership interest joint venture company performed engineering services joint venture approximately 28 million recognized revenue 2005 december 31 2005 company receivable 01 million december 2005 partners agreed dissolve joint venture global asia partners lp global asia partners lp venture capital fund formed make private equity investments private preipo technology telecommunications companies asia general partner fund also one sales agents june 2002 april 2005 invested total 26 million fund december 31 2005 49 outstanding partnership units org inc 49 ownership global asia partners lp turn significant shareholder org inc 2005 sales 05 million org inc december 31 2005 receivable 02 million deferred revenue 01 million spacetime january 2005 formed joint venture two parties provide mobile communication broadband ip related value added services mongolia operations joint venture consolidated financial statements december 31 2005 03 million included related party receivables 03 million long term debt related one joint venture partners spacetime golden communication technology usa inc spacetime starcom products inc obtain engineering consulting employee placement services starcom products inc starcom 31 owned individual related one officers also member board directors paid starcom 07 million 2005 11 million 2004 14 million 2003 engineering consulting employee placement services provided starcom xalted networks received purchase orders xalted networks company 9 ownership interest totaling approximately 13 million 2005 telecommunications equipment product typically sold us customers charging ten percent procurement fee xalted networks obtaining reselling products equipment delivered 2005 revenue recognized revenue recognition process completed equipment cost included inventory december 31 2005 liquidity capital resources operating activities net cash provided operating activities year ended december 31 2005 2184 million operating cash affected changes accounts receivable inventories income taxes payable accounts payable 2682 million decrease accounts receivable primarily attributable increased collections final quarter 2005 compared final quarter 2004 days sales outstanding 65 days december 31 2005 compared 107 days december 31 2004 shorter days sales outstanding primarily result shift sales china typically long collection cycle united states typically shorter collection cycle decrease inventory balance 1659 million primarily result shift sales pcd segment faster inventory turnover also contributed increase operating cash customer advances decreased 1503 million year ended december 31 2005 customer advances represent cash deposits received customers orders yet received final acceptance upon subsequent receipt final acceptances revenue recognition customer advances reduced revenue cost sales recorded income taxes payable decreased 1102 million due losses incurred 2005 addition accounts payable decreased 878 million due lower inventory lower forecast sales factors contributed decrease operating cash reduction customer advances 2005 primarily due completion revenue earning process agreements japan telecom inc jt affiliate softbank corp well decline sales corresponding cash advances products sold china cash received jt advance revenue recognition advance spending promotional activities reflected customer advances prior periods revenue certain agreements recognized year ended december 31 2005 additional information refer note 22 related party transactions reduction income taxes payable due effects current year tax provision net cash used operating activities year ended december 31 2004 950 million operating cash affected changes accounts receivable inventory customer advances offset changes accounts payable deferred costsinventories customer sites contract 4539 million increase accounts receivable attributable increased sales longer collection periods experienced 2004 increase accounts receivable part due addition pcd business audiovox communications corporation approximately 144 accounts receivable balance outstanding december 31 2004 attributable pcd inventory increased 1759 million 2004 includes 1560 million inventory attributable pcd acquisition customer advances decreased 1169 million year ended december 31 2004 customer advances represent cash deposits received customers orders yet received final acceptance upon receipt final acceptances customer advance reduced revenue cost sales recorded reduction customer advances deferred costs inventory customer sites 2004 largely result customers china transitioning new system installations system expansions generally requires shorter period customer advance acceptance working capital 11 billion increased proportion growth business addition 1750 million increase associated acquisition acc offsetting activity decreased operating cash period net income noncash charges including 127 million provision longlived asset impairment 762 million depreciation amortization 213 million provision doubtful accounts 183 million inventory provision accounts payable increased 977 million consistent increased inventory purchasing inventories customer sites contracts awaiting final acceptance classified deferred costs separate historically considered inventory title risk loss inventory transferred customer revenue costs sales recorded final acceptance received customer deferred costsinventories customer sites contracts decreased 2851 million december 31 2003 december 31 2004 decrease deferred costs resulted greater number customer acceptances corresponding decrease customer advances net cash provided operating activities year ended december 31 2003 452 million operating cash affected changes accounts receivable inventory accounts payable assets offset changes deferred revenue 1510 million increase accounts receivable balance attributable 98 increase sales 2003 reduced net cash provided operations 2003 sold 2988 million notes receivable associated expenses 23 million cash provided operating activities also reduced 680 million 3162 million increase inventory deferred costs respectively operating cash also decreased due 53 million decrease accounts payable decrease operating cash 2003 offset increase customer advances deferred revenue 3172 million 275 million respectively collected approximately 25 billion cash customers 2003 investing activities net cash provided investing activities fiscal 2005 701 million mainly due net proceeds sale investments 1817 million including 569 million received sale softbank china restructuring fund 1 1248 million net sales investment holdings partially offset 644 million property plant equipment purchases 243 million acquisitions giga telecom inc pedestal networks net cash used investing activities 4680 million year ended december 31 2004 significant components investing activities business acquisitions additions property plant equipment net investment shortterm securities cash used business acquisitions totaled 2178 million 2004 including approximately 1783 million selected assets acc 300 million substantially assets liabilities telos 91 million hsi cash used purchase property plant equipment including 571 million construction hangzhou facility totaled 1356 million net cash used purchase shortterm investments 828 million net cash used investing activities 1765 million year ended december 31 2003 change mainly due 1232 million property plant equipment purchases 1067 million business acquisitions offset 696 million net proceeds sale shortterm investments financing activities net cash used financing activities fiscal 2005 2028 million primarily due net repayments 2164 million borrowings including 571 million cash payment connection early debt extinguishments net cash provided financing activities 7427 million year ended december 31 2004 primarily due proceeds raised sale 121 million shares common stock 3925 per share banc america securities llc january 2004 net proceeds approximately 4746 million addition incurred net borrowing 3500 million year existing lines credit china fund operations needs china also received 257 million issuance common stock option warrant exercises offsetting cash provided financing activities first second quarter 2004 used portion capital raised repurchase total 36 million shares common stock average price 3025 per share total cost 1076 million including transaction fees net cash provided financing activities 2753 million year ended december 31 2003 primarily due 589 million proceeds issuance common stock espp stock option exercises 3996 million proceeds net borrowing offset repurchase shares related transaction costs 1396 million purchase convertible bond hedge call option totaling 438 million liquidity working capital 8691 million 11032 million december 31 2005 2004 respectively decrease working capital primarily due reduced accounts receivable inventory current deferred tax assets offset reduced customer advances short term debt income taxes payable cash hand increased 6456 million 2005 5625 million 2004 short term investments decreased 133 million 2005 1363 million 2004 china sales generally denominated local currency due limitations converting renminbi limited ability engage foreign currency hedging activities china cannot guarantee fluctuations foreign currency exchange rates future material adverse effect revenues international sales correspondingly business financial condition results operations contracts negotiated japanese yen maintain bank accounts japanese yen purchasing portions inventories supplies balance japanese yen accounts december 31 2005 approximately 316 million may hedge certain japanese yendenominated balance sheet exposures future movements foreign currency exchange rates using foreign currency forward contracts gains losses fair value hedges intended offset gains losses revaluation japanese yendenominated recognized assets liabilities accordance statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities recognize derivative instruments hedging activities either assets liabilities balance sheet measure fair value intend utilize derivative financial instruments speculative trading purposes accept commercial notes receivable maturity dates three six months customers china normal course business notes receivable available sale 21 million 270 million december 31 2005 2004 respectively may discount notes banking institutions china notes sold included consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 accounting transfers servicing financial assets extinguishment liabilities sfas 140 met march 2003 completed offering 4025 million convertible subordinated notes due march 1 2008 qualified institutional buyers pursuant rule 144a securities act 1933 amended notes bear interest rate 78 per annum convertible common stock conversion price 2379 per share subordinated present future senior debt concurrent issuance convertible notes entered convertible bond hedge call option transaction respect common stock bond hedge call option transactions may settled option either cash net shares expire march 1 2008 march 16 2006 continuing june 1 2006 technical noncompliance indenture governing convertible subordinated notes due untimely filing annual report form 10k technical noncompliance impact liquidity cured upon filing form 10k 2005 completed exchanges approximately 50 million shares common stock approximately 571 million cash 1279 million aggregate principal amount outstanding notes result early extinguishment also amended convertible bond hedge call option transactions reflect change principal amount underlying notes august 1 2005 entered 364day 1000 million committed receivables purchase facility citibank na initial term agreement expire one year execution shall extended automatically pursuant terms receivable purchase facility may sell certain receivables arising sale telecommunications equipment financial institution 2005 receivables sold pursuant arrangement believe existing credit facilities cash equivalents shortterm investments cash operations sufficient finance operations least next 12 months december 31 2005 cash shortterm restricted cash investments 7125 million also credit facilities totaling 7001 million 4829 million remained available future borrowings approximately 2292 million credit facilities expire second half 2006 remainder expire first half 2006 proceeding extension renewal credit facilities however renewal certain interest rates borrowings credit facilities range approximately 435 522 guaranteed debt included consolidated balance sheet total cash shortterm investment balance december 31 2005 5001 million held china currency exchange controls exist result ability make payments jurisdictions could limited ability transfer money china jurisdictions event current cash balances future cash flows operations current credit facilities sufficient meet obligations strategic needs event market conditions favorable would consider raising additional funds capital equity markets due delinquent filing annual report form 10k year ended december 31 2005 eligible register equity securities using form s3 could impact ability raise additional funds additional financing needed assurance financing available us commercially reasonable terms income taxes certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time tax holidaysincentives discussed applicable potentially applicable utstarcom chongqing telecom co ltd utstarcom telecom co ltd huts hangzhou utstarcom telecom co ltd hstc utstarcom china co ltd utsc active subsidiaries china entities may qualify accredited technologically advanced enterprises first quarter 2005 company recorded reduction tax expense attributable increase deferred tax assets arising assessment local income tax huts hstc china second quarter 2005 huts received approval knowledge intensive technology intensive certificate subjects company reduced national tax rate 15 approval certificate currently effect local taxation huts company reversed deferred tax asset impact balance sheet arrangements august 1 2005 entered 364day committed receivables purchase facility citibank na provides sale 1000 million trade accounts receivable pcd segment sales accounts receivables citibank na program result reduction total accounts receivable consolidated balance sheet remaining accounts receivables sold citibank na carried net realizable value including allowance doubtful accounts sold receivables pursuant facility 2005 believe available funding accounts receivable financing program provides us increased flexibility manage working capital requirements sufficient trade accounts receivable support us financing programs program continue service accounts receivable contractual obligations commercial commitments obligations contractual obligations commercial commitments primarily regard leasing arrangements standby letters credit follows certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products notes payable occasionally issue shortterm notes payable vendors lieu trade accounts payable payment terms normally three nine months typically noninterest bearing notes payable balances outstanding december 31 2005 bank loans december 31 2005 loans various banks totaling 1988 million interest rates ranging 435 522 per annum bank loans mature 2006 included shortterm debt convertible subordinated notes 2746 million convertible subordinated notes due march 1 2008 bear interest rate 78 per annum payable semiannually may 1 september 1 convertible common stock conversion price 2379 per share subordinated present future senior debt company principal due maturity notes operating leases lease certain facilities noncancelable operating leases expire various dates 2011 standby letters credit issue standby letters credit primarily support international sales activities outside china submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof purchase commitments obligated purchase raw materials workinprocess inventory various orders suppliers expected fulfilled adverse consequences material operations financial condition entered various earnout agreements related certain acquisitions subject completion performance milestones see note 5 notes consolidated financial statements accounts receivable transferred notes receivable accept commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months notes receivable available sale 21 million 270 million december 31 2005 december 31 2004 respectively may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows year ended december 31 2005 sold notes receivable totaling 130 million notes receivable sold year ended december 31 2004 notes sold included consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 accounting transfers servicing financial assets extinguishment liabilities sfas 140 met costs settling transferring notes receivable 07 million year ended december 31 2005 included income expense net consolidated statements operations investment commitments december 31 2005 invested total 26 million global asia partners lp recorded longterm investment fund size anticipated 10 million fund formed make private equity investments private preipo technology telecommunications companies asia commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner also one sales agents intellectual property certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products discussion analysis quarterly results operations restated following information discussion derived restated unaudited interim financial data net sales three months ended march 31 2005 2004 net sales three months ended march 31 2005 previously reported 9018 million restated 9019 million increase 01 million net sales three months ended march 31 2004 previously reported 6223 million restated 6176 million decrease 47 million net sales increased 46 march 31 2005 compared corresponding quarter 2004 overall increase net sales primarily due incremental sales derived pcd resulting selected assets acquired audiovox november 2004 well increased sales revenues recognized revenue previously deferred relating agreements japan telecom net sales revenue geography shifted significantly comparison corresponding quarter 2004 attributable part continuous efforts growing business internationally demand pasipas products including pasipas system based handsets china market continued mature resulted lower demand average selling price general seasonality factor business activity china many countries asia decline considerably first quarter year observance lunar new year result sales first quarter fiscal year typically lower sales fourth quarter preceding year recorded stronger sales revenue broadband infrastructure segment three months ended march 31 2005 primarily due recognition revenue products delivered japan telecom third fourth quarters 2004 previously deferred additional discussion see related party transactionssoftbank net sales increased broadband infrastructure service segments declined three segments three months ended march 31 2005 compared corresponding quarter fiscal 2004 group china customers together province treat province one customer since level purchasing decisions made march 31 2005 2004 30 31 customers respectively province exceeded 10 net sales three months ended march 31 2005 guangdong province accounted 24 net sales three months ended march 31 2004 three six months ended june 30 2005 2004 net sales three months ended june 30 2005 previously reported 7230 million restated 7198 million decrease 32 million net sales three months ended june 30 2004 previously reported 6896 million restated 6766 million decrease 130 million net sales increased 6 june 30 2005 compared corresponding quarter 2004 although sales generated china decreased overall net sales increased primarily due incremental sales united states derived pcd resulting selected assets acquired audiovox november 2004 net sales revenue geography shifted significantly comparison corresponding period 2004 attributable part continuous efforts grow business internationally revenue derived china accounted approximately 40 net sales revenue three months ended june 30 2005 comparison approximately 92 corresponding period last year experienced recent quarters demand pasipas products including pasipas systembased handsets china market continued mature resulting lower demand average selling prices net sales increased broadband infrastructure service segments net sales decreased wireless handsets segments offset incremental sales derived pcd three months ended june 30 2005 compared corresponding period 2004 group china customers province level purchasing decisions made treat province one customer june 30 2005 2004 31 30 customers respectively jingsu province contributed approximately 10 net sales three months ended june 30 2005 jiangsu hei long jiang provinces contributed approximately 15 10 respectively net sales three months ended june 30 2004 net sales six months ended june 30 2005 previously reported 16248 million restated 16216 million decrease 32 million net sales six months ended june 30 2004 previously reported 13119 million restated 12942 million decrease 177 million net sales increased 25 six months ended june 30 2005 compared corresponding period 2004 overall increase net sales primarily due incremental revenue derived pcd resulting selected assets acquired audiovox november 2004 stronger first quarter sales revenue broadband infrastructure segment primarily due recognition revenue products delivered japan telecom third fourth quarters 2004 previously deferred offset decrease wireless handset sales china net sales increased broadband infrastructure service segments net sales decreased wireless handsets segments offset incremental sales derived pcd six months ended june 30 2005 compared corresponding period 2004 net sales revenue geography shifted significantly comparison corresponding period 2004 attributable part continuous efforts grow business internationally revenue derived china accounted approximately 32 net sales revenue six months ended june 30 2005 comparison approximately 92 corresponding period last year sales jt accounted 17 sales six months ended june 30 2005 guangdong jiangsu hei long jiang province accounted 16 11 10 respectively net sales six months ended june 30 2004 three months nine months ended september 30 2005 2004 net sales three months ended september 30 2005 previously reported 6353 million restated 6320 million decrease 33 million net sales three months ended september 30 2004 previously reported 6450 million restated 6421 million decrease 29 million net sales decreased 2 september 30 2005 compared corresponding quarter 2004 although sales generated china decreased decrease nearly offset incremental sales united states derived pcd resulting selected assets acquired audiovox november 2004 experienced recent quarters demand pasipas products including pasipas systembased handsets china market continued mature resulting lower demand average selling prices believe demand pas products weakened telecommunication service providers delay deploying new systems anticipation introduction new technology next generation telecommunication equipment net sales nine months ended september 30 2005 previously reported 22601 million restated 22537 million decrease 64 million net sales nine months ended september 30 2004 previously reported 19569 million restated 19363 million decrease 206 million net sales increased 16 compared corresponding period 2004 overall increase net sales primarily due incremental revenue derived pcd resulting selected assets acquired audiovox november 2004 addition net sales higher result stronger first quarter sales revenue broadband infrastructure segment primarily due recognition revenue products delivered japan telecom third fourth quarters 2004 previously deferred offset decrease wireless handset sales china net sales increased broadband infrastructure service segments net sales decreased wireless handsets segments offset incremental sales derived pcd nine months ended september 30 2005 compared corresponding period 2004 net sales revenue geography shifted significantly comparison corresponding period 2004 attributable part continuous efforts grow business internationally revenue derived china accounted approximately 33 32 respectively net sales revenue three months nine months ended september 30 2005 comparison approximately 92 respectively corresponding periods last year group china customers province level purchasing decisions made treat province one customer september 30 2005 2004 33 31 customers respectively one customer united states contributed approximately 18 net sales three months ended september 30 2005 two provinces china contributed approximately 13 12 net sales three months ended september 30 2004 sales one customer united states contributed approximately 11 one customer japan accounted 12 sales nine months ended september 30 2005 two provinces china accounted 14 12 net sales nine months ended september 30 2004 periods prior december 31 2003 company structured across three business segments wireless infrastructure subscriber handsets wireline products result system change 2004 impractical determine allocation method quarterly sales 2003 conform fivebusiness segment presentation quarters 2005 2004 therefore sales presented original threebusiness segment format comparability 2004 information also shown original threebusiness segment format three months ended march 31 2004 2003 net sales three months ended march 31 2004 previously reported 6223 million restated 6176 million decrease 47 million net sales months ended march 31 2003 previously reported 3305 million unchanged restatement net sales restated increased 46 march 31 2004 compared previous quarter increase sales primarily attributable increased demand products services continued strength sales china globally net sales growth primarily due increase subscribers requiring telecommunication providers expand telecommunication infrastructures changed sales mix greater percentage wireless infrastructure products sold three months ended march 31 2004 comparative period 2003 decrease wireline sales attributable several factors primarily decrease due chinas evolution wireline wireless technology china evolves using wireless technology telecommunications needs sales wireline products decreased additionally sales wireline products atypically high three months ended march 31 2003 due japans expansion wireline infrastructure base period 100 sales japan wireline product sales three months ended march 31 2003 compared approximately 60 three months ended march 31 2004 addition increasing amount infrastructure sales increase subscribers also led increase customer demand handsets first quarter 2004 compared first quarter 2003 contributing increase absolute dollars handset sales group china customers together province treat province one customer since level purchasing decisions made march 31 2004 2003 31 customers guangdong province accounted 24 net sales three months ended march 31 2004 hei long jiang province accounted 14 net sales three months ended march 31 2003 handset sales increased result increased total pas subscribers approximately 171 million subscribers march 31 2003 approximately 469 million subscribers march 31 2004 three months ended june 30 2004 2003 net sales three months ended june 30 2004 previously reported 6896 million restated 6766 million decrease 130 million net sales three months ended june 30 2003 previously reported 4058 million restated 4039 million decrease 19 million second quarter 2004 net sales increased 2727 million 68 second quarter 2003 increase primarily driven increases wireless infrastructure sales 2849 million increase attributable increased demand carriers china result increased number subscribers total pas subscribers increased approximately 20 million june 30 2003 approximately 54 million june 30 2004 wireless infrastructure revenues directly affected timing customer acceptance second quarter 2004 customers accepted wireless infrastructure projects faster historically experienced group china customers together province treat province one customer since level purchasing decisions made june 30 2004 2003 30 31 customers respectively jiangsu hei long jiang provinces accounted 15 10 net sales respectively three months ended june 30 2004 hei long jiang zhejiang hebei provinces accounted 13 11 10 net sales respectively three months ended june 30 2003 six months ended june 30 2004 2003 net sales six months ended june 30 2004 previously reported 13119 million restated 12942 million decrease 177 million net sales six months ended june 30 2003 previously reported 7364 million restated 7344 million decrease 20 million six months ended june 30 2004 net sales increased 5598 million 76 corresponding period 2003 increase sales primarily attributable increased demand products services resulting increased number subscribers net sales growth primarily due increase subscribers requiring telecommunication providers expand telecommunication infrastructures wireless infrastructure revenues directly affected timing customer acceptance first half 2004 customers accepted wireless infrastructure expansion projects faster historically experienced increasing percentage net sales derived wireless infrastructure products sold six months ended june 30 2004 comparative period 2003 group china customers together province treat province one customer since level purchasing decisions made june 30 2004 2003 30 31 customers respectively guangdong jiangsu hei long jiang provinces accounted 16 11 10 net sales respectively six months ended june 30 2004 hei long jiang province accounted 13 net sales six months ended june 30 2003 decrease wireline sales attributable several factors sales wireline products six months ended june 30 2004 lower comparative period prior year due high levels wireline product sales first half 2003 due japans expansion wireline infrastructure base period wireline product shipments customer acceptances delayed second quarter due supply chain difficulties thereby reducing wireline revenues recorded six months ended june 30 2004 three months ended september 30 2004 2003 net sales three months ended september 30 2004 previously reported 6450 million restated 6421 million decrease 30 million net sales three months ended september 30 2003 previously reported 5844 million restated 5700 million decrease 144 million third quarter 2004 net sales increased 721 million 13 third quarter 2003 increase primarily driven increases wireless infrastructure sales 2369 million offset decrease handset sales 1732 million increase wireless infrastructure sales broadly attributable increased demand carriers china result increased number subscribers total pas subscribers increased approximately 28 million september 30 2003 approximately 60 million september 30 2004 decrease handset sales due primarily increased competition put downward pressure volumes sold well average selling price average selling price handsets dropped 71 third quarter 2003 52 third quarter 2004 wireless infrastructure revenues generally affected timing customer acceptance third quarter 2004 customers accepted projects faster historical experience primarily result customers china transitioning new system installations system expansions group china customers together province treat province one customer since level purchasing decisions made september 30 2004 2003 31 customers jiangsu hebei provinces accounted 13 12 net sales respectively three months ended september 30 2004 hebei guangdong provinces accounted 12 net sales three months ended september 30 2003 nine months ended september 30 2004 2003 net sales nine months ended september 30 2004 previously reported 19569 million restated 19363 million decrease 206 million net sales nine months ended september 30 2003 previously reported 13207 million restated 13045 million decrease 162 million nine months ended september 30 2004 net sales increased 6318 million 48 corresponding period 2003 increase sales primarily attributable increased demand products services continued strength sales globally net sales growth primarily due increase subscribers requiring telecommunication providers expand telecommunication infrastructures wireless infrastructure revenues generally affected timing customer acceptance first nine months 2004 customers undertook number wireless infrastructure expansion projects changed sales mix therefore greater percentage wireless infrastructure products sold nine months ended september 30 2004 comparative period 2003 increase wireless infrastructure revenue offset decline handset revenue due primarily lower average selling prices resulting increased competition group china customers together province treat province one customer since level purchasing decisions made september 30 2004 2003 31 customers guangdong jiangsu provinces accounted 14 12 net sales respectively nine months ended september 30 2004 nine months ended september 30 2003 sales softbank bb corporation accounted 11 heilongjiang province accounted 11 net sales respectively sales wireline products nine months ended september 30 2004 lower comparative period prior year due high levels wireline product sales first nine months 2003 due japans expansion wireline infrastructure base period gross profit three months ended march 31 2005 2004 gross margin three months ended march 31 2005 previously reported 2382 million restated 2374 million decrease 08 million gross margin three months ended march 31 2004 previously reported 1760 million restated 1750 million decrease 10 million gross margin 26 net sales three months ended march 31 2005 compared 28 net sales corresponding quarter 2004 gross profit increase attributed increased sales overall gross profit percentage decline attributed principally lower gross profit percentages terminal products includes pasipas based handsets sales pcd business continued pricing pressure throughout telecommunications market china attributed lower gross profit pasipas system based handsets addition handsets sales pcd typically lower gross margin approximately 4 realized pasipas system based handsets pcd contributed 137 million gross margin three months ended march 31 2005 contribution corresponding quarter fiscal 2004 since pcd acquired november 2004 improvement gross profit percentage net sales broadband operating segment primarily due increased economies scale resulting larger orders three six months ended june 30 2005 2004 gross margin three months ended june 30 2005 previously reported 1094 million restated 1121 million increase 27 million gross margin three months ended june 30 2004 previously reported 1763 million restated 1746 million decrease 17 million gross profit 16 net sales three months ended june 30 2005 compared 26 net sales corresponding quarter 2004 absolute decrease gross profit dollars primarily result 60 decline wireless revenue reflective maturing market china attribute decrease gross profit percentage sales principally impact lower margins thennewly acquired pcd business handsets sales pcd gross profit margin approximately 5 lower gross profit margins realized pasipas system based handsets pcd contributed 160 million gross margin three months ended june 30 2005 contribution corresponding quarter fiscal 2004 acquire pcd november 2004 also included cost sales three months ended june 30 2005 restructuringrelated 55 million inventory writeoff discontinued products overall gross profit three months ended june 30 2005 excluding pcd restructuring writeoff stable 27 gross profit percentage decreased broadband handsets segments improved wireless service segments three months ended june 30 2005 gross margin six months ended june 30 2005 previously reported 3476 million restated 3496 million increase 20 million gross margin six months ended june 30 2004 previously reported 3523 million restated 3495 million decrease 28 million gross profit 22 net sales six months ended june 30 2005 compared 27 net sales corresponding period 2004 gross profit dollars substantially unchanged two periods weakness wireless handset sales china offset increase broadband sales japan primarily first quarter decline gross profit percentage sales primarily due inclusion pcd gross profit 5 sales gross profit six months ended june 30 2005 excluding pcd 33 three nine months ended september 30 2005 2004 gross margin three months ended september 30 2005 previously reported 539 million restated 530 million decrease 09 million gross margin three months ended september 30 2004 previously reported 1371 million restated 1353 million decrease 18 million gross profit 8 net sales three months ended september 30 2005 compared 21 net sales corresponding quarter 2004 absolute decrease gross profit dollars primarily result 73 decline wireless revenue reflective maturing market china attribute decrease gross profit percentage sales several factors including pricing pressure warranty inventory reserves impact lower margins pcd business acquired november 2004 handsets sales pcd gross profit margin approximately 4 lower gross profit margins realized pasipas system based handsets pcd contributed 132 million gross margin three months ended september 30 2005 contribution corresponding quarter fiscal 2004 acquire pcd november 2004 broadband infrastructure operating segment reported negative gross margin 45 three months ended september 30 2005 primarily due 90 million additional costs incurred relating certain contracts japan quality issues encountered gross profit percentage decreased broadband handsets operating segments improved wireless service segments three months ended september 30 2005 gross margin nine months ended september 30 2005 previously reported 4016 million restated 4025 million increase 09 million gross margin nine months ended september 30 2004 previously reported 4894 million restated 4849 million decrease 45 million gross profit 18 net sales nine months ended september 30 2005 compared 25 net sales corresponding period 2004 gross profit dollars declined primarily attributable weakness wireless infrastructure handset sales china offset increase broadband infrastructure sales japan primarily first quarter decline gross profit percentage sales primarily due inclusion pcd gross profit approximately 4 sales gross profit nine months ended september 30 2005 excluding pcd 29 prior december 31 2003 company structured across three business segments wireless infrastructure subscriber handsets wireline products however company assess performance segments revenue also result system change 2004 impractical determine allocation method quarterly gross profit 2003 conform fivebusiness segment presentation quarters 2005 2004 therefore consolidated gross profits presented comparability 2004 quarterly consolidated gross profits also presented three months ended march 31 2004 2003 gross profit varies across different product lines affected product mix average selling prices cost materials decrease gross profit percent net sales three months ended march 31 2004 corresponding period 2003 part attributable decreased sales higher margin wireline products gross profit also decreased three months ended march 31 2004 due higher cost sales inventory component purchases denominated japanese yen result appreciation yen versus dollar months inventory received finally decline gross profit resulted increased competitive market pricing pressures products result continued pricing pressures throughout telecommunications market first quarter 2004 three six months ended june 30 2004 2003 gross profit varies across different product lines affected product mix average selling prices cost materials attribute decrease gross profit percent net sales three months ended june 30 2004 corresponding period 2003 mostly declining margins handset products declining margins resulted increased competitive market pricing pressures throughout telecommunications market second quarter 2004 declining margins handset products slightly offset decreased percentage handset sales 46 net sales second quarter 2003 29 net sales second quarter 2004 secondly decline gross profit second quarter 2004 compared second quarter 2003 due smaller percentage sales higher margin wireline products 19 net sales second quarter 2003 8 net sales period 2004 addition lower percentage wireline sales period margins decreased due lower margins specific contract upon revenues recognized period gross margin decline offset higher margins increased percentage sales ipaspas systems decrease gross profit six months ended 2004 compared period 2003 due smaller percentage sales higher margin wireline products 19 net sales six months ended june 30 2003 8 net sales period 2004 addition lower percentage wireline sales period margins decreased due lower margins specific contract upon revenues recognized period also attribute decline gross profit percent net sales six months ended june 30 2004 corresponding period 2003 declining margins handset products declining margins resulted increased competitive market pricing pressures throughout telecommunications market first half 2004 declining margins handset products slightly offset decreased percentage handset sales 45 net sales six months ended june 30 2003 33 net sales period 2004 gross margin decline offset higher margins ipaspas systems also offsetting declining gross margins increased percentage sales derived ipaspas systems 36 six months ended june 30 2003 59 six months ended june 30 2004 three nine months ended september 30 2004 2003 gross profit varies across different product lines affected product mix average selling prices cost materials decrease gross profit percent net sales three months ended september 30 2004 corresponding period 2003 attributable declining margins handset products resulting increased competitive market pricing pressures result continued pricing pressures throughout telecommunications market third quarter 2004 declining margins handset products slightly offset decreased percentage handset sales 59 net sales third quarter 2003 25 net sales third quarter 2004 secondly margins current quarter wireline products lower due initial ramp newer broadband products decrease gross profit nine months ended 2004 compared period 2003 due smaller percentage sales higher margin wireline products 19 net sales nine months ended september 30 2003 9 net sales period 2004 addition lower percentage wireline sales period margins wireline products experienced gross margin erosion due lower margins specific contract upon revenues recognized period well lower margins due initial ramp newer broadband products decline gross profit percent net sales nine months ended september 30 2004 corresponding period 2003 also attributable declining margins handset products resulting increased competitive market pricing pressures result continued pricing pressures throughout telecommunications market first nine months 2004 declining margins handset products slightly offset decreased percentage handset sales 45 net sales nine months ended september 30 2003 30 net sales period 2004 gross margin decline offset higher margins ipaspas systems also offsetting declining gross margins increased percentage sales derived ipaspas systems 35 nine months ended september 30 2003 61 nine months ended september 30 2004 selling general administrative three months ended march 31 2005 2004 selling general administrative sga expenses three months ended march 31 2005 previously reported 1082 million restated 1090 million increase 08 million sga expenses three months ended march 31 2004 previously reported 669 million restated 675 million increase 06 million monitor sga percentage net sales 12 11 net sales three months ended march 31 2005 corresponding quarter 2004 respectively increase sga expenses absolute dollars 415 million due increase headcount support increased business volume including pcd operations exist corresponding quarter 2004 increase 116 million compared quarter 2004 due longer collection cycles china increased professional costs 108 million expenses associated supply chain management system integration sarbanesoxley act compliance projects three months ended march 31 2004 2003 selling general administrative sga expenses three months ended march 31 2004 previously reported 669 million restated 675 million increase 06 million sga expenses three months ended march 31 2003 previously reported 376 million restated 377 million increase 01million sga expenses percentage net sales 11 three months ended march 31 2004 2003 respectively increase absolute dollars selling general administrative expenses due hiring additional personnel support increased business activities china globally sga headcount increased 2679 employees march 31 2004 compared 1810 employees march 31 2003 causing increase absolute dollars new personnel hired help support expanding global business outside china three six months ended june 30 2005 2004 sga expenses three months ended june 30 2005 previously reported 1028 million restated 1030 million increase 02 million sga expenses three months ended june 30 2004 previously reported 678 million restated 682 million increase 04 million sga expenses percentage net sales 14 10 three months ended june 30 2005 2004 respectively increase sga expenses absolute dollars 348 million primarily due several factors including 128 million increase provision doubtful accounts compared period 2004 days sales outstanding 170 days excluding pcd june 30 2005 compared 70 days june 30 2004 days sales outstanding 106 days including pcd june 30 2005 longer days sales outstanding direct result longer collection cycles china due slowdown telecommunication industry addition headcount overhead 61 million support pcd operations contributed increase pcd exist corresponding period 2004 increased professional fees 44 million associated supply chain management system integration sarbanesoxley act compliance projects also contributed increase sga expenses sga expenses six months ended june 30 2005 previously reported 2110 million restated 2120 million increase 10 million sga expenses six months ended june 30 2004 previously reported 1348 million restated 1357 million increase 09 million sga expenses percentage net sales 13 10 six months ended june 30 2005 2004 respectively increase 763 million absolute dollars sga expenses primarily due increase allowance doubtful accounts expense 241 million due longer collection cycle china first six months 2005 compared corresponding period 2004 discussed ii increase professional services fees 151 million associated supply chain management system integration sarbanesoxley act compliance projects iii increased headcount overhead 122 million support pcd operations exist corresponding period 2004 three six months ended june 30 2004 2003 sga expenses three months ended june 30 2004 previously reported 678 million restated 682 million increase 04 million sga expenses three months ended june 30 2003 previously reported 350 million restated 351 million increase 01 million sga expenses percentage net sales 10 9 three months ended june 30 2004 2003 respectively increase 94 absolute dollars sga expenses primarily due hiring additional personnel support increased business activities china globally sga headcount increased approximately 41 average 2088 employees three months ended june 30 2003 average 2947 employees three months ended june 30 2004 secondly bad debt expense generally function size accounts receivable balance gross accounts receivable increased 100 june 30 2003 resulted increase approximately 10 million bad debt expense second quarter 2004 compared second quarter 2003 finally company incurred additional professional services fees related sarbanesoxley compliance supply chain management resulted increase approximately 70 million professional services fees second quarter 2004 sga expenses six months ended june 30 2004 previously reported 1348 million restated 1357 million increase 09 million sga expenses six months ended june 30 2003 previously reported 725 million restated 728 million increase 03 million sga expenses percentage net sales 10 six months ended june 30 2004 2003 respectively increase 86 absolute dollars selling general administrative expenses primarily due hiring additional personnel support increased business activities china globally sga headcount increased approximately 48 average 1895 employees six months ended june 30 2003 average 2801 employees six months ended june 30 2004 additionally increases professional services fees 107 million bad debt expense 85 million first six months 2004 compared first six months 2003 contributed increase three nine months ended september 30 2005 2004 sga expenses three months ended september 30 2005 previously reported 887 million restated 864 million decrease 23 million sga expenses three months ended september 30 2004 previously reported 749 million restated 746 million decrease 03 million sga expenses percentage net sales 14 12 three months ended september 30 2005 2004 respectively increase sga expenses absolute dollars 118 million primarily due several factors including headcount overhead 60 million support pcd operations exist corresponding period 2004 increased professional fees 54 million associated supply chain management system integration sarbanesoxley act compliance projects legal fees sga expenses nine months ended september 30 2005 previously reported 2997 million restated 2984 million decrease 13 million sga expenses nine months ended september 30 2004 previously reported 2097 million restated 2103 million increase 06 million sga expenses percentage net sales 13 11 nine months ended september 30 2005 2004 respectively increase 881 million absolute dollars sga expenses primarily due increase professional services fees 233 million associated supply chain management system integration sarbanesoxley act compliance projects legal fees ii increase allowance doubtful accounts expense 206 million first nine months 2005 compared corresponding period 2004 reflecting continued deterioration aged receivables primarily china iii increased headcount overhead 172 million support pcd operations exist corresponding period 2004 iv increase headcount overhead operations 157 million incurred first two quarters 2005 compared quarters 2004 v increase facilities expense 38 million hangzhou china office three nine months ended september 30 2004 2003 sga expenses three months ended september 30 2004 previously reported 749 million restated 746 million decrease 03 million sga expenses three months ended september 30 2003 previously reported 574 million restated 573 million decrease 01 million sga expenses percentage net sales 12 10 three months ended september 30 2004 2003 respectively increase sga expenses absolute dollars primarily due increase revenue increase headcount support increased business volume higher bad debt expense due longer collection cycles costs associated managing requirements sarbanesoxley act additional professional costs associated management supply chain sga expenses nine months ended september 30 2004 previously reported 2097 million restated 2103 million increase 06 million sga expenses nine months ended september 30 2003 previously reported 1299 million restated 1301 million increase 02 million sga expenses percentage net sales 11 10 nine months ended september 30 2004 2003 respectively increase sga expenses primarily due hiring additional personnel support increased business activities china globally sga headcount increased approximately 47 average 1949 employees nine months ended september 30 2003 average 2873 employees nine months ended september 30 2004 additionally increases professional services fees 188 million related systems implementations sarbanesoxley compliance supply chain management bad debt expense 166 million related increased size age receivables balances first nine months 2004 compared first nine months 2003 contributed increase research development three months ended march 31 2005 2004 research development rd expenses three months ended march 31 2005 previously reported 667 million restated 663 million decrease 04 million rd expenses 663 million 7 net sales three months ended march 31 2005 compared 457 million 7 net sales corresponding quarter 2004 monitor rd expenses percentage net sales three months ended march 31 2005 percentage consistent compared corresponding quarter 2004 increase absolute dollars rd expenses due increased headcount related payroll expenses 93 million support product enhancements new product development three months ended march 31 2005 rd headcount increased approximately 900 employees compared period last year resulting continued expansion rd teams china approximately 700 employees 200 additional employees absorbed relation various acquisitions addition increase rd expenses also attributable increased professional costs 73 million associated outsourced projects driven increased sales activities three months ended march 31 2005 depreciation facility expenses also increased 25 million resulting various acquisitions internal growth operations lastly recorded 22 million charge relating shutdown hyundai syscomm inc hsi operations acquired april 2004 decided fourth quarter 2004 substantially abandon hsis legacy operation due difficulties encountered integrating operations charge 22 million includes fixed assets writeoff costs associated termination leases personnel three months ended march 31 2004 2003 rd expenses three months ended march 31 2003 previously reported 268 million restated 272 million increase 04 million rd expenses 457 million 7 net sales three months ended march 31 2004 compared 272 million 8 net sales corresponding quarter 2003 monitor rd expenses percentage net sales three months ended march 31 2004 percentage declined compared corresponding quarter 2003 increase absolute dollars research development expenses primarily due hiring additional technical personnel support increased business levels rd headcount increased 2342 employees march 31 2004 compared 1440 employees march 31 2003 decrease research development expenses percentage net sales due increased economies scale associated increased business levels majority new personnel hired china labor costs less expensive united states also contributing decrease rd expenses percentage net sales three six months ended june 30 2005 2004 rd expenses 656 million 9 net sales three months ended june 30 2005 compared 526 million 8 net sales corresponding period 2004 increase 130 million absolute dollars rd expenses primarily attributed increased headcount approximately 120 employees resulting various acquisitions support product enhancements new product development higher head count contributed increase 56 million personnel related expenses 22 million depreciation facility expenses addition increase rd expenses also attributed increased professional costs 23 million associated outsourced projects new designs product development rd expenses six months ended june 30 2005 previously reported 1323 million restated 1319 million decrease 04 million rd expenses 1319 million 983 million 8 7 net sales six months ended june 30 2005 2004 respectively absolute dollars rd expenses increased 336 million primarily due hiring additional technical personnel support product enhancements development well retention employees various acquisitions personnel expenses including payroll taxes benefits increased 149 million due increased head count addition increase rd expenses also attributed increased professional costs 96 million associated outsourced projects driven numerous product development projects three six months ended june 30 2004 2003 46 increase absolute dollars rd expenses three months ended june 30 2004 compared three months ended june 30 2003 primarily due hiring additional technical personnel support product enhancements new product development rd headcount increased approximately 52 average 1787 employees three months ended june 30 2003 average 2719 employees three months ended june 30 2004 significant majority increase research development expenses three months ended june 30 2003 three months ended june 30 2004 attributable higher payroll payrollrelated costs resulting continued expansion rd teams china full quarters salaries commworks personnel compared one months salaries period prior year additional employees hired conjunction acquisitions telos hsi rd expenses six months ended june 30 2003 previously reported 629 million restated 633 million increase 04 million increase absolute dollars rd expenses 55 six months ended june 30 2004 compared six months ended june 30 2003 primarily due hiring additional technical personnel support product enhancements new product development rd headcount increased approximately 57 average 1591 employees six months ended june 30 2003 average 2492 employees six months ended june 30 2004 significant majority increase rd expenses six months ended june 30 2003 six months ended june 30 2004 attributable higher payroll payrollrelated costs resulting continued expansion research development teams china full six months salaries commworks personnel compared one months salaries period prior year additional employees hired conjunction acquisitions telos hsi three nine months ended september 30 2005 2004 rd expenses 608 million 10 net sales three months ended september 30 2005 compared 560 million 9 net sales corresponding period 2004 increase 48 million absolute dollars rd expenses primarily attributed net increased headcount approximately 221 employees resulting various acquisitions support product enhancements new product development offset restructuring related headcount reduction higher head count contributed increase 48 million personnel related expenses 12 million depreciation facility expenses partially offset decrease professional costs 32 million associated outsourced projects new designs product development rd expenses nine months ended september 30 2005 previously reported 1931 million restated 1927 million decrease 04 million rd expenses 1927 million 1543 million 9 8 net sales nine months ended september 30 2005 2004 respectively absolute dollars rd expenses increased 384 million primarily due hiring additional technical personnel support product enhancements development well retention employees various acquisitions offset restructuring related headcount reduction initiated second quarter 2005 personnel expenses including payroll taxes benefits increased 197 million due net increased head count addition increase rd expenses also attributed increased professional costs 63 million associated outsourced projects driven numerous product development projects three nine months ended september 30 2004 2003 increase rd expenses three months ended september 30 2004 compared three months ended september 30 2003 primarily due hiring additional technical personnel support product enhancements new product development rd headcount increased approximately 45 average 2061 employees three months ended september 30 2003 average 2979 employees three months ended september 30 2004 significant majority increase rd expenses three months ended september 30 2003 three months ended september 30 2004 attributable higher payroll payrollrelated costs resulting continued expansion rd teams china additional employees hired conjunction various acquisitions rd expenses nine months ended september 30 2003 previously reported 1076 million restated 1080 million increase 04 million rd expense remained 8 total sales nine month periods ended september 30 2004 2003 increase absolute dollars rd expenses primarily due hiring additional technical personnel support product enhancements new product development rd headcount increased approximately 50 average 1776 employees nine months ended september 30 2003 average 2658 employees nine months ended september 30 2004 significant majority increase rd expenses nine months ended september 30 2003 nine months ended september 30 2004 attributable higher payroll payrollrelated costs resulting continued expansion rd teams china full nine months salaries commworks personnel compared four months salaries period prior year additional employees hired conjunction acquisitions telos hsi income expenses three months ended march 31 2004 2003 net income three months ended march 31 2004 previously reported 88 million restated net income three months ended march 31 2003 previously reported 42 million restated 46 million increase 04 million net income three months ended march 31 2004 primarily due receiving 78 million financial subsidy local chinese government subsidy encourage investment local research development manufacturing activities also recorded japanese consumption tax refund 14 million offset 04 million foreign exchange loss net income three months ended march 31 2003 primarily due reinvestment incentive payment received china 39 million three six months ended june 30 2004 2003 net income three months ended june 30 2004 previously reported 43 million restated net income three months ended june 30 2003 previously reported 2 million restated 15 million increase 13 million net income three months ended june 30 2004 primarily due 21 million tax refund received china additionally currency exchange gain 09 million second quarter 2004 compared currency exchange loss 23 million second quarter 2003 also earned 05 million dividend one investments three months ended june 2004 net income three months ended june 30 2003 primarily due consumption tax refunds japan net income six months ended june 30 2004 previously reported 130 million restated net income six months ended june 30 2003 previously reported 43 million restated 61 million increase 18 million net income six months ended june 30 2004 primarily due receiving 78 million financial subsidy local chinese government first quarter 2004 subsidy encourage investment local research development manufacturing activities also recorded currency exchange gain 05 million six months ended 2004 compared currency exchange loss 15 million six months ended 2003 additionally japanese consumption tax refund 14 million first quarter 2004 net income beyond restatement six months ended june 30 2003 primarily due 39 million reinvestment incentive payment 26 million tax refund received china three nine months ended september 30 2004 2003 net income three months ended september 30 2004 previously reported 12 million restated net income three months ended september 30 2003 previously reported 07 million restated expense 01 million decrease 08 million net income three months ended september 30 2004 primarily due net investment gains 11 million consumption tax refunds japan 07 million offset currency exchange losses 05 million net expense three months ended september 30 2003 included 12 million fees associated sale commercial bank notes receivable 14 million currency exchange losses 02 expenses offset consumption tax refunds japan 27 million net income nine months ended september 30 2004 previously reported 142 million restated net income nine months ended september 30 2003 previously reported 41 million restated 51 million increase 10 million net income nine months ended september 30 2004 primarily due receiving 102 million financial subsidies local chinese government first two quarters 2004 subsidies encourage investment local research development manufacturing activities also recorded japanese consumption tax refunds 21 million net investment gains dividends 10 million nine months ended september 30 2004 net income nine months ended september 30 2003 primarily due japanese consumption tax refunds 41 million 39 million reinvestment incentive payment received china 26 million tax refund also received china offset 29 million currency exchange losses 12 million fees associated sale commercial bank notes receivable china restructuring costs three six months ended june 30 2005 2004 second quarter fiscal 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products addition restructuring plan designed allow us reduce breakeven revenues product line align investments key growth opportunities facilitate process globalization primary goal improvements optimize cost structure enable us deliver consistent sustainable profitability stockholders three six months ended june 30 2005 incurred approximately 151 million operating expenses relating restructuring plan actions primarily consisting 76 million severance payments 75 million asset impairments primarily related impairment equipment licenses associated discontinued products included restructuring costs 151 million noncash charges 69 million asset impairments made cash payments 63 million severance benefits 27 million accrued expenses part restructuring plan three six months ended june 30 2005 recorded 55 million inventory writeoff associated discontinued products restructuring expense related inventory writeoff included cost sales consolidated statements operations june 30 2005 approximately 870 employees terminated placed workforce reduction programs three nine months ended september 30 2005 second quarter fiscal 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products three months ended september 30 2005 company incurred approximately 34 million expenses relation restructuring plan actions consisting 21 million related severance payments 12 million asset impairments primarily related writeoff equipment licenses associated discontinued products nine months ended september 30 2005 company incurred approximately 185 million operating expenses relation restructuring plan actions primarily consisting 98 million related severance payments 87 million asset impairments primarily related impairment equipment licenses associated discontinued products included restructuring costs 185 million noncash charges 76 million asset impairments made cash payments 105 million severance benefits 11 million accrued expenses part restructuring plan nine months ended september 30 2005 recorded 55 million inventory writeoff associated discontinued products restructuring expense related inventory writeoff included cost sales consolidated statements operations end third quarter 2005 approximately 965 employees terminated placed workforce reduction programs asset impairment three six months ended september 30 2005 due existence impairment indicators september 2005 determined significant adverse changes business outlook could indicate carrying value certain longlived asset groups may recoverable could indicate fair value reporting units may carrying value performed interim impairment tests goodwill certain long lived assets result impairment test recorded impairment charge longlived assets 2181 million quarter ended september 30 2005 impairment charge consisted 1929 million goodwill 17 million intangible assets 235 million property plant equipment income tax expense benefit three months ended march 31 2005 2004 income tax expense three months ended march 31 2005 previously reported 79 million restated 77 million decrease 02 million income tax expense three months ended march 31 2004 previously reported 137 million restated 131 million decrease 06 million 2005 annual effective tax rate estimated 27 would resulted 123 million tax expense three months ended march 31 2005 46 million difference expected tax expense 123 million actual tax expense 77 million attributable discrete item increase deferred tax assets due assessment local income tax two entities china difference us statutory rate 35 2005 estimated rate 27 attributable expected utilization operating losses permanent tax deductions related convertible debt offering 2003 lower tax rates various jurisdictions operate partially offset application state income taxes three months ended march 31 2004 2003 income tax expense three months ended march 31 2004 previously reported 137 million restated 131 million decrease 06 million primary reason income tax increased march 2003 march 2004 income taxes increased 34 three months ended march 31 2004 corresponding period 2003 consistent increase income tax expense overall effective tax rate increased 19 2004 compared 17 2003 increase resulted greater proportion income derived countries higher tax rates three six months ended june 30 2005 2004 income tax expense three months ended june 30 2005 previously reported benefit 15 million restated 02 million increase 17 million income tax expense three months ended june 30 2004 previously reported 110 million restated 102 million decrease 08 million change income tax expense due tax effect restatement adjustments decrease income tax expense result decrease pretax income offset part increase tax expense 135 million primarily relating valuation deferred tax assets china quarter utstarcom telecom co ltd huts received approval knowledge intensive technology intensive certificate subjects company reduced national tax rate 15 approval certificate currently effect local taxation huts income tax expense six months ended june 30 2005 previously reported 64 million restated 79 million increase 15 million income tax expense six months ended june 30 2004 previously reported 247 million restated 234 million decrease 13 million change income tax expense due tax effect restatement adjustments decrease income tax expense result tax benefit due operating losses offset part increase tax expense primarily relating valuation deferred tax assets china six months ended june 30 2005 recorded additional tax expense 90 million primarily relating valuation deferred tax assets china six months ended june 30 2005 huts received approval certificate subjects company reduced national tax rate 15 previous quarter company recorded reduction tax expense attributable increase deferred tax assets arising assessment local income tax huts hangzhou utstarcom telecom co ltd hstc china approval certificate currently effect local taxation huts three six months ended june 30 2004 2003 income tax expense three months ended june 30 2004 previously reported 110 million restated 102 million decrease 08 million primary reason increase income tax expense overall effective tax rate increased 19 2004 compared 17 2003 increase resulted greater proportion income derived countries higher tax rates income tax expense six months ended june 30 2004 previously reported 247 million restated 234 million decrease 13 million income tax expense 177 million six months ended june 30 2003 restated increase income tax expense result increase income taxes 16 six months ended june 30 2004 compared corresponding period 2003 overall effective tax rate increased 19 2004 compared 17 2003 increase resulted greater proportion income derived countries higher tax rates three months nine months ended september 30 2005 2004 income tax expense three months ended september 30 2005 previously reported 1037 million restated 1075 million increase 38 million income tax expense three months ended september 30 2004 previously reported benefit 19 million restated benefit 24 million decrease 05 million change income tax expense due tax effect restatement adjustments establishing deferred income tax assets liabilities make judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income record deferred tax assets liabilities evaluate need valuation allowances reduce deferred tax assets realizable amounts september 30 2005 believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets result review undertaken september 30 2005 concluded appropriate establish full valuation allowance net deferred tax assets cumulative losses weigh heavily overall assessment accordingly recorded 984 million noncash charge september 30 2005 united states china income tax expense 1075 million benefit 24 million three months ended september 30 2005 2004 respectively increase income tax expense primarily attributable 984 million noncash charge provide full valuation allowance remaining net deferred tax assets september 30 2005 united states china income tax expense nine months ended september 30 2005 previously reported 1100 million restated 1154 million increase 54 million income tax expense nine months ended september 30 2004 previously reported 228 million restated 209 million decrease 19 million change income tax expense due tax effect restatement adjustments income tax expense 1154 million 209 million nine months ended september 30 2005 2004 respectively increase income tax expense primarily attributable 984 million noncash charge provide full valuation allowance remaining net deferred tax assets september 30 2005 united states china three nine months ended september 30 2004 2003 income tax benefit three months ended september 30 2004 previously reported 19 million restated 24 million increase 05 million income tax expense three months ended september 30 2003 previously reported 137 million restated 117 million decrease 20 million decrease income tax expense primarily related decrease income taxes three months ended september 30 2004 compared corresponding period 2003 contributing decrease income tax expense first two quarters 2004 estimated effective tax rate 20 rate reduced 18 q3 2004 adjusted retroactively year due revised estimate current year taxable income proportional level profits expected china relative higher tax rate jurisdictions income tax expense nine months ended september 30 2004 previously reported 228 million restated 209 million decrease 19 million income tax expense nine months ended september 30 2003 previously reported 314 million restated 294 million decrease 20 million primary reason decrease income tax expense due lower net income tax nine months ended september 30 2004 compared corresponding period 2003 critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery product occurred customer acceptance obtained fee fixed determinable collectibility reasonably assured payment due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region shipping handling costs recorded revenues costs revenues expected losses contracts recognized identified sales may generated complex contractual arrangements require significant revenue recognition judgments particularly areas multiple element arrangements multiple elements exist arrangement fee allocated different elements based upon verifiable objective evidence fair value elements governed emerging issues task force issue eitf 0021 sab 104 multiple element arrangements primarily involve sale pas family wireless access handsets wireless consumer products core infrastructure equipment internet protocolbased pas ipas wireless access systems employ micro cell radio technology specialized handsets allowing service providers offer subscribers mobile fixed access telephone services multiple element arrangements include sale pas ipas equipment handsets installation training provision equipment different locations customer revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered element control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction additionally recognize revenue cash payments received customers transactions customers final acceptance record cash receipts customer advances defer revenue recognition final acceptance received multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 amended eitf 0305 allocate revenues element software arrangements based vendor specific objective evidence vsoe element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion arrangement fee recognized revenue evidence fair value one undelivered elements exist revenue deferred recognized delivery elements occurs fair value established recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue related maintenance support contracts recognized ratably contract term revenues services less 10 revenues years also sell products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectibility cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards 48 revenue recognition right return exists sfas 48 developed reasonable estimates stock exchanges estimates derived based historical experience similar types sales similar products sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material estimate amount rebate based upon terms individual arrangement historical experience future expectations price reductions record estimate rebate amount time sale also enter sales incentive programs comarketing arrangements certain wireless handset customers record incurred costs related incentive reduction revenue sales revenue recognized assessment collectibility also factor determining whether revenue recognized assess collectibility based number factors including payment history creditworthiness customer request collateral customers international sales often require letters credit customers drawn demand customer defaults payment determine collection payment reasonably assured recognize revenue time collection becomes reasonably assured generally upon receipt cash occasionally enter revenue sharing arrangements collect revenues customer telecommunications service provider collects service revenues enter revenue sharing arrangement recognize revenue collection reasonably assured nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms prior final acceptance accordingly accounts receivable booked recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained product warranty provide warranty equipment handset sales period generally ranging one three years time final acceptance rarely entered arrangements provide limited warranty services periods longer three years longest warranty period ten years provide expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate variable interest entities financial accounting standards board fasb issued fasb interpretation 46 fin 46 fin 46 requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity adopted fin 46 quarter ended december 31 2003 consolidated one related party deemed vie primary beneficiary 2003 2004 fourth quarter 2005 sold equity interest terminated material commercial arrangements settled bank debt determined longer primary beneficiary result assets liabilities entity consolidated december 31 2005 invested two additional entities considered vie included consolidated financial statements receivables although evaluate customer credit worthiness prior sale provide allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured assess collectibility receivables based number factors including analysis creditworthiness ability collect payment length time individual receivable balance outstanding believe accounting estimate related allowance doubtful accounts critical accounting estimate length collection cycle china based receivables material affect estimate upon net income periodically reevaluate estimate allowance doubtful accounts based upon changes facts circumstances last years experienced lengthening collection cycle china based receivables lengthened collection cycle attributed number factors primarily changes customers business practices surrounding payment lesser degree maturation chinese telecommunications sector however based upon collections experience lengthening necessarily coincide change overall estimate collectibility individual receivable balances accordingly revised estimates collectibility individual receivable balances end 2005 doubtful accounts allowances provided new estimates 85 million 101 million lower would provided using historical estimates 2005 2004 respectively december 31 2005 allowance doubtful accounts 678 million trade related party receivables 5230 million inventories consist inventories held manufacturing facility warehouses customer sites prior signing contracts may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost net realizable value net writedowns excess slow moving obsolete inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites deferred costsinventories customer sites contracts inventories customer sites contracts awaiting final acceptance classified deferred costs title associated inventory transferred customer assumed risk physical loss deferred costs also include labor related third party integrators freight deferred costs stated cost periodically assesses recoverability deferred costs provide reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time inventory held customer site viability payment including assessment product demand revenue sharing arrangement exists revenue cost sales recorded final acceptance received customer greater concentration inventory customer sites contract specific individual customer financial conditions specific individual customer may result increased concentration risk exposure inventory research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs deferred income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain establish reserves taxrelated uncertainties based estimates whether extent additional taxes interest due reserves established despite belief tax return positions fully supportable believe certain positions likely challenged may sustained review tax authorities adjust reserves light changing facts circumstances closing tax audit provision income taxes includes impact reserve provisions changes reserves considered appropriate well related net interest recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income record valuation allowance reduce deferred tax assets amount management believes likely realized goodwill intangible assets recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets perform annual goodwill impairment review fourth quarter year changes circumstances indicate potential impairment exists third quarter 2005 determined circumstances existed performed impairment review reporting unit level resulted asset impairment charge assessing potential impairment goodwill compare book value fair market value fair market value determined based present value estimated future cash flows longterm investments invested fund focused investments internet companies china fund focused investments companies asia undergoing restructuring bankruptcy procedures also invested directly number private technologybased companies early stages development publicly listed technology companies traded nasdaq new york stock exchange quoted market prices readily available determine fair value investments publicly traded companies management judgment required determine losses temporary furthermore management judgment required evaluating carrying value private company investments possible impairment private technology company investments assess impairment based evaluation achievement business objectives milestones financial condition prospects companies relevant factors continually monitor investments impairment charge income impairment amounts period determination made recent accounting pronouncements december 2004 financial accounting standards board fasb issued sfas 123 revised 2004 sharebased payment sfas 123r sfas 123r require us measure employee stockbased compensation awards using fair value method record expense consolidated financial statements addition adoption sfas 123r require additional accounting related income tax effects additional disclosure regarding cash flow effects resulting sharebased payment arrangements currently plans modify existing compensation programs march 2005 sec issued staff accounting bulletin 107 sab 107 provides guidance regarding application sfas 123r sab 107 expresses views staff regarding interaction sfas 123r sharebased payment certain sec rules regulations provides staffs views regarding valuation sharebased payment arrangements public companies particular sab 107 provides guidance related sharebased payment transactions nonemployees transition nonpublic public entity status valuation methods including assumptions expected volatility expected term accounting certain redeemable financial instruments issued sharebased payment arrangements classification compensation expense nongaap financial measures firsttime adoption sfas 123r interim period capitalization compensation cost related sharebased payment arrangements accounting income tax effects sharebased payment arrangements upon adoption sfas 123r modification employee share options prior adoption sfas 123r disclosures managements discussion analysis mda subsequent adoption sfas 123r april 14 2005 sec approved new rule delays effective date sfas 123r annual periods beginning june 15 2005 cumulative effect initial application statement recognized effective date sfas 123r allows two alternative transition methods modified prospective modified retrospective application modified prospective application compensation cost portion awards requisite service rendered outstanding effective date recognized requisite service rendered remaining service period compensation cost portion awards based grantdate fair value awards calculated either recognition pro forma disclosure sfas 123 new awards modified repurchased cancelled option date accounted provisions sfas 123r modified retrospective application prior period financial statements adjusted give effect fair value based method accounting compensation cost awards granted modified settled cash basis consistent pro forma disclosures required periods sfas 123 amended sfas 148 determined adopt modified prospective application use blackscholes option pricing model determine fair value stock options employee stock purchase plan shares determination fair value stockbased payment awards date grant using optionpricing model affected stock price well assumptions regarding number complex subjective variables include expected stock price volatility term awards actual projected employee stock option exercise behaviors riskfree interest rate expected dividends currently expect impact adoption sfas 123r increase compensation costs approximately 15 million 2006 december 2004 fasb issued sfas 153 exchanges nonmonetary assets amendment apb opinion 29 sfas 153 sfas 153 addresses measurement exchanges nonmonetary assets redefines scope transactions measured based fair value assets exchanged sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption sfas 153 expected material effect consolidated financial position results operations november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 sfas 151 sfas 151 clarifies abnormal inventory costs idle facilities excess freight handling costs wasted materials spoilage required recognized current period charges provisions sfas 151 effective fiscal year beginning june 15 2005 adoption sfas 151 expected material impact consolidated financial position results operations cash flows june 2005 fasbs emerging issues task force eitf issued eitf issue 0502 meaning conventional convertible debt instrument eitf issue 0019 accounting derivative financial instruments indexed potentially settled companys stock retains exception paragraph 4 eitf issue 0019 conventional convertible debt instruments holder option convert instrument fixed number shares corresponding amount cash issuers discretion ability exercise option based either passage time b contingent event considered conventional purposes applying exception consensus applied prospective basis new modified instruments starting third quarter 2005 adoption eitf 0502 expected material effect consolidated financial position results operations june 2005 fasb issued fasb statement 154 accounting changes error corrections sfas 154 require entities voluntarily make change accounting principles apply change retrospectively prior periods financial statements unless would impracticable sfas 154 supersedes accounting principles board opinion 20 accounting changes apb 20 previously required voluntary changes accounting principle recognized including current periods net income cumulative effect changing new accounting principle sfas 154 also makes distinction retrospective application accounting principle restatement financial statements reflect correction error sfas 154 entity changes method depreciation amortization depletion longlived nonfinancial assets change must accounted change accounting estimate apb 20 change would reported change accounting principle sfas 154 applies accounting changes error corrections made fiscal years beginning december 15 2005 adoption fas 154 expected material effect consolidated financial position results operations item 7aitem 7 management’s discussion analysis financial condition results operations forwardlooking statements annual report form 10k contains forwardlooking statements within meaning federal securities laws statements based information currently available management intend forwardlooking statements covered safe harbor provisions private securities litigation reform act 1995 including statement purposes complying provisions forwardlooking statements include without limitation concerning following expectations regarding compliance sec reporting requirements nasdaq listing requirements expectations nature possible market trends expectations regarding continued growth business operations expectations regarding fluctuations gross profit plans regarding payment cash dividends expectations regarding recognition certain compensation costs plans regarding legal proceedings expectations regarding effect legal proceedings government inquiries expectations regarding functionality performance features products expectations regarding softbank’s continued service certain modems modem rental agreements plans expectations regarding relationships vendors suppliers plan fulfill purchase commitment various orders suppliers expectations regarding exchange rate risks respect accountable receivables payables renminbi japanese yen euros plans regarding use financial instruments hedge certain foreign currency exchange rate risks plans regarding use derivative financial instruments speculative trading purposes plans regarding discounting certain bank notes commercial notes expectations regarding ability raise funds including impact late filing reports securities exchange commission ability raise funds expectations regarding availability funding account receivable financing program citibank na plan continue service accounts receivable expectations regarding investment global asia partners lp expectations regarding right intellectual property embedded products expectations regarding ability protect intellectual property expectations regarding effect market risks operating results plans implement measures remediate material weaknesses expectations regarding effectiveness remediation measures plans continue review internal controls expectations regarding competition competitive advantages competitors expectations regarding consolidation telecommunications industry expectations regarding development introduction new advanced products expectations regarding deployment products plans expectations regarding workforce restructurings expectations regarding adoption environmental health safety laws countries worldwide expectations regarding effect sarbanesoxley act corporate governance disclosure practices expectations regarding expenses associated compliance sarbanesoxley act expectations regarding impact restatement consolidated financial statements expectations regarding maturation pas market corresponding decrease pas subscriber growth expectations regarding longterm demand pas products expectations regarding ability offset decline pas sales pursuing products expectations regarding pas system spending plan improve pcd gross margins supplying cdma handsets design manufacture plan pursue opportunities wireless infrastructure products multiple markets expectations regarding investment development iptv market expectations regarding product margins expectations regarding impact initiatives revenue plan expectations regarding annual effective tax rate expectations regarding likelihood realize tax benefits us countries expectations regarding effect china corporate income tax law future tax expenses expectations regarding valuation allowance net deferred tax assets impact expectations regarding reporting net losses throughout 2007 expectations regarding level capital expenditures china plans maintain adequate liquidity levels least next 12 months expectations regarding availability sufficiency credit lines lenders plans issue new debt instruments sell investments assets expectations regarding refinancing convertible notes access cash china subsidiaries meet liquidity requirements outside china expectations regarding interest rates expectations regarding sufficiency cash resources expectations regarding ability receive licenses products expectation business financial condition results operations continue significantly influenced political economic legal social environment china international markets including japan india europe expectations regarding nature political economic legal reform china expectations regarding continued importance chinese market technologies development importance sales china operating results expectations regarding future sales generated china percentage total sales expectations regarding impact receiving license sell gsm cdma handsets china ability meet future market demands expectations regarding subscriber growth china expectations regarding global expansion sales outside china plan extend supplier base introducing models design expanding relationships manufacturers plans pursue opportunities divest additional noncore assets expectation research development expenses stable expectations regarding future amortization expenses expectations regarding impact product defects performance quality issues expectations regarding impact international expansion management operational financial resources expectations regarding impact legislation restricts prohibits use wireless handsets driving future sales expectations regarding days sales outstanding plans regarding improvement internal supply chain inventory management processes expectations regarding product cost reduction efforts expectations regarding reliability stockbased compensation valuation models impact sfas 123r expectations regarding ability implement enhance administrative infrastructure additional forwardlooking statements may identified words “anticipate” “expect” “believe” “intend” “will” “may” similar expressions relate us management words “designed” “intended” similar expressions relate products services investors cautioned forwardlooking statements inherently uncertain statements subject risks uncertainties may cause actual results events differ materially detailed discussion risks uncertainties see item 1a “risk factors” section form 10k guarantee future results undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k restatement consolidated financial statements consolidated financial statements financial information annual report form 10k accounting periods prior third quarter 2006 restated summary july 2007 company announced audit committee conducting independent investigation historical sales certain customers china stated could rule possibility outcome investigation could impact revenue recognized certain contracts recorded previously issued financial statements september 2007 company announced investigative phase audit committee’s investigation completed consultation upon recommendation management audit committee determined revenue company’s western region china recognized earlier financial statements affected periods restated company also announced previously issued financial statements fiscal years ended december 31 period 2000 2005 financial statements interim periods contained quarterly reports form 10q filed respect years quarterly reports form 10q filed respect quarterly periods ended march 31 june 30 2006 relied upon annual report corrected effects net sales related costs net sales recorded earlier net effect december 31 2005 reduce defer previously recognized revenue gross profit 2786 million 977 million respectively also conducted voluntary review historical stock option practices direction nominating corporate governance committee board directors “governance committee” review considered option grant awards made period february 29 2000 shortly initial public offering common stock august 2006 compliance various stockbased compensation accounting standards applicable period well rules stock option plans found number instances use proper date measurement date determining whether stock options issued exercise prices fair value common stock therefore restated previously issued financial statements years ended december 31 1998 2005 account additional 255 million stock compensation expense recognized period together equal increase additional paidin capital recognize intrinsic value assigned issuances equity securities related adjustments payroll income taxes resulted additional 05 million expense recognized 1998 2005 period total stockholders’ equity reduced total 21 million december 31 2005 first six months 2006 additional 12 million stock compensation expense recognized reduces previously reported operating results period restating previously issued financial statements investigations described also corrected previously reported amounts corrected reporting 803 million net sales certain third party resellers 412 million associated cost net sales 2005 classify amounts related party net sales related party cost net sales classifications respectively 2006 determined sales entities substance sales one significant shareholders softbank corp accounts receivable sales similarly reclassified accounts receivable related parties 2005 balance sheets also corrected reporting 63 million time deposits march 31 june 30 2006 mature within three months formerly time deposits reported error cash equivalents amounts included shortterm investments balance sheets statements cash flows march june 2006 reporting periods corrections 2006 2005 interim periods recorded condensed consolidated financial statements included exhibit 991 annual report none restatements effect december 31 cash balances however cash equivalents reduced march june 2006 periods due reclassifications described additional information restatements effects financial statements presented well notes consolidated financial statements china sales investigation audit committee company’s board directors “audit committee” engaged independent counsel conduct investigation sales china following determination internal audit group allegations improper activities sales office western region credible allegations made company employee using company’s whistle blower program independent counsel engaged forensic accountants group collectively referred investigating team rest discussion conducting procedures investigating team found instances customer contracts evidenced arrangement contained obligations company deliver software upgrades made available equipment sold additional consideration unspecified period could extend term contract additional contract obligation element “post contract support” cases investigating team found contract documentation transaction submitted sales office company’s china headquarters accounting purposes utilized company determining amount revenue recognized include evidence post contract support obligations accounting standards governing revenue recognition system sales require revenue deferred undelivered elements arrangement unless seller established vendor specific objective evidence “vsoe” fair value contract elements arrangements included undelivered elements revenue deferred based vsoe fair value underlying elements vsoe fair value represents price charged element sold separately since company sell element separately established vsoe undelivered elements revenue contracts required deferred recognized period company obligated provide post contract support china sales investigation covered seven years period ended december 31 2006 included investigating approximately 1200 contracts five regions china reviews electronic files 45 employees formal interviews 96 employees china additionally china sales investigation included reviewing contract files performing various financial analyses including comparison payments received per accounting records contract terms computer forensic procedures destruction electronic documents suspected aggregate investigating team expended approximately 25000 hours conducting investigation commenced february 2007 completed september 2007 independent counsel forensic accountants presented final report audit committee july 2007 announced audit committee conducting independent investigation historical sales certain customers china stated could rule possibility outcome investigation could impact revenue recognized certain contracts recorded previously issued financial statements upon completion investigative phase independent investigation audit committee management · conducted followup procedures attempt locate additional relevant information ensure company considered available information documents · evaluated accounting identified system sales using contract template documentation found sales contract files western region offices included calculating financial statement effects correcting accounting system sales contract template found sales offices contained post contract support obligations recognize revenue cost net sales estimated period post contract support · concluded result existence undelivered post contract support obligation previously issued financial statements restated defer system sales contract revenue related cost net sales estimated period post contract support contract contained unspecified software upgrade rights audit committee concurred management’s decisions effect correcting improperly recognized revenue cost net sales reduce increase previously reported net sales gross profit net income following amounts thousands dollars cumulative effect china sales restatement adjustments consolidated balance sheet december 31 2003 resulted decrease retained earnings 366 million increase deferred revenue 1154 million account previously recognized sales increase deferred costs 757 million account previously recognized cost net sales increase deferred tax assets 30 million consolidated balance sheet december 31 2006 deferred revenue 2757 million 356 million classified current 2401 million noncurrent deferred costs balance 1766 million amounts recognized consolidated statements operations estimated remaining period post contract support upon completing investigation audit committee concluded conditions practices relating systems contracts prevalent western region resulted primarily failure prevent detect instances override related controls china customer agreements lack proper management oversight unclear record retention policies procedures relating systems contracts inadequate employee training investigating team audit committee also concluded respect four regions western region evidence fraud misconduct reason suspect occurred investigating team audit committee also concluded credible evidence knowledge senior management china united states conditions practices related western region china discovered investigation audit committee concluded local management several sales offices western region china submit appropriate information company’s senior management china united states therefore prior years neither company’s management company’s independent registered accounting firm able properly evaluate effect information revenue recognition audit committee also concluded certain members management china bear varying degrees responsibility inadequate oversight activities result certain employees china either terminated placed suspension failure provide adequate oversight activities restructured management western region sales organization working identify implement changes policies procedures enhance employee training improve internal control consciousness lessen possibility accounting errors occurring future stock option accounting november 2006 announced commenced voluntary review historical stock option practices leadership governance committee following preliminary review management identified potential deficiencies discrepancies documentation stock option grants review considered option grant awards made period february 29 2000 shortly initial public offering common stock august 2006 “review period” compliance various stockbased compensation accounting standards applicable review period well rules stock option plans governance committee engaged independent outside legal counsel assist review turn engaged forensic accountants separate law firms separate forensic accounting firms engaged audit committee governance committee china sales investigation stock option accounting review rest discussion group collectively referred stock option review team actions activities referred stock option review stock option review team members spent 11000 hours review governance committee met stock option review team dozen occasions receive discuss consider stock option review team’s information findings time review commenced governance committee consisted three members board directors independent directors committee decided delegate supervision review mr jeff clarke chairman joined board 2005 served compensation committee board directors “compensation committee” period review governance committee also consisted two independent directors mr larry horner mr thomas toy also serve board’s compensation committee mr allen lenzmeier appointed governance committee april 27 2007 review procedures included · interviews individuals involved granting advising administering accounting stock options including current former management members board directors employees nonemployee professionals · review relevant stock administration human resource legal finance department files records · review stock option grant information select employee personnel files · review least 30 attorneys 15 forensic accountants approximately 250000 potentially relevant emails documents electronic format selected electronic discovery techniques 18 million electronic documents processed · review electronic database company’s stock option activity maintained third party along communications service provider · reconciliation grant activity approval documents executed compensation committee electronic database · reconciliation stock option grant exercise cancellation information sec filings select employee personnel files electronic database · statistical judgmental pattern analysis · followup matters raising questions option granting process history conduct involved granting advising administering accounting stock options accounting treatment stock options · followup items issues requested identified management company’s independent registered public accounting firm stock option review team management governance committee decided group stock option grants six award categories based differences constituted substantive approval category stock option granting practices well giving consideration risk intentional misstatement grant date guidance september 19 2006 letter publicly issued sec’s chief accountant focuses concept measurement date accounting principles board opinion 25 accounting stock issued employees “apb 25” accounting standard governing stock option accounting 2005 occur number shares individual employee entitled receive exercise price determined finality ie longer subject change date substantive approval occurred depending company’s facts circumstances guidance sec discussed recognizes company may determine measurement date stock option grants may occur required granting actions occurredsuch final approval compensation committee alternative available review facts circumstances supports conclusion substantive approval occurs earlier required granting actions occurred evidence fraudulent manipulative conduct company’s option granting practices determining measurement date used stock option review team management governance committee agreed use following definitions constituting proper measurement date generally dates used testing stated grant dates establishing corrected measurement dates discretionary director officer grants date compensation committee meeting grant approved date final compensation committee signer approved grant approval occurred unanimous written consent documents “uwc” automatic director grants date specified relevant stock option plan broadbase date grantee list including allocation shares individual grantees complete compensation committee approval considered perfunctory due delegation authority management acquisition first compensation committee meeting following acquisition provided grantees received employment offer letters stating number stock options granted date option exercise price established compensation committee approval considered perfunctory due delegation authority management new hire first scheduled compensation committee meeting following first day employment date option exercise price established number options based either grant amounts specified employment offer letter cases matrix assigned grant amounts based position level within company compensation committee approval considered perfunctory due delegation authority management merit date grantee list including allocation shares grantees substantially complete compensation committee approval considered perfunctory due delegation authority management 12 tested grant dates corrected measurement date required stock option review team management unable locate sufficient evidence establish corrected measurement date using established criteria applicable option grant type situations alternative available evidence used establish corrected measurement date period covered stock option review granted stock options approximately 34 million shares common stock 197 grant dates review specifically examined appropriateness stated grant date approximately 90 stock options granted including stock option grants made directors officers broadbase grants option grants made connection business acquisitions findings review summarized follows 1 apb 25 expense adjustment arising using corrected measurement date grants amount employee would pay exercise stock option grants exceeded quoted market price common stock corrected measurement date therefore stock option grants contained intrinsic value corrected measurement date 2 number grants exceeds number grant dates certain grant dates one category stock option grants approved late january 2007 governance committee reported interim findings concerning use incorrect measurement dates stock option accounting apb 25 board directors february 1 2007 audit committee board directors concluded consultation upon recommendation management correct errors previously reported stockbased compensation expense restatement previously issued financial statements previously issued financial statements periods longer relied upon communicated decision february 1 2007 public announcement noncash compensation charge recognized expense grantee’s service period arises apb 25 stock option intrinsic value measurement date intrinsic value measured excess fair value date grant underlying common stock option’s exercise price practice grant stock options exercise prices equal closing price common stock grant date use grant date measurement date stockbased compensation purposes previously determined granted stock options intrinsic value grant dates compensation expense recognized however apb 25 states measurement date occur essential actions necessary grant option completed including final determination number shares granted employee director exercise price option grant approved requisite authority reinforced september 19 2006 letter issued sec’s chief accountant focuses need number shares exercise price award individual finalized measurement date letter clarifies sec staff’s view possible terms could change measurement date occurred even award’s terms actually changed based available evidence review found number shares individual employee entitled receive andor exercise price determined finality stated grant date 53 tested grant dates used later date measurement date principal reasons stated grant date qualifying measurement date apb 25 include · certain listings grantees officer level incomplete added modified stock option administration personnel grant approved compensation committee · certain grants compensation committee approval considered perfunctory date uwc document sent compensation committee members approval used stated grant date discretionary officer director grants rather date uwc signed compensation committee members therefore became effective · stock option review team unable locate contemporaneous documentation director officer broadbase new hire merit grants review company also discovered stock option grant former officer modified 1998 connection termination employment change never included company’s stock option grant records additional compensation expense resulting change option’s terms approximately 12 million recorded previously discovery consistent stock option review team’s finding certain instances lack formal documentation stock option granting process andor expected documentation missing stock option administration files addition stock option review team found many instances lack selfauthenticating evidence corroborate cash exercises contemporaneous result findings issue backdating cash exercises inconclusive restating consolidated financial statements recognize additional noncash stockbased compensation expense arising using corrected measurement dates certain stock option grants made years 2000 2005 reflect modification 1998 grant described consistent historical accounting policy additional stockbased compensation expense recognized accelerated basis treating vesting tranche separate stock option grant graded vesting accounting stockbased compensation changed fair value based method 2006 required accounting standards ceased accounting stockbased compensation intrinsic value method pursuant apb 25 began accounting stockbased compensation statement financial accounting standards 123r sharebased payments “sfas 123r” method stock option grants fair value determined using option pricing model fair value used recognize noncash stockbased compensation expense restating unaudited condensed consolidated financial statements first second fiscal quarters 2006 included exhibit 991 recognize changes noncash stockbased compensation expense arose redetermination fair value stock options granted 2005 prior governance committee’s review resulted corrected measurement date january 1 2006 179 million options granted 2000 2005 corrections made measurement dates stock option review 44 million options corrected measurement dates granted 2000 2001 fully vested therefore fair values outstanding unvested portion remaining 135 million stock options granted 2002 2005 incorrect measurement dates recalculated also recording additional noncash stockbased compensation expense first two quarters 2006 arising correcting measurement date stock option grants three individuals period recognize stock compensation expense straightline basis sfas 123r stock option grants corrected measurement dates also restated using fair value based measurement principles statement financial accounting standards 123 accounting stockbased compensation “sfas 123” present note 2 “restatement financial statements” notes consolidated financial statements contained item 8 annual report pro forma effect stockbased compensation expense net income loss earnings loss per share amounts 2004 2005 using fair value based method determine stockbased compensation expense rather using apb 25’s intrinsic value method disclosure required financial statements periods prior adoption sfas 123r addition restating consolidated financial statements response governance committee’s findings recording additional noncash adjustments account modification 1998 stock option grant former officer connection termination employment record first two quarters 2006 corrections relating accounting performance related stock options restricted stock grants previously identified considered immaterial correcting measurement date previously granted stock options cases results additional taxable income employees additional payroll taxes due employees well us provided additional payroll taxes plus related penalties interest arising restatement stockbased compensation including amounts otherwise payable stock option recipients restated financial statements include accrual affected years approximately 15 million estimated payroll tax related expenses corrections stock option restatement increase reduce previously reported noncash compensation expense payroll taxes income taxes net income following amounts thousands dollars governance committee’s review found 179 million stock options 288 million options granted common stock 2000 2005 incorrect measurement dates using corrected measurement dates 76 million stock options exercise prices exceeded closing price common stock therefore intrinsic value accounted apb 25 103 million stock options intrinsic value exercise prices closing price common stock 103 million stock options resulted increase additional noncash stockbased compensation expense 243 million additional 15 million payroll tax related expenses 2000 2005 partially offset 05 million income tax benefit shown table 103 million stock options resulting additional noncash stockbased compensation expense 20 million options granted officers directors resulted 61 million additional noncash stockbased compensation expense upon completing review governance committee concluded found evidence intent manipulate company’s operating results financial statements key finding governance committee deficiencies process stock options granted period initial public offering 2000 least 2005 resulted accounting errors governance committee concluded certain members management bear varying degrees responsibility deficiencies process options granted governance committee’s review also concluded none current former employees directors company engaged intentional wrongdoing determining restatement amounts management used reasonably available relevant information form conclusions believes reasonable likely option granting actions occurred dates actions occurred determination grant dates financial accounting purposes based requirements accounting standards met light significant judgment used establishing revised measurement dates alternative approaches used stock option review team management could resulted different compensation charges recorded restatement stock option review team management considered various alternatives throughout course review restatement management believes approaches used appropriate circumstances choices measurement dates used review stock option grant accounting restatement financial statements reasonable appropriate circumstances summary restatement amounts following table presents decrease net earnings restatement restated year effect corrections diluted earnings loss per share 2002 2005 follows cumulative effect stockholders’ equity december 31 2003 corrections follows thousands restating previously issued financial statements also corrected previously reported amounts corrected reporting 803 million net sales certain third party resellers 412 million associated cost net sales 2005 classify amounts related party net sales related party cost net sales classifications respectively 2006 determined sales entities substance sales one significant shareholders softbank corp accounts receivable sales similarly reclassified accounts receivable related parties 2005 balance sheets also corrected reporting 63 million time deposits march 31 june 30 2006 mature within three months formerly time deposits reported error cash equivalents amounts included shortterm investments balance sheets statements cash flows march june 2006 reporting periods amounts following sections management’s discussion analysis financial condition results operations except identified “as previously reported” tables within quarterly data unaudited restated caption reflect effects restatement financial statements correct revenue recognition certain sales contracts china historical stock option accounting well certain 2005 sales cost sales accounts receivables amounts discovered related party transactions correction classification time deposit cash shortterm investments first two quarters 2006 late sec filings nasdaq delisting proceedings result nominating corporate governance’s committee’s review historical stock option accounting resulting restatements timely file quarterly report form 10q quarter ended september 30 2006 “q3 2006 form 10q” annual report form 10k fiscal year ended december 31 2006 “2006 form 10k” quarterly report form 10q quarter ended march 31 2007 “q1 2007 form 10q” securities exchange commission addition result audit committee’s review certain historical sales contracts china timely file quarterly report form 10q quarter ended june 30 2007 “q2 2007 form 10q” securities exchange commission connection failure timely file periodic reports received four nasdaq staff determination letters dated november 15 2006 march 7 2007 may 16 2007 august 13 2007 respectively stating result nontimely filings compliance requirements marketplace rule 4310c14 therefore stock subject delisting nasdaq stock market appealed november 15 2006 determination nasdaq listing qualifications panel “panel” granted conditional extension request continued listing april 16 2007 april 17 2007 panel extended deadline filing q3 2006 form 10q may 14 2007 panel also extended deadline filing 2006 form 10k july 16 2007 may 2 2007 asked nasdaq listing hearing review council “listing council” review april 17 2007 decision panel may 14 2007 listing council called panel’s decision review requested provide update efforts file delinquent filings continued continue comply request addition listing council stayed panel’s decision required us file q3 2006 form 10q may 14 2007 file 2006 form 10k july 16 2007 august 23 2007 listing council granted company extension october 22 2007 file delinquent periodic reports restatements date filing form 10k filed concurrently q3 2006 form 10q two periodic reports still outstanding q1 2007 form 10q q2 2007 form 10q expect able complete filing outstanding reports soon practicable overview design manufacture sell telecommunications equipment handset products provide services associated operation telecommunication equipment products deployed installed globally primarily wireless wireline telecommunications service providers provide extensive range products transportation voice data video traffic service providers differentiate products designed reduce network complexity integrate high performance capabilities allow simple transition next generation networks personal communications division personal communications division “pcd” distribution channel code division multiple access “cdma” handset market pcd established acquisition assets wireless handset division audiovox corporation acc november 2004 see note 5 “acquisitions sale assets” notes consolidated financial statements contained item 8 annual report acquired acc’s sales service support infrastructure cdma handset brand access supplychain channels product marketing expertise key relationships cdma operators north south america believe distribution channel strengthens position handset market providing additional sales volume utstarcom designed products benefit economies scale manufacturing sourcing development 2005 pcd became largest segment basis net sales generating 48 total sales primarily due fact 2005 full year pcd operations reflected results compared 2004 approximately two months pcd revenues included time sales network solutions segment declined significantly 2006 pcd continued largest segment basis net sales generating 13395 million 55 total sales gross margins pcd distribution marketing services much lower margins traditionally realized operating segments plan improve pcd gross margins supplying cdma handsets design manufacture introduced three cdma handset models 2006 plan introduce six additional models 2007 historically pcd relied upon limited number third party vendors supply handset products 2006 2005 three vendors accounted approximately 88 97 purchases respectively september 2006 entered strategic alliance agreement one vendors whereby appointed exclusive distributor certain territories additionally 2006 extended supplier base introducing models design expanding relationships manufacturers wireless infrastructure handsets personal access service “pas” infrastructure handset products primarily sold china historically china largest market believe continue important market current future technologies percentage sales generated china declined 32 30 total sales 2006 2005 respectively compared 79 2004 decline due maturation pas market coupled proportionally increased sales outside china organic growth acquisitions 2006 2005 sales wireless infrastructure products declined 86 million 2 8328 million 66 respectively compared previous year decline sales wireless infrastructure products primarily due customers china reducing capital spending anticipation next generation technology networks shifting pas investments geographical extension expanding capacity improving quality existing networks 2006 2005 sales handset products declined 777 million 16 2756 million 37 respectively compared previous year primarily due declines total market size average selling price decline handset market size result lower subscriber growth 2006 driven lower marketing efforts service providers despite competitive pressures margin rate handsets improved 18 percentage points 2005 2006 china handset business focused higher end products cost reductions rather increase volume continue focus product cost reductions increased sale handset models lower cost chipsets well higher end products including dual mode handsets despite market conditions experienced 2006 expect longterm demand pas products continue believe pas remain important technology market china foreseeable future according china’s ministry information industry mobile phone teledensity rate 35 end 2006 still far behind developed countries world means almost 65 china’s 13 billion population still mobile phone service china’s economic growth urbanization continues coming years believe represents huge market demand costeffective communication services addressable market pas end fiscal year 2006 number pas subscribers exceeded 96 million users increase 10 prior year positioned extension fixedline service affordable citywide mobile phone service pas significant cost advantage 2nd 3rd generation mobile phone technologies terms existing infrastructure network lower service tariffs restructuring programs past years undertaken significant globalization program intend continue build global sales outside china intend continue enhance manufacturing capabilities improve internal supply chain inventory management processes ensure timely deliveries quality products also intend continue implement enhance administrative infrastructure assist globalization part program reviewed corporate wide operations aim narrowing strategic focus regard market concentration product portfolio selection resources allocation second quarter fiscal 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products align investments key growth opportunities primary goal improvements optimize cost structure enable us deliver consistent sustainable profitability stockholders 2005 incurred approximately 353 million restructuring expenses consisting 152 million severance payments approximately 1595 employees terminated workforce reduction programs 145 million asset impairments writeoff equipment licenses associated discontinued products 56 million inventory writeoff discontinued products restructuring expense related severance asset impairments reported operating expense inventory writeoff reported cost sales consolidated statements operations see note 21 “restructuring costs” notes consolidated financial statements contained item 8 annual report 2006 additional restructuring expenses incurred approximately 11 million accrued expenses settled remaining 01 million accrued expenses december 31 2006 relate facility lease settled 2007 october 2 2007 board directors approved restructuring plan “plan” reduce operating costs includes worldwide reduction force approximately 11 company’s headcount approximately 700 employees workforce reduction based primarily united states china lesser degree international locations management expects plan completed fourth quarter fiscal year 2007 expect incur restructuring charge connection plan approximately 10 million comprised largely cash payments associated onetime severance benefits majority charge taken fourth quarter 2007 addition company expects realize annual cost savings salary compensation related expenses approximately 21 million annualized basis continue efforts evaluate certain operations actively pursue opportunities divest additional noncore assets may incur additional costs associated future actions align business operations streamline business processes debt extinguishment supplemental indenture agreements 2005 entered agreements exchange 4988100 shares common stock fair value approximately 376 million approximately 571 million cash 1279 million aggregate principal amount outstanding convertible subordinated notes due 2008 “notes” five note holders exchanges considered early extinguishments debt aggregate fair value common stock cash less carrying value notes accordingly recorded gains 314 million exchanges 2005 effective january 9 2007 entered supplemental indenture agreement holders notes providing failure us comply certain provisions original agreement result default event default accordance supplemental indenture agreement notes accrue additional 675 per annum compared 7¤8 annual interest provided original indenture related notes special interest beginning january 9 2007 maturity date notes unless notes earlier repurchased converted july 26 2007 entered second supplemental indenture receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection consent solicitation announced july 19 2007 second supplemental indenture convertible subordinated notes accrue aggregate additional 10 per annum compared 7¤8 annual interest provided original indenture related notes special interest including july 26 2007 march 1 2008 maturity date notes unless notes earlier repurchased converted special interest rate represents increase 325 per annum previous special interest rate 675 per annum first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 see note 11 “debt” notes consolidated financial statements contained item 8 annual report asset impairment valuation allowance deferred tax assets management held series planning meetings september 2005 assess current business forecast reporting units assessment analyzed various factors including reduction rate growth pas subscribers delay expected granting 3g licenses china japan challenges product quality primarily broadband reporting unit narrowing strategic focus related product offering greater expected revenue margin decline due continued pricing pressures several key markets determined certain circumstances changed sufficiently indicate fair value certain reporting units may book values result conducted evaluation longlived assets including goodwill intangible assets certain property plant equipment impairment recorded impairment charges based upon analysis discussed results operations 2005 recorded impairment charges totaling 2181 million consisting 1929 million goodwill 17 million intangible assets 235 million property plant equipment see note 8 note 10 notes consolidated financial statements contained item 8 annual report management also evaluated expected realization deferred tax assets 2005 recorded noncash charge 2373 million provide full valuation allowance net deferred tax assets december 31 2005 united states china additional asset impairment charges recorded fiscal 2006 softbank china december 2005 sold 10 ownership interest softbank china holdings pte ltd “softbank china” softbank corp related party owner remaining 90 softbank china 569 million result recorded income gain 472 million management fees transaction expenses net investment’s carrying value results operations reorganized business based principally upon product families realigned business four operating units network solutions ii pcd iii handsets iv services network solutions operating unit provides products services two reporting segments broadband infrastructure wireless infrastructure aligned reporting business segment reorganization accordance sfas 131 “disclosures segments enterprise related information” basis management evaluated managed business period december 31 2006 broadband infrastructure primarily comprised ian8000 ipbased digital subscriber line access multiplexer gepon netringô rollingstreamô wireline products wireless infrastructure primarily comprised pas cdma products handsets primarily comprised pas handsets pcd primarily comprised cdma handsets digital devices also provide installation certain maintenance services periods presented total services sales accounted less 10 net sales net sales fiscal 2006 vs 2005 net sales decreased 14 25 billion 2006 compared 2005 revenues lower operating segments 57 decrease net sales broadband infrastructure segment contributed half total net sales decrease broadband infrastructure revenues 2005 driven sales ian8000 equipment japan telecom affiliate softbank corp related party 2006 broadband infrastructure sales softbank affiliates decreased 3330 million softbank completed initial investment fixed line businesses changed focus wireless business following acquisition vodafone japan decrease wireless infrastructure revenues handsets revenues reflect lower demand china market pas systems handsets pas subscriber growth declined 10 2006 compared 31 2005 70 2004 pcd net sales remained relatively consistent decrease average selling price offset 6 increase number units sold 2006 verizon wireless tmobile respectively accounted approximately 14 11 total net sales demand pas products weakened telecommunication service providers reduced expenditures deploying pas systems promoting pas handsets anticipation introduction new technology next generation telecommunication equipment however expect longterm demand pas products continue believe pas remain important technology market china foreseeable future due mix higher growth segments geographies declining revenues pas dominated wireless infrastructure handsets segments revenues customers china represent 32 total company revenues individual province sales accounted 10 total company revenues 2006 2005 company recorded restatement adjustments defer 496 million revenue conditions necessary revenue recognition achieved net sales year ended december 31 2006 include approximately 447 million revenue deferred part 2005 restatement adjustments additional discussion business segments see “segment reporting” 2007 expect revenues pas products infrastructure continue decline increased competition partially offset revenues higher end pas products including dual mode pas handsets dual mode cdma softswitch products multiple markets though anticipate sales fully offset decline pas sales currently offer initial market acceptance rollingstreamô iptv products china japan geographic regions believe iptv market presents meaningful growth opportunity regions well regions targeted expand iptv offerings including india fiscal 2005 vs 2004 revenues increased 11 29 billion 2005 driven higher pcd revenues united states broadband infrastructure revenues japan offset declining wireless infrastructure handsets revenue china pcd established selected assets liabilities acquired audiovox november 2004 2005 pcd revenues 12 month period increased 11 billion compared revenues two month post acquisition period 2004 due pcd revenues united states almost quadrupled represent 46 total company revenues 2005 additionally verizon wireless accounted 12 total company revenues 2005 broadband infrastructure revenues doubled 2005 driven sales ian8000 equipment japan telecom affiliate softbank corp related party softbank corp affiliates accounted 89 broadband infrastructure revenues 17 total company revenues 2005 experienced 66 decline wireless infrastructure revenues 37 decline handsets revenues due lower demand china market pas systems handsets pas subscriber growth declined 70 2004 31 2005 2004 guangdong jiangsu provinces accounted 13 10 net sales respectively gross profit cost sales consists primarily material labor costs associated manufacturing assembly testing products costs associated installation customer training warranty costs fees agents inventory contract loss provisions overhead cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers manufacture assemble cdma handsets gross profit affected average selling prices material costs product mix impact warranty charges contract loss provisions well inventory reserves release deferred revenues related cost pertaining prior years addition acquisition pcd november 2004 resulted higher percentage revenue associated product offerings lower margins gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate future result shifts product mix stage product life cycle anticipated decreases average selling prices ability reduce cost sales fiscal 2006 vs 2005 gross profit declined absolute dollars remained relatively constant percentage net sales 16 2006 compared 15 2005 wireless handsets segments contributed increase gross profit absolute dollars primarily result shift product mix reduction production costs absolute decrease gross profit dollars primarily result decline gross profit broadband segment resulting 57 decline segment sales reduced profit percentage segment sales due additional inventory reserves 321 million provision anticipated losses infrastructure deployment contract entered fourth quarter 2006 addition increased percentage revenue derived lower margin pcd segment resulted decrease total gross profit percentage net sales additional discussion business segments see “segment reporting” fiscal 2005 vs 2004 gross profit declined absolute dollars percentage net sales 2005 compared 2004 absolute decrease gross profit dollars primarily result 67 decline wireless operating segment gross profit reflective maturing pas market china offset higher absolute gross profit dollars broadband pcd primarily attribute decrease gross profit percentage sales impact pcd margins lower handsets margins due declines pas handset average selling prices offset higher broadband infrastructure gross margins achieved ian8000 products relating sales japan telecom first quarter pcd contributed 528 million gross margin 2005 contributed 119 million 2004 acquire pcd november 2004 gross profit 2005 negatively affected 56 million inventory writeoff associated discontinued products operating expenses income following table summarizes operating expenses selling general administrative expenses “sga” include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs research development expenses consist primarily compensation benefits employees engaged research design development activities costs parts prototypes equipment depreciation third party development expenses portion costs fixed difficult quickly reduce periods lower sales however second quarter 2005 announced initiated restructuring plan resulted reduction certain sga research development costs believe continued investment research development critical longterm success although total absolute expenditures research development 2006 lower 2005 streamlined rd activities focused high value strategic projects businesses selling general administrative fiscal 2006 vs selling general administrative expenses decreased 370 million 10 fiscal 2006 compared fiscal 2005 decrease primarily due 278 million decrease provision doubtful accounts 2006 compared 2005 resulting strong cash collection fully reserved receivables china days sales outstanding 60 days december 31 2006 compared 66 days outstanding december 31 2005 due strong cash collections fourth quarter 2006 high percentage fourth quarter revenue derived pcd segment generally experienced shorter collection period related receivables 2007 expect days sales outstanding increase line historical trends addition sales marketing personnel costs decreased approximately 167 million result cost saving resulting reduced sales marketing headcount offset partially increased stockbased compensation charges reduction sales marketing headcount primarily due shift 2006 approximately 477 employees previously providing sales support services towards generating revenue support arrangements cost savings sales marketing primarily related 2005 restructuring cost containment measures included 120 million decrease depreciation facility equipment costs 101 million decrease travel expenses 40 million decrease professional services cost savings sales marketing expenses partially offset increase general administrative costs primary factors increased general administrative costs include increase 213 million general administrative personnel costs due increased stockbased compensation charges additional finance information technology resources hired improve processes controls ii 79 million value added tax expense resulting audit 2003 2005 tax years china tax authorities iii 47 million writeoff net assets connection termination joint venture 2006 selling general administrative costs included approximately 10 million stockbased compensation result adoption sfas 123r fiscal 2005 vs selling general administrative expenses increased 675 million 22 fiscal 2005 compared fiscal 2004 increase sga primarily due increased headcount overhead 199 million includes pcd operations exist november 2004 ii increased professional services fees 185 million 2005 2004 associated supply chain management system integration sarbanesoxley act compliance projects audit fees iii increased litigation legal costs 133 million iv increase facilities expense 124 million hangzhou china office placed service october 2004 research development fiscal 2006 vs research development “rd” expenses decreased 639 million 26 fiscal 2006 compared 2005 decrease primarily due decrease 306 million depreciation facility equipment costs result restructuring writedown rd equipment 2005 ii decrease personnel expenses approximately 164 million attributed decrease headcount due restructuring activities transfer engineers part sale semiconductor design operations marvell technology transfer nonpas wireless research development china cellon iii decrease professional costs 93 million associated decrease outsourced projects rd expenses approximately 7 8 net sales 2006 2005 respectively expect rd expenses stable continue streamline rd activities invest product lines improve longterm profitability growth fiscal 2005 vs rd expenses fiscal 2005 approximately 8 net sales 2005 compared 8 net sales 2004 absolute amounts rd expenses increased 277 million 13 compared prior year absolute increase primarily due increase personnel expenses approximately 198 million attributed 15 increase average head count 2757 3170 employees due retention personnel various acquisitions well hiring personnel support product enhancements development primarily broadband handsets segments ii increase professional costs 32 million associated outsourced projects driven product development projects primarily handsets segment inprocess research development fiscal 2005 vs 07 million 14 million charges inprocess research development 2005 2004 respectively related acquisitions pedestal networks telos charges iprd based part upon independent valuations assessing iprd projects considered key product characteristics including product’s development stage acquisition date product’s life cycle product’s future prospects also considered rate technology changes relevant industry’s competitive environment economic market outlook amortization intangible assets fiscal 2006 vs amortization intangible assets expenses decreased 70 million 2006 compared 2005 decrease amortization intangible assets due several intangible assets fully amortized preceding twelve months amortization expenses next five years beginning year ending december 31 2007 expected amount 160 million 127 million 69 million 51 million 51 million respectively fiscal 2005 vs amortization intangible assets expenses increased 103 million 2005 compared 2004 increase amortization intangible assets 2005 due intangibles recorded result acquisitions telos may 2004 acc november 2004 giga january 2005 results 2005 fiscal year amortized portion prior year case acc telos gain saleof semiconductor design assets fiscal 2006 february 2006 sold substantially assets selected liabilities semiconductor design operations including assets related prior acquisition advanced communications devices corporation marvell technology group ltd recognized 123 million gain sale assets third quarter 2006 upon achieving defined milestones restructuring costs fiscal 2006 restructuring plan initiated 2005 completed december 31 2005 major restructuring effort undertaken 2006 settled approximately 11 million accrued expenses remaining 01 million accrued expenses settled 2007 fiscal 2005 second quarter fiscal 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products 2005 incurred approximately 297 million operating expenses relation restructuring plan actions primarily consisting 152 million related severance payments 145 million asset impairments primarily related impairment equipment licenses associated discontinued products included restructuring costs 297 million noncash charges 134 million asset impairments made cash payments 166 million severance benefits 2005 part restructuring plan recorded 56 million inventory writeoff associated discontinued products 2005 restructuring expense related inventory writeoff included cost sales consolidated statements operations end 2005 approximately 1595 employees terminated placed workforce reduction programs asset impairment fiscal 2005 third quarter 2005 determined certain circumstances changed sufficiently indicate fair value certain reporting units may book values result conducted evaluation longlived assets including goodwill intangible assets certain property plant equipment impairment recorded impairment charges intangible assets classified goodwill indefinite lives amortized intangible assets determinable lives amortized estimated useful lives perform annual impairment test goodwill november 1st year also test impairment annual tests “triggering” event occurs may effect reducing fair value reporting unit respective carrying values conducting goodwill impairment analysis calculate impairment charges based twostep test prescribed sfas 142 “goodwill intangible assets” “sfas 142” using estimated fair value respective reporting units use present value future cash flows respective reporting units determine estimated fair value reporting unit implied fair value goodwill also test longlived assets asset groups potential impairment accordance sfas 144 “accounting impairment disposal long lived assets” longlived assets tested recoverability based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values management held series planning meetings september 2005 assess current business forecast reporting units assessment analyzed various factors including reduction rate growth pas subscribers third quarter delay expected granting 3g licenses china japan challenges product quality primarily broadband reporting unit narrowing strategic focus related product offering greater expected revenue margin decline due continued pricing pressures several key markets management concluded factors combined represented triggering event due existence triggering event september 2005 determined significant adverse changes business outlook could indicate carrying value certain long lived assets groups may recoverable could indicate fair value reporting units may fair value result performed interim impairment tests goodwill certain long lived tangible intangible assets goodwill performed impairment analysis pursuant sfas 142 september 30 2005 reporting units compared fair value reporting units carrying value determined fair value reporting unit using present value comparable company techniques based part upon independent valuation fair values reporting units reconciled overall market capitalization september 30 2005 based impairment assessment noted goodwill impairment charge 1929 million estimated recorded three months ended september 30 2005 write full value goodwill wireless broadband handsets pcd business units second step goodwill impairment test broadband handsets segments completed third quarter wireless pcd units performed fourth quarter 2005 reaffirmed estimate third quarter goodwill fully impaired adjustment amount previously recorded longlived assets also tested longlived assets asset groups potential impairment third quarter 2005 accordance sfas 144 “accounting impairment disposal longlived assets” based analysis determined undiscounted expected future cash flows broadband handset asset groups less carrying value net assets determined relative estimated fair value tangible assets comparison similar assets wherever practical based quoted market prices taking consideration asset type age condition physical location asset result analysis recorded impairment charge 141 million longlived tangible assets related broadband asset group 94 million longlived tangible assets related handset asset group addition determined fair value technologyrelated intangible assets within handset asset group calculated using discounted future cash flows less carrying value net assets recorded net asset writeoff 17 million following table summarizes impairment charges incurred 2005 fiscal 2004 second quarter 2004 consummated acquisition hyundai syscomm inc “hsi” order gain foothold cdma infrastructure market encountered difficulties integrating hsi operations cdma operations acquisition fourth quarter 2004 decided winddown legacy operations transfer employees support handset engineering korea decision substantially abandon operations occurred within nine months acquisition hsi operations integrated therefore written remaining values intangible assets associated acquisition totaling 127 million year ended december 31 2004 income expense interest income fiscal 2006 vs interest income 148 million 2006 compared 71 million 2005 higher average cash balances 2006 primary reason increase addition increase average interest rate due part geographic location cash balances also favorable impact interest income fiscal 2005 vs interest income 71 million 2005 compared 62 million 2004 increase average cash shortterm investment balances 2005 compared 2004 coupled increase average interest rate resulted increase interest income interest expense fiscal 2006 vs interest expense 117 million 2006 compared 168 million 2005 decrease interest expense primarily attributable decrease shortterm borrowings china form bank loans extinguishment longterm debt 2005 average quarterly borrowings outstanding 4006 million 5707 million 2006 2005 respectively average interest rate thereon 29 2006 2005 expect interest expense increase significantly 2007 result first supplemental indenture agreement entered january 2007 increased interest rate subordinated notes 7625 beginning january 9 2007 second supplemental indenture agreement entered july 2007 increased interest rate subordinated notes 10875 beginning july 26 2007 fiscal 2005 vs interest expense 168 million 2005 compared 69 million 2004 increase interest expense attributable increase average shortterm borrowings china form bank loans relatively higher interest rates average quarterly borrowings outstanding 5707 million 5345 million 2005 2004 respectively average interest rates thereon 29 13 2005 2004 respectively gain extinguishment debt fiscal 2005 gain extinguishment debt net writeoff unamortized issuance expenses 314 million 2005 year ended december 31 2005 4988100 shares common stock fair value approximately 376 million approximately 571 million cash exchanged 1279 million aggregate principal amount outstanding convertible subordinated notes due 2008 income expenses fiscal 2006 vs income 11 million 2006 compared 437 million 2005 income 2006 consisted primarily foreign exchange gains 76 million gain sale asset 25 million dividend income 21 million miscellaneous income 21 million offset 135 million impairment charge longterm investment fiscal 2005 vs income 437 million 2005 compared 154 million 2004 income 2005 primarily consisted gain sale softbank china 472 million 60 million consumption tax refund japan partially offset foreign exchange loss 100 million december 2005 sold 10 ownership softbank china holdings pte ltd “softbank china” softbank corp related party owner remaining 90 softbank china 569 million accordingly recorded income gain 472 million management fees transaction expenses net investment carrying value foreign exchange losses primarily consisted losses attributed appreciation us dollar japanese yen denominated cash accounts receivable offset gains company’s china subsidiaries attributed appreciation chinese renminbi us dollar denominated shortterm debt payables yendenominated sales significantly higher 2005 compared 2004 income tax expense benefit fiscal 2006 vs income tax benefit 150 million 2006 compared tax expense 1365 million 2005 company subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain company establishes reserves taxrelated uncertainties based estimates whether extent additional taxes interest due reserves established despite company’s belief tax return positions fully supportable company believes certain positions likely challenged may sustained review tax authorities company adjusts reserves light changing facts circumstances closing tax audit provision income taxes includes impact reserve provisions changes reserves considered appropriate well related net interest 2006 recorded 290 million income tax benefit related settlement tax audit china 2003 2005 tax years utstarcom telecom co ltd “huts” hangzhou utstarcom telecom co ltd “hstc” two subsidiaries china acceptance tax holiday hstc without 290 million tax benefit company would negative 10 effective tax rate two primary reasons negative 10 effective tax rate first company provided tax benefit current years losses incurred tax credits generated united states countries company believes likely tax benefit associated losses realized second company continues accrue tax expense jurisdictions company historically profitable 2005 discussed incurred 2373 million noncash charge provide full valuation allowance net deferred tax assets december 31 2005 united states china also recorded 119 million increase tax expense 2005 due revaluation deferred tax assets china statutory rate changes certain company’s subsidiaries china fiscal 2005 vs establishing deferred income tax assets liabilities make judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income record deferred tax assets liabilities evaluate need valuation allowances reduce deferred tax assets realizable amounts 2005 believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets result review undertaken concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment accordingly recorded 2373 million noncash charge united states china income tax expense 1365 million 2005 compared benefit 203 million 2004 increase income tax expense primarily attributable 2373 million noncash charge provide full valuation allowance net deferred tax assets december 31 2005 united states china also recorded 119 million increase tax expense due revaluation deferred tax assets china statutory rate changes certain company’s subsidiaries china addition provide tax benefit 2005 losses incurred tax credits generated united states china three primary reasons negative 34 effective income tax rate 2005 despite pretax loss year equity loss affiliated companies fiscal 2006 vs equity loss affiliated companies 0 2006 compared 55 million 2005 joint venture investment matsushita communication industrial co ltd “matsushita” liquidated 2005 fiscal 2005 vs equity loss affiliated companies 55 million 2005 compared 13 million 2004 2005 incurred loss joint venture investment matsushita 48 million gain 07 million investment restructuring fund 1 loss 2004 attributable joint venture investment matsushita december 2005 venture partners agreed liquidate venture segment reporting historically managed business single reportable segment effective fourth quarter 2004 determined chief operating decision makers accordance sfas 131 “disclosures segments enterprise related information” evaluating performance making operating decisions allocating resources based two operating segments china ii regions referred international “international” november 1 2004 acquired selected assets wireless handset division audiovox corporation acquired business integrated operation separate distinct operating division referred personal communications division “pcd” result december 31 2004 organized principally based geographical market locations three operating segments china international pcd segment consisted one reporting unit effective first quarter 2005 company elected reorganize business based principally upon product family realigned business five operating units broadband infrastructure ii wireless infrastructure iii handsets iv personal communications division “pcd” v services company announced effective july 1 2006 newly created operating unit network solutions would begin offering products services combination broadband infrastructure wireless infrastructure reporting segments reporting segment operating unit responsible managing performance operating unit represents reporting segment operating unit responsible production sales management currently evaluate operating performance allocate resources reporting segments based segment gross profit cost sales direct expenses relation production assigned reporting segments accounting policies used measuring segment assets operating performance used consolidated level network solutions broadband infrastructure fiscal 2006 vs largest broadband infrastructure customer softbank affiliates including japan telecom representing approximately 54 89 total broadband infrastructure sales 2006 2005 respectively due customer concentration segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts 2006 sales softbank declined 3330 million softbank completed initial investment fixed line businesses changed focus wireless business following acquisition vodafone japan decline gross profit percentage net sales 31 2005 negative 1 2006 due primarily decreased revenues high margin ian8000 products included 2719 million relating japan telecom agreements first quarter 2005 gross profit 2006 2005 also negatively impacted additional warranty reserves adsl gepon netring™ products sold softbank 2003 2004 special warranty charges approximated 56 million 306 million 2006 2005 respectively contributing gross profit decline 2006 321 million provision anticipated losses infrastructure deployment contract entered fourth quarter 2006 accepted contract felt would allow us develop relationship customer consider important international expansion broadband infrastructure business experience incurring higher warranty costs broadband infrastructure segment introduced new products requirement adjust contract losses provisions additional information becomes available may potentially negative impacts future gross margins believe iptv market presents meaningful growth opportunity currently offer initial market acceptance rollingstream™ iptv products china japan geographic regions addition investments made develop market broadband products 2005 loaned 124 million china based company support development technical service information networking technology venture china loan partially secured indirect ownership interest venture’s continuing viability also heavily dependent future provisioning equipment determined primary beneficiary venture consolidated venture’s results operations results years ended december 31 2006 2005 expect continue invest development important market future fiscal 2005 vs 2005 broadband infrastructure net sales doubled primarily due two large transactions softbank 2719 million revenue recognized first quarter certain agreements entered japan telecom primarily ian8000 product 577 million revenue recognized fourth quarter rolling stream™ internet protocol television “iptv” product launched yahoo bb fourth quarter 2004 approximately 791 million revenue recognized sales primarily gepon netring™ products softbank gross profit improvement absolute dollars percentage net sales largely due margins ian8000 products relating japan telecom agreements first quarter 2005 ii low margins fourth quarter 2004 gepon netring™ products iii offset higher warranty costs 2005 adsl gepon netring™ products experienced higher warranty costs broadband infrastructure segment introduced new products wireless infrastructure fiscal 2006 vs net sales declined 2 2006 compared 2005 primarily due decreased sales pas systems china 2006 approximately 79 wireless infrastructure sales attributed pas systems china compared 85 2005 decrease pas system sales primarily result customers china transitioning new system installations system expansions pas systems reach product maturity gross profit percentage net sales increased 20 percentage points 2006 compared 2005 due number factors including margins pas infrastructure improved due shift product mix towards higher margin cell sites well reduction product discounts given ii improvement inventory management product quality resulting decrease excess inventory writedowns scrap iii sales voice data networks software totaling 161 million typically gross margins approximately 90 expect future pas infrastructure spending decline 2007 compared 2006 levels china prepares 3g launch however expect revenue decline moderate 2007 revenue expected come existing backlog based current projection receiving final acceptance plan aggressively pursue opportunities packet pas products broadband wireless data market based pas technology high end pas products including dual mode cdma products softswitch products multiple markets though anticipate sales fully offset decline pas sales 2007 fiscal 2005 vs 2004 2005 approximately 85 wireless infrastructure sales attributed pas systems china net sales declined 66 demand decreased due product maturation resulting transition new system installations system expansions ii customers reduced fiscal capital spending anticipation next generation technology gross margin percentage net sales declined one percentage point primarily due impact china customers shifting investments pas geographical extension expanding capacity improving quality existing network compared building networks new areas cost expanding capacity much lower additionally less competition pricing pressure pas network expansion contracts included cost goods sold 2005 inventory writeoff 56 million negligible effect gross profit percentage sales pcd fiscal 2006 vs net sales pcd operating segment 13395 million 2006 decrease 2 compared net sales 13693 million 2005 relatively consistent net sales result decrease overall average selling price offset 6 increase number units sold 2006 greater percentage revenue derived internally manufactured handsets expect trend continue future gross profit percentage net sales recognized handset sales pcd declined one percentage point 2006 compared 2005 gross profit negatively impacted inventory writedowns market certain slow moving models partially offsetting inventory charges higher margins utstarcom branded devices sold 2006 gross profit percentage net sales typically lower realized pas systems based handsets sold china market percentage utstarcom designed manufactured products increases expect pcd margin increase future fiscal 2005 vs 2004 revenue pcd operating segment 13693 million 2005 compared 2774 million 2004 revenues pcd significantly greater 2005 2004 since acquisition wireless handset division audiovox corporation creation pcd occur november 2004 revenues 2005 consistent 2004 pro forma revenues see note 5 “acquisitions sale assets” notes consolidated financial statements contained item 8 annual report gross profit percentage net sales recognized handset sales pcd consistent 4 2005 2004 handsets fiscal 2006 vs 2005 net sales declined 16 primarily due volume decrease pas handsets china units sold declined 78 million 2006 compared 102 million 2005 25 volume decline primarily attributed lower demand pas handsets resulting slower subscriber growth 2006 pas subscriber growth 10 compared 31 2005 70 2004 service providers reduced marketing efforts pas handsets anticipation next generation technology average selling price per unit “asp” improved 10 due shift product mix sales higherend models well introduction new pasgsm dual mode product line 2006 shift product mix offset declining prices models due competitive pricing pressures pas market experienced china telecommunications market since latter part 2003 expect cumulative pas subscriber growth continue lower growth rates future periods gross profit percentage sales handsets segment increased 18 percentage points 2006 compared 2005 portion improvement gross profit percentage relates shifting products use chipsets greater functionality pas handsets reduce overall component costs unit additionally shift product mix towards higher margin products pasgsm dual mode ultrathin highend pas handsets additional factors leading improvement gross profit reduction scrap variances warranty costs 2007 beyond continue expect lower cumulative growth rates pas subscribers time anticipate market demand pasgsm dual mode increase continue develop unique highend models higher gross margin average selling price continue focus product cost reductions efforts supply chain improvements rd improvement fiscal 2005 vs net sales declined 37 primarily due decreases volume price pas handsets china units sold declined 102 million compared 140 million 2004 27 volume decline primarily attributed lower demand pas handsets resulting slower subscriber growth 2005 pas subscriber growth slowed 31 70 2004 service providers reduced marketing efforts pas handsets anticipation next generation technology networks ii inability supply product customers fourth quarter due component shortages result shortages key components printed circuit boards flash memory radio frequency components fourth quarter unable fill customers’ orders chinese new year sales promotions average selling price per unit declined 18 due combination competitive pricing pressures first half year shift product mix sales lowerend models also experienced continuing pricing pressure china telecommunications market since later part 2003 driven average unit selling prices lower gross profit percentage sales decreased 6 percentage points primarily due decline pas handset average unit price offset lower material costs renegotiated prices vendors shift product mix lowerend higher margin models services fiscal 2006 vs services segment’s net sales decreased 77 million 9 2006 compared 2005 decrease net sales primarily due delays associated receiving final acceptance existing projects completed 2006 focused revenue opportunities respect support china approximately 477 employees previously providing sales support services shifted towards generating revenue support arrangements resulting additional cost goods sold 2006 150 million corresponding decrease operating expenses additionally revenues 97 million wireless infrastructure 07 million broadband segment sales china allocated services segment 2006 allocation made certain completed contracts service element separately priced gross profit percentage sales decreased 22 percentage points primarily due one time service charge marketing services softbank 2005 repeated 2006 order succeed today’s multiservices convergence environment operators need differentiate subscriber offerings make operations efficient cost effective enhance productivity grow businesses increase revenues new solutions methodology designed let operators concentrate business model endcustomers provide complete end support implementing managing multivendor networks primarily noncore business processes activities many service providers feel outsourced infrastructure vendor partners utstarcom new value added service portfolio aims extend solutionoriented approach supplying platforms aspects planning deploying managing platforms services targeting new geographies customers endtoend solution approach expect initiative significantly improve revenue plan 2007 fiscal 2005 vs increase services segment revenue due continuing development service product offerings 126 million revenue gross profit associated promotional services japan telecom recognized first quarter 2005 increase absolute gross profit gross profit percentage sales due increase overall net sales segment performed relatively consistent headcount well increase china services lower associated costs 126 million revenue gross profit associated promotional services japan telecom recognized first quarter 2005 contributed significantly total gross profit year ended december 31 2005 transactions related parties information softbank recognized revenue 1308 million 4753 million 1437 million years ended december 31 2006 2005 2004 respectively respect sales telecommunications equipment affiliates softbank corp “softbank” significant stockholder company softbank offers asynchronous digital subscriber line “adsl” coverage throughout japan marketed name “yahoo bb” 2006 determined certain sales third party resellers substance sales softbank therefore included amounts related party sales prior year amounts reclassified conform current period presentation support softbank’s fibertothehome service sales carrier class gigabit ethernet passive optical network “gepon” product well multiservice optical transport product “netring™” addition support softbank’s new internet protocol television “iptv” sales rollingstream™ product included revenue year ended december 31 2006 fee 312 million charged cancellation orders broadband products 100 million charged cancellation orders wireless infrastructure products included accounts receivable december 31 2006 december 31 2005 299 million 834 million respectively related transactions 2006 2005 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period 115 million 196 million included long term deferred revenue respect agreements december 31 2006 2005 respectively additionally 116 million 80 million included current deferred revenue december 31 2006 2005 respectively december 31 2005 54 million included customer advances related softbank agreements august 2004 entered several agreements japan telecom co ltd “jt” wholly owned subsidiary softbank agreements relate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt determined service activities revenue recorded net expected promotional spending provided activities past could estimate fair value services determined guidance sab 104 revenue related agreements could recognized goods services delivered received final acceptance equipment contemplated agreements quarter ended march 31 2005 promotional services discussed involved contracting third party promotional vendors turn facilitated marketing subscriber recruitment jt fibertothehome program fourth quarter 2004 determined would end involvement jt promotional program completion contract discussed accordingly late fourth quarter 2004 first quarter 2005 either cancelled assigned another party third party contracts promotional vendors related jt contract termination assignment third party promotional agreements well effective satisfaction obligations jt agreements satisfied revenue recognition criteria agreements net value promotional services value equipment delivered totaled 2048 million reported quarter ended march 31 2005 also entered agreement jt third quarter 2004 supply chassis equipment shipped agreement considered linked ian8000 sale noted also deferred completion abovementioned promotional activities revenue recognition criteria related sale ian 8000 equipment satisfied first quarter 2005 revenue related chassis sale 665 million reported quarter ended march 31 2005 years ended december 31 2006 2005 sales softbank included 67 million 2801 million respectively regards sales telecommunications equipment service sold jt none 2004 invested restructuring fund no1 venture capital investment limited partnership established softbank partnership dissolved july 2006 total cash distribution 30 million us 2006 recorded gain investment 14 million 07 million respectively year ended december 31 2006 2005 recorded immaterial equity loss year ended december 31 2004 july 17 2003 entered mezzanine loan agreement bb modem rental plc “bb modem” affiliate softbank corp terms agreement loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements loan subordinated certain senior lenders bb modem repayments payable us 42month period january 31 2007 substantial portion principal amount loan repaid last 16 months period year ended 2006 2005 2004 recorded 06 million 13 million 13 million respectively interest income respect loan receivable december 31 2006 approximately 10 million included current assets december 31 2005 loan balance approximately 90 million included longterm assets note receivable paid full january 2007 december 31 2006 softbank beneficially owned approximately 12 outstanding stock acoustek int’l corp 2005 2006 received consulting services acoustek int’l corp “acoustek” employed minnie huang spouse william huang former senior vice president chief technology officer mr haung’s employment company terminated december 31 2006 paid 01 million years 2006 2005 consulting services provided acoustek audiovox one officers also serves director audiovox corporation “audiovox” year ended 2006 2005 paid approximately 14 million 07 million respectively services audiovox cellon september 2001 invested 20 million cellon international holdings corporation “cellon” made additional investments 30 million april december 2002 cellon designs wireless terminals related technology handset manufacturers private distributors november 2005 entered agreement cellon received consideration form preferred stock warrants cellon valued 55 million exchange transfer fixed assets net book value 30 million facilities lease workforce place consisting 156 employees transaction completed may 31 2006 gain sale assets 25 million recorded income december 31 2006 additional shares obtained transaction 11 ownership interest cellon fourth quarter 2006 review investment included limited review cellon’s cash position recent financing activities financing needs earningsrevenue outlook operational performance managementownership changes competition based deterioration cellon’s financial condition determined carrying value investment amount fair value investment decline otherthan temporary fourth quarter 2006 recorded 135 million otherthantemporary impairment charge investment income net november 2005 entered development service agreement cellon 50 million prepaid exchange future product development approximately 20 million prepaid amount used year ended december 31 2006 payments design services may also use prepayment satisfaction royalties cellon may earn sales us products cellon designs development services agreement also obligates cellon pay us royalty certain technology shared us cellon used products developed sold customers us november 2007 2006 royalty earned us related product developed sold customers us fourth quarter 2006 recorded operating expense 30 million writeoff prepayment connection assessment financial condition cellon discussed june 18 2007 meeting cellon’s shareholders held resolution passed place cellon voluntary liquidation fiberxon outstanding purchase commitment fiberxon 7 ownership interest purchase component parts optical networking products addition provided letter credit 50 million purchase raw materials manufacture component parts commitment expired 2005 commitment arrangement 2006 purchases fiberxon totaled 26 million 97 million 151 million years ended december 31 2006 2005 2004 respectively 04 million 03 million accounts payable fiberxon december 31 2006 2005 respectively gct semiconductor outstanding purchase commitment gct semiconductor inc “gct” 2 ownership interest purchase component parts purchases gct totaled 63 million 19 million years ended december 31 2006 2005 respectively 11 million accounts payable gct december 31 2006 2005 global asia partners lp global asia partners lp venture capital fund formed make private equity investments private preipo technology telecommunications companies asia general partner fund also sales agent third quarter 2006 june 2002 april 2005 invested total 26 million fund december 31 2006 owned 49 fund’s outstanding partnership units commitment invest maximum 50 million result reorganization capital contributions partners reached april 2005 capital contribution 06 million april 2005 final capital contribution made addition agreement allows partnership reinvest 25 million otherwise would available us future distributions matsushita joint venture july 2002 entered joint venture agreement matsushita communication industrial co ltd jointly design develop manufacture sell telecommunication products 49 ownership interest joint venture company performed engineering services joint venture approximately 28 million recognized revenue 2005 december 31 2005 receivable 01 million december 2005 partners agreed dissolve joint venture dissolution completed 2006 mdc holding ltd outstanding accounts receivable balance mdc holding inc “mdc” related pas system purchase 13 million december 31 2006 accounts receivable balance december 31 2005 certain employees shareholders mdc december 31 2006 mdc business providing valueadded services short message voicemail ringtone services pas telecom networks org inc 49 ownership global asia partners lp turn significant shareholder org inc sales 16 million 05 million org inc 2006 2005 respectively accounts receivable 10 million 02 million org inc december 31 2006 2005 respectively deferred revenue december 31 2006 01 million deferred revenue december 31 2005 starcom products inc obtain engineering consulting employee placement services starcom products inc “starcom” 31 owned individual related one former officers also member board directors paid less 01 million 2006 07 million 2005 11 million 2004 engineering consulting employee placement services provided starcom xalted networks may 2005 august 2005 invested 20 million 10 million respectively xalted networks “xalted” march 2006 invested additional 03 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings 11 ownership interest received purchase orders xalted networks totaling approximately 13 million 2005 telecommunications equipment product typically sold us customers charge ten percent procurement fee xalted obtaining reselling products equipment delivered 2005 revenue recognized revenue recognition process yet completed liquidity capital resources operating activities net cash provided operating activities year ended december 31 2006 661 million cash operating activities positively affected changes accounts receivable deferred costs customer advances partially offset net loss well changes inventories payables current liabilities decrease accounts receivable resulting improved cash collections 2006 compared 2005 provided cash 1331 million days sales outstanding 60 days december 31 2006 compared 66 days outstanding december 31 2005 due strong cash collections fourth quarter 2006 high percentage fourth quarter revenue derived pcd segment generally experienced shorter collection period related receivables 2007 expect days sales outstanding increase line historical trends customer advances increased 384 million december 31 2006 customer advances represent cash deposits received customers orders yet received final acceptance upon subsequent receipt final acceptances revenue recognition customer advances reduced revenue cost sales recorded decrease payables current liabilities primarily resulted decrease accounts payable 223 million decrease income taxes payable 289 million decrease current liabilities 276 million decrease current liabilities included decreases payroll taxes payable accrued contract costs relate purchase goods services invoices received warranty costs offset 321 million increase current liabilities related loss contract reserve noncash charges year ended december 31 2006 included 680 million depreciation amortization 166 million stockbased compensation expense 135 million otherthantemporary charge related impairment longterm investment net gain sale assets 96 million included gain 123 million related sale semiconductor design business division marvell technology group ltd net cash provided operating activities year ended december 31 2005 2184 million operating cash affected changes accounts receivable inventories income taxes payable accounts payable 2682 million decrease accounts receivable primarily attributable increased collections final quarter 2005 compared final quarter 2004 days sales outstanding 66 days december 31 2005 compared 113 days december 31 2004 shorter days sales outstanding primarily result shift sales china typically long collection cycle united states typically shorter collection cycle decrease inventory balance 1659 million primarily result shift sales pcd segment faster inventory turnover also contributed increase operating cash customer advances decreased 1503 million year ended december 31 2005 upon subsequent receipt final acceptances revenue recognition customer advances reduced revenue cost sales recorded income taxes payable decreased 1102 million due losses incurred 2005 addition accounts payable decreased 878 million due lower inventory lower forecast sales factors contributed decrease operating cash reduction customer advances 2005 primarily due completion revenue earning process agreements japan telecom inc “jt” affiliate softbank corp well decline sales corresponding cash advances products sold china cash received jt advance revenue recognition advance spending promotional activities reflected customer advances prior periods revenue certain agreements recognized year ended december 31 2005 additional information see note 20 “related party transactions” notes consolidated financial statements contained item 8 annual report net cash used operating activities year ended december 31 2004 950 million operating cash affected changes accounts receivable inventory customer advances offset changes accounts payable deferred costs 4539 million increase accounts receivable attributable increased sales longer collection periods experienced 2004 increase accounts receivable part due addition pcd business audiovox communications corporation approximately 144 accounts receivable balance outstanding december 31 2004 attributable pcd inventory increased 1759 million 2004 includes 1560 million inventory attributable pcd acquisition customer advances decreased 1169 million year ended december 31 2004 upon receipt final acceptances customer advance reduced revenue cost sales recorded reduction customer advances deferred costs inventory customer sites 2004 largely result customers china transitioning new system installations system expansions generally requires shorter period customer advance acceptance working capital 11 billion increased proportion growth business addition 1750 million increase associated acquisition acc offsetting activity decreased operating cash period net income noncash charges including 127 million provision longlived asset impairment 762 million depreciation amortization 213 million provision doubtful accounts 183 million deferred cost provision accounts payable increased 977 million consistent increased inventory purchasing inventories customer sites contracts awaiting final acceptance classified deferred costs separate historically considered inventory title risk loss inventory transferred customer revenue costs sales recorded final acceptance received customer deferred costs decreased 2074 million december 31 2003 december 31 2004 decrease deferred costs resulted greater number customer acceptances corresponding decrease customer advances investing activities net cash provided investing activities fiscal 2006 totaled 361 million cash inflows investing activities included 360 million received sale semiconductor design operations marvell technology group ltd 40 million net proceeds sale shortterm investments 209 million changes restricted cash used additions property plant equipment totaled 263 million net cash provided investing activities fiscal 2005 701 million mainly due net proceeds sale investments 1817 million including 569 million received sale softbank china restructuring fund 1 1248 million net sales investment holdings partially offset 644 million property plant equipment purchases 243 million acquisitions giga telecom inc pedestal networks net cash used investing activities 4680 million year ended december 31 2004 significant components investing activities business acquisitions additions property plant equipment net investment shortterm securities cash used business acquisitions totaled 2178 million 2004 including approximately 1783 million selected assets acc 300 million substantially assets liabilities telos 91 million hsi cash used purchase property plant equipment including 571 million construction hangzhou facility totaled 1356 million net cash used purchase shortterm investments 828 million financing activities net cash used financing activities 995 million primarily consisting net repayment shortterm borrowings excess new borrowings net cash used financing activities fiscal 2005 2028 million primarily due net repayments 2164 million borrowings including 571 million cash payment connection early debt extinguishments net cash provided financing activities 7427 million year ended december 31 2004 primarily due proceeds raised sale 121 million shares common stock 3925 per share banc america securities llc january 2004 net proceeds approximately 4746 million addition incurred net borrowing 3500 million year existing lines credit china fund operations needs china also received 257 million issuance common stock option warrant exercises offsetting cash provided financing activities first second quarter 2004 used portion capital raised repurchase total 36 million shares common stock average price 3025 per share total cost 1076 million including transaction fees liquidity reported net losses quarter period beginning april 1 2005 continuing december 31 2006 resulted accumulated deficit 4942 million total stockholders’ equity reduced 7744 million december 31 2006 additionally december 31 2006 shortterm debt china lines credit china subsidiaries 1025 million maturing 2007 longterm debt outside china form 7¤8 convertible subordinated notes principal balance 2746 million matures march 2008 working capital 7935 million 8341 million december 31 2006 2005 respectively includes cash hand 6616 million 6456 million short term investments 95 million 133 million respectively 2006 2005 planned capital expenditures include increase level capital expenditures china 2007 approximately 40 million support wire line telephone carriers china utilize products services provide television service customers using iptv protocol credit facilities china december 31 2006 totaled 6983 million 3575 million amount available working capital purposes drawn 1025 million outstanding borrowings interest rates 551 3408 million available use support letters credit corporate guarantees facilities expire primarily november december 2007 believe based upon recent financial performance financial position lenders may reduce total available credit negotiates renewals lines furthermore borrowing credit facilities subject bank’s current favorable opinion credit worthiness company’s china subsidiaries well bank funds available lending chinese banking regulations however believe amounts credit lenders may make available borrowings made renewed lines credit sufficient meet planned uses credit facilities september 30 2007 outstanding borrowings credit facilities china total 1401 million interest rates 667 varying maturity dates september 2008 company’s practice china draw new loans credit facilities prior either maturity borrowings expiration facilities ensure maintain adequate liquidity repay existing borrowings maturity effectively lengthen credit facility period latest maturity date underlying borrowings total cash shortterm investments december 31 2006 6712 million total 4837 million held china meet liquidity needs outside china subsidiaries china ability transfer cash company united states china’s current exchange control regulations amount cash available transfer china subsidiaries limited liquidity needs subsidiaries china chinese government requirements china subsidiaries retain adequate capital levels china protect creditors funds available mandated employee benefits believed china subsidiaries could freely transfer least 200 million december 31 2006 nine months ended september 30 2007 china subsidiaries made transfers funds china company totaling 150 million although management believes sufficient amount cash resources finance anticipated working capital expenditure requirements next 12 months enough cash outside china repay convertible notes due march 1 2008 management’s liquidity plans include partial complete refinancing convertible notes renewal lines credit china transfers cash subsidiaries china extent necessary needed liquidation certain investments andor seeking new financing arrangements ability maintain sufficient liquidity also dependent achieving projected sales operating margin forecasts convertible notes issued march 2003 completed offering 4025 million 7¤8 convertible subordinated notes due march 1 2008 qualified institutional buyers notes convertible common stock conversion price 2379 per share subordinated present future senior debt concurrent issuance convertible notes entered convertible bond hedge call option transaction respect common stock bond hedge call option transactions may settled option either cash net shares expire march 1 2008 2005 completed exchanges approximately 50 million shares common stock approximately 571 million cash 1279 million aggregate principal amount outstanding notes result early extinguishment also amended convertible bond hedge call option transactions reflect change principal amount underlying notes event default occur continuing trustee holders least 25 aggregate principal amount notes outstanding could declare unpaid principal accrued interest notes outstanding immediately due payable therefore result inability timely file quarterly report form 10q period ended september 30 2006 independent review governance committee company’s historic stock option accounting completed receiving purported notice default trustee asserting delay filing failure comply certain covenants caused default indenture solicited received requisite consents holders notes waiver defaults may occurred including january 9 2007 caused delay filing sec reports entered first supplemental indenture trustee dated january 9 2007 provided failure us comply certain provisions original agreement result default event default may 31 2007 receiving notice default trustee asserting inability timely file sec reports comply certain covenants may 31 2007 caused default indenture solicited received requisite consents holders notes waiver defaults may occurred including july 26 2007 entered second supplemental indenture trustee receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection consent solicitation announced july 19 2007 second supplemental indenture provides period including july 26 2007 including october 15 2007 “covenant reversion date” failure us comply covenants contained original indenture agreement related required filing reports sec furnishing copies sec reports certain compliance certificates trustee constitute default ii second supplemental indenture default would deemed occurred result failure comply covenants default remains uncured continuing covenant reversion date default deemed occurred covenant reversion date second supplemental indenture convertible subordinated notes accrue additional 675 per annum special interest january 9 2007 including july 25 2007 additional 10 per annum special interest july 26 2007 date notes paid prepaid redeemed converted otherwise cease outstanding special interest rate accruing notes july 26 2007 represents increase 325 per annum previous special interest rate 675 per annum provided first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 accordingly 220 million additional annual interest expense 2007 convertible subordinated notes outstanding payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest additional sources liquidity needed company would consider new debt equity offerings obtaining cash asset sales assurance transactions could consummated acceptable terms failure raise sufficient capital needed could material adverse effect business results operations financial position company china sales generally denominated local currency accept commercial notes receivable maturity dates three six months customers china normal course business notes receivable available sale 51 million 21 million december 31 2006 2005 respectively may discount notes banking institutions china notes sold included consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishment liabilities” “sfas 140” met due limitations converting renminbi limited ability engage foreign currency hedging activities china cannot guarantee fluctuations foreign currency exchange rates future material adverse effect revenues international sales correspondingly business financial condition results operations cash flows contracts negotiated japanese yen maintain bank accounts japanese yen purchasing portions inventories supplies balance japanese yen accounts december 31 2006 approximately 131 million august 1 2005 entered 364day 1000 million committed receivables purchase facility financial institution march 2007 agreement amended restated reflect purchase trade receivables shall sole discretion financial institution agreement also extended earlier march 28 2008 ii upon 90 days written notice financial institution pursuant terms receivable purchase facility may sell certain receivables arising sale telecommunications equipment financial institution receivables sold pursuant arrangement guaranteed debt included consolidated balance sheet income taxes certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time tax holidaysincentives discussed applicable potentially applicable utstarcom chongqing telecom co ltd “cuts” utstarcom telecom co ltd “huts” hangzhou utstarcom telecom co ltd “hstc” utstarcom china co ltd “utsc” active subsidiaries china entities may qualify accredited technologically advanced enterprises second quarter 2005 huts received approval knowledge intensive technology intensive certificate “the certificate” subjects company reduced national tax rate 15 first quarter 2005 company recorded reduction tax expense attributable increase deferred tax assets arising assessment local income tax huts hstc china approval certificate currently effect local taxation huts balance sheet arrangements august 1 2005 entered 364day committed receivables purchase facility citibank na provides sale 1000 million trade accounts receivable pcd segment march 30 2007 agreement amended restated reflect purchase trade receivables shall sole discretion citibank na sales accounts receivables citibank na program result reduction total accounts receivable consolidated balance sheet remaining accounts receivables sold citibank na carried net realizable value including allowance doubtful accounts sell receivables pursuant facility 2006 2005 believe available funding accounts receivable financing program provides us increased flexibility manage working capital requirements sufficient trade accounts receivable support us financing programs program continue service accounts receivable december 31 2006 balance sheet arrangements contractual obligations commercial commitments obligations contractual obligations commercial commitments primarily regard leasing arrangements standby letters credit follows bank loans december 31 2006 loans various banks totaling 1025 million interest rates ranging 502 551 per annum bank loans mature 2007 included shortterm debt significant covenants associated loans convertible subordinated notes convertible subordinated notes due march 1 2008 convertible common stock conversion price 2379 per share subordinated present future senior debt principal due maturity notes effective january 9 2007 company holders remaining 2746 million convertible subordinated notes entered first supplemental indenture providing failure us comply certain provisions original agreement result default event default may 31 2007 convertible subordinated notes accrue additional 675 per annum special interest january 9 2007 march 1 2008 maturity date notes unless notes earlier repurchased converted july 26 2007 entered second supplemental indenture providing convertible subordinated notes accrue additional 10 per annum special interest july 26 2007 march 31 2008 maturity date notes unless notes earlier repurchased converted special interest rate represents increase 325 per annum previous special interest rate 675 per annum first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 interest payable semiannually march 1 september 1 payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest information regarding notice default may 31 2007 company’s second supplemental indenture see “liquidity” section annual report leases lease certain facilities noncancelable operating leases expire various dates 2013 letters credit issue standby letters credit primarily support international sales activities outside china submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire without drawn beneficiary thereof finally may issue commercial letters credit support purchase commitments purchase commitments obligated purchase raw materials workinprogress inventory various orders suppliers expected fulfilled adverse consequences material operations financial condition purchase commitments exclude agreements cancelable without penalty accounts receivable transferred notes receivable accept commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months notes receivable available sale 51 million 21 million december 31 2006 december 31 2005 respectively may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows year ended december 31 2005 sold notes receivable totaling 130 million notes receivable sold year ended december 31 2006 notes sold included consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishment liabilities” “sfas 140” met costs settling transferring notes receivable 07 million year ended december 31 2005 included income expense net consolidated statements operations investment commitments december 31 2006 invested total 26 million global asia partners lp fund formed make private equity investments private preipo technology telecommunications companies asia commitment invest maximum 50 million result reorganization capital contributions partners reached april 2005 capital contribution 06 million april 2005 final capital contribution made addition agreement allows partnership reinvest 25 million otherwise would available us future distributions intellectual property certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products quarterly financial data unaudited restated discussion analysis quarterly results operations following tables set forth key quarterly unaudited financial information see note 2 “restatement financial statements” notes consolidated financial statements contained item 8 annual report exhibit 991 details impact restatement quarterly results utstarcom inc condensed consolidated statements operations unaudited thousands except per share amounts 1 gross profit fourth quarter 2006 unfavorably impacted 321 million loss contract provision 2 loss continuing operations fourth quarter 2006 included 135 million temporary impairment charge longterm investment utstarcom inc condensed consolidated statements operations unaudited thousands except per share amounts net sales net sales three months ended march 31 2006 2005 net sales decreased 33 6020 million quarter ended march 31 2006 compared period 2005 decrease primarily due decrease sales broadband segment 82 march 31 2005 march 31 2006 greater broadband segment sales three months ended march 31 2005 included sales 2719 million japan telecom affiliate softbank primarily ian8000 product due customer concentration broadband segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts additionally handset sales declined 290 million 23 experiencing recent quarters demand pasipas products including pasipas system based handsets china market continued mature resulted lower demand average selling price net sales increased pcd wireless segments declined services segment three months ended march 31 2006 compared corresponding quarter fiscal 2005 three six months ended june 30 2006 2005 net sales decreased 21 5515 million quarter ended june 30 2006 compared period 2005 decline sales occurred across operating segment equally segment reported sales 13 27 lower three months june 30 2006 period prior year broadband segment sales concentrated one customer softbank japan fluctuate based upon magnitude timing revenue recognition certain contracts decline broadband segment revenue result decline sales softbank three months ended june 30 2006 compared period prior year experiencing recent quarters pasipas wireless infrastructure products well pasipas based handsets china market continued mature resulted lower unit demand pcd operating segment unit sales three months ended june 30 2006 remained substantially unchanged comparable period prior year average price per unit declined prior year net sales 11535 million six months ended june 30 2006 decrease 28 15926 million corresponding period 2005 overall decrease net sales largely due decrease sales broadband segment 73 june 30 2005 june 30 2006 broadband segment sales six months ended june 30 2005 included one large transaction softbank totaling 2719 million revenue certain agreements entered japan telecom primarily ian8000 product experiencing recent quarters pasipas wireless infrastructure products pasipas based handsets china market continued mature resulted lower unit demand led decrease wireless infrastructure handset segment sales 5 24 respectively june 30 2005 june 30 2006 pcd operating segment unit sales six months ended june 30 2006 change significantly comparable period prior year average price per unit declined leading 10 decline segment revenue three nine months ended september 30 2006 2005 net sales increased 1 6009 million quarter ended september 30 2006 compared period 2005 net sales increased 48 network solutions segment sales declined operating segments reported sales remaining segments 5 12 lower three months ended september 30 2006 period prior year broadband segment sales concentrated one customer softbank japan fluctuate based upon magnitude timing revenue recognition certain contracts experiencing recent quarters pasipas wireless infrastructure products well pasipas based handsets china market continued mature resulted lower unit demand pcd operating segment net sales decreased 10 three months ended september 30 2006 comparable period prior year due decline number handsets sold partially offset increase average price per unit net sales 17544 million nine months ended september 30 2006 decrease 20 21900 million corresponding period 2005 overall decrease net sales largely due decrease sales broadband segment 63 september 30 2005 september 30 2006 broadband segment sales nine months ended september 30 2005 included one large transaction softbank totaling 2719 million revenue certain agreements entered japan telecom primarily ian8000 product experiencing recent quarters pasipas wireless infrastructure products pasipas based handsets china market continued mature resulted lower unit demand led decrease handset segment sales 21 september 30 2005 september 30 2006 pcd operating segment unit sales average price per unit declined nine months ended september 30 2006 comparable period prior year leading 10 decline segment revenue net sales revenue geography shifted comparison corresponding period 2005 revenue derived china remained relatively constant accounting approximately 34 net sales revenue nine months ended september 30 2006 comparison approximately 30 corresponding period last year revenue derived united states accounted approximately 52 net sales revenue nine months ended september 30 2006 comparison approximately 45 corresponding period last year due completion large contract 2005 revenue japan accounted approximately 7 net sales revenue nine months ended september 30 2006 comparison approximately 18 comparable period prior year gross profit three months ended march 31 2006 2005 gross profit 1238 million 21 net sales three months ended march 31 2006 compared 2324 million 26 net sales corresponding quarter 2005 overall gross profit decrease due decline sales lower gross profit percentages broadband segment broadband infrastructure net sales three months ended march 31 2005 included one large transaction softbank totaling 2719 million revenue certain agreements entered japan telecom primarily ian8000 product 2005 gross profit percentages improved wireless handset segments declined broadband services segments remained pcd gross profit percentage sales wireless infrastructure segment increased 23 percentage points three months ended march 31 2006 compared corresponding quarter 2005 due number factors including margins pas infrastructure improved due shift product mix towards higher margin cell sites well reduction product discounts given ii improvement inventory management resulting decrease excess inventory writedowns iii sales voice data networks software totaling 86 million nearly 100 gross margins gross profit percentage sales handsets segment increased 21 percentage points three months ended march 31 2006 compared corresponding quarter 2005 portion improvement gross profit percentage relates increased use chipsets greater functionality pas handsets reduce overall component costs unit additional factors leading improvement gross profit reduction scrap variances warranty costs three six months ended june 30 2006 2005 gross profit 1090 million 20 net sales three months ended june 30 2006 compared 1029 million 15 net sales corresponding quarter 2005 overall gross profit increased due improved gross profit percentages wireless infrastructure handset segments partially offset decline sales lower gross profit percentages broadband infrastructure services segments gross profit 2327 million 20 net sales six months ended june 30 2006 compared 3353 million 21 net sales restated corresponding period 2005 decline gross profit dollars primarily reflects 85 decrease broadband infrastructure segment mentioned previously revenue broadband infrastructure segment concentrated one customer japan significant contract recognized revenue first quarter 2005 similarsized transaction broadband infrastructure segment six months ended june 30 2006 gross profit percentages improved wireless handset segments declined broadband infrastructure services segments remained pcd three nine months ended september 30 2006 2005 gross profit 748 million 12 net sales three months ended september 30 2006 compared 379 million 6 net sales corresponding quarter 2005 overall gross profit increased real terms even though net sales declined due significant increase gross profit percentages broadband infrastructure wireless handsets segments gross profit 3075 million 18 net sales nine months ended september 30 2006 compared 3732 million 17 net sales corresponding period 2005 gross profit percentage remained relatively constant broadband infrastructure gross profit dollars decreased 1398 million due decline sales 2614 million decrease gross profit percentage 40 nine months ended september 30 2005 18 corresponding period 2006 mentioned previously revenue broadband infrastructure segment concentrated one customer japan significant contract recognized revenue first quarter 2005 similarsized transaction broadband infrastructure segment nine months ended september 30 2006 decrease gross profit resulting broadband infrastructure segment partially offset increased gross profit dollars resulting improvement gross profit percentages wireless infrastructure handset segments operating expenses selling general administrative three months ended march 31 2006 2005 selling general administrative expenses decreased 242 million increased 14 net sales three months ended march 31 2006 compared 12 net sales period 2005 decrease sga expenses primarily due 167 million decrease provision doubtful accounts compared period 2005 approximately 45 million reduction due lower travel entertainment costs particularly china operations addition reductions expenses across entities due expense controls days sales outstanding 74 days march 31 2006 compared 91 days march 31 2005 shorter days sales outstanding resultant decrease provision doubtful accounts result improved cash collections first quarter 2006 relative comparable period 2005 first quarter 2006 decided terminate mongolian joint venture arrangement wrote remaining net assets approximately 47 million three six months ended june 30 2006 2005 selling general administrative expenses decreased 200 million remained relatively consistent percentage net sales three months ended june 30 2006 compared period 2005 decrease sga expenses primarily due 137 million decrease provision doubtful accounts compared period 2005 addition reductions expenses across entities due expense controls days sales outstanding 69 days june 30 2006 compared 109 days june 30 2005 shorter days sales outstanding resulting decrease provision doubtful accounts result improved cash collections three months ended june 30 2006 relative comparable period 2005 sga expenses 1668 million 2110 million six months ended june 30 2006 2005 respectively sga expenses percentage net sales 14 13 six months ended june 30 2006 2005 respectively decrease sga expenses primarily due 305 million decrease provision doubtful accounts compared period 2005 addition reductions expenses across entities due expense controls days sales outstanding 72 days june 30 2006 compared 99 days june 30 2005 shorter days sales outstanding resulting decrease provision doubtful accounts result improved cash collections three months ended june 30 2006 relative comparable period 2005 three nine months ended september 30 2006 2005 selling general administrative expenses decreased 63 million three months ended september 30 2006 compared period 2005 decrease sga expenses primarily due 147 million decrease provision doubtful accounts compared period 2005 days sales outstanding 64 days september 30 2006 compared 86 days september 30 2005 shorter days sales outstanding resulting decrease provision doubtful accounts result improved cash collections three months ended september 30 2006 relative comparable period 2005 addition reductions expenses due expense controls cost savings partially offset value added tax expense 79 million resulting audit 2003 2005 tax years china tax authorities sga expenses 2469 million 2974 million nine months ended september 30 2006 2005 respectively sga expenses percentage net sales 14 nine months ended september 30 2006 2005 respectively decrease sga expenses primarily due 451 million decrease provision doubtful accounts compared period 2005 days sales outstanding 69 days september 30 2006 compared 95 days september 30 2005 shorter days sales outstanding resulting decrease provision doubtful accounts result improved cash collections nine months ended september 30 2006 relative comparable period 2005 addition reductions expenses due expense controls cost savings partially offset value added tax expense 79 million resulting audit 2003 2005 tax years china tax authorities research development three months ended march 31 2006 2005 research development “rd” expenses decreased 194 million increased 1 percentage net sales three months ended march 31 2006 compared period 2005 absolute decrease rd expenses attributed decrease headcount approximately 778 employees resulting restructuring activities transfer engineers part sale acd personnel related expenses decreased 47 million facility depreciation costs decreased 56 million result restructuring write rd equipment additionally professional services decreased 36 million due decreased use consultants three six months ended june 30 2006 2005 rd expenses 466 million 8 net sales three months ended june 30 2006 compared 657 million 9 net sales corresponding period 2005 decrease 190 million absolute dollars rd expenses primarily attributed decreased headcount approximately 778 employees resulting restructuring activities transfer engineers part sale acd personnel related expenses decreased 55 million facility depreciation cost decreased 62 million result restructuring write rd equipment additionally professional services costs decreased 25 million due decreased use consultants rd expenses 930 million 1315 million 8 net sales six months ended june 30 2006 2005 respectively absolute dollars rd expenses decreased 385 million primarily due decrease facility depreciation costs 118 million result restructuring writedown rd equipment also decrease personnel expenses including payroll taxes benefits totaling 102 million resulting decreased headcount described addition decrease rd expenses also attributed decreased professional costs 60 million associated decreased use consultants three nine months ended september 30 2006 2005 research development expenses 463 million 8 net sales three months ended september 30 2006 compared 608 million 10 net sales corresponding period 2005 decrease 145 million absolute dollars rd expenses primarily attributed decreased headcount approximately 778 employees resulting restructuring activities transfer engineers part sale acd personnel related expenses decreased 39 million equipment facility depreciation cost decreased 85 million result restructuring write rd equipment rd expenses 1393 million 1923 million 8 9 net sales nine months ended september 30 2006 2005 respectively absolute dollars rd expenses decreased 530 million primarily due decrease equipment facility depreciation costs 254 million result restructuring writedown rd equipment also decrease personnel expenses including payroll taxes benefits totaling 141 million resulting decreased headcount described addition decrease rd expenses attributed part 71 million cost savings resulting decreased use consultants asset impairment three nine months ended september 30 2005 due existence impairment indicators september 2005 determined significant adverse changes business outlook could indicate carrying value certain longlived asset groups may recoverable could indicate fair value reporting units may carrying value performed interim impairment tests goodwill certain long lived assets result impairment test recorded impairment charge longlived assets 2181 million quarter ended september 30 2005 impairment charge consisted 1929 million goodwill 17 million intangible assets 235 million property plant equipment restructuring costs three six months ended june 30 2006 2005 second quarter fiscal year 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products addition restructuring plan designed allow us reduce breakeven revenues product line align investments key growth opportunities facilitate process globalization three six months ended june 30 2005 incurred approximately 151 million operating expenses relating restructuring plan actions primarily consisting 76 million severance payments 75 million asset impairments primarily related impairment equipment licenses associated discontinued products included restructuring costs 151 million noncash charges 69 million asset impairments made cash payments 63 million severance benefits 27 million accrued expenses part restructuring plan three six months ended june 30 2005 recorded 56 million inventory writeoff associated discontinued products restructuring expense related inventory writeoff included cost sales consolidated statements operations three nine months ended september 30 2005 three months ended september 30 2005 company incurred approximately 34 million expenses relation restructuring plan actions consisting 21 million related severance payments 12 million asset impairments primarily related writeoff equipment licenses associated discontinued products nine months ended september 30 2005 company incurred approximately 185 million operating expenses relation restructuring plan actions primarily consisting 98 million related severance payments 87 million asset impairments primarily related impairment equipment licenses associated discontinued products included restructuring costs 185 million noncash charges 76 million asset impairments made cash payments 105 million severance benefits 11 million accrued expenses part restructuring plan nine months ended september 30 2005 recorded 56 million inventory writeoff associated discontinued products restructuring expense related inventory writeoff included cost sales consolidated statements operations end third quarter 2005 approximately 965 employees terminated placed workforce reduction programs gain extinguishment debt three six months ended june 30 2006 2005 gain extinguishment debt net writeoff unamortized issuance expenses 111 million three six months ended june 30 2005 june 2005 1482000 shares common stock fair value approximately 106 million approximately 158 million cash exchanged 380 million aggregate principal amount outstanding convertible subordinated notes due 2008 extinguishment debt six months ended june 30 2006 three nine months ended september 30 2006 2005 gain extinguishment debt net writeoff unamortized issuance expenses 203 million 314 million three nine months ended september 30 2005 respectively june 2005 1482000 shares common stock fair value approximately 106 million approximately 158 million cash exchanged 380 million aggregate principal amount outstanding convertible subordinated notes due 2008 third quarter 2005 completed four additional exchanges wherein exchanged total 3506100 shares common stock fair value approximately 270 million approximately 414 million cash 899 million aggregate principal amount notes extinguishment debt nine months ended september 30 2006 income expense three months ended march 31 2006 2005 net income expense income 36 million expense 68 million three months ended march 31 2006 2005 respectively net income three months ended march 31 2006 primarily due 28 million gain foreign currency revaluation 05 million financial subsidy local chinese government net expense three months ended march 31 2005 primarily due 78 million loss foreign currency revaluation offset consumption tax refunds japan 12 million 05 million financial subsidy local chinese government three six months ended june 30 2006 2005 net income 69 million net expense 22 million three months ended june 30 2006 2005 respectively net income three months ended june 30 2006 primarily consisted 29 million currency exchange 25 million gain sales assets three months ended june 30 2005 net expense consisted foreign exchange losses 68 million partially offset 48 million japan consumption tax refund net income 105 million net expense 91 million six months ended june 30 2006 2005 respectively net income six months ended june 30 2006 primarily consisted gains foreign exchange 57 million gain sale asset 25 million net expense six months ended june 30 2005 primarily consisted foreign exchange loss 146 million partially offset 60 million consumption tax refund japan yendenominated sales accounts receivable significantly higher six months ended june 30 2005 compared period 2004 incurred 146 million unrealized loss foreign exchange due weakened japanese yen us dollar six months ended june 30 2005 three nine months ended september 30 2006 2005 net income 18 million 74 million three months ended september 30 2006 2005 respectively net income three months ended september 30 2006 primarily consisted dividend income 10 million net income three months ended september 30 2005 primarily consisted foreign exchange gains 73 million foreign exchange gains primarily result gains company’s china subsidiaries attributed appreciation chinese renminbi us dollar denominated shortterm debt payables offset loss attributed appreciation us dollar japanese yen denominated cash accounts receivable net income 123 million nine months ended september 30 2006 net expense 17 million nine months ended september 30 2005 net income nine months ended september 30 2006 primarily consisted gains foreign exchange 61 million 25 million gain sale assets cellon dividend income 17 million net income nine months ended september 30 2005 primarily consisted 60 million consumption tax refund japan offset foreign exchange loss 73 million income tax expense three months ended march 31 2006 2005 income tax expense 28 million 55 million three months ended march 31 2006 2005 respectively company’s 2006 annual effective tax rate estimated negative 14 two primary reasons negative 14 effective tax rate first provided tax benefit forecasted current year losses incurred tax credits generated united states countries management believes likely tax benefit associated losses realized second continue accrue tax expense jurisdictions historically profitable estimates annual effective tax rate end interim periods based evaluations possible future events transactions may subject subsequent refinement revision three six months ended june 30 2006 2005 income tax expense 47 million 33 million three months ended june 30 2006 2005 respectively 2006 annual effective tax rate estimated negative 17 two primary reasons negative 17 effective tax rate first provided tax benefit forecasted current year losses incurred tax credits generated united states countries management believes likely tax benefit associated losses realized second continue accrue tax expense jurisdictions historically profitable estimates annual effective tax rate end interim periods based evaluations possible future events transactions may subject subsequent refinement revision income tax expense 75 million 88 million six months ended june 30 2006 2005 respectively six months ended june 30 2005 tax expense consisted 90 million primarily relating valuation deferred tax assets china three nine months ended september 30 2006 2005 income tax expense 15 million 1252 million three months ended september 30 2006 2005 respectively two primary reasons company tax expense company pretax losses first provided tax benefit forecasted current year losses incurred tax credits generated united states countries management believes likely tax benefit associated losses realized second continue accrue tax expense jurisdictions historically profitable estimates annual effective tax rate end interim periods based evaluations possible future events transactions may subject subsequent refinement revision september 30 2005 believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets result review undertaken september 30 2005 concluded appropriate establish full valuation allowance net deferred tax assets cumulative losses weigh heavily overall assessment accordingly recorded 1166 million noncash charge september 30 2005 united states china income tax expense 90 million 1340 million nine months ended september 30 2006 2005 respectively nine months ended september 30 2005 recorded 1166 million noncash charge provide full valuation allowance remaining net deferred tax assets september 30 2005 united states china critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements governed emerging issues task force issue “eitf” 0021 “accounting revenue arrangements multiple deliverables” sec staff accounting bulletin 104 “revenue recognition” multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 “software revenue recognition” amended eitf 0305 “applicability sop 972 nonsoftware deliverables containing incidental software” allocate revenues element software arrangements based vendor specific objective evidence “vsoe” fair value vsoe fair value element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases agreed give software upgrade rights “when made available” basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element “post contract support” established vsoe contract element accordingly revenues contracts recognized ratably period post contract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support review assumptions regarding estimated post contract support periods regular basis determine necessary revise estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding post contract support periods different original assumptions contract revenues would recognized remaining expected period support contract accounting utilized contracts include requirement significant software modification customization utilized generally account contracts using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process year ended december 31 2006 recorded 321 million loss fixed price contract recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term revenues services less 10 revenues periods presented also sell products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectibility cannot reasonably assured reseller arrangement revenue recognized upon sell end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards “sfas” 48 “revenue recognition right return exists” cases developed reasonable estimates stock exchanges based historical experience similar types sales similar products sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material estimate amount rebate based upon terms individual arrangement historical experience future expectations price reductions records estimate rebate amount time sale also enter sales incentive programs comarketing arrangements certain wireless handset customers record incurred incentive reduction revenue sales revenue recognized assessment collectibility also factor determining whether revenue recognized assess collectibility based number factors including payment history credit worthiness customer request collateral customers international sales may require letters credit customers drawn demand customer defaults payment determine collection payment reasonably assured defer revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally enter revenue sharing arrangements collect payment customer telecommunications service provider collects service revenues enter revenue sharing arrangement recognize revenue collection reasonably assured nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained stockbased compensation prior january 1 2006 accounted sharebased payment awards accounting principles board opinion 25 “accounting stock issued employees” “apb 25” provided required pro forma disclosures statement financial accounting standards 123 “accounting stockbased compensation” accordance apb 25 noncash compensation expense recognized options exercise price market price actual grant date based difference exercise price market price expense recognized ratably associated service period generally option vesting term january 1 2006 adopted statement financial accounting standards 123 revised 2004 “sharebased payment” “sfas 123r” using modified prospective transition method stockbased compensation expense recognized period based value portion sharebased payment awards ultimately expected vest stockbased compensation expense recognized consolidated statement operations year ended december 31 2006 included compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions sfas 123 compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r november 10 2005 financial accounting standards board “fasb” issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” elected adopt alternative transition method provided fasb staff position calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establishing beginning balance additional paidincapital pool “apic pool” related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected term sharebased payment awards stock volatility estimate expected term options granted based upon historical exercise cancellation data vested options use historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options common stock available determine implied volatility assumptions used calculating fair value sharebased payment awards represent management’s best estimates involve inherent uncertainties compensation expense could materially different future changes subjective assumptions materially affect estimated value management’s opinion existing valuation models may provide accurate measure fair value employee stock options addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period see note 15 “common stock incentive plans” notes consolidated financial statements contained item 8 annual report discussion stockbased compensation product warranty provide warranty equipment handset sales period generally ranging one three years time final acceptance rarely entered arrangements provide limited warranty services periods longer three years longest warranty period ten years provide expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate variable interest entities financial accounting standards board “fasb” issued fasb interpretation 46r “fin 46r” fin 46r requires entity primary beneficiary variable interest entity “vie” assets liabilities results operations vie included consolidated financial statements entity adopted fin 46r quarter ended december 31 2003 consolidated one related party deemed vie primary beneficiary 2003 2004 fourth quarter 2005 sold equity interest terminated material commercial arrangements settled bank debt determined longer primary beneficiary result assets liabilities entity consolidated december 31 2005 invested two additional entities considered vie included assets liabilities results operations entities consolidated financial statements 2005 2006 disassociated one vies triggered reconsideration event fin 46r resulting determination longer primary beneficiary additional information regarding variable interest entities see note 22 “variable interest entities” notes consolidated financial statements item 8 annual report receivables although evaluate customer credit worthiness prior sale provide allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured assess collectibility receivables based number factors including analysis creditworthiness ability collect payment length time individual receivable balance outstanding believe accounting estimate related allowance doubtful accounts critical accounting estimate length collection cycle china based receivables material effect estimate results operations inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value net writedowns excess slow moving obsolete inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs also include costs associated third party integrators freight deferred costs stated cost periodically assess recoverability deferred costs provide reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites contract specific individual customer financial conditions specific individual customer may result increased concentration risk exposure inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset per accounting research bulletin 43 “working capital current assets current liabilities” research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain establish reserves taxrelated uncertainties based estimates whether extent additional taxes interest due reserves established despite belief tax return positions fully supportable believe certain positions likely challenged may sustained review tax authorities adjust reserves light changing facts circumstances closing tax audit provision income taxes includes impact reserve provisions changes reserves considered appropriate well related net interest recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary record valuation allowance reduce deferred tax assets amount management believes likely realized 2006 due recent developments business made determination earnings certain subsidiaries permanently reinvested outside united states provide us taxes foreign undistributed earnings considered permanently reinvested outside united states apb 23 “accounting income taxesspecial areas” deferred income taxes must provided unremitted earnings foreign subsidiaries unless earnings could deemed permanently reinvested outside united states prior 2006 provided us tax foreign unremitted earnings intend repatriate earnings see note 14 goodwill intangible assets recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets perform annual goodwill impairment review fourth quarter year changes circumstances indicate potential impairment exists third quarter 2005 determined circumstances existed performed impairment review reporting unit level resulted asset impairment charge assessing potential impairment goodwill compare book value fair market value fair market value determined based present value estimated future cash flows longterm investments invested directly number private technologybased companies early stages development publicly listed technology real estate companies traded securities exchanges quoted market prices readily available determine fair value investments publicly traded companies management judgment required determine losses otherthantemporary furthermore management judgment required evaluating carrying value private company investments possible impairment private technology company investments assess impairment based evaluation achievement business objectives milestones financial condition prospects companies relevant factors continually monitor investments impairment charge income impairment amounts period determination made 2006 recorded 135 million otherthantemporary impairment charge related one investments recent accounting pronouncements see note 3 “summary significant accounting policies” notes consolidated financial statements contained item 8 annual report full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations forwardlooking statements annual report 10k contains forwardlooking statements within meaning federal securities laws statements based information currently available management intend forwardlooking statements covered safe harbor provisions private securities litigation reform act 1995 including statement purposes complying provisions forwardlooking statements include without limitation concerning following expectations regarding compliance sec reporting requirements nasdaq listing requirements expectations respect ability execute business plan expectations respect impact going concern explanatory paragraph independent auditors respect financial statements expectations respect ability execute operating plans expectations nature possible market trends expectations regarding continued growth business operations expectations regarding fluctuations gross profit expectations regarding market reactions price stock plans regarding payment cash dividends expectations regarding recognition certain compensation costs plans regarding legal proceedings expectations regarding effect legal proceedings government inquiries expectations regarding functionality performance features products plans expectations regarding relationships vendors suppliers expectations regarding future source costs chipsets plan fulfill purchase commitment various orders suppliers expectations respect amount stock compensation expense expectations regarding exchange rate risks respect accountable receivables payables renminbi japanese yen indian rupees euros plans regarding use financial instruments hedge certain foreign currency exchange rate risks plans regarding use derivative financial instruments speculative trading purposes plans regarding discounting certain bank notes commercial notes expectations regarding ability raise funds plan continue service account receivable expectations regarding right intellectual property embedded products expectations regarding ability protect intellectual property expectations regarding effect market risks operating results plans align business operations streamline expenses expectations respect reduction product costs supply chain rd improvements expectations respect loss contracts expectations regarding becoming stronger global competitor plans implement measures remediate material weaknesses expectations regarding effectiveness remediation measures plans continue review internal controls expectations regarding competition competitive advantages competitors expectations regarding consolidation telecommunications industry expectations regarding development introduction new advanced products expectations regarding deployment products plans reinvest cost savings derived expectations regarding workforce restructurings expectations regarding future workforce restructurings expectation regarding adoption environmental health safety laws countries worldwide expectations regarding effect sarbanesoxley act corporate governance disclosure practices expectation regarding expenses associated compliance sarbanesoxley act expectations regarding impact restatement consolidated financial statements expectations regarding maturation pas market corresponding decrease pas subscriber growth expectations regarding longterm demand pas products expectations regarding ability offset decline pas sales pursuing products expectations regarding pas system spending plan pursue opportunities wireless infrastructure products multiple markets expectations regarding investment development iptv market expectations regarding product margins expectations regarding annual effective tax rate expectations regarding likelihood realize tax benefits us countries expectations regarding effect china corporate income tax law future tax expenses expectations regarding valuation allowance net deferred tax assets impact plan develop measures address employees adverse tax consequences connection past stock option granting practices expectations regarding reporting net losses throughout 2008 expectations regarding level capital expenditures china plans maintain adequate liquidity levels least next 12 months expectations regarding availability sufficiency credit lines existing lenders plans issue new debt instruments sell investments assets plan regarding repayment convertible subordinate notes expectations regarding access cash china subsidiaries meet liquidity requirements outside china expectations regarding interest rates expectations regarding sufficiency cash resources expectations regarding ability receive licenses products expectation business financial condition results operations continue significantly influenced political economic legal social environment china international markets including japan india europe expectations regarding nature political economic legal reform china expectations regarding continued importance chinese market technologies development importance sales china operating results expectations regarding future sales generated china percentage total sales expectations regarding subscriber growth china expectations regarding global expansion sales outside china plan extend supplier base introducing models design expanding relationships manufacturers plans pursue opportunities divest additional noncore assets anticipations regarding acquisitions divestitures including divestiture noncore assets operations expectation respect research development expenses expectations regarding future amortization expenses expectations regarding impact product defects performance quality issues expectations regarding impact international expansion management operational financial resources expectations regarding impact legislation restricts prohibits use wireless handsets driving future sales plans regarding improvement internal supply chain inventory management processes expectations regarding reliability stockbased compensation valuation models impact sfas 123r expectations regarding ability implement enhance administrative infrastructure additional forwardlooking statements may identified words anticipate expect believe intend may similar expressions relate us management words designed intended similar expressions relate products services investors cautioned forwardlooking statements inherently uncertain statements subject risks uncertainties may cause actual results events differ materially detailed discussion risks uncertainties see item 1a risk factors form 10k guarantee future results undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k overview design manufacture sell telecommunications infrastructure handsets customer premise equipment provide services associated installation operation maintenance products sold primarily telecommunications service providers operators sell extensive range products designed enable voice data video services operator customers consumers around world past years expanded focus build global presence currently sell products several established emerging growth markets including north america china japan india central latin america europe middle east africa southeast north asia differentiate products designed reduce network complexity integrate high performance capabilities allow simple transition next generation networks design products facilitate costeffective efficient deployment maintenance upgrades products ipbased customers easily integrate products industry standard hardware software additionally believe introduce new features enhancements costeffectively added customers existing networks ipbased devices changed upgraded modules saving customers expense replacing entire system installation strategy built upon following key concepts •identify key technology shifts trends competitors •develop differentiated products designed offer new innovative revenuegenerating features enhanced functionality customers •reduce overall operational deployment costs customers networks enabling meet demands greater number consumers expanding addressable markets •develop tailored products services suit customers current needs anticipate future needs september 2007 announced results indepth strategic analysis company undertaken management team aim defining new corporate strategy making utstarcom even stronger global competitor current strategy focus key segments ip technology market identified greatest potential profitable growth specifically strategy •invest rd resources select ipbased technologies believe create unique endtoend solutions deliver strong market share create value customers •drive revenue technology select core geographic markets high acceptance disruptive shift ip technologies established credibility customers •supplement revenue outside core markets using regional technology sales partners areas leverage strong customer relationships restructuring programs past years undertaken significant globalization program intend continue build global sales outside china intend continue enhance manufacturing capabilities improve internal supply chain inventory management processes ensure timely deliveries quality products also intend continue implement enhance administrative infrastructure assist globalization october 2 2007 board directors approved restructuring plan reduce operating costs included worldwide reduction force approximately 11 companys headcount approximately 700 employees workforce reduction primarily united states china lesser degree international locations incurred restructuring charge connection plan approximately 145 million fourth quarter 2007 comprised largely cash payments associated onetime severance benefits continue efforts evaluate certain operations consider opportunities divest additional noncore assets may incur additional costs associated future actions align business operations streamline business processes asset impairment quarter ended september 30 2007 company announced new organization structure align business units corporate strategy result fourth quarter 2007 company performed impairment tests goodwill certain longlived tangible intangible assets based upon impairment assessment company recorded goodwill impairment charges 31 million addition company written 105 million 52 million related fair values customer relationships technology intangible assets within business segment respectively company also recorded impairment charge 11 million longlived tangible assets related business segment asset group see note 8 property plant equipment note 9 goodwill intangible assets notes consolidated financial statements contained item 8 annual report restatement consolidated financial statements july 2007 company announced audit committee conducting independent investigation historical sales certain customers china consultation upon recommendation management audit committee determined revenue companys western region china recognized earlier 2006 annual report form 10k corrected effects net sales related costs net sales recorded earlier also conducted voluntary review historical stock option practices direction nominating corporate governance committee board directors governance committee review considered option grant awards made period february 29 2000 shortly initial public offering common stock august 2006 compliance various stockbased compensation accounting standards applicable period well rules stock option plans found number instances use proper date measurement date determining whether stock options issued exercise prices fair value common stock therefore restated previously issued financial statements years ended december 31 1998 2005 account additional stock compensation expense recognized period together equal increase additional paidin capital recognize intrinsic value assigned issuances equity securities related adjustments payroll income taxes also recorded restating previously issued financial statements investigations described also corrected previously reported amounts related sales cost sales certain third party resellers classify amounts related party sales related party cost sales classifications respectively 2006 determined sales entities substance sales one significant shareholders softbank corp accounts receivable sales similarly reclassified accounts receivable related parties 2005 balance sheet results operations fourth quarter 2007 company announced new organization structure align business units corporate strategy new organization structure changed reporting segments company measures performance allocates resources effective october 1 2007 new reporting segments follows •broadband infrastructure •multimedia communications •personal communications division •handsets •services •other includes mobile solutions custom solutions business units broadband infrastructure segment responsible software hardware products enable end users access highspeed cost effective wireline data voice media communication products within categories include multiple hardware software subsystems offered various combinations suit individual carrier needs system products based widelyadopted global communications standards designed allow service providers quickly costefficiently integrate systems existing networks deploy systems new broadband ip wireless network rollouts products also designed quick costeffective transition future network technologies enabling customers make best use existing infrastructure multimedia communications segment responsible development management iptv related technologies surveillance plus core next generation network ngn software personal handyphone system phs infrastructure wireless systems teams also part segment personal communications division markets sells supports handsets personal access system pas handsets markets china historically handset sales division designed built manufacturers however 2005 began shipping handsets designed manufactured us year ended december 31 2007 handsets manufactured us made approximately 35 total unit sales segment handsets segment designs builds sells consumer handset devices including pas handsets allow customers access wireless services handset revenues within china included segment support growth operation installed base system solutions professional services business utstarcom services globallydeployed experts assist companys customers activities ranging network planning circuittopacket network migration planning systems integration program management operations management support knowledge transfer included segment mobile solutions business unit custom solutions business unit mobile solutions business unit responsible development sales service wireless ipcdmaipgsm product line packet data services node pdsn product line connects cdma cellular network infrastructure equipment ip network custom solutions business unit responsible development sales service noncore products ip messaging transaction gateways remote access server ras enables users access network data services remote locations net sales fiscal 2007 vs 2006 net sales 2007 25 billion change significantly consolidated basis compared net sales 2006 revenue lower segments except pcd services revenue broadband infrastructure multimedia communications segments decreased 22 28 respectively 2007 compared 2006 due decrease demand caused continued maturity pas market customers china prepare 3g launch well decrease demand softbank experienced last two years pasipas products pasipas based handsets china market continued experience declining revenues resulting lower unit demand pricing pressures led decrease handset segment sales 41 2007 compared 2006 pcd segment increase number units sold higher average selling price 2007 compared 2006 led 24 increase segment revenue services segment increased 3 sales segment increased 23 due increases custom solutions ipcdma product service sales additional discussion business segments see segment reporting 2008 expect revenues pas products infrastructure continue decline increased competition partially offset revenues higher end pas products including dual mode pas handsets dual mode cdma softswitch products multiple markets anticipate sales fully offset decline pas product sales currently offer initial market acceptance rollingstream™ iptv products china japan india believe iptv market presents meaningful growth opportunity regions well regions targeted expand iptv offerings 2007 verizon wireless tmobile usa sprint spectrum respectively accounted approximately 22 15 13 total net sales fiscal 2006 vs 2005 net sales 25 billion 2006 decrease 14 compared 29 billion 2005 revenues lower segments 55 decrease net sales broadband infrastructure segment contributed half total net sales decrease broadband infrastructure revenues 2005 driven sales ian8000 equipment japan telecom affiliate softbank corp related party 2006 broadband infrastructure sales softbank affiliates decreased 3330 million softbank completed initial investment fixed line businesses changed focus wireless business following acquisition vodafone japan decrease multimedia communications revenues handsets revenues reflects lower demand china market pas systems handsets pas subscriber growth declined 10 2006 compared 31 2005 pcd net sales remained relatively consistent decrease average selling price offset 6 increase number units sold 2006 verizon wireless tmobile usa respectively accounted approximately 14 11 total net sales 2005 verizon wireless accounted approximately 12 total net sales gross profit cost sales consists primarily material labor costs associated manufacturing assembly testing products costs associated installation customer training warranty costs fees agents inventory contract loss provisions overhead cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers manufacture assemble cdma handsets gross profit affected average selling prices material costs product mix impact warranty charges contract loss provisions well inventory reserves release deferred revenues related costs pertaining prior years gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate future result shifts product mix stage product life cycle anticipated decreases average selling prices ability reduce cost sales fiscal 2007 vs 2006 gross profit 3215 million 13 net sales 2007 compared 3857 million 16 net sales 2006 gross profit dollars decreased 643 million due decline sales segments except pcd services segments gross profit percentage declined 16 2006 13 2007 lower margin pcd sales represented 67 total sales 2007 compared 55 2006 gross profit gross profit percentages 2007 also negatively impacted additional inventory reserves 62 million additional contract loss fixed price infrastructure deployment contract additional discussion segments see segment reporting fiscal 2006 vs 2005 gross profit 3857 million 16 net sales 2006 compared 4358 million 15 net sales 2005 gross profit declined absolute dollars remained relatively constant percentage net sales 2006 2005 multimedia communication handsets segments contributed increase gross profit absolute dollars primarily result shift product mix reduction production costs absolute decrease gross profit dollars primarily result decline gross profit broadband infrastructure segment resulting 55 decline segment sales reduced profit percentage segment sales due additional inventory reserves 321 million provision anticipated losses fixed price infrastructure deployment contract entered fourth quarter 2006 addition increased percentage revenue derived lower margin pcd segment resulted decrease total gross profit percentage net sales operating expenses income following table summarizes operating expenses selling general administrative expenses sga include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs research development expenses consist primarily compensation benefits employees engaged research design development activities costs parts prototypes equipment depreciation third party development expenses believe continued prudent investment research development critical longterm success aggressively evaluate appropriate investment levels portion costs fixed difficult quickly reduce periods lower sales selling general administrative fiscal 2007 vs 2006 selling general administrative expenses 3191 million 2007 decrease 5 compared 3345 million 2006 expenses percentage net sales 13 14 2007 2006 respectively decrease primarily attributable 97 million cost savings resulting reduction use outside consultants contractors transferred associated projects internal staff ii 23 million reduction travel expenses iii 32 million reduction facility related expenses reduced leased area decreases partially offset 11 million decrease recovery bad debt ii 81 million increase professional fees primarily related various legal proceedings investigations restatements iii 27 million charge related fixed assets related upgrade oracle system 2006 selling general administrative expenses included charge 79 million vat expense resulting audit 2003 2005 tax years china tax authorities 47 million writeoff net assets connection termination joint venture 2006 fiscal 2006 vs 2005 selling general administrative expenses 3345 million 2006 decrease 10 compared 3715 million 2005 decrease primarily due 278 million decrease provision doubtful accounts 2006 compared 2005 resulting strong cash collection fully reserved receivables china days sales outstanding 60 days december 31 2006 compared 66 days outstanding december 31 2005 due strong cash collections fourth quarter 2006 high percentage fourth quarter revenue derived pcd segment generally experienced shorter collection period related receivables addition sales marketing personnel costs decreased approximately 167 million result cost savings resulting reduced sales marketing headcount offset partially increased stockbased compensation charges reduction sales marketing headcount primarily due reassignment approximately 477 employees 2006 previously providing sales support services towards generating revenue support arrangements cost savings sales marketing primarily related 2005 restructuring cost containment measures included 120 million decrease depreciation facility equipment costs 101 million decrease travel expenses 40 million decrease professional services cost savings sales marketing expenses partially offset increase general administrative costs primary factors increased general administrative costs included increase 213 million general administrative personnel costs due increased stockbased compensation charges additional finance information technology resources hired improve processes controls ii 79 million value added tax expense resulting audit 2003 2005 tax years china tax authorities iii 47 million writeoff net assets connection termination joint venture 2006 selling general administrative costs included approximately 13 million stockbased compensation result adoption sfas 123r research development fiscal 2007 vs 2006 rd expenses 1683 million 1829 million 7 net sales 2007 2006 absolute dollars rd expenses decreased 146 million primarily due decrease equipment parts depreciation costs 96 million writedown rd equipment prior periods decrease personnel expenses including payroll taxes benefits totaling 61 million resulting decreased headcount addition decrease rd expenses also attributable 25 million cost savings resulting decreased use outside services savings partially offset 14 million increase stockbased compensation fiscal 2006 vs 2005 rd expenses 1829 million 2006 decrease 639 million 26 compared 2468 million 2005 decrease primarily due decrease 306 million depreciation facility equipment costs result restructuring writedown rd equipment 2005 ii decrease personnel expenses approximately 164 million attributed decrease headcount due restructuring activities transfer engineers part sale semiconductor design operations marvell technology transfer nonpas wireless research development china cellon iii decrease professional costs 93 million associated decrease outsourced projects stock based compensation expense following table summarizes stockbased compensation expense companys consolidated statement operations fiscal 2007 vs 2006 decline level stock compensation 2007 compared 2006 attributable timing equity grants subject accounting sfas 123r well decline stock price unable grant new equity grants 2007 october 2007 due inability file periodic financial reports required sec extent compensation related older equity grants becomes fully recognized replaced compensation attributable new equity grants experience decline overall stock compensation expense fiscal 2006 vs 2005 adopted provision fas 123r sharebased payment january 1 2006 therefore stockbased compensation 2005 prior year represent charges recorded apb 25 2005 stockbased compensation expense primarily consists grants restricted stock employees certain acquisitions offset reversals compensation expense related certain awards subject variable accounting amortization intangible assets fiscal 2007 vs 2006 amortization intangible assets 160 million 2007 compared 189 million 2006 amortization intangible assets declined several intangible assets became fully amortized preceding twelve months estimated aggregate amortization expense intangibles five years beginning 2008 2012 62 million 35 million 35 million 35 million 35 million respectively 46 million aggregate thereafter fiscal 2006 vs 2005 amortization intangible assets 189 million 2006 decrease 70 million 27 compared 259 million 2005 decrease amortization intangible assets due several intangible assets fully amortized preceding twelve months gain sale semiconductor design assets fiscal 2007 vs 2006 february 2006 sold substantially assets selected liabilities semiconductor design operations including assets related prior acquisition advanced communications devices corporation marvell technology group ltd recognized 43 million 123 million gain sale assets 2007 2006 respectively upon achieving defined milestones see note 5acquisitions sale assetssale assets marvell technology group ltd asset impairment fiscal 2007 conducted indepth strategic analysis company aim define new corporate strategy review completed fourth quarter 2007 declines revenues excluding pcd services segments appeared persistent evidenced continued decline fourth quarter 2007 fourth quarter 2007 taking decline consideration new strategic direction well persistent weak global industry economic conditions revised near medium term revenue expectations downward significantly also reviewed corresponding key assumptions overall strategic business manufacturing capacity plans material changes outlook plans first able quantify fourth quarter fiscal 2008 budgeting process triggered impairment review longlived assets impairment review indicated estimated future undiscounted cash flows would sufficient recover carrying values fixed assets segment result recorded charge 11 million write assets continue hold use estimated fair values determined based established valuation practices appraisals appropriate also determined fourth quarter 2007 certain intangible assets related acquisition telos commworks specifically existing technology customer relationships also become impaired recorded 157 million charge adjust existing technology customer relationships assets estimated fair market value revenue estimates time acquisition made market outlook considerably favorable performing overall impairment analysis goodwill followed guidance paragraph 29 fas 142 requires longlived assets goodwill tested impairment first carrying amount assets adjusted impairment testing goodwill impairment accordingly adjusting carrying value longlived assets due impairment test goodwill impairment recognizing impairment 31 million fiscal 2006 record impairment charges related technology intangible assets property plant equipment circumstances events occurred indicated possible impairment fiscal 2005 third quarter 2005 determined certain circumstances changed sufficiently indicate fair value certain reporting units may book values result conducted evaluation longlived assets including goodwill intangible assets certain property plant equipment impairment recorded impairment charges management held series planning meetings september 2005 assess current business forecast reporting units assessment analyzed various factors including reduction rate growth pas subscribers third quarter delay expected granting 3g licenses china japan challenges product quality primarily broadband infrastructure segment narrowing strategic focus related product offering greater expected revenue margin decline due continued pricing pressures several key markets management concluded factors combined represented triggering event due existence triggering event september 2005 determined significant adverse changes business outlook could indicate carrying value certain long lived assets groups may recoverable could indicate fair value reporting units may fair value result performed impairment tests goodwill certain long lived tangible intangible assets based impairment assessment goodwill impairment charge 1929 million estimated recorded 2005 write full value goodwill broadband infrastructure pcd handsets majority goodwill segments also recorded impairment charge 141 million longlived tangible assets related broadband infrastructure asset group 94 million longlived tangible assets related handsets asset group addition determined fair value technologyrelated intangible assets within handsets asset group calculated using discounted future cash flows less carrying value net assets recorded asset impairment charge 17 million following table summarizes impairment charges incurred 2005 restructuring costs fiscal 2007 october 2 2007 board directors approved restructuring plan reduce operating costs included worldwide reduction force approximately 11 headcount approximately 700 employees workforce reduction primarily united states china lesser degree international locations incurred restructuring charge connection plan 145 million fourth quarter 2007 comprised largely cash payments associated onetime severance benefits quarter 113 million paid december 31 2007 remaining 32 million restructuring expense remained unsettled included current liabilities expected paid 2008 expect realize annual cost savings salary compensation related expenses approximately 315 million following table shows total amount costs incurred segment connection restructuring plan fiscal 2006 restructuring plan initiated 2005 completed december 31 2005 major restructuring effort undertaken 2006 settled approximately 11 million accrued expenses remaining 01 million accrued expenses paid 2007 fiscal 2005 second quarter fiscal 2005 announced initiated restructuring plan rationalize cost structure response decline demand certain products 2005 incurred approximately 297 million operating expenses related restructuring plan actions primarily consisting 152 million related severance payments 145 million asset impairments primarily related impairment equipment licenses associated discontinued products made cash payments 166 million severance benefits 2005 part restructuring plan recorded 56 million inventory writeoff associated discontinued products 2005 restructuring expense related inventory writeoff included cost sales consolidated statements operations inprocess research development fiscal 2006 vs 2005 07 million inprocess research development charge 2005 related acquisitions pedestal networks charges inprocess research development iprd based part upon independent valuations assessing iprd projects considered key product characteristics including products development stage acquisition date products life cycle products future prospects also considered rate technology changes relevant industry industrys competitive environment economic market outlook income expense interest income fiscal 2007 vs 2006 interest income 145 million 148 million 2007 2006 respectively decrease mainly due lower interest rates lower average cash balances china partially offset higher yield generated us cash balances remained relatively stable 2007 compared 2006 fiscal 2006 vs 2005 interest income 148 million 2006 compared 71 million 2005 higher average cash balances 2006 primary reason increase addition increase average interest rate due part geographic location cash balances also favorable impact interest income interest expense fiscal 2007 vs 2006 interest expense 327 million 117 million 2007 2006 respectively increase interest expense 2007 compared 2006 primarily attributable incremental interest expense 22 million resulting first second supplemental indentures associated convertible subordinated notes due 2008 stated interest rate convertible subordinated notes 7625 january 9 2007 july 25 2007 10875 july 26 2007 december 31 2007 prior january 9 2007 convertible subordinated notes accrued interest 78 per annum effective january 9 2007 entered supplemental indenture agreement holders notes providing failure us comply certain provisions original agreement result default event default supplemental indenture agreement stipulated notes accrue additional 675 per annum compared 78 annual interest provided original indenture related notes special interest beginning january 9 2007 maturity date notes unless notes earlier repurchased converted july 26 2007 entered second supplemental indenture receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection consent solicitation announced july 19 2007 second supplemental indenture provided convertible subordinated notes accrue aggregate additional 10 per annum compared 78 annual interest provided original indenture related notes special interest including july 26 2007 march 1 2008 maturity date notes unless notes earlier repurchased converted special interest rate represented increase 325 per annum previous special interest rate 675 per annum first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 see note 10 debt notes consolidated financial statements contained item 8 annual report fiscal 2006 vs 2005 interest expense 117 million 2006 decrease 51 million 303 compared 168 million 2005 decrease interest expense primarily attributable decrease shortterm borrowings china form bank loans extinguishment longterm debt 2005 average quarterly borrowings outstanding 4006 million 5707 million 2006 2005 respectively average interest rate thereon 29 2006 2005 gain extinguishment subordinated notes fiscal 2005 gain extinguishment subordinated notes net writeoff unamortized issuance expenses 314 million 2005 year ended december 31 2005 4988100 shares common stock fair value approximately 376 million approximately 571 million cash exchanged 1279 million aggregate principal amount outstanding convertible subordinated notes due 2008 income net fiscal 2007 vs 2006 income net 648 million 2007 compared 11 million 2006 income net 2007 included 537 million gain sale part investment gemdale 57 million gain sale investments immenstar fiberxon income net 2006 consisted primarily foreign exchange gains 76 million gain sale asset 25 million dividend income 21 million miscellaneous income 21 million partially offset 135 million impairment charge longterm investment fiscal 2006 vs 2005 income net 11 million 2006 compared 437 million 2005 income net 2006 consisted primarily foreign exchange gains 76 million gain sale asset 25 million dividend income 21 million miscellaneous income 21 million partially offset 135 million impairment charge longterm investment income net 2005 primarily consisted gain sale softbank china 472 million 60 million consumption tax refund japan partially offset foreign exchange loss 100 million december 2005 sold 10 ownership softbank china holdings pte ltd softbank china softbank corp related party owner remaining 90 softbank china 569 million accordingly recorded income gain 472 million management fees transaction expenses net investment carrying value foreign exchange losses primarily consisted losses attributed appreciation us dollar japanese yen denominated cash accounts receivable offset gains companys china subsidiaries attributed appreciation chinese renminbi us dollar denominated shortterm debt payables income tax expense benefit company adopted provisions fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 january 1 2007 result implementation fin 48 company recognized 14 million increase liability unrecognized tax benefits required accounted reduction january 1 2007 balance retained earnings fin 48 established criteria recognizing continuing recognize morelikelythannot tax positions may result income tax expense volatility future periods company believes adequately provided tax positions amounts asserted taxing authorities could greater accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved fiscal 2007 vs 2006 subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain establish reserves taxrelated uncertainties based estimates whether extent additional taxes interest due reserves established despite belief tax return positions fully supportable believe certain positions likely challenged may sustained review tax authorities adjust reserves light changing facts circumstances closing tax audit provision income taxes includes impact reserve provisions changes reserves considered appropriate well related net interest income tax expense 329 million 2007 compared tax benefit 150 million 2006 march 16 2007 chinas top legislature national peoples congress passed china corporate income tax law cit law cit law effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies would effectively replaced unified system result enactment new regulations december 2007 address cit law company accrued income tax expense 117 million related recording deferred tax liability foreign withholding taxes related unremitted earnings companys subsidiaries company determined permanently reinvested outside united states company also accrued 54 million foreign withholding taxes related realized gain sale investment gemdale addition recorded 158 million tax expense relating jurisdictions historically profitable 2006 discussed recorded 290 million income tax benefit related settlement tax audit china 2003 2005 tax years utstarcom telecom co ltd huts hangzhou utstarcom telecom co ltd hstc two subsidiaries china acceptance tax holiday hstc fiscal 2006 vs 2005 income tax benefit 150 million 2006 compared tax expense 1365 million 2005 2006 recorded 290 million income tax benefit related settlement tax audit china 2003 2005 tax years utstarcom telecom co ltd huts hangzhou utstarcom telecom co ltd hstc two subsidiaries china acceptance tax holiday hstc tax benefit partially offset tax expense accrued relating jurisdictions historically profitable establishing deferred income tax assets liabilities make judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income record deferred tax assets liabilities evaluate need valuation allowances reduce deferred tax assets realizable amounts 2005 believe likely company would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets result review undertaken concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment accordingly recorded 2373 million noncash charge united states china also recorded 119 million increase tax expense 2005 due revaluation deferred tax assets china statutory rate changes certain subsidiaries china equity loss affiliated companies fiscal 2006 vs 2005 equity loss affiliated companies 0 2006 compared 55 million 2005 joint venture investment matsushita communication industrial co ltd matsushita liquidated 2005 segment reporting fourth quarter 2007 company announced new corporate organization align business units corporate strategy new organization structure changed reporting segments company measures performance allocates resources effective october 1 2007 new reporting segments follows •broadbandfocused companys world class portfolio broadband products •multimedia communicationsfocused development market opportunities iptv solutions wireless infrastructure technologies •personal communications division pcdfocused distribution mobile handsets outside china •handsetsfocused mobile phone business continued focus pas handset market •servicesfocused providing services support broadband infrastructure multimedia communications product lines •other includes mobile solutions focused development sales services ipcdma market custom solutions focused customized telecommunication solution make financial decisions based information receive internal management system currently evaluate operating performance allocate resources segments based segment revenue gross profit cost sales direct expenses relation production assigned segments accounting policies used measuring segment assets operating performance used consolidated level broadband infrastructure fiscal 2007 vs 2006 largest broadband infrastructure customer softbank japan representing approximately 34 54 total broadband sales 2007 2006 respectively due customer concentration segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts larger customers net sales broadband infrastructure segment decreased 444 million 2007 compared 2006 decrease primarily due lower sales softbank japan softbank completed initial investment fixed line businesses changed focus wireless business following acquisition vodafone japan decrease also due broadband infrastructure net sales 2006 including 312 million revenue order cancellation fees associated cost sales gross profit increased 91 million 2007 compared 2006 primarily due 321 million provision anticipated losses infrastructure deployment contract entered fourth quarter 2006 well additional warranty cost 49 million 2006 additional costs 2006 partially offset gross margin 312 million revenue related cancellation fees related costs sale 2007 recorded 62 million additional contract loss infrastructure deployment contract discussed accepted contract would allow us develop relationship customer consider important international expansion broadband infrastructure business may incur additional warranty expense introduce new products may required accrue additional contract losses certain fixed price contracts progress events may negative impacts future gross margins results operations financial position fiscal 2006 vs 2005 largest broadband infrastructure customer softbank affiliates including japan telecom representing approximately 54 88 total broadband infrastructure sales 2006 2005 respectively 2006 sales softbank declined 3330 million softbank completed initial investment fixed line businesses changed focus wireless business following acquisition vodafone japan decline gross profit percentage net sales 31 2005 negative 1 2006 due primarily 321 million provision anticipated losses infrastructure deployment contract entered fourth quarter 2006 multimedia communications fiscal 2007 vs 2006 2007 multimedia communications sales decreased 28 compared 2006 mainly due decrease pas infrastructure sales phase 3g product lines worldwide pas system sales decreased 22 contributed approximately 92 multimedia communications sales 2007 compared 85 2006 new pas system sales china declined continuously since late 2004 carriers transitioned new system installations system expansions pasipas systems reach product maturity gross profit percentage sales decreased 45 33 net sales 2007 compared 2006 primarily due higher warranty expenses higher inventory reserves exited certain unprofitable product lines due restructuring plan initiated october 2007 expect future pas infrastructure spending decline 2008 compared 2007 levels china prepares 3g launch expect revenue decline continue plan aggressively pursue opportunities packet pas products broadband wireless data market based pas technology dual mode enterprise pas products softswitch products multiple markets although anticipate sales fully offset anticipated decline pas sales 2008 believe iptv market presents meaningful growth opportunity currently offer initial market acceptance rollingstream™ iptv products china japan india taiwan geographic regions fiscal 2006 vs 2005 net sales declined 10 2006 compared 2005 primarily due decreased sales pas systems china 2006 well sales 577 million iptv product 2005 2006 approximately 85 multimedia communications sales attributable pas systems china compared 87 2005 decrease pas system sales primarily result customers china transitioning new system installations system expansions pas systems reach product maturity gross profit percentage net sales increased 19 percentage points 2006 compared 2005 due number factors including margins pas infrastructure improved due shift product mix towards higher margin cell sites well reduction product discounts given ii improvement inventory management product quality resulting decrease excess inventory writedowns scrap iii sales networks software totaling 76 million gross margins 90 personal communication devices pcd fiscal 2007 vs 2006 net sales pcd segment 166 billion 2007 increase 24 compared 134 billion 2006 increase primarily due 15 million increase total units sold well 8 increase overall average selling price 2007 sales utstarcom manufactured devices accounted 35 total units sold compared 36 total units sold 2006 gross profit percentage net sales increased 6 2007 compared 3 gross profit net sales 2006 increased gross profit 2007 compared 2006 primarily due higher average selling prices 2007 compared 2006 larger inventory writedown certain slow moving models 2006 significant benefit gross profit margin 2007 result sales inventory previously reserved excess obsolete fiscal 2006 vs 2005 net sales pcd segment 134 billion 2006 decrease 2 compared net sales 137 billion 2005 relatively consistent net sales result decrease overall average selling price offset 6 increase number units sold gross profit percentage net sales recognized handset sales pcd declined one percentage point 2006 compared 2005 gross profit negatively impacted inventory writedowns certain slow moving models partially offsetting inventory charges higher margins utstarcom branded devices sold 2006 gross profit percentage net sales typically lower realized pas systems based handsets sold china market handsets fiscal 2007 vs 2006 handset sales declined 41 2007 compared 2006 decrease net sales primarily attributable declining volume china telecommunications market price erosion resulting reduction subsidies pas handsets service providers competition mobile carriers like china mobile china unicom pas pasgsm dual mode handset unit sales china declined 478 million units 2007 compared 786 million units prior year average selling price pas pasgsm china 2007 423 compared 477 2006 representing 113 decrease gross profit 2007 percentage sales increased 3 percentage points compared 2006 mainly due gross profit contributed non pas handsets gross profit percentage sales pas handsets remained stable compared 2006 due continuous effort cost reduction better inventory management reduction royalty warrantyrelated expenditures 2008 beyond expect slower even negative growth rates pas subscribers china prepares 3g launch furthermore expect price erosion gross margin deterioration pas handsets competition sales approach shifting direct sales carriers selling distributors plan continue develop highend models pas packet data cards tdscdma business higher gross margins average selling prices also expect continue focus product cost reduction efforts supply chain improvements rd improvements including outsourcing part product development fiscal 2006 vs 2005 net sales declined 16 primarily due volume decrease pas handsets china units sold declined 78 million 2006 compared 102 million 2005 25 volume decline primarily attributed lower demand pas handsets resulting slower subscriber growth 2006 pas subscriber growth 10 compared 31 2005 service providers reduced marketing efforts pas handsets anticipation next generation technology average selling price per unit improved 10 due shift product mix sales higherend models well introduction new pasgsm dual mode product line 2006 shift product mix offset declining prices models due competitive pricing pressures pas market experienced china telecommunications market since latter part 2003 gross profit percentage sales handsets segment increased 18 percentage points 2006 compared 2005 portion improvement gross profit percentage relates shifting products use chipsets greater functionality pas handsets reduce overall component costs unit additionally shift product mix toward higher margin products pasgsm dual mode ultrathin highend pas handsets additional factors leading improvement gross profit reduction scrap variances warranty costs services fiscal 2007 vs 2006 service segment revenue increased 15 million 3 2007 compared 2006 due increase sales china operations signed new contracts multimedia communication products second half 2007 increase gross profit 55 million 9 percentage points 2007 compared 2006 due increased sales china recognition revenue certain nonchina sales orders originated 2006 higher gross margins compared recognized 2006 fiscal 2006 vs 2005 net sales services segment decreased 04 million 1 2006 compared 2005 decrease net sales primarily due delays associated receiving final acceptance existing projects completed 2006 focused revenue opportunities respect support china approximately 477 employees previously providing sales support services refocused towards generating revenue service arrangements resulting additional cost goods sold 2006 150 million corresponding decrease operating expenses additionally revenues 97 million multimedia communications 07 million broadband infrastructure segment sales china allocated services segment 2006 allocation made certain completed contracts service element separately priced gross profit percentage sales decreased 25 percentage points primarily due one time service charge marketing services softbank 2005 repeated 2006 fiscal 2007 vs 2006 segment consists mobile solutions custom solutions business units revenue increased 81 million 23 2007 compared 2006 due increase sales custom solutions products related services well ipcdma product line mobile solutions partially offset decrease sales data software products mobile solutions business unit due increased competition ipcdma product line accounts 34 total segment revenue gross profit percentage sales decreased 73 2006 61 2007 mainly due decrease data software sales normally higher gross profit margins fiscal 2006 vs 2005 net sales segment decreased 110 million 24 2006 compared 2005 decrease net sales primarily due revenue decrease product lines except ipcdma caused increased competition delay obtaining final acceptance certain contracts 2006 related party transactions softbank affiliates company recognizes revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb company supports softbanks fibertothehome service sales carrier class gepon product well netring™ product addition company supports softbanks new internet protocol television iptv sales rollingstream™ product 2007 2006 2005 company recognized revenue 678 million 1308 million 4753 million respectively sales telecommunications equipment affiliates softbank included revenue year ended december 31 2006 fee 312 million charged cancellation orders broadband products 100 million charged cancellation orders multimedia communications products included accounts receivable december 31 2007 2006 262 million 299 million respectively related transactions company immaterial amounts accounts payable softbank affiliates december 31 2007 2006 sales softbank include threeyear service period penalty clause product failure rates exceed certain level seven year period december 31 2007 companys customer advance balance related softbank agreements 03 million compared balance december 31 2006 current deferred revenue balance related softbank 56 million 116 million december 31 2007 december 31 2006 respectively december 31 2007 companys noncurrent deferred revenue balance related softbank 101 million compared 115 million december 31 2006 august 2004 company entered several agreements japan telecom co ltd jt wholly owned subsidiary softbank agreements relate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt company determined service activities revenue recorded net expected promotional spending july 17 2003 company entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank terms agreement company loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements companys loan subordinated certain senior lenders bb modem repayments paid company 42month period january 31 2007 substantial portion principal amount loan repaid last 16 months period year ended december 31 2007 2006 2005 company recorded immaterial amount 06 million 13 million respectively interest income respect loan receivable fully settled first quarter 2007 compared balance approximately 10 million december 31 2006 included prepaid current assets december 31 2007 softbank beneficially owned approximately 12 companys outstanding stock audiovox one companys officers also serves director audiovox corporation audiovox 2007 2006 2005 company paid approximately 21 million 14 million 07 million respectively services provided audiovox liquidity capital resources operating activities net cash used operating activities 2007 2182 million operating cash negatively affected net loss 1956 million including 537 million gain sale short term investment changes accounts payable customer advances deferred revenue assets partially offset favorable changes accounts receivable inventories deferred costs discussed 2007 accounts payable decreased 1651 million due decrease purchases inventory 2007 due change timing payments vendors beginning first quarter 2007 comply accelerated vendor payment terms addition deferred revenue decreased 407 million primarily due recognition revenue deferred prior periods assets increased 212 million primarily due advance payments suppliers customer advances decreased 481 million 2007 customer advances represent cash deposits received customers orders yet received final acceptance upon subsequent receipt final acceptances revenue recognition customer advances reduced revenue cost sales recorded cash used operating activities partially offset reduction accounts receivable 939 million inventory 824 million deferred costs 366 million reduction accounts receivable result strong cash collections high percentage revenue 2007 pcd segment generally experienced shorter collection period related receivables days sales outstanding 48 days december 31 2007 compared 60 days december 31 2006 decrease inventory deferred cost primarily due decrease purchases inventory 2007 noncash charges 2007 included 574 million depreciation amortization 128 million stockbased compensation expense 199 million impairment charges longlived assets net cash provided operating activities year ended december 31 2006 661 million cash operating activities positively affected changes accounts receivable deferred costs customer advances partially offset net loss well changes inventories payables current liabilities decrease accounts receivable resulting improved cash collections 2006 compared 2005 provided cash 1331 million days sales outstanding 60 days december 31 2006 compared 66 days outstanding december 31 2005 due strong cash collections fourth quarter 2006 high percentage fourth quarter revenue derived pcd segment generally experienced shorter collection period related receivables customer advances increased 384 million december 31 2006 decrease payables current liabilities primarily resulted decrease accounts payable 223 million decrease income taxes payable 289 million decrease current liabilities 276 million decrease current liabilities included decreases payroll taxes payable accrued contract costs relate purchase goods services invoices received warranty costs offset 321 million increase current liabilities related loss contract reserve noncash charges year ended december 31 2006 included 680 million depreciation amortization 166 million stockbased compensation expense 135 million otherthantemporary charge related impairment longterm investment net gain sale assets 96 million included gain 123 million related sale semiconductor design business division marvell technology group ltd net cash provided operating activities year ended december 31 2005 2184 million operating cash affected changes accounts receivable inventories income taxes payable accounts payable 2682 million decrease accounts receivable primarily attributable increased collections final quarter 2005 compared final quarter 2004 days sales outstanding 66 days december 31 2005 compared 113 days december 31 2004 shorter days sales outstanding primarily result shift sales china typically long collection cycle united states typically shorter collection cycle decrease inventory balance 1659 million primarily result shift sales pcd segment faster inventory turnover also contributed increase operating cash customer advances decreased 1503 million year ended december 31 2005 income taxes payable decreased 1102 million due losses incurred 2005 addition accounts payable decreased 878 million due lower inventory lower forecast sales factors contributed decrease operating cash reduction customer advances 2005 primarily due completion revenue earning process agreements japan telecom inc jt affiliate softbank corp well decline sales corresponding cash advances products sold china cash received jt advance revenue recognition advance spending promotional activities reflected customer advances prior periods revenue certain agreements recognized year ended december 31 2005 additional information see note 19 related party transactions notes consolidated financial statements contained item 8 annual report investing activities net cash provided investing activities 2007 totaled 294 million cash 832 million received proceeds sale shortterm longterm investments 43 million received connection achieving certain milestones related sale certain semiconductor assets 2006 66 million result change restricted cash balances representing release restricted cash outflows investing activities included 379 million purchase shortterm investments well 273 million purchase property plant equipment net cash provided investing activities fiscal 2006 totaled 361 million cash inflows investing activities included 360 million received sale semiconductor design operations marvell technology group ltd 40 million net proceeds sale shortterm investments 209 million changes restricted cash used additions property plant equipment totaled 263 million net cash provided investing activities fiscal 2005 701 million mainly due net proceeds sale investments 1817 million including 569 million received sale softbank china restructuring fund 1 1248 million net sales investment holdings partially offset 644 million property plant equipment purchases 243 million acquisitions giga telecom inc pedestal networks financing activities net cash used financing activities 581 million primarily due net repayment lines credit 616 million net cash used financing activities 995 million primarily consisting net repayment shortterm borrowings excess new borrowings net cash used financing activities fiscal 2005 2028 million primarily due net repayments 2164 million borrowings including 571 million cash payment connection early debt extinguishments liquidity working capital 3898 million 8004 million december 31 2007 2006 respectively included cash hand 4374 million 6616 million short term investments 656 million 95 million 2007 2006 respectively shortterm investments increased primarily due reclassification 424 million investments longterm shortterm additionally december 31 2007 company shortterm debt china lines credit china subsidiaries 480 million maturing 2008 interest rates ranging 575 710 shortterm debt outside china form convertible subordinated notes principal balance 2746 million matures march 1 2008 reported net losses 1956 million 1173 million 5326 million years ended december 31 2007 2006 2005 respectively december 31 2007 accumulated deficit 6912 million discussed used 2182 million cash operations year ended december 31 2007 december 31 2007 cash equivalents 4374 million 2895 million transferred february 28 2008 trustee order assure repayment convertible subordinated notes due march 1 2008 notes amount includes principal payment 2746 million 149 million accrued interest continuing experience net operating losses factors well others discussed raise substantial doubt companys ability continue going concern independent registered public accounting firm included going concern uncertainty explanatory paragraph report dated february 29 2008 management believes developed liquidity plan executed successfully provide sufficient liquidity finance companys anticipated working capital expenditure requirements next 12 months managements liquidity plans include divesting companys noncore assets operations obtaining funding outside sources however assurance transactions could consummated acceptable terms addition managements ongoing efforts improve companys profitability cash flows management continues reexamine aspects companys business areas improvement continues focus companys fixed cost base improving working capital position better align operations market demand current sales levels however projected sales materialize management may need reduce expenses addition company may require additional equity debt financing future funds raised issuance stock debt securities could rights privileges preference senior common stock debt covenants could impose restrictions companys operations sale additional equity securities debt financing could result additional dilution companys current shareholders assurance additional financing required available terms satisfactory company consolidated financial statements include adjustments relating recoverability classification recorded assets amounts classification liabilities adjustments might necessary company unable continue going concern december 31 2007 cash equivalents shortterm investments aggregating 5031 million meet liquidity requirements 3763 million held subsidiaries china imposes currency exchange controls transfers funds outside china controls limit transfers approximately 200 million net assets outside china without first obtaining consent chinese government china subsidiaries transferred 150 million dividend year ended december 31 2007 another 100 million dividend february 2008 amount cash available transfer china subsidiaries limited liquidity needs subsidiaries china chinese government requirements china subsidiaries retain adequate capital levels china protect creditors funds available mandated employee benefits additionally available credit facilities china december 31 2007 totaled 1522 million amount aggregate 411 million may used general working capital purposes addition 1110 million available use support letters credit corporate guarantees credit facilities expire fourth quarter 2008 fourth quarter 2007 credit facilities china aggregate amount approximately 4817 million matured extinguished december 31 2007 outstanding balance continuing general working capital line 69 million additional 411 million outstanding lines matured fourth quarter 2007 practice china draw new loans credit facilities prior either maturity borrowings expiration facilities ensure maintain adequate liquidity repay existing borrowings maturity effectively lengthen credit facility period latest maturity date underlying borrowings currently negotiations renew credit facilities believe based upon recent financial performance financial position lenders may reduce total available credit negotiate renewals lines furthermore borrowing credit facilities subject banks current favorable opinion credit worthiness companys china subsidiaries well bank funds available lending chinese banking regulations available lines credit significantly less available us historically process renewing matured lines credit may need collateralize certain assets china increase lines however cannot certain additional lines credit available us commercially reasonable terms managements liquidity plans include divesting noncore assets operations obtaining funding outside sources including sale securities obtaining loans financial institutions march 2003 issued notes completed offering 4025 million 78 convertible subordinated notes due march 1 2008 qualified institutional buyers notes convertible common stock conversion price 2379 per share subordinated present future senior debt concurrent issuance notes entered convertible bond hedge call option transaction respect common stock bond hedge call option transactions may settled option either cash net shares expire march 1 2008 2005 completed exchanges approximately 50 million shares common stock approximately 571 million cash 1279 million aggregate principal amount outstanding notes result early extinguishment also amended convertible bond hedge call option transactions reflect change principal amount underlying notes event default occur continuing trustee holders least 25 aggregate principal amount notes outstanding could declare unpaid principal accrued interest notes outstanding immediately due payable therefore result inability timely file quarterly report form 10q period ended september 30 2006 independent review governance committee companys historic stock option accounting completed receiving purported notice default trustee notes trustee asserting delay filing failure comply certain covenants purportedly caused default indenture solicited received requisite consents holders notes waiver defaults may occurred including january 9 2007 caused delay filing certain reports required filed pursuant exchange act sec reports securities exchange commission sec entered first supplemental indenture trustee dated january 9 2007 provided failure us comply certain provisions original agreement result default event default may 31 2007 receiving notice default trustee asserting inability timely file sec reports comply certain covenants may 31 2007 purportedly caused default indenture solicited received requisite consents holders notes waiver defaults may occurred including july 26 2007 entered second supplemental indenture trustee receiving consent holders 50 outstanding aggregate principal amount notes connection consent solicitation announced july 19 2007 second supplemental indenture provided period including july 26 2007 including october 15 2007 covenant reversion date failure us comply covenants contained original indenture agreement related required filing reports sec furnishing copies sec reports certain compliance certificates trustee constitute default ii second supplemental indenture default would deemed occurred result failure comply covenants default remains uncured continuing covenant reversion date default deemed occurred covenant reversion date october 15 2007 received additional notice default asserting default occurred indenture amended first supplemental indenture second supplemental indenture respect notes specific purported defaults referred notice default failure file sec provide copies trustee quarterly report form 10q fiscal quarter ended march 31 2007 quarterly report form 10q fiscal quarter ended june 30 2007 ii failure deliver trustee officers certificate compliance required indenture notice default provided 60 consecutive days october 15 2007 cure purported defaults would constitute event default indenture occurrence event default indenture would afford trustee holders less 25 aggregate principal amount outstanding notes right declare full principal amount outstanding notes immediately due payable october 17 2007 filed form 10q fiscal quarter ended march 31 2007 sec october 19 2007 filed form 10q fiscal quarter ended june 30 2007 sec delivered officers certificate compliance required indenture trustee subsequently notified trustee cured purported default indenture within period specified notice default second supplemental indenture notes accrued additional 675 per annum special interest january 9 2007 including july 25 2007 accrued additional 10 per annum special interest july 26 2007 date notes paid prepaid redeemed converted otherwise cease outstanding special interest rate accruing notes july 26 2007 represents increase 325 per annum previous special interest rate 675 per annum provided first supplemental indenture result second supplemental indenture notes bear stated interest rate 10875 220 million additional interest expense 2007 compared 2006 resulting first second supplemental indentures payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest february 28 2008 transferred 2895 million trustee notes order assure repayment notes mature march 1 2008 amount includes principal payment 2746 million 149 million accrued interest trustee instructed pay amounts note holders due china sales generally denominated local currency accept commercial notes receivable maturity dates ranging three six months customers china normal course business notes receivable available sale 126 million 51 million december 31 2007 december 31 2006 respectively may discount notes banking institutions china notes sold included consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 accounting transfers servicing financial assets extinguishment liabilities sfas 140 met due limitations converting renminbi limited ability engage foreign currency hedging activities china cannot guarantee fluctuations foreign currency exchange rates future material adverse effect revenues international sales correspondingly business financial condition results operations cash flows contracts negotiated japanese yen maintain bank accounts japanese yen purchasing portions inventories supplies balance japanese yen accounts december 31 2007 2006 approximately 105 million 131 million respectively august 1 2005 entered 364day 1000 million committed receivables purchase facility financial institution march 2007 agreement amended restated reflect purchase trade receivables shall sole discretion financial institution agreement also extended earlier march 28 2008 ii upon 90 days written notice financial institution pursuant terms receivable purchase facility may sell certain receivables arising sale telecommunications equipment financial institution receivables sold pursuant arrangement income taxes certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time tax holidaysincentives discussed applicable potentially applicable utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc companys active subsidiaries china entities may qualify accredited technologically advanced enterprises second quarter 2005 huts received approval knowledge intensive technology intensive certificate subjects company reduced national tax rate 15 first quarter 2005 company recorded reduction tax expense attributable increase deferred tax assets arising assessment local income tax huts hstc china approval certificate currently effect local taxation huts march 16 2007 chinas top legislature national peoples congress passed china corporate income tax law cit law cit law effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies would effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises prior change tax law certain subsidiaries joint ventures located china enjoy tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable cuts huts utsc active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law targets certain industries reduced 15 tax rate certain qualified high technology enterprises fies established promulgation new law currently enjoy lower tax rates increase tax rates would gradually phased five years based cit law december 31 2007 companys subsidiaries qualified reduced 15 tax rate however significant regulations regarding interpretation implementation new tax law still pending companys subsidiaries may qualify reduced 15 tax rate future chinese central government may review audit tax benefits granted local provincial authorities could determine disallow benefits certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises tax benefits reduced disallowed repealed due changes tax laws determination chinese government business could suffer balance sheet arrangements august 1 2005 entered 364day committed receivables purchase facility financial institution provides sale 1000 million trade accounts receivable pcd segment march 30 2007 agreement amended restated reflect purchase trade receivables shall sole discretion financial institution potential sales accounts receivables program result reduction total accounts receivable consolidated balance sheet remaining accounts receivables sold carried net realizable value including allowance doubtful accounts sold receivables pursuant facility 2007 2006 believe available funding accounts receivable financing program provides us increased flexibility manage working capital requirements sufficient trade accounts receivable support us financing programs program continue service accounts receivable december 31 2007 2006 balance sheet arrangements contractual obligations commercial commitments obligations contractual obligations commercial commitments primarily regard leasing arrangements standby letters credit follows bank loans december 31 2007 loans various banks totaling 48 million interest rates ranging 575 710 per annum bank loans mature 2008 included shortterm debt convertible subordinated notes convertible subordinated notes due march 1 2008 convertible common stock conversion price 2379 per share subordinated present future senior debt principal due maturity notes effective january 9 2007 company holders remaining 2746 million convertible subordinated notes entered first supplemental indenture providing failure us comply certain provisions original agreement result default event default may 31 2007 pursuant first supplemental indenture convertible subordinated notes accrued additional 675 per annum special interest january 9 2007 march 1 2008 maturity date notes july 26 2007 entered second supplemental indenture provided convertible subordinated notes accrue additional 10 per annum special interest july 26 2007 march 31 2008 maturity date notes special interest rate represented increase 325 per annum previous special interest rate 675 per annum first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 interest payable semiannually march 1 september 1 payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest information regarding notice default may 31 2007 notice default october 15 2007 companys second supplemental indenture see liquidity capital resources section annual report form 10k february 28 2008 transferred 2895 million trustee notes trustee order assure repayment notes mature march 1 2008 amount includes principal payment 2746 million 149 million accrued interest trustee instructed pay amounts note holders due operating leases lease certain facilities noncancelable operating leases expire various dates 2013 letters credit issue standby letters credit primarily support international sales activities outside china submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six twelve months date issuance without drawn beneficiary thereof purchase commitments obligated purchase raw materials workinprocess inventory various orders various suppliers fulfilled without adverse consequences material operations financial condition purchase commitments exclude agreements cancelable without penalty additionally agreed purchase marvell certain chip sets included 50 100 pas handsets 2011 accounts receivable transferred notes receivable accept bank notes commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months bank notes included shortterm investments commercial notes receivable available sale 126 million 51 million december 31 2007 2006 respectively may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes receivable sold 2007 2006 sold notes receivable totaling 130 million 2005 notes sold included companys consolidated balance sheets criteria sale treatment established sfas 140 accounting transfers servicing financial assets extinguishment liabilities met intellectual property certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products income tax obligations effective january 1 2007 company adopted provisions fin 48 december 31 2007 companys gross unrecognized tax benefits totaled 797 million included long term liabilities net certain deferred tax assets federal tax benefit state income tax items totaling 713 million recognized portion gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 84 million company included amounts table contractual obligations commercial commitments difficulty making reasonably reliable estimates timing cash settlements respective taxing authorities critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements governed emerging issues task force issue eitf 0021 accounting revenue arrangements multiple deliverables sec staff accounting bulletin 104 revenue recognition multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 software revenue recognition amended eitf 0305 applicability sop 972 nonsoftware deliverables containing incidental software allocate revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element post contract support established vsoe contract element accordingly revenues contracts recognized ratably period post contract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support review assumptions regarding estimated post contract support periods regular basis determine necessary revise estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding post contract support periods different original assumptions contract revenues would recognized remaining expected period support revenue fixed priced contracts include requirement significant software modification customization recognized accordance sop 811 accounting performance constructiontype certain production type contracts instances account contracts using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2006 2007 recorded 321 million 62 million contract loss fixed price contract respectively recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term revenues services less 10 revenues periods presented also sell products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sell end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards sfas 48 revenue recognition right return exists cases developed reasonable estimates stock exchanges based historical experience similar types sales similar products sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material estimate amount rebate based upon terms individual arrangement historical experience future expectations price reductions record estimate rebate amount time sale also enter sales incentive programs comarketing arrangements certain wireless handset customers record incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized assess collectability based number factors including payment history credit worthiness customer request collateral customers international sales may require letters credit customers drawn demand customer defaults payment determine collection payment reasonably assured defer revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally enter revenue sharing arrangements collect payment customer telecommunications service provider collects service revenues enter revenue sharing arrangement recognize revenue collection reasonably assured nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained restructuring liabilities litigation contingencies account companys restructuring plans statement financial accounting standards 146 accounting costs associated exit disposal activities sfas 146 statement financial accounting standards 112 employers accounting postemployment benefits sfas 112 account litigation contingencies accordance statement financial accounting standards 5 accounting contingencies sfas 5 sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated stockbased compensation prior january 1 2006 accounted sharebased payment awards accounting principles board opinion 25 accounting stock issued employees apb 25 provided required pro forma disclosures statement financial accounting standards 123 accounting stockbased compensation accordance apb 25 noncash compensation expense recognized options exercise price market price actual grant date based difference exercise price market price expense recognized ratably associated service period generally option vesting term january 1 2006 adopted statement financial accounting standards 123 revised 2004 sharebased payment sfas 123r using modified prospective transition method stockbased compensation expense recognized period based value portion sharebased payment awards ultimately expected vest stockbased compensation expense recognized consolidated statement operations year ended december 31 2006 included compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions sfas 123 compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r november 10 2005 financial accounting standards board fasb issued fasb staff position fas 123r3 transition election related accounting tax effects sharebased payment awards company elected adopt alternative transition method provided fasb staff position calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establishing beginning balance additional paidin capital pool apic pool related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r company accounts utilization windfall tax benefits based tax law ordering considered direct effects stockbased compensation purposes measuring windfall settlement award determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected term sharebased payment awards stock volatility company estimates expected term options granted based upon companys historical exercise cancellation data vested options company uses historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options companys common stock available determine implied volatility assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties compensation expense could materially different future changes subjective assumptions materially affect estimated value managements opinion existing valuation models may provide accurate measure fair value companys employee stock options addition company required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different companys estimate stockbased compensation expense could significantly different company recorded current period product warranty provide warranty equipment handset sales period generally ranging one two years time final acceptance rarely entered arrangements provide limited warranty services periods longer two years provide expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate time may subject additional costs related nonstandard warranty claims customers occurs estimate additional accruals based historical experience communication customers various assumptions believe reasonable circumstances additional warranty accruals recorded period additional costs identified variable interest entities financial accounting standards board fasb issued fasb interpretation 46r fin 46r fin 46r requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity adopted fin 46r quarter ended december 31 2003 evaluate investments periodically triggering events occur application fin 46r receivables although company evaluates customer credit worthiness prior sale company provides allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured company assesses collectability receivables based number factors including analysis creditworthiness companys historical payment history current economic conditions ability collect payment length time individual receivable balance outstanding companys policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging companys accounts receivable applying percentage based companys historical experience approach results allowance computed based aging receivables company evaluates percentages applied category aged accounts receivable periodically based actual history writeoffs collections refines formulabased approach accordingly use future periods company certain accounts receivable china outstanding significant period time company provides allowances receivables based criteria discussed company believes sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations company uses actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting except pcd utilizes weighted average method accounting approximates fifo net writedowns excess slow moving obsolete inventory writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs stated cost periodically assess recoverability deferred costs provide reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites contract specific individual customer financial conditions specific individual customer may result increased concentration risk exposure inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset per accounting research bulletin 43 working capital current assets current liabilities research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating companys tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain july 2006 financial accounting standards board fasb issued interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 requires income tax positions meet morelikelythannot recognition threshold recognized financial statements fin 48 tax positions previously failed meet morelikelythannot threshold recognized first subsequent financial reporting period threshold met previously recognized tax positions longer meet morelikelythannot threshold derecognized first subsequent financial reporting period threshold longer met recognize interest expense penalties related income tax matters part provision income taxes adopted fin 48 january 1 2007 prior 2007 company established reserves taxrelated uncertainties based estimates whether extent additional taxes interest due recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary record valuation allowance reduce deferred tax assets amount management believes likely realized 2006 due developments business repatriations cash via dividends settlements intercompany accounts described note 1 basis presentation liquidity notes financial statements made determination earnings certain subsidiaries permanently reinvested outside united states provide us taxes foreign undistributed earnings considered permanently reinvested outside united states goodwill intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based fair value assets received identifiable intangible assets comprised purchased trade names developed technologies customer supplier relationships intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based test future goodwill impairment tests could result charge earnings purchased intangibles finite lives amortized straightline basis respective estimated useful lives goodwill tested impairment annual basis annual tests certain circumstances written impaired purchased intangible assets goodwill amortized useful lives unless lives determined indefinite purchase intangible assets carried cost less accumulated amortization performed annual goodwill impairment analysis fourth quarter 2007 based estimates forecasted discounted cash flows concluded goodwill impaired recorded charge 31 million also assessed recoverability longlived assets determining whether carrying value assets recovered undiscounted future cash flows asset impairments primarily consist intangible assets property plant equipment based estimate amounts timing future cash flows related expected future remaining use ultimate sale disposal property plant equipment net costs sell 2007 incurred 157 million 12 million intangible assets property plant equipment impairment charges respectively process evaluating potential impairment goodwill intangibles highly subjective requires significant judgment estimate expected future cash flows various businesses operate number markets geographical regions determine carrying value businesses exercise judgment assigning allocating certain assets liabilities businesses compare carrying value including goodwill intangibles discounted future cash flows total future cash flows less carrying amount assets recognize impairment loss based excess carrying amount fair value assets estimates future cash flows associated assets critical assessments changes estimates based changed economic conditions business strategies could result material impairment charges future periods process evaluating potential impairment longlived assets property plant equipment also highly subjective requires significant judgment order estimate fair value longlived assets typically make various assumptions future prospects business asset relates consider market factors specific business estimate future cash flows generated business based assumptions estimates determine whether need recognize impairment charge reduce value asset stated balance sheet reflect estimated fair value assumptions estimates future values remaining useful lives complex often subjective affected variety factors including external factors real estate market industry economic trends internal factors changes business strategy internal forecasts although believe assumptions estimates made past reasonable appropriate changes assumptions estimates could materially impact reported financial results investments account investments debt equity securities statement financial accounting standards sfas 115 accounting certain investments debt equity securities fasb staff position fsp sfas 1151 meaning otherthantemporary impairment application certain investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date follow guidance provided eitf 031 meaning otherthantemporary impairment application certain investments assess whether investments unrealized loss positions temporarily impaired realized gains losses declines value judged temporary determined based specific identification method reported statements operations also made strategic investments publicly traded privately held companies promotion business strategic objectives investments publicly traded equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value comprehensive income investments equity securities nonpublicly traded companies accounted cost method cost method strategic investments hold less 20 voting interest ability exercise significant influence carried lower cost fair value types investments carried fair value cost appropriate recognize impairment charge decline fair value publicly traded equity securities costmethod investments cost basis judged otherthantemporary significant judgment used identify events circumstances would likely significant adverse effect future use investment consider various factors determining whether impairment otherthantemporary including severity duration impairment forecasted recovery financial condition nearterm prospects investee ability intent hold investment period time sufficient allow anticipated recovery market value recent accounting prouncements see note 2 summary significant accounting policies notes consolidated financial statements contained item 8 annual report full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations forwardlooking statements annual report form 10k contains forwardlooking statements regarding future events future results subject safe harbors created securities act 1933 securities exchange act 1934 forwardlooking statements based current expectations estimates forecasts projections us future performance industries operate well managements assumptions beliefs statements relate among things business plan expected financial results new accounting pronouncements liquidity access credit facilities cash china subsidiary statements contain words like expects anticipates may targets projects intends plans believes seeks estimates variations words similar expressions also forwardlooking statements readers cautioned forwardlooking statements predictions subject risks uncertainties related among things ability execute business plan chinas control currency exchanges decline pas market ongoing litigation items discussed part item 1a risk factors form 10k therefore actual results may differ materially adversely expressed forwardlooking statements guarantee future results actual results developments business decisions may differ contemplated forwardlooking statements undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k overview design manufacture sell ipbased telecommunications infrastructure products including primary product suite internet protocol tv iptv next generation network ngn broadband solutions along ongoing services relating installation operation maintenance products addition also sell handsets designed manufactured primarily china market products sold primarily telecommunications service providers operators sell extensive range products designed enable voice data video services operator customers consumers around world past years expanded focus build global presence currently sell products several established emerging growth markets asia latin america europe intend continue enhance manufacturing capabilities improve internal supply chain inventory management processes ensure timely deliveries quality products also intend continue implement enhance administrative infrastructure assist globalization differentiate products designed reduce network complexity integrate high performance capabilities allow simple transition next generation networks design products facilitate costeffective efficient deployment maintenance upgrades products ipbased customers easily integrate products industry standard hardware software additionally believe introduce new features enhancements costeffectively added customers existing networks ipbased devices changed upgraded modules saving customers expense replacing entire system installation strategic priorities summarized follows •focus primarily providing suite ipbased solutions including main product suite comprised iptv ngn broadband products related services •maintain leadership position china india growing presence key developing economies across asia latin america europe •leverage strong reputation telecom carriers ability solve complex network problems •use favorable reputation carrier relationships china provide handsets china market •maintain improve financial model strengthening balance sheet reducing operating expense levels increasing bookings december 2008 announced initiative transition certain key functions including finance china order eliminate functional duplication reduce operating expenses ability successfully implement change 2009 critical part plan achieve profitability maintain liquidity may encounter difficulties implementing significant change short time period successful may achieve expected benefits despite expended significant capital human effort sale noncore assets july 1 2008 sold utstarcom personal communications llc whollyowned subsidiary company pcd entity controlled aig global investment group certain investors total sale consideration approximately 2377 million pursuant terms divestiture agreement may entitled receive additional 50 million earnout payment 2011 based achievement certain earnings levels divested business personal communications devices llc pcd llc december 31 2010 recorded net gain 38 million divestiture 2008 additionally july 31 2008 completed divestiture mobile solutions business unit msbu global private equity firm third quarter 2008 recorded net gain divestiture msbu 39 million restructuring programs october 2 2007 board directors approved restructuring plan 2007 plan reduce operating costs included worldwide reduction force approximately 12 companys headcount approximately 800 employees workforce reduction primarily united states china incurred restructuring charge connection 2007 plan approximately 145 million fourth quarter 2007 comprised largely cash payments associated onetime severance benefits completed workforce reduction first quarter 2008 december 16 2008 board directors approved restructuring plan 2008 plan designed reduce operating costs plan includes among things winding korea based handset operations korea operations implementing additional worldwide reduction force approximately 10 headcount end second quarter 2009 connection 2008 plan fourth quarter 2008 incurred restructuring charge 131 million comprised largely cash payments associated onetime severance benefits continue efforts evaluate certain operations consider opportunities divest additional noncore assets may incur additional costs associated future actions align business operations streamline business processes revenue effects noncore asset sales restructuring programs sale pcd july 2008 anticipated winding korea operations expected result substantial reduction 2009 net sales 2008 net sales included 8796 million pcd sales recognized first second quarters 2008 prior pcds sale july 1 2008 net sales pcd 2009 net sales 2008 also include 1260 million sales pcd llc third fourth quarters 2008 presently expect korea operations record sales end second quarter 2009 net sales pcd korea operations 2008 aggregated 4307 million 4489 million 343 million 917 million first second third fourth quarters respectively divestiture msbu operations expected material effect 2009 net sales asset impairment performed tests recoverability longlived assets december 31 2008 due recurring operating losses continuing challenging business environment sustained decline stock price estimates future cash flows business segments indicated inability recover carrying values segments assets result analysis recorded impairment charge 223 million reduce carrying value equipment furniture software automobiles leasehold improvements estimated fair values addition recorded impairment charge 49 million writeoff customer relationships intangible assets related previous acquisition 2003 commworks division 3com corporation commworks result decision fourth quarter fiscal 2008 disband custom solutions business unit provided customized telecommunications solutions quarter ended september 30 2007 announced new organization structure align business segments corporate strategy result fourth quarter 2007 performed impairment tests goodwill certain longlived tangible intangible assets based upon impairment assessments recorded goodwill impairment charge 31 million intangible asset impairment charge 157 million impairment charge 11 million equipment furniture software automobiles leasehold improvements see note 8 notes consolidated financial statements included part ii item 8 annual report form 10k sale investments first quarter 2008 sold remaining investment gemdale co ltd gemdale approximately 329 million recognized gain 324 million income expense net also sold investment infinera corporation infinera approximately 92 million recognized gain 73 million income expense net decline pas business anticipated refocus pas operations pas handset units sold china declined 36 million units 2008 compared 48 million units 2007 25 volume decline primarily attributed lower demand pas handsets resulting decline pas subscribers service providers reduced marketing efforts pas handsets anticipation next generation technology networks restructuring china telecommunication industry average selling price per unit pas products declined 94 2008 compared 2007 due competitive pricing pressures increased sales distributor channels china government recently announced pas phased 2011 2009 beyond expect declines pas subscribers price erosion gross margin deterioration pas handset sales china telecommunication industry transitions 3g mobile service offerings recognition anticipated changes service mobile customers china expect transition handset capabilities china manufacture cdma tdscdma handsets sale china market believe positively contribute revenue well partially offset decline pas business china capitalize growing data business china mid2009 also plan introduce hsdpa high speed downlink packet access data cards supported tdscdma network evdo evolution data cards supported cdma 3g network expect relatively higher gross margin average selling prices potential effects current global economic conditions sales operations liquidity disruptions orderly financial markets recent months resulting among factors severely diminished liquidity credit availability plus volatile declining valuations securities investments caused business consumer confidence ebb business activities slowdown unemployment increase factors along interconnectivity interdependency international economies created global downturn economic activity sufficiently without precedent governments many leading nations taken actions designed counter worst effects severity current economic conditions business sensitive changes general economic conditions believe 2008 results reflect potential impacts global economic downturn could sales operations liquidity part substantially revenues related cost net sales recognized 2008 broadband infrastructure multimedia communication service segments result longterm contracts entered global economic downturn performance occurs several years additionally revenues recognized 2008 segments results equipment delivered andor services performed earlier years generally accepted accounting principles often require deferral revenue recognition related complex contracts period equipment delivered installed later periods obligations pursuant related contract satisfied criteria revenue recognition met including receipt customers final acceptance equipment installation services unable predict long economic downturn last continuing economic downturn may adversely impact business number ways •reduced demand products services period economic uncertainty customers may adopt strategy deferring purchases upgrade existing deploy new systems later periods recoverability investment becomes assured addition customers must finance capital expenditures issuance debt equity securities may find securities markets unavailable •increased pricing pressure lower margins competitors include number global enterprises relatively greater size terms revenues working capital financial resources number employees customers telecommunication service providers typically owned controlled sponsored governments size potential markets contract due global economic downturn competition available contracts may become intense could require us offer accept pricing payment local content terms less favorable remain competitive cases might unwilling unable compete business competitive pressures make potential opportunity unprofitable us •greater difficulty collecting accounts receivable many telecommunication carrier customers either owned controlled governments changes governments policies concerning authorization funding payments capital expenditures could lengthen cash collection cycle thereby cause liquidity deteriorate additionally vast majority net sales large well capitalized telecommunication carriers sales made distributors customers whose financial resources may subject rapid decline could expose us losing sales delaying revenue recognition accepting greater collection risks due credit quality issues •additional restructuring asset impairment charges unable generate level new contract bookings revenues cash flow contemplated financial plan management forced take action focus business activities align cost structure anticipated revenues actions necessary could result additional restructuring charges andor asset impairment charges recognized 2009 beyond fourth quarter 2008 operating results net sales three months ended december 31 2008 2007 net sales decreased 5652 million 70 2411 million three months ended december 31 2008 compared period 2007 decrease primarily due pcd sold july 2008 three months ended december 31 2007 pcd represented 5597 million net sales disposal msbu immaterial impact net sales net sales excluding pcd msbu decreased 60 million three months ended december 31 2008 compared period 2007 net sales handsets segment increased 789 million 182 mainly due 917 million sales pcd llc fourth quarter 2008 increased sales pcd llc offset decline sales pas handsets china sales pas handsets china 269 million 404 million respectively fourth quarter 2008 2007 multimedia communication segment net sales decreased 401 million 33 three months ended december 31 2008 compared period 2007 mainly due decline pas infrastructure sales continue experience weakening demand partially offset higher rollingstream set top box stb sales broadband infrastructure segment net sales decreased 332 million 64 primarily due lower cpe msan sales service segment net sales increased 18 million 12 primarily due higher international sales segment net sales decreased 130 million 83 due lower ip messaging revenue overall decline csbu revenue three months ended december 31 2008 september 30 2008 net sales increased 33 605 million three months ended december 31 2008 compared third quarter 2008 increase primarily due 574 million increase sales pcd llc handsets segment compared third quarter 2008 multimedia communication segment net sales increased 234 million 40 three months ended december 31 2008 compared third quarter 2008 recognized additional pas infrastructure revenue upon completion projects previously included backlog partially offset decrease ngn sales due recognition major contract third quarter 2008 decrease ngn sales china fourth quarter 2008 broadband infrastructure segment net sales decreased 128 million 41 three months ended december 31 2008 compared third quarter 2008 decrease mainly due lower msan optical product sales recognized larger contracts third quarter 2008 due customer concentration segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts handset sales increased 503 million 70 three months ended december 31 2008 primarily due increased sales pcd llc offset price volume declines pas handsets sold compared third quarter 2008 consistent experience recent quarters increased competition decline pas subscribers resulted lower demand decrease average selling price handsets gross profit three months ended december 31 2008 2007 gross profit 299 million 12 net sales three months ended december 31 2008 compared 1020 million 13 net sales corresponding quarter 2007 overall gross profit decrease absolute dollars primarily due disposition pcd july 2008 accounted 345 million decrease gross profit resulting related decrease net sales gross profit percentage net sales decreased mainly due higher inventory cost increase provision loss contract partially offset impact disposition pcd relatively lower gross profit percentages compared segments gross profit three months ended december 31 2008 includes 16 million contract loss charges relating costs included calculation broadband infrastructure segment gross profit prior periods impact recording priorperiod charge prior current periods material excluding pcd msbu gross profit decreased 379 million 56 three months ended december 31 2008 compared corresponding quarter 2007 gross profit percentage net sales broadband infrastructure segment negative primarily due higher inventory reserve 71 million related optical product sales china 2008 loss contract provisions 99 million 73 million recorded three months ended december 31 2008 2007 respectively gross profit percentage net sales multimedia communications segment improved 42 three months ended december 31 2008 compared 35 period 2007 mainly due one time inventory writeoff related stb sales china 2007 gross profit percentage net sales handsets segment decreased 1 three months ended december 31 2008 27 period 2007 mainly due increased sales lower margin handsets pcd llc beginning july 2008 well continued increase pricing pressure pas handsets addition fourth quarter 2008 incurred additional 155 million inventory charge related cancelation order cdma handset model well additional inventory write related gsm handset unit china gross profit service segment improved percentage net sales absolute dollars due increase international sales secured higher profit margin gross profit segment decreased percentage net sales absolute dollars primarily due overall decline csbu revenue three months ended december 31 2008 september 30 2008 gross profit 299 million 12 net sales three months ended december 31 2008 compared 573 million 32 net sales third quarter 2008 overall gross profit percentage sales decreased 20 percentage points due primarily 99 million additional loss contract provision broadband infrastructure segment recorded three months ended december 31 2008 compared 20 million third quarter 2008 well 155 million additional inventory charge related cancelation order cdma handset model inventory write related gsm handset unit china three months ended december 31 2008 addition recognized higher margin ngn sales multimedia infrastructure segment three months ended september 30 2008 results operations fourth quarter 2007 announced new organization structure align business units corporate strategy new organization structure changed reporting segments measure performance allocates resources effective october 1 2007 new reporting segments follows •multimedia communications •broadband infrastructure •handsets •services •personal communications division pcd •other includes mobile solutions business unit msbu custom solutions business unit csbu multimedia communications segment responsible development management internet protocol television iptv related technologies plus core next generation network ngn software personal access system pas infrastructure wireless systems teams also part segment broadband infrastructure segment responsible software hardware products enable end users access highspeed cost effective wireline data voice media communication handsets segment designs builds sells consumer handset devices allow customers access wireless services handsets segment included handset revenues within china including pas handsets following disposition pcd july 2008 handsets segment also includes korea based handset operations whose principal activity supplying handsets pcd llc support growth operation installed base system solutions professional services business utstarcom services globallydeployed experts assist customers activities ranging network planning circuittopacket network migration planning systems integration program management operations management support knowledge transfer july 1 2008 sold personal communications division see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k prior july 1 2008 pcd sold supported handsets pas handsets mainly united states included segment msbu csbu july 31 2008 sold msbu responsible development sales service wireless ipcdmaipgsm product line fourth quarter 2008 announced csbu disbanded first quarter 2009 wind certain products consolidation voice messaging technology multimedia communications segment csbu historically responsible development sales service noncore products ip messaging transaction gateways remote access server ras enables users access network data services remote locations packet data services node pdsn product line connects cdma cellular network infrastructure equipment ip networks net sales fiscal 2008 vs 2007 net sales decreased 34 8265 million 2008 compared 2007 revenue lower segments except handsets services decrease primarily due pcd sold july 2008 net sales disposed pcd segment decreased 7846 million multimedia communications segment net sales decreased 351 million 11 2008 compared 2007 mainly due continued weakening demand pas infrastructure products broadband infrastructure segment net sales decreased 463 million 29 2008 compared 2007 decrease mainly due lower cpe msan sales due customer concentration segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts handsets sales increased 531 million 23 2008 primarily due handsets sold pcd llc aggregating 1260 million second half 2008 partially offset continued price volume declines pas handsets sold 2008 compared 2007 experiencing recent quarters increased competition decline pas subscribers resulted lower demand decreases average selling prices pas handsets additional discussion see segment reporting section item 7 economic uncertainty operating today could adversely impact business however majority business based china indiatwo countries still projected economic growth 2009 beyond expect new orders pas handsets infrastructure equipment continue decline due china telecommunications industry restructuring well increased pricing pressures expect cdma tdscdma handsets positively contribute revenue partially offset decline pas business order capitalize growing data business china mid2009 also plan introduce hsdpa high speed downlink packet access data cards supported tdscdma networks evdo evolution data cards supported cdma 3g networks expect relatively higher gross margins average selling prices however anticipate sales fully offset expected decline pas handsets infrastructure sales currently offer initial market acceptance iptv products china india taiwan geographic regions believe iptv market presents meaningful growth opportunity regions well regions targeted expand iptv offerings 2008 verizon wireless sprint spectrum respectively accounted approximately 20 12 total net sales fiscal 2007 vs 2006 net sales 2007 25 billion change significantly consolidated basis compared net sales 2006 revenue lower segments except pcd services revenue broadband infrastructure multimedia communications segments decreased 22 28 respectively 2007 compared 2006 due decrease demand caused continued maturity pas market customers china preparing 3g launch well decrease demand softbank experienced last two years pasipas products pasipas based handsets china market continued experience declining revenues resulting lower unit demand pricing pressures led decrease handsets segment sales 41 2007 compared 2006 pcd segment increase number units sold higher average selling price 2007 compared 2006 led 24 increase segment revenue services segment increased 8 due increase sales china operations signed new contracts multimedia communications products second half 2007 sales segment increased 23 due increase sales custom solutions ipcdma products 2007 verizon wireless tmobile usa sprint spectrum respectively accounted approximately 22 15 13 total net sales gross profit cost sales consists primarily material labor costs associated manufacturing assembly testing products costs associated installation customer training warranty costs fees agents inventory contract loss provisions overhead cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers manufacture assemble cdma handsets gross profit affected average selling prices material costs product mix impact warranty charges contract loss provisions well inventory reserves release deferred revenues related costs pertaining prior years gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate future result shifts product mix stage product life cycle decreases average selling prices ability reduce cost sales fiscal 2008 vs 2007 gross profit 2612 million 16 net sales 2008 compared 3215 million 13 net sales 2007 overall gross profit decrease absolute dollars primarily due disposition pcd july 2008 inventory charge related cancellation order cdma handset model higher loss contract provision broadband infrastructure segment well lower volume gross margin percentage pas handset sales decrease offset increased sales higher margin products multimedia communications services segments well 51 million supplier rebate recognized 2008 overall gross profit percentage sales increased mainly due disposition pcd july 2008 relatively lower gross profit percentages compared segments gross profit 2008 includes 34 million contract loss charges relating costs included calculation broadband infrastructure segment gross profit prior periods impact recording priorperiod charges prior current periods material excluding pcd msbu gross profit 1884 million 25 net sales 2008 compared 2221 million 28 2007 additional discussion see segment reporting section item 7 fiscal 2007 vs 2006 gross profit 3215 million 13 net sales 2007 compared 3857 million 16 net sales 2006 gross profit dollars decreased 643 million due decline sales multimedia communications handsets segments gross profit percentage declined 16 2006 13 2007 lower margin pcd sales represented 67 total sales 2007 compared 55 2006 gross profit gross profit percentages 2007 also negatively impacted additional inventory reserves 62 million additional contract loss fixed price infrastructure deployment contract operating expenses income following table summarizes operating expenses selling general administrative expenses sga include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs research development expenses consist primarily compensation benefits employees engaged research design development activities costs parts prototypes equipment depreciation third party development expenses believe continued prudent investment research development critical longterm success aggressively evaluate appropriate investment levels portion costs fixed difficult quickly reduce periods lower sales selling general administrative fiscal 2008 vs 2007 sga expenses 2576 million 2008 decrease 19 compared 3191 million 2007 decrease 615 million 149 million related disposal pcd msbu july 2008 decrease also due 157 million decrease legal accounting fees result reduced activity investigations litigation 76 million savings reduction use outside services primarily due accounting restatement 2007 implementation upgrade oracle system 71 million decrease personnel related expenses bonuses due continuous streamlining operations recent cost reduction measures 32 million decrease due deconsolidation variable interest entity certain fixed assets fully amortized early 2008 23 million decrease advertising marketing expense due reduced sales activities 23 million reduction commission expense due decrease overall revenue 25 million decrease tax licenses due reduced business taxes china resulting tax refund government 18 million decrease travel related expenses due reduced travel activity cost containment efforts decrease partially offset 31 million decrease recovery bad debt 2008 fiscal 2007 vs 2006 selling general administrative expenses 3191 million 2007 decrease 5 compared 3345 million 2006 expenses percentage net sales 13 14 2007 2006 respectively decrease primarily attributable 97 million cost savings resulting reduction use outside consultants contractors transferred associated projects internal staff 23 million reduction travel expenses 32 million reduction facility related expenses reduced leased area decreases partially offset 11 million decrease recovery bad debt 81 million increase professional fees primarily related various legal proceedings investigations restatements 27 million charge related fixed assets related upgrade oracle system 2006 selling general administrative expenses included charge 79 million vat expense resulting audit 2003 2005 tax years china tax authorities 47 million writeoff net assets connection termination joint venture 2006 research development fiscal 2008 vs 2007 rd expenses decreased 250 million 2008 compared 2007 second half 2008 sold pcd msbu resulted aggregated rd savings 83 million addition decrease also attributed 116 million decrease personnel related expenses continued transfer rd functions united states china reduced spending noncore business units 23 million decrease depreciation 20 million decrease software license expense continued streamline operations well 20 million decrease related recognition sale patent 2008 offset increase 19 million consulting testing expense related new handset introductions 2008 fiscal 2007 vs 2006 rd expenses 1683 million 1829 million 7 net sales 2007 2006 absolute dollars rd expenses decreased 146 million primarily due decrease equipment parts depreciation costs 96 million writedown rd equipment prior periods decrease personnel expenses including payroll taxes benefits totaling 61 million resulting decreased headcount addition decrease rd expenses also attributable 25 million cost savings resulting decreased use outside services savings partially offset 14 million increase stockbased compensation stockbased compensation expense december 31 2008 approximately 221 million total unrecognized compensation cost measured related nonvested stock options restricted stock restricted stock units expected recognized weightedaverage period 23 years following table summarizes stockbased compensation expense consolidated statement operations fiscal 2008 vs 2007 increase level stockbased compensation 2008 compared 2007 primarily due recognition expense 2008 awards granted fourth quarter 2007 2008 including annual merit equity awards granted november 2007 february 2008 compared period 2007 awards granted delinquent filing reports sec 2008 stockbased compensation expense attributable selling general administrative includes approximately 15 million resulting award modifications related retirement one companys executives fourth quarter 2008 includes charge 25 million relating prior periods resulting correction forfeiture rate application impact recording priorperiod charge prior current periods material fiscal 2007 vs 2006 decline level stock compensation 2007 compared 2006 attributable timing equity grants subject accounting sfas 123r well decline stock price unable grant new equity grants 2007 october 2007 due inability file periodic financial reports required sec extent compensation related older equity grants becomes fully recognized replaced compensation attributable new equity grants experience decline overall stock compensation expense amortization intangible assets fiscal 2008 vs 2007 amortization intangible assets 41 million 2008 compared 160 million 2007 amortization intangible assets declined primarily due impairment intangible assets carrying value 157 million fourth quarter 2007 disposition intangible assets carrying value 158 million third quarter 2008 connection sale pcd due fact several intangible assets became fully amortized preceding twelve months fiscal 2007 vs 2006 amortization intangible assets 160 million 2007 compared 189 million 2006 amortization intangible assets declined several intangible assets became fully amortized preceding twelve months asset impairment fiscal 2008 performed recoverability test property plant equipment assets december 31 2008 due recurring operating losses continuing challenging business environment sustained decline companys stock price estimates future cash flows developed 2009 budgeting process indicated business segments inability recover carrying value segments assets made various estimates management believes reasonable appropriate determining estimated fair values property plant equipment december 31 2008 concluding fair values also considered part results appraisals made december 31 2008 valuation firms fair value facility hangzhou china certain equipment furniture software automobiles leasehold improvements obtained confirm reasonableness estimates significant longlived asset terms carrying value manufacturing research development administrative offices facility hangzhou china using income capitalization approach determined estimated fair value facility related improvements december 31 2008 approximately 1832 million exceeded net book value approximately 158 million result concluded headquarters china operations impaired tested individually significant equipment furniture software automobiles leasehold improvement assets located china india japan korea united states impairment primarily using cost approach estimate related fair values adjustment factors applied original cost tested assets first estimate current replacement cost account deterioration obsolescence causes well deinstallation costs determine items estimated fair value december 31 2008 result analysis recorded impairment charge approximately 223 million operating expenses consisted 119 million erp system 67 million equipment furniture 37 million primarily capitalized software believe reasonably possible additional impairment charges would reduce carrying values property plant equipment assets may arise 2009 unable achieve operating results anticipated companys 2009 financial plan addition fourth quarter 2008 decided disband custom solutions business unit provided customized telecommunications solutions recorded charge approximately 49 million writeoff unamortized balance customer relationships intangible asset arising previous acquisition commworks result consolidated balance sheet december 31 2008 contains balances finitelived purchased intangible assets subject amortization fiscal 2007 light current market conditions conducted indepth strategic analysis completed fourth quarter 2007 define new corporate strategy review reevaluated key assumptions overall strategic business manufacturing capacity plans light continued declines revenues excluding pcd appeared persistent result revised near medium term revenue expectations downward significantly taking account persistent weak global industry economic conditions new strategic direction well declines revenues company experienced material changes outlook plans first able quantify fourth quarter 2007 result strategic review 2008 budgeting process triggered impairment review longlived assets based upon 2007 goodwill impairment assessment recorded goodwill impairment charges approximately 31 million year ended december 31 2007 result consolidated balance sheets december 31 2008 2007 contain balances goodwill also determined estimated undiscounted cash flows within segment sufficient recover carrying value certain longlived assets calculated estimated fair values intangible assets subject amortization segment using expected discounted future cash flows recorded asset impairment charge approximately 157 million customer relationships existing technology intangible assets approximate 11 million impairment charge recorded recognize impairment carrying value certain equipment segment well fiscal 2006 record impairment charges related intangible assets property plant equipment circumstances events occurred indicated possible impairment restructuring fiscal 2008 december 16 2008 board directors approved restructuring plan 2008 plan designed reduce operating costs plan includes among things winding certain noncore operations implementing worldwide reduction force approximately 10 headcount reduction force affect approximately 700 employees china korea locations including united states connection 2008 plan fourth quarter 2008 incurred restructuring charge 131 million comprised largely onetime severance benefits expect realize annual cost savings salary compensation related expenses approximately 23 million upon complete implementation 2008 plan fiscal 2007 october 2 2007 board directors approved restructuring plan 2007 plan reduce operating costs included worldwide reduction force approximately 12 headcount workforce reduction primarily united states china incurred restructuring charge connection plan 145 million fourth quarter 2007 comprised largely cash payments associated onetime severance benefits following table shows total amount costs incurred 2008 2007 segment connection restructuring plans december 31 2008 remaining restructuring liability related 2008 plan 2007 plan approximately 87 million 08 million respectively remaining restructuring liability 2008 plan consists primarily 80 million related workforce reduction settled 2009 02 million related lease obligation settled remaining lease term expires 2009 05 million costs remaining restructuring liability 2007 plan consists 08 million related lease obligation settled remaining lease term expires 2010 net gain divestitures fiscal 2008 78 million net gain divestitures 2008 consisted primarily 38 million gain sale pcd 39 million gain sale msbu discussion divestitures see note 3 notes consolidated financial statements contained item 8 annual report form 10k fiscal 2007 vs 2006 february 2006 sold substantially assets selected liabilities semiconductor design operations including assets related prior acquisition advanced communications devices corporation marvell technology group ltd recognized 43 million 123 million gain sale assets 2007 2006 respectively upon achieving defined milestones income expense interest income fiscal 2008 vs 2007 interest income 75 million 145 million 2008 2007 respectively decrease interest income primarily due decrease cash balances available investment due lower interest rates earned 2008 compared 2007 fiscal 2007 vs 2006 interest income 145 million 148 million 2007 2006 respectively decrease mainly due lower interest rates lower average cash balances china partially offset higher yield generated us cash balances remained relatively stable 2007 compared 2006 interest expense fiscal 2008 vs 2007 interest expense 104 million 327 million 2008 2007 respectively decrease interest expense 2008 compared 2007 primarily attributable repayment 2746 million convertible subordinated notes march 1 2008 480 million bank loan repayments 2008 interest expense 2008 included approximately 25 million debt issuance costs related 75 million secured revolving credit facility period january 1 2008 maturity march 1 2008 convertible subordinated notes stated interest rate 10875 accordance second supplemental indenture stated interest rate convertible subordinated notes 7625 january 9 2007 july 25 2007 10875 july 26 2007 december 31 2007 prior january 9 2007 convertible subordinated notes accrued interest 78 per annum fiscal 2007 vs 2006 interest expense 327 million 117 million 2007 2006 respectively increase interest expense 2007 compared 2006 primarily attributable incremental interest expense 22 million resulting first second supplemental indentures associated convertible subordinated notes due 2008 stated interest rate convertible subordinated notes 7625 january 9 2007 july 25 2007 10875 july 26 2007 december 31 2007 prior january 9 2007 convertible subordinated notes accrued interest 78 per annum effective january 9 2007 entered supplemental indenture agreement holders notes providing failure us comply certain provisions original agreement result default event default supplemental indenture agreement stipulated notes accrue additional 675 per annum compared 78 annual interest provided original indenture related notes special interest beginning january 9 2007 maturity date notes unless notes earlier repurchased converted july 26 2007 entered second supplemental indenture receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection consent solicitation announced july 19 2007 second supplemental indenture provided convertible subordinated notes accrue aggregate additional 10 per annum compared 78 annual interest provided original indenture related notes special interest including july 26 2007 march 1 2008 maturity date notes unless notes earlier repurchased converted special interest rate represented increase 325 per annum previous special interest rate 675 per annum first supplemental indenture result second supplemental indenture convertible subordinated notes stated interest rate 10875 income net fiscal 2008 vs 2007 income net 354 million 2008 compared 648 million 2007 income net 2008 consisted primarily 324 million gain sale investment gemdale 73 million gain sale investment infinera 82 million gain liquidation investment variable interest entity offset partially 99 million foreign currency loss 43 million writedowns longterm investments income net 2007 included 537 million gain sale part investment gemdale 57 million gain sale investments immenstar inc immenstar fiberxon inc fiberxon fiscal 2007 vs 2006 income net 648 million 2007 compared 11 million 2006 income net 2007 included 537 million gain sale part investment gemdale 57 million gain sale investments immenstar fiberxon income net 2006 consisted primarily foreign exchange gains 76 million gain sale asset 25 million dividend income 21 million miscellaneous income 24 million partially offset 135 million impairment charge longterm investment income tax expense benefit adopted provisions fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 january 1 2007 fin 48 established criteria recognizing continuing recognize morelikelythannot tax positions may result income tax expense volatility future periods believe adequately provided tax positions amounts asserted taxing authorities could greater accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved fiscal 2008 vs 2007 income tax expense 71 million 2008 compared tax expense 329 million 2007 china corporate income tax law cit law became effective january 1 2008 result enactment new regulations first quarter 2008 address cit law recorded income tax benefit 117 million first quarter 2008 related reversing deferred tax liability foreign withholding taxes related unremitted earnings subsidiaries determined longer permanently reinvested outside united states also accrued 32 million foreign withholding taxes first quarter 2008 related realized gain sale investment gemdale due sale pcd believe generate sufficient income canada realize deferred tax assets canada therefore established valuation allowance remaining net deferred tax assets canada income tax expense associated establishing valuation allowance 18 million without 117 million tax benefit related reversal deferred tax liabilities 32 million tax expense related accrued foreign withholding taxes 18 million tax expense related establishing canada deferred tax asset valuation allowance mentioned tax expense 138 million 2008 two primary reasons tax expense despite incurring pretax losses first provided tax benefit current year losses incurred tax credits generated united states countries believe likely tax benefit associated losses realized second continue accrue tax expense jurisdictions historically profitable 2007 discussed recorded 171 million income tax expense related establishing 117 million deferred tax liability unremitted earnings accruing 54 million withholding taxes related realized gain sale investment gemdale fiscal 2007 vs 2006 income tax expense 329 million 2007 compared tax benefit 150 million 2006 march 16 2007 chinas top legislature national peoples congress passed cit law effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies effectively replaced unified system result enactment new regulations december 2007 address cit law accrued income tax expense 117 million related recording deferred tax liability foreign withholding taxes unremitted earnings subsidiaries determined permanently reinvested outside united states also accrued 54 million foreign withholding taxes related realized gain sale investment gemdale without 171 million foreign withholding taxes tax expense 158 million two primary reasons tax expense despite incurring pretax losses first provide tax benefit current year losses incurred tax credits generated united states countries believed likely tax benefit associated losses would realized second continued accrue tax expense jurisdictions historically profitable 2006 recorded 290 million income tax benefit related settlement tax audit china 2003 2005 tax years utstarcom telecom co ltd huts hangzhou utstarcom telecom co ltd hstc two subsidiaries china acceptance tax holiday hstc segment reporting noted previously fourth quarter 2007 announced new corporate organization align business units corporate strategy make financial decisions based information receive internal management system currently evaluate operating performance allocate resources segments based segment revenue gross profit cost sales direct expenses relation production assigned segments accounting policies used measuring segment assets operating performance used consolidated level multimedia communications fiscal 2008 vs 2007 sales 2008 decreased 11 351 million compared 2007 decrease mainly due lower pas system sales 3g related product sales 2008 exited 3g related product lines early 2007 decrease partially offset higher set top box stb ngn sales worldwide pas system sales decreased 21 contributed approximately 77 multimedia communications sales 2008 compared 87 2007 gross profit percentage increased 45 2008 35 2007 primarily due lower warranty inventory costs well impact reduction 45 million previously accrued third party commissions third quarter 2008 91 million 3g product sales low margins 2007 offset part increased sales lower margin stb products 2008 reduction accrued third party commissions third quarter 2008 resulted determination aged accruals longer needed statute limitations respect unclaimed commissions expired exhausted efforts extinguish liabilities accordance established company procedures expect future pas infrastructure spending decline 2009 beyond china launched 3g networks expect decline new pas infrastructure orders continue plan aggressively pursue opportunities dual mode enterprise pas products ngn products multiple markets however anticipate sales fully offset anticipated decline pas sales 2009 beyond believe iptv market presents meaningful growth opportunity currently offer initial market acceptance iptv products china india taiwan geographic regions fiscal 2007 vs 2006 2007 multimedia communications sales decreased 28 compared 2006 mainly due decrease pas infrastructure sales phase 3g product lines worldwide pas system sales decreased 22 contributed approximately 87 multimedia communications sales 2007 compared 82 2006 new pas system sales china declined continuously since late 2004 carriers transitioned new system installations system expansions pasipas systems reach product maturity china launched 3g networks gross profit percentage sales decreased 46 35 net sales 2007 compared 2006 primarily due higher warranty expenses higher inventory reserves exited certain unprofitable product lines due restructuring plan initiated october 2007 broadband infrastructure fiscal 2008 vs 2007 sales decreased due decline cpe msan product lines softbank japan completed current phase adsl expansion softbank japan represented approximately 23 34 total broadband infrastructure sales 2008 2007 respectively decline partially offset higher sales optical products gross profit decreased 100 million 2008 compared 2007 primarily due approximately 184 million contract loss provisions well approximately 71million increased inventory costs related optical products china 2008 decrease partially offset sale higher margin msan products 2008 gross profit 2008 includes 34 million contract loss charges relating costs included calculation gross profit prior periods 2007 recorded 62 million additional contract loss infrastructure deployment contract may incur additional warranty expense introduce new products may required accrue additional contract losses certain fixed price contracts progress events may negative impacts future gross profits results operations financial position fiscal 2007 vs 2006 largest broadband infrastructure customer softbank japan representing approximately 34 54 total broadband sales 2007 2006 respectively due customer concentration segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts larger customers net sales broadband infrastructure segment decreased 448 million 2007 compared 2006 decrease primarily due lower sales softbank japan softbank completed initial investment fixed line businesses changed focus wireless business following acquisition vodafone japan decrease also due broadband infrastructure net sales 2006 including 312 million revenue order cancellation fees associated cost sales gross profit increased 87 million 2007 compared 2006 primarily due 321 million provision anticipated losses infrastructure deployment contract entered fourth quarter 2006 well additional warranty cost 49 million 2006 additional costs 2006 partially offset gross margin 312 million revenue related cancellation fees related costs sale 2007 recorded 62 million additional contract loss infrastructure deployment contract discussed accepted contract would allow us develop relationship customer consider important international expansion broadband infrastructure business handsets fiscal 2008 vs 2007 net sales increased 23 year 2008 compared periods 2007 majority handset sales historically china experienced decline volume price pas handsets disposition pcd operations july 1 2008 handset sales pcd llc totaled 1260 million contributed approximately 44 total handset sales 2008 pas handset units sold china declined 36 million units 2008 compared 48 million units 2007 25 volume decline primarily attributed lower demand pas handsets resulting decline pas subscribers service providers reduced marketing efforts pas handsets anticipation next generation technology networks restructuring china telecommunication industry average selling price per unit pas products declined 94 2008 compared 2007 due competitive pricing pressures increased sales distributor channels expect continued decline pas subscribers future periods gross profit percentage net sales handsets segment decreased 2008 compared 2007 decrease primarily due losses gsm products reduced inventory older models costs related cancelation order cdma model higher inventory cost pas data card business well continued price erosion decrease demand pas product lines increased sales lower gross margin cdma handsets pcd llc also contributed decline gross profit percentage decrease gross margin partially offset 51 million supplier rebate 2008 2009 beyond expect decline pas subscribers china telecommunication industry reorganizes furthermore expect price erosion gross margin deterioration pas handsets increasing competition however expect cdma tdscdma handsets contribute revenue partially offset decline pas business china capitalize growing data business china mid2009 also plan introduce hsdpa data cards supported tdscdma networks evdo data cards supported cdma 3g networks expect relatively higher gross margins average selling prices addition expect continue focus product cost reduction efforts supply chain improvements rd improvements including outsourcing part product development december 2008 decided wind korea operations sells cdma handsets pcd llc first six months 2009 expect satisfy obligations supplier agreement pcd llc terminated accordance agreement giving 180 days notice termination december 2008 fiscal 2007 vs 2006 handset sales declined 41 2007 compared 2006 decrease net sales primarily attributable declining volume china telecommunications market price erosion resulting reduction subsidies pas handsets service providers competition mobile carriers like china mobile china unicom pas pasgsm dual mode handset unit sales china declined 48 million units 2007 compared 79 million units prior year average selling price pas pasgsm china 2007 423 million compared 477 million 2006 representing 113 decrease gross profit 2007 percentage sales increased 3 percentage points compared 2006 mainly due gross profit contributed non pas handsets gross profit percentage sales pas handsets remained stable compared 2006 due continuous effort cost reduction better inventory management reduction royalty warrantyrelated expenditures services fiscal 2008 vs 2007 services segments revenue external customers increased 9 2008 compared 2007 increase mainly due continued growth china service sales resulting increased service contracts maintenance services value added services previously allocated revenues service segment 78 million multimedia communications 03 million broadband infrastructure segment sales china reclassified respective segments 2007 conform current years segment presentation gross profit increased 17 2007 30 2008 increase primarily due china service sales increases without corresponding increases associated cost utilizing excess capacity fiscal 2007 vs 2006 service segment revenue increased 40 million 8 2007 compared 2006 due increase sales china operations signed new contracts multimedia communication products second half 2007 previously allocated revenues service segment 78 million 97 million multimedia communications 03 million 07 million broadband infrastructure segment sales china reclassified respective segments 2007 2006 respectively conform current years segment presentation increase gross profit 79 million compared 2006 due increased sales china recognition revenue certain nonchina sales orders originated 2006 higher gross margins compared recognized 2006 personal communication devices pcd fiscal 2008 vs 2007 net sales pcd decreased 7846 million compared 2007 due disposition pcd july 1 2008 see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k gross profit increased 6 2007 8 2008 primarily due sales higher margin products 2008 fiscal 2007 vs 2006 net sales pcd 166 billion 2007 increase 24 compared 134 billion 2006 increase primarily due 15 million increase total units sold well 8 increase overall average selling price 2007 sales utstarcom manufactured devices accounted 35 total units sold compared 36 total units sold 2006 gross profit percentage net sales increased 6 2007 compared 3 gross profit net sales 2006 increased gross profit 2007 compared 2006 primarily due higher average selling prices 2007 compared 2006 larger inventory writedowns certain slow moving models 2006 significant benefit gross profit margin 2007 result sales inventory previously reserved excess obsolete fiscal 2008 vs 2007 segment consists mobile solutions msbu custom solutions csbu business units revenue decreased 184 million 43 2008 compared 2007 total 184 million decrease sales 77 million due disposition msbu july 2008 46 million related recognition revenue higher margin product sales 2007 fourth quarter 2008 initiated actions disband csbu gross profit percentage decreased 51 2008 61 2007 decrease primarily due higher inventory reserves higher overhead expenses 2008 offset effect disposition msbu lower gross margin sales fiscal 2007 vs 2006 segment revenue increased 81 million 23 2007 compared 2006 due increase sales custom solutions products related services well ipcdma product line mobile solutions partially offset decrease sales data software products mobile solutions business unit due increased competition ipcdma product line accounted 34 total segment revenue gross profit percentage sales decreased 73 2006 61 2007 mainly due decrease data software sales normally higher gross profit margins related party transactions softbank affiliates recognize revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb support softbanks fibertothehome service sales carrier class gepon product well netring™ product addition support softbanks new internet protocol television iptv sales rollingstream™ product 2008 2007 2006 recognized revenue 383 million 678 million 1308 million respectively sales telecommunications equipment services affiliates softbank included revenue year ended december 31 2006 fee 312 million charged cancellation orders broadband products 100 million charged cancellation orders multimedia communications products included accounts receivable december 31 2008 2007 92 million 262 million respectively related transactions immaterial amounts accounts payable softbank affiliates december 31 2008 2007 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period december 31 2008 2007 customer advance balance related softbank agreements 07 million 03 million respectively current deferred revenue balance related softbank 40 million 56 million december 31 2008 december 31 2007 respectively december 31 2008 noncurrent deferred revenue balance related softbank 92 million compared 101 million december 31 2007 july 17 2003 entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank terms agreement loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements loan subordinated certain senior lenders bb modem repayments paid us 42month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period year ended december 31 2007 2006 recorded immaterial amount 06 million respectively interest income respect loan receivable fully settled first quarter 2007 december 31 2008 softbank beneficially owned approximately 12 outstanding stock audiovox prior sale pcd july 1 2008 phillip christopher one former officers served director audiovox corporation audiovox 2008 2007 2006 paid approximately 08 million 21 million 14 million respectively services provided audiovox liquidity capital resources following sections discuss effects changes balance sheet cash flows contractual obligations commitments liquidity capital resources balance sheet cash flows cash equivalents shortterm investments cash equivalents consisting primarily bank deposits money market funds recorded cost approximates fair value shortterm nature instruments december 31 2008 cash equivalents approximating 2008 million held subsidiaries china chinese government imposes currency exchange controls cash transfers china regulations china permit foreign owned entities freely convert renminbi foreign currency transactions fall current account includes trade related receipts payments interest dividends accordingly chinese subsidiaries may use renminbi purchase foreign exchange settlement current account transactions without preapproval however pursuant applicable regulations foreigninvested enterprises china may pay dividends accumulated profits determined accordance chinese accounting standards regulations calculating accumulated profits foreign investment enterprises china required allocate least 10 accumulated profits year fund certain reserve funds including mandated employee benefits funds unless reserves reached 50 registered capital enterprises transactions involve conversion renminbi foreign currency classified capital account transactions examples capital account transactions include repatriations investments loans foreign owners direct equity investments foreign entity china domiciled entity capital account transactions require prior approval chinas state administration foreign exchange safe provincial branch convert remittance foreign currency us dollars transmit foreign currency outside china result restrictions prc laws regulations china subsidiaries restricted ability transfer portion net assets us parent restricted portion amounted approximately 1861 million 40 total consolidated net assets december 31 2008 believe sufficient noncash assets available meet reserved net assets china restriction none cash balances legally restricted transfer 1278 million decrease cash equivalents 2008 primarily result 3326 million cash used financing activities 552 million cash used operating activities partially offset cash provided investing activities approximately 2460 million 2008 cash flows net cash used operating activities 2008 552 million year ended december 31 2008 operating activities significantly impacted following •net loss 1503 million adjusted gains sale investments 402 million 82 million gain liquidation ownership interest variable interest entity 78 million gain divestitures noncash charges 960 million resulted net use cash 1104 million noncash charges 960 million included 380 million depreciation amortization 206 million stockbased compensation expense 272 million impairment longlived assets 43 million impairment longterm investments 181 million provision deferred costs partially offset recovery doubtful accounts 52 million deferred tax benefit 64 million deferred tax benefit primarily due 117 million benefit resulting change china corporate income tax law offset partially tax expense including 19 million expense related placing valuation allowance canadian deferred tax assets •changes net operating assets liabilities providing net cash 552 million primarily result management working capital part necessitated repayment convertible subordinated notes due march 1 2008 cash operations benefited 589 million decrease accounts receivable 2008 primarily occurred pcd business segment first quarter 2008 due strong collection efforts 1289 million increase accounts payable primarily due timing payments vendors partially offsetting 649 million use cash resulting decrease customer advances due timing bookings related revenue recognition customer advances represent cash deposits received customers orders yet received final acceptance net cash provided investing activities year ended december 31 2008 2460 million included approximately 2141 million net proceeds sale pcd msbu 550 million net proceeds sale investments net purchases 77 million repayment loan variable interest entity partially offset 142 million used purchase property plant equipment 87 million used purchase long term investment interests 82 million change restricted cash net cash used financing activities year ended december 31 2008 3326 million related primarily repayment convertible subordinated notes 2746 million march 1 2008 net repayment 480 million bank loans 2008 2007 cash flows net cash used operating activities 2007 2251 million year ended december 31 2007 operating activities significantly impacted following •net loss 1956 million adjusted gains sale investments 537 million 43 million gain divestiture noncash charges 920 million resulted net use cash 1616 million noncash charges 2007 included 574 million depreciation amortization 128 million stockbased compensation expense 199 million impairment charges longlived assets •changes net operating assets liabilities using net cash 635 million 2007 accounts payable decreased 1720 million due decrease purchases inventory 2007 change timing payments vendors beginning first quarter 2007 comply accelerated vendor payment terms addition deferred revenue decreased 407 million primarily due recognition revenue deferred prior periods assets increased 212 million primarily due advance payments suppliers customer advances decreased 481 million 2007 upon subsequent receipt final acceptances revenue recognition customer advances reduced revenue cost sales recorded customer advances represent cash deposits received customers orders yet received final acceptance cash used operating activities partially offset reduction accounts receivable 939 million inventory 824 million deferred costs 366 million reduction accounts receivable result strong cash collections high percentage revenue 2007 pcd generally experienced shorter collection period related receivables days sales outstanding 48 days december 31 2007 compared 60 days december 31 2006 decrease inventory deferred cost primarily due decrease purchases inventory 2007 net cash provided investing activities 2007 totaled 294 million cash 832 million received proceeds sale shortterm longterm investments 43 million received connection achieving certain milestones related sale certain semiconductor assets 2006 66 million result change restricted cash balances representing release restricted cash outflows investing activities included 379 million purchase shortterm investments well 273 million purchase property plant equipment net cash used financing activities 581 million primarily due net repayment lines credit 616 million 2006 cash flows net cash provided operating activities year ended december 31 2006 629 million year ended december 31 2006 operating activities significantly impacted following •net loss 1173 million adjusted gain divestiture 123 million noncash charges 930 million resulted net use cash 366 million noncash charges 2006 included 680 million depreciation amortization 166 million stockbased compensation expense 135 million otherthantemporary charge related impairment longterm investment net gain sale assets related sale semiconductor design business division marvell technology group ltd •changes net operating assets liabilities providing net cash 995 million cash operating activities positively affected changes accounts receivable deferred costs customer advances partially offset net loss well changes inventories payables current liabilities decrease accounts receivable resulted improved cash collections 2006 compared 2005 provided cash 1331 million days sales outstanding 60 days december 31 2006 compared 66 days outstanding december 31 2005 due strong cash collections fourth quarter 2006 high percentage fourth quarter revenue derived pcd generally experienced shorter collection period related receivables customer advances increased 384 million december 31 2006 decrease payables current liabilities primarily resulted decrease accounts payable 255 million decrease income taxes payable 289 million decrease current liabilities 276 million decrease current liabilities included decreases payroll taxes payable accrued contract costs relate purchase goods services invoices received warranty costs offset 321 million increase current liabilities related loss contract reserve net cash provided investing activities fiscal 2006 totaled 361 million cash inflows investing activities included 360 million received sale semiconductor design operations marvell technology group ltd 40 million net proceeds sale shortterm investments 209 million changes restricted cash used additions property plant equipment totaled 263 million net cash used financing activities 995 million primarily consisting net repayment shortterm borrowings excess new borrowings accounts receivable net following table summarizes accounts receivable net accounts receivable decreased 1725 million primarily result sale pcd 2008 accounts receivable december 31 2007 related pcd approximated 1558 million dso calculated excluding pcd decreased slightly 75 december 31 2008 79 december 31 2007 result continued focus working capital management inventories deferred costs following table summarizes inventories deferred costs inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized inventories decreased approximately 1632 million primarily result sale pcd finished goods inventory december 31 2007 held pcd approximated 1566 million shortterm deferred costs decreased approximately 569 million primarily due timing revenue recognition well reduction deferred costs approximately 138 million resulting sale msbu decrease 155 million longterm deferred costs due revenue recognition longterm contracts debt following table summarizes debt bank loans outstanding december 31 2008 march 2008 repaid convertible subordinated debt 2746 million also repaid 480 million bank loans 2008 december 31 2008 primary source available credit facility china credit facility provides uncollateralized lines credit totaling 733 million 293 million available working capital draws 440 million issuance letters credit corporate guarantees nonworking capital draws credit facility provides additional 1904 million additional borrowing availability subject collateralization 1172 million available working capital draws 732 million available nonworking capital draws december 31 2008 approximately 2190 million available future borrowings china credit facility aggregate 1466 million remained available general working capital purposes 724 million remained available support letters credit corporate guarantees china line credit expires third quarter 2009 january 2009 entered second credit facility china additional 585 million available credit expires december 2009 available lines credit china significantly less available us historically renewed expire within next 12 months fourth quarter 2007 credit facilities china aggregate amount approximately 4817 million matured extinguished able renew approximately 2638 million lines credit third quarter 2008 borrowings certain threshold require collateralization real property china borrowing credit facilities subject banks current favorable opinion credit worthiness china subsidiaries well bank funds available lending chinese banking regulations furthermore previously utilized collateralized credit lines china uncertain whether collateralized credit lines would readily available us significant factor resulting decrease currently available lines credit china reduced profitability china domiciled subsidiaries also believe decrease currently available lines credit china result recent changes banking practices china resulted granting lines credit china banks line us international credit underwriting practices upon expiration third quarter 2009 cannot certain additional lines credit available us commercially reasonable terms march 21 2008 entered credit agreement providing 750 million secured revolving credit facility subject accounts receivable inventory borrowing base formula used second quarter 2008 fund general working capital requirements quarter repaid outstanding borrowings credit agreement june 30 2008 connection agreement sale pcd terminated commitments credit agreement liquidity incurred net losses 1503 million 1956 million 1173 million years ended december 31 2008 2007 2006 respectively recorded operating losses 15 16 consecutive quarters period ended december 31 2008 december 31 2008 accumulated deficit 8415 million incurred net cash outflows operations 552 million 2251 million 2008 2007 respectively expect continue incur losses negative cash flows operations least next four quarters december 31 2008 cash equivalents 3096 million 2008 million held subsidiaries china amount cash available transfer china subsidiaries use nonchina subsidiaries limited liquidity needs subsidiaries china chinesegovernment mandated limitations including currency exchange controls transfers funds outside china subsidiaries paid aggregate 150 million dividends us parent company year ended december 31 2007 another 100 million february 2008 cash transfers offset eliminated preparing consolidated cash flow statements principal source funding nonchina operations periods made february 2009 china subsidiaries paid additional 50 million dividends us parent company additional cash dividends china based subsidiaries us parent company may necessary fund nonchina cash requirements 2009 however going forward amount cash available transfer china subsidiaries limited liquidity needs subsidiaries china chinesegovernment mandated requirements including currency exchange controls transfers funds outside china currently committed credit sources credit facilities china december 31 2008 credit facilities aggregated 2638 million 1466 million available working capital purposes remaining 1172 million restricted use trade financing credit facilities require compliance financial covenants require collateralization working capital draws excess 293 million trade financing draws excess 440 million bank providing principal credit line added requirement borrowings amounts secured manufacturing research development administrative offices facility hangzhou china credit line renewed third quarter 2008 december 31 2008 2190 million total credit facilities remained available credit agreements usage principal credit line reached levels would require collateral furthermore borrowing credit facilities subject banks current favorable opinion credit worthiness china subsidiaries banks funds available lending chinese banking regulations principal credit facility expires third quarter 2009 based upon recent financial performance financial position believe bank may reduce total available credit facility negotiate renewal accordingly cannot certain borrowings credit facilities china adequate meet financing requirements 2008 took number actions improve liquidity march 2008 paid 2895 million retire convertible subordinated notes related accrued interest july 1 2008 completed sale pcd proceeds 2191 million addition divested mobile solutions business unit july 2008 fourth quarter 2008 management initiated actions disband customs solutions business unit wind korea based handset operations result actions restructuring initiatives undertaken management yeartoyear quarterly selling general administrative research development operating expenses reduced 3540 december 2008 management announced initiatives including efforts eliminate functional duplications consolidation number key functions china operations management believes initiatives executed successfully help achieve significant operating expense reductions fourth quarter 2009 enable fixed cost base better aligned operations market demand projected sales levels management expects increase significantly latter half 2009 compared first two quarters 2009 uncertainties sales levels may achieved 2009 heightened recent market turmoil global economic downturn level sales anticipated financial plan materialize need take actions reduce costs expenses explore cost reduction options management believes able achieve projected sales levels 2009 contain expenses cash used operations levels contemplated 2009 financial plan china nonchina operations sufficient liquidity finance working capital expenditure needs next 12 months able execute 2009 financial plan successfully may need obtain funds equity debt financings assurance additional financing required available terms satisfactory us funds raised future issuance preferred stock debt securities could rights privileges preference senior common stock newly issued debt could contain debt covenants impose restrictions operations sale newly issued debt equity securities could result additional dilution current shareholders recently global economies experienced significant downturn driven financial credit crisis continue challenge economies period time current macroeconomic environment significant risks uncertainties inherent managements ability forecast future results operating environment confronting us internally externally raises significant uncertainties improvements operating results cash flows liquidity anticipated 2009 financial plan managements initiatives control reduce costs maintaining growing revenue base fully implemented recurring losses expected negative cash flows operations raise substantial doubt ability continue going concern independent registered public accounting firm included explanatory paragraph highlighting uncertainty report independent registered public accounting firm dated march 2 2009 included part ii item 8 financial statements supplementary data annual report form 10k consolidated financial statements include adjustments relating recoverability classification recorded assets amounts classification liabilities adjustments may necessary entity unable continue going concern income taxes certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises including full exemption national enterprise income tax two years starting first profitmaking year andor 50 reduction national income tax rate following three years addition local enterprise income tax often waived reduced tax holidayincentive period current regulations china foreign investment enterprises accredited technologically advanced enterprises entitled additional tax incentives tax incentives vary different locales could include preferential national enterprise income tax treatment 50 usual rates different periods time tax holidaysincentives discussed applicable companys active subsidiaries china utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc entities may qualify accredited technologically advanced enterprises march 16 2007 chinas top legislature national peoples congress passed china corporate income tax law cit law cit law became effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises prior change tax law certain subsidiaries joint ventures located china enjoyed tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable cuts huts utsc active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law targets certain industries reduced 15 tax rate certain qualified high technology enterprises fies established promulgation new law currently enjoy lower tax rates increase tax rates would gradually phased five years fourth quarter 2008 two china subsidiaries huts utsc approved reduced 15 tax rate approval lasts three years retroactive january 1 2008 chinese central government may review audit tax benefits granted local provincial authorities could determine disallow benefits certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises tax benefits reduced disallowed repealed due changes tax laws determination chinese government business could suffer balance sheet arrangements december 31 2008 2007 balance sheet arrangements contractual obligations commercial commitments obligations contractual obligations commercial commitments primarily regard leasing arrangements standby letters credit follows december 31 2008 operating leases lease certain facilities noncancelable operating leases expire various dates 2013 letters credit issue standby letters credit primarily support international sales activities outside china support purchase commitments submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six twelve months date issuance without drawn beneficiary thereof purchase commitments obligated purchase raw materials workinprocess inventory various orders various suppliers fulfilled without adverse consequences material operations financial condition purchase commitments table exclude agreements cancelable without penalty cancelable purchase commitments approximating 993 million december 31 2008 additionally agreed purchase marvell certain chip sets included 50 100 pas handsets 2011 accounts receivable transferred notes receivable accept bank notes commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months bank notes included shortterm investments commercial notes receivable available sale 111 million 126 million december 31 2008 2007 respectively may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes sold included consolidated balance sheets criteria sale treatment established sfas 140 accounting transfers servicing financial assets extinguishment liabilities met notes receivable sold 2008 2007 intellectual property certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products uncertain tax positions effective january 1 2007 adopted provisions fin 48 december 31 2008 gross unrecognized tax benefits totaled 928 million included long term liabilities net certain deferred tax assets federal tax benefit state income tax items totaling 821 million recognized portion gross unrecognized tax benefits would decrease provision income taxes increase net income approximately 107 million included amounts table contractual obligations commercial commitments difficulty making reasonably reliable estimates timing cash settlements respective taxing authorities third party commissions record accruals commissions payable third parties normal course business commissions recorded based terms contracts us third parties paid pursuant contracts consistent accounting policies commissions recorded operating expense period liability incurred december 31 2008 approximately 63 million accrued commissions claimed third parties three years management performed continues perform followup procedures respect accrued commissions upon completion followup procedures accrued commissions claimed statute limitations expired reasonable period time elapsed reduce accruals reduction recorded statement operations period management determines certain accruals longer necessary year ended december 31 2008 reduced approximately 45 million accrued commissions payable reduction recorded cost net sales years ended december 31 2007 2006 significant accruals related third party commissions reversed critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements governed emerging issues task force issue eitf 0021 revenue arrangements multiple deliverables sec staff accounting bulletin 104 revenue recognition multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery installation equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position sop 972 software revenue recognition amended eitf 0305 applicability statement position 972 nonsoftware deliverables arrangement containing morethanincidental software allocate revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element postcontract support established vsoe contract element accordingly revenues contracts recognized ratably period post contract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support review assumptions regarding estimated postcontract support periods regular basis determine necessary revise estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding postcontract support periods different original assumptions contract revenues would recognized remaining expected period support revenue fixed priced contracts include requirement significant software modification customization recognized accordance sop 811 accounting performance constructiontype certain productiontype contracts instances account contracts using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2008 2007 2006 recorded 184 million 62 million 321 million contract loss fixed price contract respectively recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term revenues services less 10 revenues periods presented also sell products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance sfas 48 revenue recognition right return exists cases developed reasonable estimates stock exchanges based historical experience similar types sales similar products sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material estimate amount rebate based upon terms individual arrangement historical experience future expectations price reductions record estimate rebate amount time sale also enter sales incentive programs comarketing arrangements certain wireless handset customers record incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized assess collectability based number factors including payment history credit worthiness customer request collateral customers international sales may require letters credit customers drawn demand customer defaults payment determine collection payment reasonably assured defer revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally enter revenue sharing arrangements collect payment customer telecommunications service provider collects service revenues enter revenue sharing arrangement recognize revenue collection reasonably assured nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained restructuring liabilities litigation contingencies account companys restructuring plans statement financial accounting standards 146 accounting costs associated exit disposal activities sfas 146 statement financial accounting standards 112 employers accounting postemployment benefits sfas 112 account litigation contingencies accordance statement financial accounting standards 5 accounting contingencies sfas 5 sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated stockbased compensation statement financial accounting standards 123 revised 2004 sharebased payment sfas 123r requires measurement recognition compensation expense sharebased payment awards made employees directors based estimated fair values sfas 123r requires companies estimate fair value share based payment awards using optionpricing model value awards ultimately expected vest recognized expense requisite service periods consolidated statements operations stockbased compensation expense recognized consolidated statements operations years presented includes compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions sfas 123 compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected term sharebased payment awards stock volatility estimate expected term options granted based historical exercise cancellation data vested options use historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options companys common stock available determine implied volatility assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties compensation expense could materially different future changes subjective assumptions materially affect estimated value managements opinion existing valuation models may provide accurate measure fair value companys employee stock options addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period product warranty provide warranty equipment handset sales period generally ranging one two years time final acceptance rarely entered arrangements provide limited warranty services periods longer two years provide expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate time may subject additional costs related nonstandard warranty claims customers occurs estimate additional accruals based historical experience communication customers various assumptions believe reasonable circumstances additional warranty accruals recorded period additional costs identified variable interest entities financial accounting standards board fasb issued fasb interpretation 46r fin 46r fin 46r requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity evaluate investments periodically triggering events occur application fin 46r receivables although evaluate customer credit worthiness prior sale provide allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured assess collectability receivables based number factors including analysis creditworthiness customers historical payment history current economic conditions ability collect payment length time individual receivable balance outstanding policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging accounts receivable applying percentage based historical experience approach results allowance computed based aging receivables evaluate percentages applied category aged accounts receivable periodically based actual history writeoffs collections refines formulabased approach accordingly use future periods certain accounts receivable china outstanding significant period time provide allowances receivables based criteria discussed believe sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations use actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting except pcd utilized weighted average method accounting approximates fifo net writedowns excess slow moving obsolete inventory writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs stated cost periodically assess recoverability deferred costs provide reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites contract specific individual customers financial conditions specific individual customers may result increased concentration risk exposure inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset per accounting research bulletin 43 working capital current assets current liabilities research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain july 2006 financial accounting standards board fasb issued interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 requires income tax positions meet morelikelythannot recognition threshold recognized financial statements fin 48 tax positions previously failed meet morelikelythannot threshold recognized first subsequent financial reporting period threshold met previously recognized tax positions longer meet morelikelythannot threshold derecognized first subsequent financial reporting period threshold longer met recognize interest expense penalties related income tax matters part provision income taxes adopted fin 48 january 1 2007 prior 2007 established reserves taxrelated uncertainties based estimates whether extent additional taxes interest due recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results managements assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary record valuation allowance reduce deferred tax assets amount management believes likely realized 2006 due developments business repatriations cash via dividends settlements intercompany accounts described note 1 notes consolidated financial statements made determination earnings certain subsidiaries permanently reinvested outside united states provide us taxes foreign undistributed earnings considered permanently reinvested outside united states longlived assets including finitelived purchased intangible assets amortize purchased intangible assets finite lives estimated economic lives assets purchased intangible assets carried cost less accumulated amortization assess recoverability longlived assets determining whether carrying value assets recovered undiscounted future cash flows asset impairments primarily consist intangible assets finite lives property plant equipment based estimate amounts timing future cash flows related expected future remaining use ultimate sale disposal property plant equipment net costs sell 2008 incurred 49 million 223 million intangible assets property plant equipment impairment charges respectively 2007 incurred 157 million 11 million intangible assets property plant equipment impairment charges respectively process evaluating potential impairment longlived assets highly subjective requires significant judgment order estimate fair value longlived assets typically make various assumptions future prospects business asset relates consider market factors specific business estimate future cash flows generated business based assumptions estimates determine whether need recognize impairment charge reduce value asset stated balance sheet reflect estimated fair value assumptions estimates future values remaining useful lives complex often subjective affected variety factors including external factors real estate market industry economic trends internal factors changes business strategy internal forecasts although believe assumptions estimates made past reasonable appropriate changes assumptions estimates could materially impact reported financial results investments account investments debt equity securities statement financial accounting standards sfas 115 accounting certain investments debt equity securities fasb staff position fsp sfas 1151 meaning otherthantemporary impairment application certain investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date follow guidance provided eitf 031 meaning otherthantemporary impairment application certain investments assess whether investments unrealized loss positions otherthantemporarily impaired realized gains losses declines value judged temporary determined based specific identification method reported statements operations also made strategic investments publicly traded privately held companies promotion business strategic objectives investments publicly traded equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value comprehensive income investments equity securities nonpublicly traded companies hold less 20 voting interest ability exercise significant influence accounted cost method cost method investments carried lower cost fair value recognize impairment charge decline fair value publicly traded equity securities costmethod investments cost basis judged otherthantemporary significant judgment used identify events circumstances would likely significant adverse effect future use investment consider various factors determining whether impairment otherthantemporary including severity duration impairment forecasted recovery financial condition nearterm prospects investee ability intent hold investment period time sufficient allow anticipated recovery market value recent accounting pronouncements see note 2 notes consolidated financial statements contained item 8 annual report form 10k full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations forwardlooking statements annual report form 10k contains forwardlooking statements regarding future events future results subject safe harbors created securities act 1933 securities exchange act 1934 forwardlooking statements based current expectations estimates forecasts projections us future performance industries operate well managements assumptions beliefs statements relate among things business expectations regarding contract awards telecom carriers plan expand market position internet protocolbased broadband products expectations regarding growth rates telecom capital expenditure budgets certain geographic regions plan grow certain geographic regions expectations regarding growth certain segments uncertainties obtaining future contracts india intention make significant investment research development expectations regarding relationship beijing development authority expectations regarding pas iptv markets plans expected financial results expectations efforts streamline operations new accounting pronouncements liquidity access credit facilities cash china subsidiary terms completion proposed reorganization change place incorporation manner conduct business following completion reorganization utstarcom caymans qualification foreign private issuer reduction operating expenses resulting therefrom listing utstarcom caymans ordinary shares nasdaq stock market statements contain words like expects anticipates may targets projects intends plans believes seeks estimates variations words similar expressions also forwardlooking statements readers cautioned forwardlooking statements predictions subject risks uncertainties related among things ability execute business plan implement certain restructuring actions chinas control currency exchanges decline pas market ongoing litigation ability introduce deploy internet protocolbased technologies products ability satisfy certain security supply chain standards india impact economic andor political risks asia customers investment decisions number competitors composition competitors additional warranty expense inventory reserves availability future financing ability parties reorganization consummate proposed transaction satisfaction closing conditions consummate transaction obtaining requisite approvals including companys stockholders ability utstarcom cayman qualify maintain status foreign private issuer companys ability realize anticipated reduction operating expenses items discussed part item 1a risk factors form 10k therefore actual results may differ materially adversely expressed forwardlooking statements guarantee future results actual results developments business decisions may differ contemplated forwardlooking statements undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k overview one leading provider ipbased network solutions including integration support services iptv interactive id tv internet tv broadband cable telecom operators focus design sell ipbased telecommunications infrastructure products including primary product suite iptv broadband solutions along ongoing services relating installation operation maintenance products collectively range solutions designed expand modernize telecommunications networks smooth network system integration lower operating costs increased broadband access also provide carriers increased revenue opportunities enhancing subscribers user experience majority business based china japan india asia markets also continue maintain presence selective markets latin america europe differentiate products designed reduce network complexity integrate high performance capabilities allow simple transition next generation networks design products facilitate costeffective efficient deployment maintenance upgrades products ipbased customers easily integrate products industry standard hardware software additionally believe introduce new features enhancements costeffectively added customers existing networks ipbased devices changed upgraded modules saving customers expense replacing entire system installation strategic priorities summarized follows •focus primarily providing suite ipbased solutions including main product suite comprised iptv broadband products related services •maintain leadership position china india solidifying presence selective geographical markets asia •leverage strong reputation telecom carriers ability solve complex network problems •improve financial position executing announced restructuring initiatives reducing operating expense levels october 2010 announced several critical shifts business strategy including increased focus chinese asian markets pursuit telecom cable network customers parallel using expertise building operating technology service platforms iptv internet tv sell endtoend solutions service providers sale leaseback transaction early termination hangzhou building december 2009 entered property transfer leaseback agreement sale leaseback agreement sale manufacturing research development administrative office facility hangzhou china hangzhou facility third party proceeds approximately 1388 million leaseback approximately onethird property 2016 may 31 2010 received sales proceeds met criteria consummation sale hangzhou facility may 31 2010 buyer us agreed conditions precedent closing met leaseback commenced june 1 2010 december 8 formally notified landlord decision early terminate lease june 2011the termination clause requires company pay total penalties 95 million termination penalty charge 13 million recorded december 2010 result full termination penalty set release deferred gain deferred rental liabilities portion would normally amortized next six month period june 8 2011 early termination december 31 2010 company net balance 40 million related early termination penalty recorded liabilities consists 95 million total penalty less prepaid rent security deposit paid second quarter 2010 see note 6 notes consolidated financial statements included part ii item 8 annual report form 10k divestitures july 1 2008 sold utstarcom personal communications llc whollyowned subsidiary company pcd entity controlled aig global investment group certain investors total sale consideration approximately 2377 million additionally july 31 2008 completed divestiture mobile solutions business unit msbu global private equity firm july 31 2009 completed sale korea operations entity founded former employee received total consideration approximately 20 million january 2010 completed sale certain assets liabilities related remote access server ras product line received total consideration approximately 15 million june 2010 completed sale ip messaging us pdsn assets located north america caribbean latin america regions part multimedia communications segment received consideration approximately 09 million december 31 2010 september 2010 entered agreement transfer emea europe middle east africa operations consideration third quarter 2010 recognized expenses approximately 09 million divestiture loss obligations primarily arising local statutory requirements severance fund transferred employees miscellaneous operational costs third quarter 2010 completed sale china pdsn assets recorded gain 16 million see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k restructuring programs june 9 2009 board directors approved restructuring plan 2009 restructuring plan designed reduce operating costs 2009 restructuring plan includes worldwide reduction force approximately 50 headcount approximately 2300 employees located primarily china united states lesser degree international locations 2010 recorded restructuring costs approximately 157 million related 2009 restructuring plan prior year restructuring plans continue efforts evaluate certain operations consider opportunities divest additional noncore assets may incur additional costs associated future actions align business operations streamline business processes investments first quarter 2008 sold remaining investment gemdale co ltd gemdale approximately 329 million recognized gain 324 million income net also sold investment infinera corporation infinera approximately 92 million recognized gain 73 million income net 2009 recorded approximately 55 million otherthantemporary impairment charges related investments mrv communications mrv xalted networks xalted fourth quarter 2009 sold investment mrv approximately 10 million recognized gain approximately 04 million see note 4 notes consolidated financial statements included part ii item 8 annual report form 10k december 2010 invested 21 million aceland investments limited aceland formed zte hk limited us investment objective participate investment wireless city planning operated softbank develop xgp business approximately 35 interest aceland december 31 2010 accounts investment aceland using equity method acquisition october 16 2010 entered ordinary shares purchase agreement stage smart limited stage smart frontier holdings limited smart frontier sole shareholder stage smart enable us launch internet tv platform generate revenue subscription advertising valueadded service coming years pursuant ordinary shares purchase agreement agreed purchase smart frontier 5100000 ordinary shares stage smart held smart frontier purchase shares aggregate purchase price 100 million paid form number shares common stock calculated dividing 100 million average closing price per share common stock quoted nasdaq stock market thirty day period immediately preceding date closing transaction closely approximates market value day issuance pursuant ordinary shares purchase agreement company right repurchase companys shares issued part consideration stage smart shareholders one year anniversary closing date regulatory approvals obtained outlined postclosing covenants concurrent entering ordinary shares purchase agreement also entered series preference shares purchase agreement stage smart affiliated entity wholly owned subsidiaries smart frontier pursuant series preference shares purchase agreement agreed purchase stage smart 9600000 series preference shares stage smart price 208333 per share aggregate consideration 200 million payable cash purchase shares series preference shares together constitute 75 total shares stage smart gives company control stage smart date acquisition november 8 2010 stage smart affiliated entity wholly owned subsidiary consolidated results recorded intangible assets goodwill 50 million 138 million respectively see note 11 notes consolidated financial statements included part ii item 8 annual report form 10k decline pas business winddown handset segment expect pas networks phased january 1 2012 miit granted 3g mobile licenses china telecom china mobile china unicom january 9 2009 miit officially issued notice unconditionally phase personal handyphone system phs end 2011 guarantee bandwidth chinas 3g services consequently fourth quarter 2009 determined remaining expected period support pas infrastructure products sold prior years 2 years hence remaining deferred revenue associated pas infrastructure recognized ratably fourth quarter 2011 additional discussion see results operationsnet sales section item 7 completed winddown worldwide handset operations thus significant revenue gross margin 2010 except sales related inventory clearing expect 2011 beyond strategic investment changes management board directors february 1 2010 entered agreements strategic relationship beijing etown international investment development co ltd beiid investment company established beijing municipality includes proposed investment common stock company beiid two unrelated investment funds elite noble limited shah capital opportunity fund lp stock purchase agreements subsequently amended may 4 2010 june 4 2010 july 7 2010 respectively investment transactions closed september 2010 terms agreements revised received cash 346 million issued approximately 181 million shares common stock option purchase additional 40 million shares common stock approximately 81 million november 8 2010 option expired unexercised december 31 2010 connection transaction furtherance strategic goals china ying jack lu appointed new chief executive officer president effective upon closing investment march 1 2010 assumed ceo position served companys chief operating officer september 7 2010 peter blackmore resigned ceo president upon ying jack lus assumption ceo position upon closing transaction three new members appointed directors board directors two current board members resigned time total number directors board increased six seven connection transaction also moved operational headquarters alameda california beijing china part agreement beijing development authority related beijing municipality agreement effective upon closing beiid investment part agreement able apply beijing development area tax incentives financial nonfinancial assistance company retained operations hangzhou shenzhen china management believes strategic changes consistent growth strategy focusing selective ipbased infrastructure products services high growth regions asia particularly china management believes growth strategy good alignment series guidelines recently issued chinas state council push forward network convergence among telecom cable television internet companies believe relationship contribute significant financial strategic value including strengthening relationships presence china better positioning us achieve profitable growth future results operations align business units corporate strategy focus core businesses july 1 2008 sold personal communications division pcd llc see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k prior july 1 2008 pcd sold supported handsets pas handsets mainly united states included segment mobile solutions business unit msbu custom solutions business unit csbu july 31 2008 sold msbu responsible development sales service wireless ipcdmaipgsm product line first quarter 2009 completed winddown csbu consolidation voice messaging technology multimedia communications segment csbu historically responsible development sales service noncore products consolidation voice messaging technology multimedia communications segment significant impact segment net sales gross profit order optimize resources improve efficiency beginning january 1 2010 integrated services segment multimedia communications broadband infrastructure segments based products services performed substantially completed winddown handsets business fourth quarter 2009 except sales relating inventory clearing significant revenue handset segment 2010 expect 2011 beyond effective january 1 2010 new reporting segments follows •multimedia communicationsfocused development market opportunities iptv solutions wireless infrastructure technologies including related services revenue •broadband infrastructurefocused world class portfolio broadband products including related services revenue •handsetsfocused mobile phone business including pas cdma handset market well data cards markets handset sales pcd llc commenced july 1 2008 sale pcd included segment reclassified previously reported segment information year ended december 31 2009 2008 conform current segment presentation net sales fiscal 2010 vs 2009 net sales decreased 25 2915 million 2010 compared 3863 million 2009 decrease primarily due winddown handset business resulted decrease 955 million revenue decrease partially offset 27 million increase sales broadband infrastructure segment mainly due tn product sales international customers multimedia communications net sales 1750 million year ended december 31 2010 compared 1771 million 2009 mainly due decrease revenue multimedia communications product lines except stb ip signage product partially offset accelerated amortization pas deferred product revenue additional discussion see segment reporting section item 7 2010 beyond expect significant new contracts pas handsets infrastructure equipment december 31 2010 approximately 934 million deferred revenue associated pas infrastructure sales recognized ratably expected period support december 2011 review assumptions regarding estimated post contract support periods regular basis due china telecommunication industry restructuring launching 3g services china ministry industry information technology china announced pas services china phased january 1 2012 fourth quarter 2009 determined remaining expected period support pas infrastructure products 2 years hence deferred revenue associated pas infrastructure recognized ratably beginning fourth quarter 2009 fourth quarter 2011 result change net sales gross profit year ended december 31 2010 increased approximately 447 million 157 million respectively compared periods 2009 2010 expect 2011 total net sales gross profit associated amortization pasrelated deferred revenue approximate 930 million 330 million respectively economic uncertainty operating today could adversely impact business however majority business based china indiatwo countries still projected economic growth 2011 currently offer initial market acceptance iptv products china india taiwan geographic regions believe iptv market presents meaningful growth opportunity regions well regions targeted expand iptv offerings also india sales cycle related infrastructure expansion extended result uncertainty obtaining future contracts growth india however may adversely impacted recent changes india requiring manufacturers satisfy certain security supply chain standards satisfaction indian authorities pursuing alternative longterm solutions working carriers purchase products ensure satisfy new requirements fiscal 2009 vs 2008 net sales decreased 76 12541 million 2009 compared 2008 decrease primarily due disposal pcd msbu 2008 disbandment operations formerly included segment first quarter 2009 pcd segments accounted 9037 million decrease net sales segments pcd decreased 3504 million 48 multimedia communications net sales decreased 1427 million 45 2009 compared 2008 mainly due continued weakening demand pas infrastructure products decrease ngn tdscdma sales partially offset increase iptv related products ip messaging product sales well recognition additional revenue related pas infrastructure product due acceleration deferred revenue amortization beginning november 2009 broadband infrastructure segment net sales decreased 221 million 17 2009 compared 2008 mainly due decrease sales major product lines except msan gepon service handsets segment net sales decreased 1856 million 65 primarily due declines pas handsets sales gsm handsets sales cdma handsets sales pcd llc partially offset increase cdma handsets sales china gross profit cost sales consists primarily material labor costs associated manufacturing assembly testing products costs associated installation customer training warranty costs fees agents inventory contract loss provisions overhead cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also relied third party manufacturers manufacture assemble cdma handsets gross profit affected average selling prices material costs product mix impact warranty charges contract loss provisions well inventory writedowns release deferred revenues related costs pertaining prior years gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate future result shifts product mix stage product life cycle decreases average selling prices ability reduce cost sales fiscal 2010 vs 2009 gross profit 702 million 24 net sales 2010 compared 650 million 17 net sales 2009 243 million gross profit increase handset segment 2010 compared 2009 gross profit handset segment 53 million 2010 related primarily clearing remaining handsets inventory compared negative gross profit 190 million 2009 impacted additional inventory writedown 260 million claim settlements pcd llc 111 million partially offset 85 million decrease cost sales handsets segment resulting amortization marvell technology group ltd marvell supply agreement first quarter 2009 compared 2009 broadband infrastructure segment contributed 08 million increase gross profit 2010 primarily due increased sales higher margin tn products partially offset 146 million inventory writedown 2010 msan mstp products two international customer contracts due reductions demand gross margin multimedia communications decreased 198 million primarily due decreased sales major product lines service revenue partially offset 60 million benefit 2010 release accrued third party commissions result expiration statute limitations benefit acceleration pas deferred product revenue amortization contributed increase gross profit 157 million additional discussion see segment reporting section item 7 fiscal 2009 vs 2008 gross profit 650 million 17 net sales 2009 compared 2612 million 16 net sales 2008 overall gross profit decrease absolute dollars primarily due overall decrease sales disposal pcd msbu 2008 disbandment operations formerly included segment first quarter 2009 pcd segments aggregate accounted 812 million decrease gross profit 2009 gross profit segments pcd decreased 1150 million 2009 compared 2008 decrease primarily due decrease sales additional inventory writedowns claim settlement related certain handsets sold pcd llc handsets segments decrease sales higher margin multimedia communications products 2009 partially offset 85 million decrease cost sales handsets segment resulting amortization marvell supply agreement first quarter 2009 see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k operating expenses following table summarizes operating expenses selling general administrative expenses sga include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs research development expenses consist primarily compensation benefits employees engaged research design development activities costs parts prototypes equipment depreciation third party development expenses believe continued prudent investment research development critical longterm success aggressively evaluate appropriate investment levels portion costs fixed difficult quickly reduce periods lower sales selling general administrative fiscal 2010 vs 2009 sga expenses 952 million 2010 decrease 455 million compared 1407 million 2009 decrease sga expense primarily due 356 million decrease personnel related expenses result restructuring actions recent cost reduction measures 87 million reduction legal accounting fees result reduced activity investigations litigation 26 million reduction advertising marketing sales promotions well shows exhibits expenses due reduced sales activities 69 million decrease facilities facilitiesrelated expenses 10 million reduction insurance result reduced business operations worldwide cost savings partially offset 55 million provision doubtful accounts related aging receivables compared 66 million recovery doubtful accounts period 2009 resulting primarily collection longaged receivables fiscal 2009 vs 2008 sga expenses 1407 million 2009 decrease 1168 million compared 2576 million 2008 decrease sga expense primarily due 144 million decrease sga expenses related divested operations primarily pcd msbu 418 million decrease personnel related expenses due continuous streamlining operations cost reduction measures 147 million reduction legal accounting fees result 35 million receipt related legal settlement starent patent litigation fourth quarter 2009 well reduced activity investigations litigation 97 million decrease depreciation expense due assets impairment writeoffs 2008 104 million savings reduction use outside services 79 million decrease travel related expenses due reduced travel activity cost containment efforts 73 million reduction advertising marketing sales promotions well shows exhibits expenses due reduced sales activities 29 million decrease facility related expense 10 million increase recovery doubtful account result continued effort collection 12 million increase net gain disposed assets 21 million reduction taxes fees licenses 12 million reduction insurance premium 12 million decrease equipment expense continued streamline operations research development fiscal 2010 vs 2009 rd expenses decreased 252 million 2010 compared 2009 decrease mainly due 193 million decrease personnel related expense result restructuring actions 20 million savings reduction use outside services total 50 million decrease depreciation software license parts facilities related expenses continued streamline operations fiscal 2009 vs 2008 rd expenses decreased 800 million 2009 compared 2008 july 2008 sold pcd msbu resulted aggregated rd savings 104 million 2009 addition decrease also due 414 million decrease personnel related expenses continued streamline rd operations reduced spending noncore business units 120 million savings reduction use outside services primarily due winddown korea operation 37 million decrease travel related expenses due reduced travel activity 38 million decrease facility related expense 34 million decrease depreciation 48 million decrease software license parts expenses continued streamline operations stockbased compensation expense december 31 2010 approximately 28 million total unrecognized compensation cost measured related nonvested stock options restricted stock restricted stock units expected recognized weightedaverage period 225 years following table summarizes stockbased compensation expense consolidated statement operations fiscal 2010 vs 2009 decrease stockbased compensation expense 2010 compared 2009 primarily due reduced headcount result workforce reductions continued 2010 decrease equity awards granted 2010 based foregoing factors expect stockbased compensation expense increase fiscal year 2011 fiscal 2009 vs 2008 decrease stockbased compensation expense 2009 compared 2008 primarily due reduced headcount result workforce reductions second half 2008 throughout 2009 higher valued equity awards becoming fully vested 2009 decrease equity awards granted 2009 amortization intangible assets fiscal 2010 vs 2009 amortization intangible assets acquired stage smart investment 2010 02 million amortization intangible assets 2009 fiscal 2009 vs 2008 amortization intangible assets 2009 compared 41 million 2008 impairment charge 49 million recorded fourth quarter 2008 fully writeoff remaining carrying value intangible assets december 31 2008 asset impairment fiscal 2010 following annual impairment review concluded assets impaired december 31 2010 fiscal 2009 june 2009 announced intention consider potential sale manufacturing research development administrative offices facility hangzhou china december 2009 entered sale leaseback agreement intended sale property another party approximately 1388 million leaseback portion property 2016 may 31 2010 received sales proceeds met criteria consummation sale hangzhou facility may 31 2010 buyer agreed conditions precedent closing met leaseback commenced june 1 2010 third quarter 2009 contracted commercial real estate agent assist evaluating potential sale facility furthermore october 2009 initiated actions consolidate use facility reduce operating costs revised projected occupancy needs light developments performed recoverability assessment facility september 30 2009 impairment testing performed us third quarter 2009 utilizing income approach indicated fair value approximated carrying value hangzhou facility september 30 2009 1605 million impairment recorded respect property income approach used result lack preliminary offers available comparable market transaction activity place reliance market valuation approach however fourth quarter 2009 sale leaseback agreement received buyer gave us better indication propertys fair value revealed value property interested third party lower fair value previously estimated using income approach building approximately 27 million square feet unique design based uniqueness building fact single offer building received market several months management determined third party offer better indication fair value methods offer specific property representing direct evidence fair value based offer determined property net book value excess fair value due apparent decline value conducted recoverability test entitywide asset determined carrying value net assets exceeded undiscounted cash flows expected result use eventual disposition asset group assessment fair value management placed primary reliance market approach third party offer result analysis reduced overall assessment fair value property 333 million accordingly recorded noncash impairment charge 333 million fourth quarter 2009 adjusted carrying value 1257 million property lower pending sales price valuation performed factored abovemarket rental rates paid company stipulated leaseback agreement accompanying sale overall assessment fair value property based level 2 inputs defined inputs quoted market prices active markets observable either directly indirectly fiscal 2008 performed recoverability test property plant equipment assets december 31 2008 due recurring operating losses continuing challenging business environment sustained decline companys stock price estimates future cash flows developed 2009 budgeting process indicated business segments inability recover carrying value segments assets made various estimates management believes reasonable appropriate determining estimated fair values property plant equipment december 31 2008 concluding fair values also considered part results appraisals made december 31 2008 valuation firms fair value facility hangzhou china certain equipment furniture software automobiles leasehold improvements obtained confirm reasonableness estimates significant longlived asset terms carrying value manufacturing research development administrative offices facility hangzhou china using income capitalization approach determined estimated fair value facility related improvements december 31 2008 approximately 1832 million exceeded net book value approximately 158 million result concluded headquarters china operations impaired tested individually significant equipment furniture software automobiles leasehold improvement assets located china india japan korea united states impairment primarily using cost approach estimate related fair values adjustment factors applied original cost tested asset first estimate current replacement cost account deterioration obsolescence causes well deinstallation costs determine items estimated fair value december 31 2008 result analysis recorded impairment charge approximately 223 million operating expenses consisted 119 million erp system 67 million equipment furniture 37 million primarily capitalized software addition fourth quarter 2008 decided disband custom solutions business unit provided customized telecommunications solutions recorded charge approximately 49 million writeoff unamortized balance customer relationships intangible asset arising previous acquisition commworks result consolidated balance sheet december 31 2008 contains balances finitelived purchased intangible assets subject amortization restructuring fiscal 2010 recorded restructuring costs approximately 157 million related 2009 restructuring plan net approximately 21 million reversal charges due changes estimates recorded prior periods restructuring costs 2010 consisted primarily severance benefits related additional employees included 2009 restructuring plan adjusted changes estimates timing employee terminations approximately 11 million lease exit costs primarily related lease expiring 2013 total restructuring costs recorded december 31 2010 related 2009 restructuring plan approximated 557 million fiscal 2009 june 9 2009 board directors approved restructuring plan 2009 restructuring plan designed reduce operating costs 2009 restructuring plan includes worldwide reduction force approximately 50 headcount approximately 2300 employees located primarily china united states lesser degree international locations year ended december 31 2009 recorded total restructuring costs approximately 465 million 400 million related 2009 restructuring plan 65 million related prior year plans 400 million charge related 2009 restructuring plan comprised primarily approximately 381 million severance benefits 19 million lease costs 65 million charge 2009 related prior year plans consisted primarily severance benefits related transition certain key functions including finance china divestiture companys korea operations additional lease costs net approximately 05 million reversal charges recorded fiscal year 2008 fiscal 2008 december 16 2008 board directors approved restructuring plan 2008 plan designed reduce operating costs plan included among things winding certain noncore operations implementing worldwide reduction force approximately 10 headcount reduction force affected approximately 750 employees china korea locations including united states connection 2008 plan fourth quarter 2008 incurred restructuring charge 131 million comprised largely onetime severance benefits net gain divestitures fiscal 2010 gain divestitures 2010 55 million comprised 16 million gain sale china pdsn assets 09 million loss transfer emea operations 30 million gain sale ip messaging us pdsn assets 18 million gain sale ras product line first quarter 2010 see note 3 notes consolidated financial statements contained part ii item 8 annual report form 10k additional information regarding gain divestitures fiscal 2009 net gain divestiture 2009 01 million comprised 14 million gain sale pcd assets resulting adjustment reflect actual transactionrelated costs partially offset 13 million loss divestiture korea operations fiscal 2008 78 million net gain divestitures 2008 consisted primarily 38 million gain sale pcd 39 million gain sale msbu discussion divestitures see note 3 notes consolidated financial statements contained part ii item 8 annual report form 10k income expense interest income fiscal 2010 vs 2009 interest income 20 million 21 million 2010 2009 respectively interest income decreased 2010 compared 2009 primarily due fluctuations average cash balances throughout 2010 fiscal 2009 vs 2008 interest income 21 million 75 million 2009 2008 respectively decrease interest income primarily due effect lower average cash balances 2009 also decline average interest rate interest expense fiscal 2010 vs 2009 interest expense 03 million 06 million 2010 2009 respectively decrease interest expense 2010 compared 2009 primarily attributable decreased use credit facilities 2010 fiscal 2009 vs 2008 interest expense 06 million 104 million 2009 2008 respectively decrease interest expense 2009 compared 2008 primarily attributable repayment 2746 million convertible subordinated notes due march 1 2008 480 million bank loan repayments 2008 income net fiscal 2010 vs 2009 income net 2010 98 million compared 23 million 2009 income net 2010 consisted primarily 80 million foreign currency gains primarily resulting intercompany receivables denominated indian rupee chinese rmb 05 million settlement proceeds mrv communications mrv related investment mrv sold 2009 13 million individually insignificant items income net 23 million 2009 consisted 63 million foreign currency gain 04 million gain sale mrv 12 million miscellaneous income partially offset 55 million otherthantemporary impairment two equity investments mrv xalted fiscal 2009 vs 2008 income net 23 million 2009 compared 354 million 2008 income net 23 million 2009 consisted 63 million foreign currency gain 04 million gain sale mrv 12 million miscellaneous income partially offset 55 million otherthantemporary impairment two equity investments mrv xalted income net 2008 consisted primarily 324 million gain sale investment gemdale 73 million gain sale investment infinera 82 million gain liquidation investment variable interest entity offset partially 99 million foreign currency loss 43 million writedowns longterm investments income tax expense benefit fasb asc 74010 establishes criteria recognizing continuing recognize morelikelythannot tax positions may result income tax expense volatility future periods believe adequately provided tax positions amounts asserted taxing authorities could greater accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 9 consolidated financial statements item 8 incorporated herein reference 2010 reversed 99 million deferred tax liabilities related unremitted earnings subsidiaries fiscal 2010 vs 2009 income tax expense 31 million 2010 compared 109 million 2009 decrease income tax expense 2010 compared 2009 primarily due decreased ordinary income jurisdictions company profitable discrete charge 14 million three months ended june 30 2009 related establishing valuation allowance net deferred tax assets korea fiscal 2009 vs 2008 income tax expense 109 million 2009 compared tax expense 71 million 2008 company made assessment realizability deferred tax assets korea included handsets segment believe generate sufficient income realize deferred tax assets korea income tax associated establishing valuation allowance 14 million first quarter 2009 company recorded tax benefit 28 million related recognition previously unrecognized tax benefits reversal interest penalties due statute limitations expirations income tax audit settlements without 14 million tax expense related establishing korea valuation allowance 28 million tax benefit related statute limitation expiration income tax audit settlements mentioned tax expense 123 million 2009 two primary reasons tax expense despite incurring pretax losses first provided tax benefit current year losses incurred tax credits generated united states countries believe likely tax benefit associated losses realized second continue accrue tax expense jurisdictions historically profitable 2008 recorded 117 million income tax benefit related reversal deferred tax liabilities related unremitted earnings subsidiaries 18 million tax expense associated establishing valuation allowance canada segment reporting make financial decisions based information receive internal management system currently evaluate operating performance allocate resources segments based segment revenue gross profit cost sales direct expenses relation production assigned segments accounting policies used measuring segment assets operating performance used consolidated level multimedia communications fiscal 2010 vs 2009 2010 sales multimedia communications segment 1750 million compared 1771 million 2009 due accelerated pas deferred product revenue amortization increase sales stb product offset decrease revenue major multimedia communications products amortization pas deferred product revenue accounted 930 million 53 multimedia communications sales 2010 compared 483 million 27 2009 gross profit percentage net sales decreased 28 2010 39 2009 decrease gross profit percentage mainly due increase inventory provision iptv products lower gross margin stb sales partially offset increase pas product related third party commission reversal accelerated amortization pas deferred product revenue 2010 gross profit benefited 60 million impact release accrued third party commissions result expiration statute limitations compared 08 million 2009 2011 expect significant new contracts pas handsets infrastructure equipment none beyond 2011 plan aggressively pursue opportunities iptv product portfolios multiple markets believe iptv market presents meaningful growth opportunity expect continue strengthen iptv products market share china india taiwan geographic regions fiscal 2009 vs 2008 net sales 2009 decreased 45 1427 million decrease mainly due declines pas equipment sales 86 well decrease sales ngn product 54 partially offset increase sales iptv related products ip messaging product accelerated amortization deferred revenue related pas equipment 2009 pas equipment sales including amortization deferred revenue comprised approximately 41 68 multimedia communications sales 2009 2008 respectively gross profit percentage decreased 39 2009 44 2008 2009 gross profit benefited 61 million sales product previously written zero carrying value 2008 gross profit benefited 45 million impact release accrued third party commissions compared 08 million 2009 decrease gross profit percentage also due decreased sales higher margin pas infrastructure equipment ngn products well increase lower margin revenue related accelerated amortization pas deferred revenue broadband infrastructure fiscal 2010 vs 2009 broadband infrastructure sales increased 3 1073 million 2009 1100 million 2010 increase 2010 mainly due increase sales major product lines especially tn product offset partially decrease sales mstp msan service tn product revenue comprised approximately 15 0 broadband infrastructure sales 2010 2009 respectively softbank japan one largest infrastructure customers represented approximately 42 22 total broadband sales 2010 2009 respectively fourth quarter 2009 began recognizing revenue ratably significant customer contract seven year post contract support period third quarter 2010 began recognizing revenue ratably second phase contract also seven year post contract support period year ended december 31 2010 recognized revenue 162 million immaterial gross profit phases contracts gross profit percentage increased 14 2010 13 2009 increase gross profit percentage primarily due contribution tn product sales high margins may incur additional warranty expense inventory writedown introduce new products may required accrue additional contract losses certain fixed price contracts progress factors result negative impacts future gross margins results operations financial position fiscal 2009 vs 2008 broadband infrastructure sales decreased 17 221 million 2009 compared 2008 decrease mainly due decrease sales major product lines 2009 softbank japan one largest infrastructure customers represented approximately 22 30 total broadband infrastructure sales 2009 2008 respectively 2009 began recognizing revenue ratably significant customer contract seven year period broadband infrastructure included 145 million revenue insignificant gross profit related contract 2009 gross profit benefited 14 million sales product previously written zero carrying value gross profit percentage increased 13 2009 1 2008 increase gross profit percentage primarily due lower provision anticipated contract losses 2009 compared 2008 handsets fiscal 2010 vs 2009 net sales decreased 94 2010 compared 2009 decrease primarily due completion winddown worldwide handset business except sales related inventory clearing expect significant handset revenues 2011 gross profit percentage net sales increased negative 19 2009 82 2010 increase mainly due inventory clearing sales pas cdma handsets previously fully written incurred additional warranty reserve recorded first quarter 2009 due additional repairs one handset products additional inventory writedown pas handsets anticipated decrease demand china launched 3g networks addition gross profit 2009 also reduced approximately 246 million result certain transactions pcd llc consisting claim settlement 111 million productrelated liability disputes product returns 260 million inventory writedowns net realizable value writedowns excess inventory warranty reserves 2009 partially offset 125 million benefit related sales cdma handsets pcd llc 2009 previously written zero carrying value fourth quarter 2008 fiscal 2009 vs 2008 net sales decreased 65 1856 million 2009 compared 2008 decrease primarily due declines pas handsets sales gsm handsets sales cdma handsets sales pcd llc partially offset increase cdma handsets sales china sale pas handsets accounted 23 50 total handset sales 2009 2008 respectively pas handset sales declined significantly since first quarter 2009 china moved toward 3g network deployment gross profit percentage net sales decreased 14 2008 negative 19 2009 decrease mainly due inventory clearing sales pas cdma handsets low margins additional inventory writedowns pas cdma tdscdma handsets china addition gross profit also reduced approximately 246 million result certain transactions pcd llc consisting claim settlement 111 million productrelated liability disputes product returns 260 million inventory writedowns net realizable value writedowns excess inventory warranty reserves 2009 partially offset 125 million benefit related sales cdma handsets pcd llc 2009 previously written zero carrying value fourth quarter 2008 personal communication devices pcd july 1 2008 sold pcd operations see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k segment consists mobile solutions msbu custom solutions csbu business units disposed msbu unit july 2008 completed disbandment csbu unit first quarter 2009 remaining ip messaging product line integrated multimedia communication segment remaining services related contracts integrated service segment related party transactions softbank affiliates recognize revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb support softbanks fibertothehome service sales carrier class gepon product well netring™ product addition support softbanks new internet protocol television iptv sales rollingstream™ product 2010 2009 recognized revenue related cost net sales telecommunications equipment services affiliates softbank follows gross profit percentage net sales fluctuations expected generally result changes product mix year ended december 31 2010 gross profit percentage net sales also benefited approximately 24 million release previously deferred revenue carveout potential penalty cancellation penalties result completing obligations included accounts receivable december 31 2010 2009 97 million 55 million respectively related transactions amounts due softbank included accounts payable 13 million december 31 2010 none december 31 2009 sales softbank include threeyear service period penalty clause product failure rates exceed certain level seven year period december 31 2010 2009 customer advance balance related softbank agreements 02 million 02 million respectively current deferred revenue balance related softbank 23 million 14 million december 31 2010 december 31 2009 respectively december 31 2010 noncurrent deferred revenue balance related softbank 66 million compared 88 million december 31 2009 discussed note 4 consolidated financial statements included part ii item 8 annual report form 10k 12 million investment sbi affiliates softbank controlling interest sbi december 31 2010 2009 softbank beneficially owned approximately 94 11 respectively outstanding stock yellowstone subsequent completion beiid investment september 7 2010 one new directors also served director yellowstone investment advisory ltd yellowstone 2010 paid approximately 02 million consulting services provided yellowstone also incurred approximately 09 million expenses success fee acquisition support services provided yellowstone audiovox prior sale pcd july 1 2008 phillip christopher one former officers served director audiovox corporation audiovox 2008 paid approximately 08 million services provided audiovox liquidity capital resources following sections discuss effects changes balance sheet cash flows contractual obligations commitments liquidity capital resources balance sheet cash flows cash equivalents shortterm investments cash equivalents consisting primarily bank deposits money market funds recorded cost approximates fair value shortterm nature instruments december 31 2010 cash equivalents approximating 2137 million held subsidiaries china chinese government imposes currency exchange controls cash transfers china regulations china permit foreign owned entities freely convert rmb foreign currency transactions fall current account includes trade related receipts payments interest dividends accordingly chinese subsidiaries may use rmb purchase foreign exchange settlement current account transactions without preapproval however pursuant applicable regulations foreigninvested enterprises china may pay dividends accumulated profits determined accordance chinese accounting standards regulations calculating accumulated profits foreign investment enterprises china required allocate least 10 accumulated profits year fund certain reserve funds including mandated employee benefits funds unless reserves reached 50 registered capital enterprises transactions involve conversion rmb foreign currency classified capital account transactions examples capital account transactions include repatriations investments loans foreign owners direct equity investments foreign entity china domiciled entity capital account transactions require prior approval chinas state administration foreign exchange safe provincial branch convert remittance foreign currency us dollars transmit foreign currency outside china result restrictions prc laws regulations china subsidiaries restricted ability transfer portion net assets parent 2010 cash flows net cash used operating activities 2010 922 million year ended december 31 2010 operating activities significantly impacted following •net loss 653 million adjusted 55 million gains divestitures changes net operating assets liabilities using net cash 408 million partially offset noncash charges including 54 million depreciation amortization 76 million stockbased compensation 55 million provision doubtful accounts •changes operating assets liabilities using net cash 408 million increase included 280 million settlement accounts payable 508 million settlement liabilities company continues streamline operations offset cash inflows inventories deferred cost cash provided investing activities 2010 1335 million included net proceeds divestitures 34 million 1240 million proceeds sale building changes restricted cash 133 million offset partially cash outflows including 18 million net purchases shortterm investments related nonqualified deferred compensation plan established fiscal 2010 allows sixmonth deferral compensation certain employees 34 million purchases property plant equipment 27 million purchase investment interest cash provided financing activities 2010 consist primarily net cash proceeds 346 million issuance 181 million shares common stock related beiid investment see note 10 notes consolidated financial statements included part ii item 8 annual report form 10k additional discussion 2009 cash flows net cash used operating activities 2009 674 million year ended december 31 2009 operating activities significantly impacted following •net loss 2257 million offset noncash charges approximately 580 million resulted net use cash 1677 million noncash charges included 333 million impairment hangzhou facility 131 million depreciation amortization 121 million stockbased compensation 55 million otherthantemporary impairment two equity investments 09 impairment variable interest entity partially offset recovery doubtful accounts 68 million •changes operating assets liabilities providing net cash 1002 million decrease sales activity 2009 primary driver changes operating assets liabilities cash operations benefited 1233 million decrease accounts receivable 728 million decrease inventory deferred costs 831 million decrease assets consisting primarily working capital items 42 million increase deferred revenue offset partially decrease accounts payable using cash 1277 million decrease customer advances 292 million decrease liabilities 246 million cash provided investing activities 2009 213 million cash provided investing activities 2009 included 100 million cash proceeds released escrow july 2009 related sale pcd 15 million cash proceeds divestiture korea operations 73 million deposit received pending sale china headquarters 26 million sale investment interests pcd llc mrv net proceeds 32 million sale shortterm investments offset partially 20 million cash used purchase property plant equipment 20 million change restricted cash used financing immaterial 2009 2008 cash flows net cash used operating activities 2008 552 million year ended december 31 2008 operating activities significantly impacted following •net loss 1508 million adjusted gains sale investments 402 million 82 million gain liquidation ownership interest variable interest entity 78 million gain divestitures noncash charges 784 million resulted net use cash 1285 million noncash charges 784 million included 380 million depreciation amortization 206 million stock based compensation expense 272 million impairment longlived assets 43 million impairment longterm investments partially offset recovery doubtful accounts 52 million deferred tax benefit 64 million deferred tax benefit primarily due 117 million benefit resulting change china corporate income tax law offset partially tax expense including 18 million expense related placing valuation allowance canadian deferred tax assets •changes net operating assets liabilities providing net cash 734 million primarily result management working capital part necessitated repayment convertible subordinated notes due march 1 2008 cash operations benefited 589 million decrease accounts receivable 2008 primarily occurred pcd business segment first quarter 2008 due strong collection efforts 1289 million increase accounts payable primarily due timing payments vendors partially offsetting 649 million use cash resulting decrease customer advances due timing bookings related revenue recognition customer advances represent cash deposits received customers orders yet received final acceptance net cash provided investing activities year ended december 31 2008 2460 million included approximately 2141 million net proceeds sale pcd msbu 129 million net proceeds sale shortterm investments net purchases 334 million proceeds sale investment interests net purchases long term investment interests 77 million repayment loan variable interest entity partially offset 142 million used purchase property plant equipment 82 million change restricted cash 334 million proceeds sale investment interests net purchases long term investment interests comprised 421 million proceeds sale gemdale offset 87 million used purchase long term investment interests net cash used financing activities year ended december 31 2008 3326 million related primarily repayment convertible subordinated notes 2746 million march 1 2008 net repayment 480 million bank loans 2008 accounts receivable net accounts receivable decreased 122 million 423 million december 31 2009 301 million december 31 2010 december 31 2010 allowance doubtful accounts 322 million gross receivables 623 million recorded provision doubtful accounts 55 million 2010 related aging receivables resulting slowdown customer payments assess collectability receivables based number factors including analysis creditworthiness customers historical payment history current economic conditions ability collect payment length time individual receivable balance outstanding certain accounts receivable china outstanding significant period time provide allowances receivables based criteria discussed believe sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations inventories deferred costs following table summarizes inventories deferred costs inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer finished goods customer sites approximately 235 million 338 million december 31 2010 2009 respectively inventories approximately 06 million held manufacturing outsource partner recorded prepaids current assets consolidated balance sheet december 31 2010 inventories held manufacturing outsource partner december 31 2009 company recorded 146 million inventory writedown 2010 msan mstp two international customer contracts due reduction product demands deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized due prolonged acceptance periods tests existence undelivered elements postcontract support including software update rights company vendor specific objective evidence fair value given uncertainty customer acceptance customer completes internal testing procedures company waits issuance final acceptance certificate support assertion delivery products services occurred significant customer contracts involving larger complex projects onsite testing multiple locations taking product warranty product title occurs acceptance products services acceptance substantive transaction certain significant contracts required company provide postcontract customer support long period time example seven years company unable establish vendor specific objective fair value upon delivery elements except postcontract support company amortizes deferred revenue related deferred costs goods sold postcontract support period liquidity incurred net losses attributable utstarcom inc 651 million 2257 million 1503 million years ended december 31 2010 2009 2008 respectively recorded operating losses 23 24 consecutive quarters period ended december 31 2010 december 31 2010 accumulated deficit 11323 million incurred net cash outflows operations 922 million 674 million 552 million 2010 2009 2008 respectively operating results expected improve 2011 compared prior years expect breakeven full year basis 2011 december 31 2010 cash equivalents 3515 million 2137 million held subsidiaries china imposes currency exchange controls certain transfers funds china amount cash available transfer china subsidiaries use nonchina subsidiaries limited liquidity needs subsidiaries china chinesegovernment mandated limitations including currency exchange controls transfers funds outside china subsidiaries accumulated profit 847 million december 31 2010 determined accordance chinese accounting standards could paid dividends believe accumulated profits provide us ability declare dividends sufficient meet liquidity needs future china subsidiaries paid aggregate 150 million dividends us parent company year ended december 31 2007 another 100 million february 2008 cash transfers offset eliminated preparing consolidated cash flow statements principal source funding nonchina operations periods made february 2009 china subsidiaries paid additional 50 million dividends us parent company however going forward amount cash available transfer china subsidiaries limited liquidity needs subsidiaries china restriction currency exchange chinesegovernment mandated requirements including currency exchange controls certain transfers funds outside china december 31 2010 approximately 287 million available credit facilities second quarter 2010 entered two credit facilities totaling 294 million credit facilities used issuance certain letters credit guarantees facilities expire second quarter 2011 global economies experienced significant downturn driven financial credit crisis continue challenge economies period time current macroeconomic environment significant risks uncertainties inherent managements ability forecast future results operating environment confronting us internally externally raises significant uncertainties past years took number actions improve liquidity march 2008 paid 2895 million retire convertible subordinated notes related accrued interest july 1 2008 completed sale pcd addition divested mobile solutions business unit july 2008 fourth quarter 2008 management initiated actions disband customs solutions business unit wind korea based handset operations announced initiatives including efforts eliminate functional duplications consolidation number functions china operations june 2009 management expanded initiatives include worldwide reduction workforce outsourcing manufacturing operations optimizing research development spending focus selected products yearoveryear 2008 2009 2010 selling general administrative research development operating expenses decreased significantly 2009 compared 2008 management believes continuing efforts streamline operations enable fixed cost base better aligned operations market demand projected sales levels projected sales materialize need take actions reduce costs expenses explore cost reduction options december 2009 entered sales leaseback agreement intended sale manufacturing research development administrative offices facility hangzhou china another third party approximately 1388 million leaseback portion facility may 31 2010 received sales proceeds met criteria consummation sale hangzhou facility may 31 2010 buyer agreed conditions precedent closing met leaseback commenced june 1 2010 december 8 company formally notified landlord decision early terminate lease june 2011 six months advance according termination clause lease agreement february 1 2010 entered agreements strategic relationship beijing etown international investment development co ltd beiid included proposed investment 485 million common stock beiid two unrelated investment funds elite noble limited shah capital opportunity fund lp stock purchase agreements subsequently amended may 4 2010 june 4 2010 july 7 2010 respectively investments closed september 2010 terms agreements revised received cash 346 million net issuance costs issued approximately 181 million shares common stock option purchase additional 40 million shares common stock approximately 81 million november 8 2010 option expired unexercised december 31 2010 management believes continuing efforts streamline operations enable fixed cost base better aligned operations market demand projected sales level management believes china nonchina operations sufficient liquidity finance working capital expenditure needs excess 12 months however company concentrated business asia particularly china india japan unforeseen prolonged economic political risk markets could impact companys customers making respective investment decisions could material impact foregoing assessment assurance additional financing required available terms satisfactory us funds raised future issuance preferred stock debt securities could rights privileges preference senior common stock newly issued debt could contain debt covenants impose restrictions operations sale newly issued debt equity securities could result additional dilution current shareholders income taxes china corporate income tax law cit law became effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises prior change tax law certain subsidiaries joint ventures located china enjoyed tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law provides reduced 15 enterprise income tax rate qualified high new technology enterprises two companys china subsidiaries huts utsc majority business china conducted obtained high new technology enterprise certificates hightech certificates relevant approval authorities september 19 2008 december 30 2008 respectively thereafter approved pay cit reduced tax rate 15 approval reduced 15 tax rate valid three years applies retroactively january 1 2008 subject possible reassessment approval authorities reassessment tax authority may suspend implementation reduced 15 rate hutss hightech certificate expire september 19 2011 utscs hightech certificate expire december 30 2011 huts utsc may apply extension respective hightech certificates prior expiration date respective certificates approved extended term three years huts utsc fails pass reassessment approval authorities fails renew hightech certificate preferential tax rate 15 cease apply huts utsc would subject tax rate 25 however since entities currently significant loss positions change tax rate material adverse impact business liquidity two china subsidiaries begin generate profit deplete net operating loss carry forwards proposed reorganization january 10 2011 announced proposed reorganization change place incorporation delaware cayman islands reorganization expected involve utstarcoms merger newly formed subsidiary result become wholly owned subsidiary cayman islands holding company utstarcom cayman expected outstanding share common stock company converted right receive one ordinary share utstarcom cayman issued utstarcom cayman connection merger pursuant registered offering following merger utstarcom cayman together subsidiaries expected continue conduct utstarcoms business substantially manner currently conducted utstarcom subsidiaries utstarcom cayman taxed united states corporation expected qualify foreign private issuer purposes reporting obligations sec expect reduce compliance operating costs shares utstarcom cayman expected listed nasdaq stock market expect neither utstarcom caymans incur us income tax result completion merger balance sheet arrangements december 31 2010 2009 balance sheet arrangements contractual obligations commercial commitments following table summarizes significant contractual obligations december 31 2010 operating leases lease certain facilities noncancelable operating leases expire various dates 2013 2015 connection sale leaseback agreement february 1 2010 entered lease contract lease respect leaseback portion hangzhou facility lease became effective june 1 2010 early terminated june 2011 contractual obligations related hangzhou facility lease june 2011 included table letters credit issue standby letters credit primarily support international sales activities outside china support purchase commitments submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six twelve months date issuance without drawn beneficiary thereof purchase commitments obligated purchase raw materials workinprocess inventory various orders various suppliers fulfilled without adverse consequences material operations financial condition purchase commitments table include agreements noncancelable cancelable without penalty intellectual property certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products uncertain tax positions december 31 2010 565 million gross unrecognized tax benefits 144 million related tax benefits recognized would impact annual effective tax rate remaining 421 million gross unrecognized tax benefits recognized would impact certain deferred tax assets third party commissions record accruals commissions payable third parties normal course business commissions recorded based terms contracts us third parties paid pursuant contracts consistent accounting policies commissions recorded cost net sales period liability incurred december 31 2010 approximately 04 million accrued commissions management performed continues perform followup procedures respect accrued commissions upon completion followup procedures accrued commissions claimed statute limitations expired reverse accruals reversals recorded consolidated statement operations period management determines accruals longer necessary assistance china counsel concluded certain accrued commissions statute limitations expired august 2010 two years formal communication sent agents year ended december 31 2010 approximately 60 million released cost net sales result expiration statute limitations significant reversals accruals third party commissions expected 2011 years ended december 31 2009 2008 respectively reversed approximately 08 million 45 million accrued commissions payable reversals recorded cost net sales india department telecommunication security supply chain standards recent changes india require equipment manufacturers satisfy certain security supply chain standards satisfaction indian authorities management entered agreements several customers india establish detailed security supply chain standards covering products supplied telecommunication customers agreements contain significant penalty clauses event security breach detected related product supplied company management unable estimate likelihood financial impact potential security breach financial position results operations cash flows regulation still review dot new interpretation expected later 2011 december 31 2010 company subject penalty liability related agreements company continues assess potential impact agreements may timing revenue recognition critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery installation equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction sales contracts enter typically include customer acceptance provisions require customer issue final acceptance certificate evidence customers acceptance products services circumstances unable enforce payment terms receipt final acceptance certificate payment conditions dependent issuance final acceptance certificate products generally deployed within core network telecommunications customers acceptance terms products services include initial test onsite testing trial running based past experience customers acceptance process larger complex projects may take longer twelve months result customers run prolonged rigorous tests ensure products work seamlessly customers existing network telecommunication customer runs unique tests equipment performance vary based equipment works combination customers equipment software conditions given uncertainty customer acceptance customer completes internal testing procedures wait issuance final acceptance certificate support assertion delivery products services occurred significant customer contracts involving larger complex projects onsite testing multiple locations taking product warranty product title occurs acceptance products services acceptance substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized accordance specific guidance recognizing software revenue allocate revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element postcontract support established vsoe contract element accordingly revenues contracts recognized ratably period post contract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support review assumptions regarding estimated postcontract support periods regular basis determine necessary revise estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding postcontract support periods different original assumptions contract revenues would recognized remaining expected period support discussed results operationsnet sales item 7 due china telecommunication industry restructuring launch 3g services china determined remaining expected period support pas infrastructure 2 years hence deferred revenue associated pas infrastructure recognized ratably beginning fourth quarter 2009 fourth quarter 2011 revenue fixed priced contracts include requirement significant software modification customization recognized using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2010 2009 2008 recorded 26 million 49 million 184 million contract loss fixed price contract respectively recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term also sell products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product cases developed reasonable estimates stock exchanges based historical experience similar types sales similar products sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material estimate amount rebate based upon terms individual arrangement historical experience future expectations price reductions record estimate rebate amount time sale also enter sales incentive programs comarketing arrangements certain wireless handset customers record incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized assess collectability based number factors including payment history creditworthiness customer request collateral customers international sales may require letters credit customers drawn demand customer defaults payment determine collection payment reasonably assured defer revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally enter revenue sharing arrangements collect payment customer telecommunications service provider collects service revenues enter revenue sharing arrangement recognize revenue collection reasonably assured nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained restructuring liabilities litigation contingencies account companys restructuring plans using guidance provided accounting standard codifications asc 420 exit disposal cost obligations asc 712 compensationnonretirement postemployment benefits account litigation contingencies accordance asc 450 contingencies requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value stockbased compensation expense restricted stock awards measured based closing fair market value common stock date grant stockbased compensation expense stock options estimated grant date based options fair value calculated blackscholes option pricing model blackscholes model stockbased compensation expensed ratably straightline basis requisite service period generally vesting term sharebased payment awards determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected term sharebased payment awards stock volatility estimate expected term options granted based historical exercise cancellation data vested options use historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options common stock available determine implied volatility assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties compensation expense could materially different future changes subjective assumptions materially affect estimated value managements opinion existing valuation models may provide accurate measure fair value employee stock options addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period product warranty provide warranty equipment handset sales period generally ranging one two years time final acceptance rarely entered arrangements provide limited warranty services periods longer two years provide expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate time may subject additional costs related nonstandard warranty claims customers occurs estimate additional accruals based historical experience communication customers various assumptions believe reasonable circumstances additional warranty accruals recorded period additional costs identified variable interest entities accounting guidance requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity evaluate investments periodically triggering events occur receivables although evaluate customer credit worthiness prior sale provide allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured assess collectability receivables based number factors including analysis creditworthiness customers historical payment history current economic conditions ability collect payment length time individual receivable balance outstanding policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging accounts receivable applying percentage based historical experience approach results allowance computed based aging receivables evaluate percentages applied category aged accounts receivable periodically based actual history writeoffs collections refine formulabased approach accordingly use future periods certain accounts receivable china outstanding significant period time provide allowances receivables based criteria discussed believe sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations use actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized due prolonged acceptance periods tests existence undelivered elements postcontract support including software update rights company vendor specific objective evidence fair value deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites contract specific individual customers financial conditions specific individual customers may result increased concentration risk exposure companys inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain recognize tax benefit expense uncertain tax position likely tax position sustained examination taxing authorities based technical merits position recognize interest expense penalties related income tax matters part provision income taxes recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results managements assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary record valuation allowance reduce deferred tax assets amount management believes likely realized provide us taxes foreign undistributed earnings considered permanently reinvested outside united states goodwill longlived assets including finitelived purchased intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using acquisition method accounting estimated management based fair value assets received identifiable intangible assets comprised developed technologies noncompete agreements goodwill amortized tested annually impairment annual tests event occurs circumstances change accordance asc350 would likely reduce fair value carrying amount fair value goodwill carrying amount impairment goodwill recorded purchased intangibles finite lives carried cost amortized straightline basis respective estimated useful lives perform annual goodwill impairment analysis november 1st year using twostep process first step goodwill impairment test used identify potential impairment compares fair value reporting unit carrying amount including goodwill reporting units operating segments one level operating segments fair value reporting unit exceeds carrying amount goodwill reporting unit considered impaired thus second step impairment test unnecessary carrying amount reporting unit exceeds fair value second step goodwill impairment test performed measure amount impairment loss second step goodwill impairment test compares implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess loss recognized cannot exceed carrying amount goodwill implied fair value goodwill determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities unit including unrecognized intangible assets reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value reporting unit first step goodwill impairment test determining fair value individual assets liabilities reporting unit including unrecognized intangible assets second step goodwill impairment test judgmental nature often involves use significant estimates assumptions estimates assumptions could significantly impact whether impairment charge recognized well magnitude charge impairment review perform internal valuation analyses utilize thirdparty valuations management believes appropriate considers market information publicly available estimates fair value primarily determined using discounted cash flow analysis approach uses significant estimates assumptions including projected future cash flows timing cash flows discount rates reflecting risk inherent future cash flows perpetual growth rates applied determine terminal values determination appropriate market comparables determination whether premium discount applied comparables addition estimates future cash flows two significant assumptions applied estimated cash flows involved determination fair value reporting units discount rates perpetual growth rates applied determine terminal values used discounted cash flow analysis discount rates used cash flow models goodwill impairment testing considered market industry data well specific risk factors reporting unit perpetual growth rates individual reporting units purposes terminal value determination generally set initial fiveyear forecasted period although certain reporting units utilized longer forecasted periods based historical experience market industry data annual impairment review disclosed impartment 2010 consolidated balance sheets december 31 2009 contained balances goodwill assess recoverability longlived assets goodwill determining whether carrying value assets recovered undiscounted future cash flows asset impairments primarily consist intangible assets finite lives property plant equipment based estimate amounts timing future cash flows related expected future remaining use ultimate sale disposal property plant equipment net costs sell following annual impairment review concluded assets impaired december 31 2010 2009 incurred 333 million plant equipment impairment charges 2008 incurred 49 million 223 million intangible assets property plant equipment impairment charges respectively see note 6 notes consolidated financial statements included part ii item 8 annual report form 10k additional discussion process evaluating potential impairment longlived assets goodwill also highly subjective requires significant judgment order estimate fair value longlived assets typically make various assumptions future prospects business asset relates consider market factors specific business estimate future cash flows generated business based assumptions estimates determine whether need recognize impairment charge reduce value asset stated balance sheet reflect estimated fair value assumptions estimates future values remaining useful lives complex often subjective affected variety factors including external factors real estate market industry economic trends internal factors changes business strategy internal forecasts although believe assumptions estimates made past reasonable appropriate changes assumptions estimates could materially impact reported financial results investments consist principally bank notes equity securities publicly traded privately held companies investments publicly traded equity securities accounted asc 320 investment debt equity securities classified availableforsale investments recorded fair value unrealized gains losses included separate component accumulated comprehensive income net tax 2009 sold remaining investment publicly traded equity securities investments equity securities privately held companies hold less 20 voting interest ability exercise significant influence accounted asc 325 investmentsother using cost method cost method investments carried lower cost fair market value investments equity securities privately held companies hold less 50 voting interest ability exercise significant influence accounted asc 323 investmentsequity method joint ventures using equity method recognize impairment charge decline fair value publicly traded equity securities costmethod investments cost basis judged otherthantemporary significant judgment used identify events circumstances would likely significant adverse effect future use investment consider various factors determining whether impairment otherthantemporary including severity duration impairment forecasted recovery financial condition nearterm prospects investee ability intent hold investment period time sufficient allow anticipated recovery market value recent accounting pronouncements see note 2 notes consolidated financial statements contained item 8 annual report form 10k full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations forwardlooking statements annual report form 10k contains forwardlooking statements regarding future events future results subject safe harbors created securities act 1933 securities exchange act 1934 forwardlooking statements based current expectations estimates forecasts projections us future performance industries operate well managements assumptions beliefs statements relate among things business plan expected financial results new accounting pronouncements liquidity access credit facilities cash china subsidiary statements contain words like expects anticipates may targets projects intends plans believes seeks estimates variations words similar expressions also forwardlooking statements readers cautioned forwardlooking statements predictions subject risks uncertainties related among things ability execute business plan chinas control currency exchanges decline pas market ongoing litigation items discussed part item 1a risk factors form 10k therefore actual results may differ materially adversely expressed forwardlooking statements guarantee future results actual results developments business decisions may differ contemplated forwardlooking statements undertake obligation update forwardlooking statements reflect events circumstances occurring date form 10k overview one leading global providers internet protocol ipbased network solutions including integration support services sold telecommunications operators emerging established markets around world focus design sell ipbased telecommunications infrastructure products including primary product suite internet protocol tv iptv broadband solutions along ongoing services relating installation operation maintenance products collectively range solutions designed expand modernize telecommunications networks smooth network system integration lower operating costs increased broadband access also provide carriers increased revenue opportunities enhancing subscribers user experience majority sales service providers china india also sell service providers selective markets asia latin america europe differentiate products designed reduce network complexity integrate high performance capabilities allow simple transition next generation networks design products facilitate costeffective efficient deployment maintenance upgrades products ipbased customers easily integrate products industry standard hardware software additionally believe introduce new features enhancements costeffectively added customers existing networks ipbased devices changed upgraded modules saving customers expense replacing entire system installation strategic priorities summarized follows •focus primarily providing suite ipbased solutions including main product suite comprised iptv broadband products related services •maintain leadership position china india solidifying presence selective geographical markets asia latin america europe •leverage strong reputation telecom carriers ability solve complex network problems •improve financial position executing announced restructuring initiatives reducing operating expense levels •improve operational flexibility cash requirements outsourcing manufacturing operations pending sale hangzhou building impairment charge june 2009 announced intention consider potential sale manufacturing research development administrative offices facility hangzhou china december 2009 entered property transfer leaseback agreement sale leaseback agreement intended sale property another party approximately 140 million terms agreement lease back approximately 83027 square meters approximately 09 million square feet property 2016 transaction expected close end march april 2010 subject customary closing conditions including completion required regulatory approvals recorded noncash impairment charge related hangzhou facility 333 million fourth quarter 2009 see note 6 notes consolidated financial statements included part ii item 8 annual report form 10k sale noncore assets july 1 2008 sold utstarcom personal communications llc whollyowned subsidiary company pcd entity controlled aig global investment group certain investors total sale consideration approximately 2377 million additionally july 31 2008 completed divestiture mobile solutions business unit msbu global private equity firm july 31 2009 company completed sale korea operations entity founded former employee received total consideration approximately 20 million restructuring programs june 9 2009 board directors approved restructuring plan 2009 restructuring plan designed reduce operating costs 2009 restructuring plan includes worldwide reduction force approximately 50 headcount approximately 2300 employees located primarily china united states lesser degree international locations 2009 recorded restructuring costs approximately 465 million related 2009 restructuring plan prior year restructuring plans continue efforts evaluate certain operations consider opportunities divest additional noncore assets may incur additional costs associated future actions align business operations streamline business processes investments first quarter 2008 sold remaining investment gemdale co ltd gemdale approximately 329 million recognized gain 324 million income net also sold investment infinera corporation infinera approximately 92 million recognized gain 73 million income net 2009 recorded approximately 55 million otherthantemporary impairment charges related investments mrv communications mrv xalted networks xalted fourth quarter 2009 sold investment mrv approximately 10 million recognized gain approximately 04 million see note 4 notes consolidated financial statements included part ii item 8 annual report form 10k decline pas business winddown handset segment expect pas networks phased january 1 2012 miit granted 3g mobile licenses china telecom china mobile china unicom january 9 2009 miit officially issued notice unconditionally phase personal handyphone system phs end 2011 guarantee bandwidth chinas 3g services consequently fourth quarter 2009 determined remaining expected period support 2 years hence deferred revenue associated pas infrastructure recognized ratably fourth quarter 2011 additional discussion see results operationsnet sales section item 7 substantially completed winddown worldwide handset operations expect handset segment significant contribution revenue gross margin 2010 beyond potential effects current global economic conditions sales operations liquidity disruptions orderly financial markets 2008 resulting among factors severely diminished liquidity credit availability plus volatile declining valuations securities investments caused business consumer confidence ebb business activities slowdown unemployment increase factors along interconnectivity interdependency international economies continued throughout 2009 created global downturn economic activity sufficiently without precedent governments many leading nations taken actions designed counter worst effects severity recent economic conditions unable predict long economic downturn last continuing economic downturn may adversely impact business number ways •reduced demand products services •increased pricing pressure lower margins •greater difficulty collecting accounts receivable •additional restructuring asset impairment charges strategic investment changes management board directors february 1 2010 entered agreements strategic relationship beijing etown international investment development co ltd beiid investment company established beijing municipality includes investment 485 million common stock company beiid two unrelated investment funds elite noble limited shah capital opportunity fund lp part investment issue approximately 22 million shares common stock price 220 per share private placement transaction intend use proceeds working capital general corporation purposes connection transaction furtherance strategic goals china ying jack lu appointed new chief executive officer president effective later date three months closing investment june 30 2010 march 1 2010 assumes ceo position companys chief operating officer peter blackmore retire ceo president upon ying jack lus assumption ceo position upon closing transaction three new members appointed directors board directors two current board members resign time total number directors board increased six seven connection transaction also announced move headquarters beijing china part agreement beijing development area also related beijing municipality agreement effective upon closing investment part agreement able apply beijing development area tax incentives financial nonfinancial assistance company plan retain operations hangzhou shenzhen management believes strategic changes consistent growth strategy focusing selective ipbased infrastructure products services high growth regions asia particularly china management believes growth strategy good alignment series guidelines recently issued chinas state council push forward network convergence among telecom cable television internet companies believe relationship contribute significant financial strategic value including strengthening relationships presence china better positioning us achieve profitable growth future results operations align business units corporate strategy focus core businesses july 1 2008 sold personal communications division pcd llc see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k prior july 1 2008 pcd sold supported handsets pas handsets mainly united states included segment mobile solutions business unit msbu custom solutions business unit csbu july 31 2008 sold msbu responsible development sales service wireless ipcdmaipgsm product line first quarter 2009 completed winddown csbu consolidation voice messaging technology multimedia communications segment csbu historically responsible development sales service noncore products consolidation voice messaging technology multimedia communications segment significant impact segment net sales gross profit result changes revised internal reporting structure operating segments reporting segments effective january 1 2009 reporting segments follows •multimedia communications •broadband infrastructure •handsets •services multimedia communications segment responsible development management internet protocol television iptv related technologies plus core next generation network ngn software personal access system pas infrastructure wireless systems teams also part segment broadband infrastructure segment responsible software hardware products enable end users access highspeed cost effective wireline data voice media communication handsets segment designs builds sells mobile phones continued focus pas cdma handset market well data cards markets handset sales pcd llc commenced july 1 2008 sale pcd included segment december 2008 initiated action wind korea operations july 2009 completed sale korea operations fourth quarter 2009 substantially completed winddown remaining worldwide handset business service segment responsible providing services support broadband infrastructure multimedia communications product lines activities ranging network planning circuittopacket network migration planning systems integration program management operations management support knowledge transfer net sales fiscal 2009 vs 2008 net sales decreased 76 12541 million 2009 compared 2008 decrease primarily due disposal pcd msbu 2008 disbandment operations formerly included segment first quarter 2009 pcd segments accounted 9037 million decrease net sales segments pcd decreased 3504 million 48 multimedia communications net sales decreased 1399 million 50 2009 compared 2008 mainly due continued weakening demand pas infrastructure products decrease ngn tdscdma sales partially offset increase iptv related products ip messaging product sales well recognition additional revenue related pas infrastructure product due acceleration deferred revenue amortization broadband infrastructure segment net sales decreased 299 million 27 2009 compared 2008 mainly due decrease sales major product lines except gepon handsets segment net sales decreased 1856 million 65 primarily due declines pas handsets sales gsm handsets sales cdma handsets sales pcd llc partially offset increase cdma handsets sales china service segment net sales increased 50 million 9 primarily due higher international maintenance service revenue partially offset decrease china service sales china telecommunications industry restructuring additional discussion see segment reporting section item 7 2010 beyond expect continued decline demand pas handsets infrastructure equipment review assumptions regarding estimated post contract support periods regular basis due china telecommunication industry restructuring launch 3g services china ministry industry information technology china announced pas services china phased january 1 2012 second third quarter 2009 streamlined sales service research development operations pas handsets infrastructure equipment perform new research development pas products maintain small support team assist customers warranty matters later part third quarter 2009 early part fourth quarter 2009 contacted pas infrastructure customers held discussions pas products future october 2009 notified pas infrastructure customers china longer provide upgrades support pas products beyond december 31 2011 consequently determined remaining expected period support 2 years hence deferred revenue associated pas infrastructure recognized ratably beginning fourth quarter 2009 fourth quarter 2011 result change net sales gross profit fourth quarter 2009 increased approximately 6 million 2 million respectively december 31 2009 approximately 1864 million deferred revenue associated pas infrastructure sales accelerated amortization period support fiscal 2010 2011 total net sales gross profit associated amortization pasrelated deferred revenue approximate 93 million 33 million respectively economic uncertainty operating today could adversely impact business however majority business based china indiatwo countries still projected economic growth 2010 currently offer initial market acceptance iptv products china india taiwan geographic regions believe iptv market presents meaningful growth opportunity regions well regions targeted expand iptv offerings fiscal 2008 vs 2007 net sales decreased 34 8265 million 2008 compared 2007 revenue lower segments except handsets services decrease primarily due pcd sold july 2008 net sales disposed pcd segment decreased 7846 million multimedia communications segment net sales decreased 351 million 11 2008 compared 2007 mainly due continued weakening demand pas infrastructure products broadband infrastructure segment net sales decreased 463 million 29 2008 compared 2007 decrease mainly due lower cpe msan sales due customer concentration segment revenues fluctuate based upon magnitude timing revenue recognition certain contracts handsets sales increased 531 million 23 2008 primarily due handsets sold pcd llc aggregating 1260 million second half 2008 partially offset continued price volume declines pas handsets sold 2008 compared 2007 gross profit cost sales consists primarily material labor costs associated manufacturing assembly testing products costs associated installation customer training warranty costs fees agents inventory contract loss provisions overhead cost sales also includes import taxes tariffs components assemblies components materials used products purchased single supplier limited group suppliers cases subject obtaining chinese import permits approvals also rely third party manufacturers manufacture assemble cdma handsets gross profit affected average selling prices material costs product mix impact warranty charges contract loss provisions well inventory writedowns release deferred revenues related costs pertaining prior years gross profit percentage net sales varies among product families expect overall gross profit percentage net sales fluctuate future result shifts product mix stage product life cycle decreases average selling prices ability reduce cost sales fiscal 2009 vs 2008 gross profit 650 million 17 net sales 2009 compared 2612 million 16 net sales 2008 overall gross profit decrease absolute dollars primarily due overall decrease sales disposal pcd msbu 2008 disbandment operations formerly included segment first quarter 2009 pcd segments aggregate accounted 812 million decrease gross profit 2009 gross profit segments pcd decreased 1150 million 2009 compared 2008 decrease primarily due decrease sales additional inventory writedowns claim settlement related certain handsets sold pcd llc handsets segments decrease sales higher margin multimedia communications products 2009 partially offset 85 million decrease cost sales handsets segment resulting amortization marvell technology group ltd marvell supply agreement first quarter 2009 see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k additional discussion see segment reporting section item 7 fiscal 2008 vs 2007 gross profit 2612 million 16 net sales 2008 compared 3215 million 13 net sales 2007 overall gross profit decrease absolute dollars primarily due disposition pcd july 2008 inventory charge related cancellation order cdma handset model higher loss contract provision broadband infrastructure segment well lower volume gross margin percentage pas handset sales decrease offset increased sales higher margin products multimedia communications services segments well 51 million supplier rebate recognized 2008 overall gross profit percentage sales increased mainly due disposition pcd july 2008 relatively lower gross profit percentages compared segments gross profit 2008 includes 34 million contract loss charges relating costs included calculation broadband infrastructure segment gross profit prior periods impact recording priorperiod charges prior current periods material excluding pcd segments gross profit 1800 million 24 net sales 2008 compared 2013 million 26 2007 operating expenses following table summarizes operating expenses selling general administrative expenses sga include compensation benefits professional fees sales commissions provision doubtful accounts receivable travel entertainment costs research development expenses consist primarily compensation benefits employees engaged research design development activities costs parts prototypes equipment depreciation third party development expenses believe continued prudent investment research development critical longterm success aggressively evaluate appropriate investment levels portion costs fixed difficult quickly reduce periods lower sales selling general administrative fiscal 2009 vs 2008 sga expenses 1407 million 2009 decrease 1168 million compared 2576 million 2008 decrease sga expense primarily due 144 million decrease sga expenses related divested operations primarily pcd msbu 418 million decrease personnel related expenses due continuous streamlining operations recent cost reduction measures 147 million reduction legal accounting fees result 35 million receipt related legal settlement starent patent litigation fourth quarter 2009 well reduced activity investigations litigation 97 million decrease depreciation expense due assets impairment writeoffs 2008 104 million savings reduction use outside services 79 million decrease travel related expenses due reduced travel activity cost containment efforts 73 million reduction advertising marketing sales promotions well shows exhibits expenses due reduced sales activities 29 million decrease facility related expense 10 million increase recovery doubtful account result continued effort collection 12 million increase net gain disposed assets 21 million reduction taxes fees licenses 12 million reduction insurance premium 12 million decrease equipment expense continued streamline operations fiscal 2008 vs 2007 sga expenses 2576 million 2008 decrease 19 compared 3191 million 2007 decrease 615 million 149 million related disposal pcd msbu july 2008 decrease also due 157 million decrease legal accounting fees result reduced activity investigations litigation 76 million savings reduction use outside services primarily due accounting restatement 2007 implementation upgrade enterprise resource planning erp system 71 million decrease personnel related expenses bonuses due continuous streamlining operations recent cost reduction measures 32 million decrease due deconsolidation variable interest entity certain fixed assets fully amortized early 2008 23 million decrease advertising marketing expense due reduced sales activities 23 million reduction commission expense due decrease overall revenue 25 million decrease tax licenses due reduced business taxes china resulting tax refund government 18 million decrease travel related expenses due reduced travel activity cost containment efforts decrease partially offset 31 million decrease recovery bad debt 2008 research development fiscal 2009 vs 2008 rd expenses decreased 800 million 2009 compared 2008 july 2008 sold pcd msbu resulted aggregated rd savings 104 million 2009 addition decrease also due 414 million decrease personnel related expenses continued streamline rd operations reduced spending noncore business units 120 million savings reduction use outside services primarily due winddown korea operation 37 million decrease travel related expenses due reduced travel activity 38 million decrease facility related expense 34 million decrease depreciation 48 million decrease software license parts expenses continued streamline operations fiscal 2008 vs 2007 rd expenses decreased 250 million 2008 compared 2007 second half 2008 sold pcd msbu resulted aggregated rd savings 83 million addition decrease also attributed 116 million decrease personnel related expenses continued transfer rd functions united states china reduced spending noncore business units 23 million decrease depreciation 20 million decrease software license expense continued streamline operations well 20 million decrease related recognition sale patent 2008 offset increase 19 million consulting testing expense related new handset introductions 2008 stockbased compensation expense december 31 2009 approximately 85 million total unrecognized compensation cost measured related nonvested stock options restricted stock restricted stock units expected recognized weightedaverage period 17 years following table summarizes stockbased compensation expense consolidated statement operations fiscal 2009 vs 2008 decrease stockbased compensation expense 2009 compared 2008 primarily due reduced headcount result workforce reductions second half 2008 throughout 2009 higher valued equity awards becoming fully vested 2009 decrease equity awards granted 2009 based foregoing factors expect stockbased compensation expense continue decrease fiscal 2010 fiscal 2008 vs 2007 increase stockbased compensation expense 2008 compared 2007 primarily due recognition expense 2008 awards granted fourth quarter 2007 2008 including annual merit equity awards granted november 2007 february 2008 compared period 2007 awards granted delinquent filing reports sec 2008 stockbased compensation expense attributable selling general administrative includes approximately 15 million resulting award modifications related retirement one companys executives fourth quarter 2008 includes charge 25 million relating prior periods resulting correction forfeiture rate application impact recording priorperiod charge prior current periods material amortization intangible assets fiscal 2009 vs 2008 amortization intangible assets 2009 compared 41 million 2008 impairment charge 49 million recorded fourth quarter 2008 fully writeoff remaining carrying value intangible assets december 31 2008 fiscal 2008 vs 2007 amortization intangible assets 41 million 2008 compared 160 million 2007 amortization intangible assets declined primarily due impairment intangible assets carrying value 157 million fourth quarter 2007 disposition intangible assets carrying value 158 million third quarter 2008 connection sale pcd due fact several intangible assets became fully amortized preceding twelve months asset impairment june 2009 announced intention consider potential sale manufacturing research development administrative offices facility hangzhou china december 2009 entered sale leaseback agreement intended sale property another party approximately 140 million leaseback portion property 2016 transaction expected close end march april 2010 subject customary closing conditions including completion required regulatory approvals third quarter 2009 contracted commercial real estate agent assist evaluating potential sale facility furthermore october 2009 initiated actions consolidate use facility reduce operating costs revised projected occupancy needs light developments performed recoverability assessment facility september 30 2009 impairment testing performed us third quarter 2009 utilizing income approach indicated fair value approximated carrying value hangzhou facility september 30 2009 1605 million impairment recorded respect property income approach used result lack preliminary offers available comparable market transaction activity place reliance market valuation approach however fourth quarter 2009 sale leaseback agreement received buyer gave us better indication propertys fair value revealed value property interested third party lower fair value previously estimated using income approach building approximately 27 million square feet unique design based uniqueness building fact single offer building received market several months management determined third party offer better indication fair value methods offer specific property representing direct evidence fair value based offer determined property net book value excess fair value due apparent decline value conducted recoverability test entitywide asset determined carrying value net assets exceeded undiscounted cash flows expected result use eventual disposition asset group assessment fair value management placed primary reliance market approach third party offer result analysis reduced overall assessment fair value property 333 million accordingly recorded noncash impairment charge 333 million fourth quarter 2009 adjusted carrying value 1257 million property lower pending sales price valuation performed factored abovemarket rental rates paid company stipulated leaseback agreement accompanying sale overall assessment fair value property based level 2 inputs defined inputs quoted market prices active markets observable either directly indirectly december 31 2009 longlived asset sold classified held use expect retain minor portion use property sixyear leaseback expect transaction qualify saleleaseback accounting upon closing potential gain realized sale leaseback expected deferred amortized leaseback term fiscal 2008 performed recoverability test property plant equipment assets december 31 2008 due recurring operating losses continuing challenging business environment sustained decline companys stock price estimates future cash flows developed 2009 budgeting process indicated business segments inability recover carrying value segments assets made various estimates management believes reasonable appropriate determining estimated fair values property plant equipment december 31 2008 concluding fair values also considered part results appraisals made december 31 2008 valuation firms fair value facility hangzhou china certain equipment furniture software automobiles leasehold improvements obtained confirm reasonableness estimates significant longlived asset terms carrying value manufacturing research development administrative offices facility hangzhou china using income capitalization approach determined estimated fair value facility related improvements december 31 2008 approximately 1832 million exceeded net book value approximately 158 million result concluded headquarters china operations impaired tested individually significant equipment furniture software automobiles leasehold improvement assets located china india japan korea united states impairment primarily using cost approach estimate related fair values adjustment factors applied original cost tested asset first estimate current replacement cost account deterioration obsolescence causes well deinstallation costs determine items estimated fair value december 31 2008 result analysis recorded impairment charge approximately 223 million operating expenses consisted 119 million erp system 67 million equipment furniture 37 million primarily capitalized software addition fourth quarter 2008 decided disband custom solutions business unit provided customized telecommunications solutions recorded charge approximately 49 million writeoff unamortized balance customer relationships intangible asset arising previous acquisition commworks result consolidated balance sheet december 31 2008 contains balances finitelived purchased intangible assets subject amortization fiscal 2007 light current market conditions conducted indepth strategic analysis completed fourth quarter 2007 define new corporate strategy review reevaluated key assumptions overall strategic business manufacturing capacity plans light continued declines revenues excluding pcd appeared persistent result revised near medium term revenue expectations downward significantly taking account persistent weak global industry economic conditions new strategic direction well declines revenues company experienced material changes outlook plans first able quantify fourth quarter 2007 result strategic review 2008 budgeting process triggered impairment review longlived assets based upon 2007 goodwill impairment assessment recorded goodwill impairment charges approximately 31 million year ended december 31 2007 result consolidated balance sheets december 31 2008 2007 contained balances goodwill also determined estimated undiscounted cash flows within segment sufficient recover carrying value certain longlived assets calculated estimated fair values intangible assets subject amortization segment using expected discounted future cash flows recorded asset impairment charge approximately 157 million customer relationships existing technology intangible assets approximate 11 million impairment charge recorded recognize impairment carrying value certain equipment segment well restructuring fiscal 2009 june 9 2009 board directors approved restructuring plan 2009 restructuring plan designed reduce operating costs 2009 restructuring plan includes worldwide reduction force approximately 50 headcount approximately 2300 employees located primarily china united states lesser degree international locations year ended december 31 2009 recorded total restructuring costs approximately 465 million 400 million related 2009 restructuring plan 65 million related prior year plans 400 million charge related 2009 restructuring plan comprised primarily approximately 381 million severance benefits 19 million lease costs 65 million charge 2009 related prior year plans consisted primarily severance benefits related transition certain key functions including finance china divestiture companys korea operations additional lease costs net approximately 05 million reversal charges recorded fiscal year 2008 fiscal 2008 december 16 2008 board directors approved restructuring plan 2008 plan designed reduce operating costs plan included among things winding certain noncore operations implementing worldwide reduction force approximately 10 headcount reduction force affected approximately 750 employees china korea locations including united states connection 2008 plan fourth quarter 2008 incurred restructuring charge 131 million comprised largely onetime severance benefits fiscal 2007 october 2 2007 board directors approved restructuring plan 2007 plan reduce operating costs included worldwide reduction force approximately 12 headcount workforce reduction primarily united states china incurred restructuring charge connection plan 145 million fourth quarter 2007 comprised largely cash payments associated onetime severance benefits december 31 2009 remaining restructuring liability related plans approximately 217 million majority remaining cash expenditures related 2009 2008 restructuring plans expected paid 2010 remaining liabilities related lease obligations expected settled remaining lease term expect incur additional restructuring charges 2010 continue execute 2009 2008 restructuring plans expect realize annual cost savings salary compensation related expenses approximately 112 million upon complete implementation 2009 2008 plans part reduction salary compensation related expense reflected consolidated statements operations years ended december 31 2009 2008 information restructuring charges see note 16 consolidated financial statements item 8 net gain divestitures fiscal 2009 net gain divestiture 2009 01 million comprised 14 million gain sale pcd assets resulting adjustment reflect actual transactionrelated costs partially offset 13 million loss divestiture korea operations fiscal 2008 78 million net gain divestitures 2008 consisted primarily 38 million gain sale pcd 39 million gain sale msbu discussion divestitures see note 3 notes consolidated financial statements contained item 8 annual report form 10k fiscal 2007 february 2006 sold substantially assets selected liabilities semiconductor design operations including assets related prior acquisition advanced communications devices corporation marvell technology group ltd recognized 43 million gain sale assets 2007 upon achieving defined milestones income expense interest income fiscal 2009 vs 2008 interest income 21 million 75 million 2009 2008 respectively decrease interest income primarily due effect lower average cash balances 2009 due decline average interest rate fiscal 2008 vs 2007 interest income 75 million 145 million 2008 2007 respectively decrease interest income primarily due decrease cash balances available investment due lower interest rates earned 2008 compared 2007 interest expense fiscal 2009 vs 2008 interest expense 06 million 104 million 2009 2008 respectively decrease interest expense 2009 compared 2008 primarily attributable repayment 2746 million convertible subordinated notes due march 1 2008 480 million bank loan repayments 2008 fiscal 2008 vs 2007 interest expense 104 million 327 million 2008 2007 respectively decrease interest expense 2008 compared 2007 primarily attributable repayment 2746 million convertible subordinated notes march 1 2008 480 million bank loan repayments 2008 interest expense 2008 included approximately 25 million debt issuance costs related 75 million secured revolving credit facility period january 1 2008 maturity march 1 2008 convertible subordinated notes stated interest rate 10875 accordance second supplemental indenture stated interest rate convertible subordinated notes 7625 january 9 2007 july 25 2007 10875 july 26 2007 december 31 2007 prior january 9 2007 convertible subordinated notes accrued interest 78 per annum income net fiscal 2009 vs 2008 income net 23 million 2009 compared 354 million 2008 income net 23 million 2009 consisted 63 million foreign currency gain 04 million gain sale mrv 12 million miscellaneous income partially offset 55 million otherthantemporary impairment two equity investments mrv xalted income net 2008 consisted primarily 324 million gain sale investment gemdale 73 million gain sale investment infinera 82 million gain liquidation investment variable interest entity offset partially 99 million foreign currency loss 43 million writedowns longterm investments fiscal 2008 vs 2007 income net 354 million 2008 compared 648 million 2007 income net 2008 consisted primarily 324 million gain sale investment gemdale 73 million gain sale investment infinera 82 million gain liquidation investment variable interest entity offset partially 99 million foreign currency loss 43 million writedowns longterm investments income net 2007 included 537 million gain sale part investment gemdale 57 million gain sale investments immenstar inc immenstar fiberxon inc fiberxon income tax expense benefit fasb asc 74010 establishes criteria recognizing continuing recognize morelikelythannot tax positions may result income tax expense volatility future periods believe adequately provided tax positions amounts asserted taxing authorities could greater accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 9 consolidated financial statements item 8 incorporated herein reference fiscal 2009 vs 2008 income tax expense 109 million 2009 compared tax expense 71 million 2008 company made assessment realizability deferred tax assets korea included handsets segment believe generate sufficient income realize deferred tax assets korea income tax associated establishing valuation allowance 14 million first quarter 2009 company recorded tax benefit 28 million related recognition previously unrecognized tax benefits reversal interest penalties due statute limitations expirations income tax audit settlements without 14 million tax expense related establishing korea valuation allowance 28 million tax benefit related statute limitation expiration income tax audit settlements mentioned tax expense 123 million 2009 two primary reasons tax expense despite incurring pretax losses first provided tax benefit current year losses incurred tax credits generated united states countries believe likely tax benefit associated losses realized second continue accrue tax expense jurisdictions historically profitable 2008 discussed recorded 117 million income tax benefit related reversal deferred tax liabilities related unremitted earnings subsidiaries 18 million tax expense associated establishing valuation allowance canada fiscal 2008 vs 2007 income tax expense 71 million 2008 compared tax expense 329 million 2007 china corporate income tax law cit law became effective january 1 2008 result enactment new regulations first quarter 2008 address cit law recorded income tax benefit 117 million first quarter 2008 related reversing deferred tax liability foreign withholding taxes related unremitted earnings subsidiaries determined longer permanently reinvested outside united states also accrued 32 million foreign withholding taxes first quarter 2008 related realized gain sale investment gemdale due sale pcd believe generate sufficient income canada realize deferred tax assets canada therefore established valuation allowance remaining net deferred tax assets canada income tax expense associated establishing valuation allowance 18 million without 117 million tax benefit related reversal deferred tax liabilities 32 million tax expense related accrued foreign withholding taxes 18 million tax expense related establishing canada deferred tax asset valuation allowance mentioned tax expense 138 million 2008 two primary reasons tax expense despite incurring pretax losses first provided tax benefit current year losses incurred tax credits generated united states countries believe likely tax benefit associated losses realized second continue accrue tax expense jurisdictions historically profitable 2007 recorded 171 million income tax expense related establishing 117 million deferred tax liability unremitted earnings accruing 54 million withholding taxes related realized gain sale investment gemdale segment reporting make financial decisions based information receive internal management system currently evaluate operating performance allocate resources segments based segment revenue gross profit cost sales direct expenses relation production assigned segments accounting policies used measuring segment assets operating performance used consolidated level multimedia communications fiscal 2009 vs 2008 sales 2009 decreased 50 1399 million decrease mainly due declines pas equipment sales 86 well decrease sales ngn product 54 partially offset increase sales iptv related products ip messaging product accelerated amortization deferred revenue related pas equipment 2009 pas equipment sales including amortization deferred revenue comprised approximately 52 77 multimedia communications sales 2009 2008 respectively gross profit percentage decreased 39 2009 45 2008 2009 gross profit benefited 61 million sales product previously written zero carrying value 2008 gross profit benefited 45 million impact release accrued third party commissions compared 08 million 2009 decrease gross profit percentage also due decreased sales higher margin pas infrastructure equipment ngn products well increase lower margin revenue related accelerated amortization pas deferred revenue expect future pas infrastructure spending decline rapidly 2010 beyond china launched 3g networks review assumptions regarding estimated post contract support periods regular basis due china telecommunication industry restructuring launch 3g services china ministry industry information technology china announced pas services china phased january 1 2012 second third quarter 2009 streamlined sales service research development operations pas handsets infrastructure equipment perform new research development pas products maintain small support team assist customers warranty matters later part third quarter 2009 early part fourth quarter 2009 contacted pas infrastructure customers held discussions pas products future october 2009 notified pas infrastructure customers china longer provide upgrades support pas products beyond december 31 2011 consequently determined remaining expected period support 2 years hence deferred revenue associated pas infrastructure recognized ratably beginning fourth quarter 2009 fourth quarter 2011 result change net sales gross profit fourth quarter 2009 increased approximately 6 million 2 million respectively december 31 2009 approximately 1864 million deferred revenue associated pas infrastructure sales accelerated amortization period support fiscal 2010 2011 total net sales gross profit associated amortization pasrelated deferred revenue approximate 93 million 33 million respectively plan aggressively pursue opportunities iptv product portfolios multiple markets however anticipate sales fully offset anticipated decline pas sales 2010 beyond believe iptv market presents meaningful growth opportunity currently offer initial market acceptance iptv products china india taiwan geographic regions fiscal 2008 vs 2007 sales 2008 decreased 11 351 million compared 2007 decrease mainly due lower pas system sales 3g related product sales 2008 exited 3g related product lines early 2007 decrease partially offset higher set top box stb ngn sales worldwide pas system sales including amortization deferred revenue decreased 21 contributed approximately 77 multimedia communications sales 2008 compared 87 2007 gross profit percentage increased 45 2008 35 2007 primarily due lower warranty inventory costs well impact reduction 45 million previously accrued third party commissions third quarter 2008 91 million 3g product sales low margins 2007 offset part increased sales lower margin stb products 2008 reduction accrued third party commissions third quarter 2008 resulted determination aged accruals longer needed statute limitations respect unclaimed commissions expired exhausted efforts extinguish liabilities accordance established company procedures broadband infrastructure fiscal 2009 vs 2008 broadband infrastructure sales decreased 27 299 million 2009 compared 2008 decrease mainly due decrease sales major product lines 2009 softbank japan one largest infrastructure customers represented approximately 11 23 total broadband infrastructure sales 2009 2008 respectively 2009 began recognizing revenue ratably significant customer contract seven year period broadband infrastructure included 145 million revenue insignificant gross profit related contract 2009 gross profit benefited 14 million sales product previously written zero carrying value gross profit percentage increased 4 2009 negative 3 2008 increase gross profit percentage primarily due lower provision anticipated contract losses 2009 compared 2008 may incur additional warranty expense inventory writedowns introduce new products may required accrue additional contract losses certain fixed price contracts progress accruals may result negative impacts future gross margins results operations financial position fiscal 2008 vs 2007 sales decreased due decline cpe msan product lines softbank japan completed current phase adsl expansion softbank japan represented approximately 23 34 total broadband infrastructure sales 2008 2007 respectively decline partially offset higher sales optical products gross profit decreased 100 million 2008 compared 2007 decreased gross profit 2008 primarily due approximately 184 million contract loss provisions well approximately 71 million increased inventory costs related optical products china 2008 decrease partially offset sale higher margin msan products 2008 gross profit 2008 includes 34 million contract loss charges relating costs included calculation gross profit prior periods impact period item material 2008 prior periods 2007 recorded 62 million additional contract loss infrastructure deployment contract handsets fiscal 2009 vs 2008 net sales decreased 65 1856 million 2009 compared 2008 decrease primarily due declines pas handsets sales gsm handsets sales cdma handsets sales pcd llc partially offset increase cdma handsets sales china sale pas handsets accounted 23 50 total handset sales 2009 2008 respectively pas handset sales declined significantly since first quarter 2009 china moved toward 3g network deployment gross profit percentage net sales decreased 14 2008 negative 19 2009 decrease mainly due inventory clearing sales pas cdma handsets low margins additional inventory writedowns pas cdma tdscdma handsets china addition gross profit also reduced approximately 246 million result certain transactions pcd llc consisting claim settlement 111 million productrelated liability disputes product returns 260 million inventory writedowns net realizable value writedowns excess inventory warranty reserves 2009 partially offset 125 million benefit related sales cdma handsets pcd llc 2009 previously written zero carrying value fourth quarter 2008 substantially completed wind worldwide handset operations expect handset segment significant contribution revenue gross margin 2010 beyond fiscal 2008 vs 2007 net sales increased 23 year 2008 compared periods 2007 majority handset sales historically china experienced decline volume price pas handsets disposition pcd operations july 1 2008 handset sales pcd llc totaled 1260 million contributed approximately 44 total handset sales 2008 pas handset units sold china declined 36 million units 2008 compared 48 million units 2007 25 volume decline primarily attributed lower demand pas handsets resulting decline pas subscribers service providers reduced marketing efforts pas handsets anticipation next generation technology networks restructuring china telecommunication industry average selling price per unit pas products declined 94 2008 compared 2007 due competitive pricing pressures increased sales distributor channels gross profit percentage net sales handsets segment decreased 2008 compared 2007 decrease primarily due losses gsm products reduced inventory older models costs related cancelation order cdma model higher inventory cost pas data card business well continued price erosion decrease demand pas product lines increased sales lower gross margin cdma handsets pcd llc also contributed decline gross profit percentage decrease gross margin partially offset 51 million supplier rebate 2008 services fiscal 2009 vs 2008 services segments revenue increased 9 50 million 2009 compared 2008 increase primarily due higher international maintenance service revenue partially offset decrease china service sales china telecommunications industry restructuring gross profit percentage net sales increased 30 2008 41 2009 increase gross profit absolute dollars primarily due increased international sales overall cost reduction efforts service divisions including headcount reductions consolidation service locations fiscal 2008 vs 2007 services segments revenue external customers increased 9 2008 compared 2007 increase mainly due continued growth china service sales resulting increased service contracts maintenance services value added services previously allocated revenues service segment 78 million multimedia communications 03 million broadband infrastructure segment sales china reclassified respective segments 2007 conform current years segment presentation gross profit increased 17 2007 30 2008 increase primarily due china service sales increases without corresponding increases associated cost utilizing excess capacity personal communication devices pcd fiscal 2009 vs 2008 july 1 2008 sold pcd operations see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k fiscal 2008 vs 2007 net sales pcd decreased 7846 million compared 2007 due disposition pcd july 1 2008 gross profit increased 6 2007 8 2008 primarily due sales higher margin products 2008 fiscal 2009 vs 2008 segment consists mobile solutions msbu custom solutions csbu business units disposed msbu unit july 2008 completed disbandment csbu unit first quarter 2009 remaining ip messaging product line integrated multimedia communication segment remaining services related contracts integrated service segment fiscal 2008 vs 2007 revenue decreased 184 million 43 2008 compared 2007 total 184 million decrease sales 77 million due disposition msbu july 2008 46 million related recognition revenue higher margin product sales 2007 fourth quarter 2008 initiated actions disband csbu gross profit percentage decreased 51 2008 61 2007 decrease primarily due higher inventory writedowns higher overhead expenses 2008 offset effect disposition msbu lower gross margin sales related party transactions softbank affiliates recognize revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb support softbanks fibertothehome service sales carrier class gepon product well netring™ product addition support softbanks new internet protocol television iptv sales rollingstream™ product 2009 2008 2007 recognized revenue 231 million 383 million 678 million respectively sales telecommunications equipment services affiliates softbank included accounts receivable december 31 2009 2008 55 million 92 million respectively related transactions sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period december 31 2009 2008 customer advance balance related softbank agreements 02 million 07 million respectively current deferred revenue balance related softbank 14 million 40 million december 31 2009 december 31 2008 respectively december 31 2009 noncurrent deferred revenue balance related softbank 88 million compared 92 million december 31 2008 december 31 2009 softbank beneficially owned approximately 11 outstanding stock audiovox prior sale pcd july 1 2008 phillip christopher one former officers served director audiovox corporation audiovox 2008 2007 paid approximately 08 million 21 million respectively services provided audiovox liquidity capital resources following sections discuss effects changes balance sheet cash flows contractual obligations commitments liquidity capital resources balance sheet cash flows cash equivalents shortterm investments cash equivalents consisting primarily bank deposits money market funds recorded cost approximates fair value shortterm nature instruments december 31 2009 cash equivalents approximating 1312 million held subsidiaries china chinese government imposes currency exchange controls cash transfers china regulations china permit foreign owned entities freely convert renminbi foreign currency transactions fall current account includes trade related receipts payments interest dividends accordingly chinese subsidiaries may use renminbi purchase foreign exchange settlement current account transactions without preapproval however pursuant applicable regulations foreigninvested enterprises china may pay dividends accumulated profits determined accordance chinese accounting standards regulations calculating accumulated profits foreign investment enterprises china required allocate least 10 accumulated profits year fund certain reserve funds including mandated employee benefits funds unless reserves reached 50 registered capital enterprises transactions involve conversion renminbi foreign currency classified capital account transactions examples capital account transactions include repatriations investments loans foreign owners direct equity investments foreign entity china domiciled entity capital account transactions require prior approval chinas state administration foreign exchange safe provincial branch convert remittance foreign currency us dollars transmit foreign currency outside china result restrictions prc laws regulations china subsidiaries restricted ability transfer portion net assets parent 2009 cash flows net cash used operating activities 2009 674 million year ended december 31 2009 operating activities significantly impacted following •net loss 2257 million offset noncash charges approximately 580 million resulted net use cash 1677 million noncash charges included 333 million impairment hangzhou facility 131 million depreciation amortization 121 million stockbased compensation 55 million otherthantemporary impairment two equity investments 09 impairment variable interest entity partially offset recovery doubtful accounts 68 million •changes operating assets liabilities providing net cash 1002 million decrease sales activity 2009 primary driver changes operating assets liabilities cash operations benefited 1233 million decrease accounts receivable 728 million decrease inventory deferred costs 831 million decrease assets consisting primarily working capital items 42 million increase deferred revenue offset partially decrease accounts payable using cash 1277 million decrease customer advances 292 million decrease liabilities 246 million cash provided investing activities 2009 213 million cash provided investing activities 2009 included 100 million cash proceeds released escrow july 2009 related sale pcd 15 million cash proceeds divestiture korea operations 73 million deposit received pending sale china headquarters 26 million sale investment interests pcd llc mrv net proceeds 32 million sale shortterm investments offset partially 20 million cash used purchase property plant equipment 20 million change restricted cash used financing immaterial 2009 2008 cash flows net cash used operating activities 2008 552 million year ended december 31 2008 operating activities significantly impacted following •net loss 1508 million adjusted gains sale investments 402 million 82 million gain liquidation ownership interest variable interest entity 78 million gain divestitures noncash charges 784 million resulted net use cash 1285 million noncash charges 784 million included 380 million depreciation amortization 206 million stockbased compensation expense 272 million impairment longlived assets 43 million impairment longterm investments partially offset recovery doubtful accounts 52 million deferred tax benefit 64 million deferred tax benefit primarily due 117 million benefit resulting change china corporate income tax law offset partially tax expense including 18 million expense related placing valuation allowance canadian deferred tax assets •changes net operating assets liabilities providing net cash 734 million primarily result management working capital part necessitated repayment convertible subordinated notes due march 1 2008 cash operations benefited 589 million decrease accounts receivable 2008 primarily occurred pcd business segment first quarter 2008 due strong collection efforts 1289 million increase accounts payable primarily due timing payments vendors partially offsetting 649 million use cash resulting decrease customer advances due timing bookings related revenue recognition customer advances represent cash deposits received customers orders yet received final acceptance net cash provided investing activities year ended december 31 2008 2460 million included approximately 2141 million net proceeds sale pcd msbu 129 million net proceeds sale shortterm investments net purchases 334 million proceeds sale investment interests net purchases long term investment interests 77 million repayment loan variable interest entity partially offset 142 million used purchase property plant equipment 82 million change restricted cash 334 million proceeds sale investment interests net purchases long term investment interests comprised 421 million proceeds sale gemdale offset 87 million used purchase long term investment interests net cash used financing activities year ended december 31 2008 3326 million related primarily repayment convertible subordinated notes 2746 million march 1 2008 net repayment 480 million bank loans 2008 2007 cash flows net cash used operating activities 2007 2251 million year ended december 31 2007 operating activities significantly impacted following •net loss 1984 million adjusted gains sale investments 537 million 43 million gain divestiture noncash charges 925 million resulted net use cash 1639 million noncash charges 2007 included 574 million depreciation amortization 128 million stockbased compensation expense 199 million impairment charges longlived assets •changes net operating assets liabilities using net cash 612 million 2007 accounts payable decreased 1720 million due decrease purchases inventory 2007 change timing payments vendors beginning first quarter 2007 comply accelerated vendor payment terms addition deferred revenue decreased 407 million primarily due recognition revenue deferred prior periods assets increased 212 million primarily due advance payments suppliers customer advances decreased 481 million 2007 upon subsequent receipt final acceptances revenue recognition customer advances reduced revenue cost sales recorded customer advances represent cash deposits received customers orders yet received final acceptance cash used operating activities partially offset reduction accounts receivable 939 million inventory deferred costs 1212 million reduction accounts receivable result strong cash collections high percentage revenue 2007 pcd generally experienced shorter collection period related receivables days sales outstanding 48 days december 31 2007 compared 60 days december 31 2006 decrease inventory deferred cost primarily due decrease purchases inventory 2007 net cash provided investing activities 2007 totaled 294 million cash 831 million received proceeds sale shortterm longterm investments 43 million received connection achieving certain milestones related sale certain semiconductor assets 2006 66 million result change restricted cash balances representing release restricted cash outflows investing activities included 379 million purchase shortterm investments well 273 million purchase property plant equipment net cash used financing activities 581 million primarily due net repayment lines credit 616 million accounts receivable net accounts receivable decreased 1160 million 1584 million december 31 2008 423 million december 31 2009 decrease accounts receivable primarily due decrease sales 2009 resulting divestiture noncore operations december 31 2009 allowance doubtful accounts 261 million gross receivables 684 million assess collectability receivables based number factors including analysis creditworthiness customers historical payment history current economic conditions ability collect payment length time individual receivable balance outstanding certain accounts receivable china outstanding significant period time provide allowances receivables based criteria discussed believe sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations inventories deferred costs following table summarizes inventories deferred costs inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer finished goods customer sites approximately 338 million 1380 million december 31 2009 2008 respectively inventories decreased approximately 1175 million primarily result winddown worldwide handset operations completion significant customer contract reclassification 728 million cost finished goods customer sites deferred costs related customer contract deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized 156 million increase shortterm deferred costs 357 million increase longterm deferred costs primarily result 728 million reclassification finished goods customer sites deferred costs upon completion significant customer contract mentioned offset part revenue recognition longterm contracts accelerated amortization deferred costs associated pas deferred revenue liquidity incurred net losses attributable utstarcom inc 2257 million 1503 million 1956 million years ended december 31 2009 2008 2007 respectively recorded operating losses 19 20 consecutive quarters period ended december 31 2009 december 31 2009 accumulated deficit 10672 million incurred net cash outflows operations 674 million 552 million 2251 million 2009 2008 2007 respectively operating results expected improve 2010 compared prior years expect continue incur losses 2010 december 31 2009 cash equivalents 2658 million 1312 million held subsidiaries china amount cash available transfer china subsidiaries use nonchina subsidiaries limited liquidity needs subsidiaries china chinesegovernment mandated limitations including currency exchange controls transfers funds outside china subsidiaries paid aggregate 150 million dividends us parent company year ended december 31 2007 another 100 million february 2008 cash transfers offset eliminated preparing consolidated cash flow statements principal source funding nonchina operations periods made february 2009 china subsidiaries paid additional 50 million dividends us parent company however going forward amount cash available transfer china subsidiaries limited liquidity needs subsidiaries china restriction currency exchange chinesegovernment mandated requirements including currency exchange controls certain transfers funds outside china 2009 approximately 3221 million credit facilities china expired renewed december 31 2009 available credit facilities global economies experienced significant downturn driven financial credit crisis continue challenge economies period time current macroeconomic environment significant risks uncertainties inherent managements ability forecast future results operating environment confronting us internally externally raises significant uncertainties 2009 2008 took number actions improve liquidity march 2008 paid 2895 million retire convertible subordinated notes related accrued interest july 1 2008 completed sale pcd addition divested mobile solutions business unit july 2008 fourth quarter 2008 management initiated actions disband customs solutions business unit wind korea based handset operations announced initiatives including efforts eliminate functional duplications consolidation number functions china operations june 2009 management expanded initiatives include worldwide reduction workforce outsourcing manufacturing operations optimizing research development spending focus selected products yeartoyear quarterly selling general administrative research development operating expenses decreased significantly 2009 compared 2008 management believes continuing efforts streamline operations enable fixed cost base better aligned operations market demand projected sales levels projected sales materialize need take actions reduce costs expenses explore cost reduction options december 2009 entered sales leaseback agreement intended sale manufacturing research development administrative offices facility hangzhou china another third party approximately 140 million leaseback portion facility date received proceeds approximately 139 million transaction march 8 2010 obtained irrevocable bank guarantee letter buyer remaining amount cash proceeds sale leaseback agreement expected close end march april 2010 provide additional cash working capital general purposes management believes china nonchina operations sufficient liquidity finance working capital expenditure needs next 12 months able execute plan successfully may need obtain funds equity debt financings assurance additional financing required available terms satisfactory us funds raised future issuance preferred stock debt securities could rights privileges preference senior common stock newly issued debt could contain debt covenants impose restrictions operations sale newly issued debt equity securities could result additional dilution current shareholders income taxes china corporate income tax law cit law became effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises prior change tax law certain subsidiaries joint ventures located china enjoyed tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law targets certain industries reduced 15 tax rate certain qualified high technology enterprises fies established promulgation new law previously enjoyed lower tax rates increase tax rates would gradually phased five years fourth quarter 2008 two china subsidiaries huts utsc approved reduced 15 tax rate approval lasts three years retroactive january 1 2008 chinese central government may review audit tax benefits granted local provincial authorities could determine disallow benefits certain subsidiaries joint ventures located china enjoy tax benefits china generally available foreign investment enterprises tax benefits reduced disallowed repealed due changes tax laws determination chinese government business could suffer balance sheet arrangements december 31 2009 2008 balance sheet arrangements contractual obligations commercial commitments following table summarizes significant contractual obligations december 31 2009 operating leases lease certain facilities noncancelable operating leases expire various dates 2013 connection sale leaseback agreement february 1 2010 entered lease contract lease respect leaseback portion hangzhou facility lease becomes effective upon closing sale transaction lease terms require total cash payments approximately 115 million years 1 2 134 million years 3 4 142 million years 5 6 letters credit issue standby letters credit primarily support international sales activities outside china support purchase commitments submit bid sale often potential customer require issue bid bond standby letter credit demonstrate commitment bid process addition may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six twelve months date issuance without drawn beneficiary thereof purchase commitments obligated purchase raw materials workinprocess inventory various orders various suppliers fulfilled without adverse consequences material operations financial condition purchase commitments table include agreements cancelable without penalty intellectual property certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products uncertain tax positions december 31 2009 906 million gross unrecognized tax benefits recognized portion gross unrecognized tax benefits would decrease provision income taxes decrease net loss 128 million impact net loss reflects gross unrecognized tax benefits net certain deferred tax assets federal tax benefit state income tax items totaling 778 million included amounts table contractual obligations commercial commitments difficulty making reasonably reliable estimates timing cash settlements respective taxing authorities third party commissions record accruals commissions payable third parties normal course business commissions recorded based terms contracts us third parties paid pursuant contracts consistent accounting policies commissions recorded operating expense period liability incurred december 31 2009 approximately 64 million accrued commissions claimed third parties three years management performed continues perform followup procedures respect accrued commissions upon completion followup procedures accrued commissions claimed statute limitations expired reasonable period time elapsed reduce accruals reduction recorded consolidated statement operations period management determines certain accruals longer necessary years ended december 31 2009 2008 respectively reduced approximately 08 million 45 million accrued commissions payable reduction recorded cost net sales year ended december 31 2007 significant accruals related third party commissions reversed expect approximately 59 million third party commissions reversed recorded reduction cost net sales 2010 critical accounting policies estimates financial condition results operations based certain critical accounting policies estimates include judgments estimates assumptions part management estimates based historical experience knowledge economic market factors various assumptions management believes reasonable circumstances actual results may differ estimates following summary critical accounting policies estimates highlights areas significant judgment application accounting policies affect financial condition results operations revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery installation equipment entitled full payment recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized accordance specific guidance recognizing software revenue allocate revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately use residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element postcontract support established vsoe contract element accordingly revenues contracts recognized ratably period post contract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support review assumptions regarding estimated postcontract support periods regular basis determine necessary revise estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding postcontract support periods different original assumptions contract revenues would recognized remaining expected period support discussed results operationsnet sales item 7 due china telecommunication industry restructuring launch 3g services china determined remaining expected period support pas infrastructure 2 years hence deferred revenue associated pas infrastructure recognized ratably beginning fourth quarter 2009 fourth quarter 2011 revenue fixed priced contracts include requirement significant software modification customization recognized using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2009 2008 2007 recorded 49 million 184 million 62 million contract loss fixed price contract respectively recognize revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term also sell products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product cases developed reasonable estimates stock exchanges based historical experience similar types sales similar products sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material estimate amount rebate based upon terms individual arrangement historical experience future expectations price reductions record estimate rebate amount time sale also enter sales incentive programs comarketing arrangements certain wireless handset customers record incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized assess collectability based number factors including payment history creditworthiness customer request collateral customers international sales may require letters credit customers drawn demand customer defaults payment determine collection payment reasonably assured defer revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally enter revenue sharing arrangements collect payment customer telecommunications service provider collects service revenues enter revenue sharing arrangement recognize revenue collection reasonably assured nature business china emerging markets billings andor customer payments may correlate contractual payment terms generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded recognize related customer revenue advances customers recognized collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained restructuring liabilities litigation contingencies account companys restructuring plans using guidance provided accounting standard codifications asc 420 exit disposal cost obligations asc 712 compensationnonretirement postemployment benefits account litigation contingencies accordance asc 450 contingencies requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value stockbased compensation expense restricted stock awards measured based closing fair market value common stock date grant stockbased compensation expense stock options estimated grant date based options fair value calculated blackscholes option pricing model blackscholes model stockbased compensation expensed ratably straightline basis requisite service period generally vesting term sharebased payment awards determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected term sharebased payment awards stock volatility estimate expected term options granted based historical exercise cancellation data vested options use historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options common stock available determine implied volatility assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties compensation expense could materially different future changes subjective assumptions materially affect estimated value managements opinion existing valuation models may provide accurate measure fair value employee stock options addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period product warranty provide warranty equipment handset sales period generally ranging one two years time final acceptance rarely entered arrangements provide limited warranty services periods longer two years provide expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate time may subject additional costs related nonstandard warranty claims customers occurs estimate additional accruals based historical experience communication customers various assumptions believe reasonable circumstances additional warranty accruals recorded period additional costs identified variable interest entities accounting guidance requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity evaluate investments periodically triggering events occur receivables although evaluate customer credit worthiness prior sale provide allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured assess collectability receivables based number factors including analysis creditworthiness customers historical payment history current economic conditions ability collect payment length time individual receivable balance outstanding policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging accounts receivable applying percentage based historical experience approach results allowance computed based aging receivables evaluate percentages applied category aged accounts receivable periodically based actual history writeoffs collections refine formulabased approach accordingly use future periods certain accounts receivable china outstanding significant period time provide allowances receivables based criteria discussed believe sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations use actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures continually monitor inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs stated cost periodically assess recoverability deferred costs provide reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites contract specific individual customers financial conditions specific individual customers may result increased concentration risk exposure inventory research development capitalized software development costs research development costs charged expense incurred capitalize software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability capitalized software development costs income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain recognize tax benefit expense uncertain tax position likely tax position sustained examination taxing authorities based technical merits position recognize interest expense penalties related income tax matters part provision income taxes recognize deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability deferred tax assets based assessment projected taxable income numerous factors could affect results operations future significant decline future operating results managements assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary record valuation allowance reduce deferred tax assets amount management believes likely realized provide us taxes foreign undistributed earnings considered permanently reinvested outside united states longlived assets including finitelived purchased intangible assets amortize purchased intangible assets finite lives estimated economic lives assets purchased intangible assets carried cost less accumulated amortization assess recoverability longlived assets determining whether carrying value assets recovered undiscounted future cash flows asset impairments primarily consist intangible assets finite lives property plant equipment based estimate amounts timing future cash flows related expected future remaining use ultimate sale disposal property plant equipment net costs sell 2009 incurred 333 million plant equipment impairment charges 2008 incurred 49 million 223 million intangible assets property plant equipment impairment charges respectively 2007 incurred 157 million 11 million intangible assets property plant equipment impairment charges respectively see note 6 notes consolidated financial statements included part ii item 8 annual report form 10k additional discussion process evaluating potential impairment longlived assets highly subjective requires significant judgment order estimate fair value longlived assets typically make various assumptions future prospects business asset relates consider market factors specific business estimate future cash flows generated business based assumptions estimates determine whether need recognize impairment charge reduce value asset stated balance sheet reflect estimated fair value assumptions estimates future values remaining useful lives complex often subjective affected variety factors including external factors real estate market industry economic trends internal factors changes business strategy internal forecasts although believe assumptions estimates made past reasonable appropriate changes assumptions estimates could materially impact reported financial results investments consist principally bank notes equity securities publicly traded privately held companies investments publicly traded equity securities accounted asc 320 investment debt equity securities classified availableforsale investments recorded fair value unrealized gains losses included separate component accumulated comprehensive income net tax 2009 sold remaining investment publicly traded equity securities investments equity securities privately held companies hold less 20 voting interest ability exercise significant influence accounted asc 325 investmentsother using cost method cost method investments carried lower cost fair market value recognize impairment charge decline fair value publicly traded equity securities costmethod investments cost basis judged otherthantemporary significant judgment used identify events circumstances would likely significant adverse effect future use investment consider various factors determining whether impairment otherthantemporary including severity duration impairment forecasted recovery financial condition nearterm prospects investee ability intent hold investment period time sufficient allow anticipated recovery market value recent accounting pronouncements see note 2 notes consolidated financial statements contained item 8 annual report form 10k full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference item 7a item 7a quantitative qualitative disclosures market risk utstarcom exposed impact interest rate changes foreign currency exchange rates interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however interest income sensitive changes general level us interest rates since majority funds invested instruments maturities less one year policy limit risk principal loss ensure safety invested funds limiting market risk funds excess current operating requirements invested government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds table represents carrying amounts related weightedaverage interest rates maturity investment portfolio december 31 2000 foreign exchange rate risk exposed foreign exchange rate risk sales china denominated renminbi portions accounts payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date insignificant fluctuations currency exchange rates future may material adverse effect results operations multicurrency bank account japanese yen purchasing portions inventories supplies balance japanese yen account december 31 2000 approximately 106 million item 8item 7a quantitative qualitative disclosures market risk utstarcom exposed impact interest rate changes foreign currency exchange rates interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however interest income sensitive changes general level us interest rates since majority funds invested instruments maturities less one year policy limit risk principal loss ensure safety invested funds limiting market risk funds excess current operating requirements invested government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds tax exempt instruments accordance investment policy shortterm investments invested investment grade rated securities minimum better ratings currently shortterm investments aa better ratings table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2001 foreign exchange rate risk exposed foreign exchange rate risk sales china denominated renminbi portions accounts payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date insignificant fluctuations currency exchange rates future may material adverse effect results operations multicurrency bank account japanese yen purchasing portions inventories supplies balance japanese yen account december 31 2001 approximately 67 million item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly shortterm nature investment portfolio however interest income sensitive changes general level us interest rates since majority funds invested instruments maturities less one year policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds tax exempt instruments accordance investment policy shortterm investments invested investment grade rated securities minimum better ratings currently shortterm investments aa better ratings table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2002 equity investment risk investment portfolio includes equity investments publicly traded companies values subject market price volatility recent events adversely affected public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary earnings may adversely affected also invested several privately held companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize foreign exchange rate risk exposed foreign exchange rate risk sales china denominated renminbi portions accounts payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date insignificant fluctuations currency exchange rates future may material adverse effect results operations multicurrency bank account japanese yen purchasing portions inventories supplies balance japanese yen account december 31 2002 approximately 71 million item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly shortterm nature investment portfolio however interest income sensitive changes general level us interest rates since majority funds invested instruments maturities less one year policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds tax exempt instruments accordance investment policy shortterm investments invested investment grade rated securities minimum better ratings currently shortterm investments aa better ratings table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2003 concentration credit risk major customers table outlines sales accounts receivable balances respect largest customers approximately 76 84 90 companys net sales 2003 2002 2001 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 3040 million 2380 million respectively december 31 2003 2002 company extends credit customers china generally without requiring collateral global sales outside china company often requires letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 86 84 90 companys sales year ended december 31 2003 2002 2001 respectively made china accordingly political economic legal environment well general state chinas economy may influence companys business financial condition results operations companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation approximately 10 13 3 companys sales year ended december 31 2003 2002 2001 respectively made japan accordingly political economic legal environment general state japans economy may influence companys business financial condition results operations equity investment risk investment portfolio includes equity investments publicly traded companies values subject market price volatility economic events could adversely affect public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary earnings may adversely affected also invested several privately held companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize debt investment risk debt investment portfolio consists 112 million note receivable bb modem rental plc bb modem affiliate softbank corp pursuant mezzanine loan agreement entered bb modem july 17 2003 loan subordinated certain senior lenders bb modem repayments payable us fortytwo month period substantial portion principal amount loan schedule repaid last 16 months period recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loan foreign exchange rate risk exposed foreign exchange rate risk sales china denominated renminbi portions accounts payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date insignificant fluctuations currency exchange rates future may material adverse effect results operations although expanding global operations outside china december 31 2003 experienced material foreign exchange rate risk due fact significant majority business remained china multicurrency bank account japanese yen purchasing portions inventories supplies balance japanese yen account december 31 2003 approximately 286 million item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly shortterm nature investment portfolio however interest income sensitive changes general level us interest rates since majority funds invested instruments maturities less one year policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds taxexempt instruments accordance investment policy shortterm investments invested “investment grade” rated securities minimum better ratings currently shortterm investments aa better ratings table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2004 2003 equity investment risk investment portfolio includes equity investments publicly traded companies values subject market price volatility economic events could adversely affect public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary earnings may adversely affected also invested several privately held companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize debt investment risk debt investment portfolio consists 118 million note receivable bb modem affiliate softbank corp pursuant mezzanine loan agreement entered bb modem july 17 2003 loan subordinated certain senior lenders bb modem repayments payable us 42 month period substantial portion principal amount loan schedule repaid last 16 months period recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modem’s modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loan foreign exchange rate risk exposed foreign exchange rate risk sales china denominated renminbi portions accounts receivable payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date insignificant fluctuations currency exchange rates future may material adverse effect results operations additionally 2004 made significant sales japanese yen euros although expanding global operations outside china december 31 2004 experienced material foreign exchange rate risk due fact significant majority business remained china well increased presence united states maintain japanese yen bank accounts purchasing portions inventories supplies balance japanese yen accounts december 31 2004 approximately 2234 million item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly shortterm nature investment portfolio however interest income sensitive changes general level us interest rates since majority funds invested instruments maturities less one year policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds accordance investment policy shortterm investments invested investment grade rated securities minimum better ratings currently shortterm investments aa better ratings table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2005 2004 equity investment risk investment portfolio includes equity investments publicly traded companies values subject market price volatility economic events could adversely affect public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary earnings may adversely affected also invested several privately held companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize debt investment risk debt investment portfolio consists 90 million note receivable bb modem affiliate softbank corp pursuant mezzanine loan agreement entered bb modem july 17 2003 loan subordinated certain senior lenders bb modem repayments payable us 42month period substantial portion principal amount loan schedule repaid last 16 months period recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loan foreign exchange rate risk exposed foreign exchange rate risk sales china denominated renminbi portions accounts receivable payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china although impact currency fluctuations renminbi date slight fluctuations currency exchange rates future may material adverse effect results operations balance cash shortterm investment balance held china 5001 million december 31 2005 july 2005 china uncoupled renminbi us dollar let float narrow band basket foreign currencies move revalued renminbi 21 us dollar additionally 2005 made significant sales japanese yen euros maintain japanese yen bank accounts purchasing portions inventories supplies revenues earnings cash flows subject fluctuations due changes foreign currency exchange rates may hedge currency exposures associated certain assets liabilities denominated nonfunctional currencies certain anticipated nonfunctional currency transactions using forward foreign currency exchange rate contracts hedged transactions due limitations converting renminbi limited ability engage currency hedging activities china global concern face exposure adverse movements foreign currency exchange rates performed sensitivity analysis december 31 2005 using modeling technique measures change fair values arising hypothetical 10 positive adverse movement levels foreign currency exchange rates relative us dollar variables held constant analysis covers underlying exposures foreign currency denominated financial instruments foreign currency exchange rates used based market rates effect december 31 2005 sensitivity analysis indicated hypothetical 10 movement foreign currency exchange rates would result gain loss fair values foreign currency denominated financial instruments 87 million december 31 2005 item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds accordance investment policy shortterm investments invested “investment grade” rated securities minimum better ratings currently shortterm investments aa better ratings table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2006 2005 equity investment risk investment portfolio includes equity investments publicly traded companies values subject market price volatility economic events could adversely affect public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary earnings may adversely affected also invested several privately held companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize debt investment risk december 31 2006 debt investment portfolio consisted 10 million note receivable bb modem affiliate softbank corp pursuant mezzanine loan agreement entered bb modem july 17 2003 note receivable paid full january 2007 foreign exchange rate risk exposed foreign exchange rate risk sales china denominated renminbi portions accounts receivable payable denominated japanese yen due limitations converting renminbi limited ability engage currency hedging activities china fluctuations currency exchange rates future could material adverse effect results operations balance cash shortterm investments held china 4837 million december 31 2006 july 2005 china uncoupled renminbi us dollar let float narrow band basket foreign currencies move revalued renminbi 21 us dollar additionally 2005 made significant sales japanese yen euros maintain japanese yen bank accounts purchasing portions inventories supplies revenues earnings cash flows subject fluctuations due changes foreign currency exchange rates may hedge currency exposures associated certain assets liabilities denominated nonfunctional currencies certain anticipated nonfunctional currency transactions using forward foreign currency exchange rate contracts hedged transactions due limitations converting renminbi limited ability engage currency hedging activities china global concern face exposure adverse movements foreign currency exchange rates performed sensitivity analysis december 31 2006 using modeling technique measures change fair values arising hypothetical 10 positive adverse movement levels foreign currency exchange rates relative functional currency variables held constant analysis covers underlying exposures foreign currency denominated financial instruments foreign currency exchange rates used based market rates effect december 31 2006 sensitivity analysis indicated hypothetical 10 movement foreign currency exchange rates would result gain loss fair values foreign currency denominated financial instruments 44 million december 31 2006 item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature certain investments anticipated declining interest rates negatively impact investment income maintain investment portfolio various holdings types maturities use derivative financial instruments place cash investments instruments meet high credit quality standards specified investment policy guidelines policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds accordance investment policy shortterm investments invested investment grade rated securities minimum better ratings currently shortterm investments aa better ratings cash equivalents subject significant interest rate risk due short maturities instruments december 31 2007 carrying value cash equivalents approximated fair value table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2007 2006 equity investment risk investment portfolio includes equity investments publicly traded companies values subject market price volatility economic events could adversely affect public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary earnings may adversely affected also invested several privatelyheld companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize debt investment risk december 31 2006 debt investment portfolio consisted 10 million note receivable bb modem affiliate softbank corp pursuant mezzanine loan agreement entered bb modem july 17 2003 note receivable paid full january 2007 foreign exchange rate risk exposed foreign currency exchange rate risk significant percentage sales made foreign countries denominated local currency historically majority sales made china denominated renminbi portions accounts receivable payable denominated japanese yen due limitations converting renminbi limited ability engage foreign currency hedging activities china fluctuations currency exchange rates future may material adverse effect results operations balance cash shortterm investments held china 3763 million december 31 2007 july 2005 china uncoupled renminbi us dollar let float narrow band basket foreign currencies move immediately revalued renminbi 21 us dollar gradually continued strengthen however uncertain adjustments may made future example renminbius dollar exchange rate 828 us dollar prior float renminbi july 2005 729 renminbi us dollar december 31 2007 additionally 2006 2007 made significant sales japanese yen euros indian rupees canadian dollars maintain japanese yen bank accounts purchasing portions inventories supplies revenues earnings cash flows subject fluctuations due changes foreign currency exchange rates may hedge currency exposures associated certain assets liabilities denominated nonfunctional currencies certain anticipated nonfunctional currency transactions using forward foreign currency exchange rate contracts hedged transactions due limitations converting renminbi limited ability engage currency hedging activities china foreign currency balances hedged significant revaluation foreign currencies may materially adversely affect cash flows revenues operating results financial position performed sensitivity analysis december 31 2007 using modeling technique measures change fair values arising hypothetical 10 positive adverse movement levels foreign currency exchange rates relative functional currency variables held constant analysis covers underlying exposures foreign currency denominated financial instruments foreign currency exchange rates used based market rates effect december 31 2007 sensitivity analysis indicated hypothetical 10 movement foreign currency exchange rates would result gain loss fair values foreign currency denominated financial instruments 157 million december 31 2007 item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature certain investments anticipated declining interest rates negatively impact investment income maintain investment portfolio various holdings types maturities use derivative financial instruments place cash investments instruments meet high credit quality standards specified investment policy guidelines policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested money market funds rated aaa cash equivalents subject significant interest rate risk due short maturities instruments december 31 2008 carrying value cash equivalents approximated fair value table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2008 2007 equity investment risk investment portfolio includes equity investments publicly traded companies values subject market price volatility economic events could adversely affect public equities market general economic conditions may continue worsen fair value publicly traded equity investments decline cost basis manner deemed otherthantemporary earnings may adversely affected also invested several privatelyheld companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize foreign exchange rate risk multinational company conduct business wide variety currencies therefore subject market risk changes foreign exchange rates expect continue expand business globally expect increasing proportion business may denominated currencies us dollars result fluctuations foreign currencies may material impact business results operations financial condition historically majority foreigncurrency denominated sales made china denominated renminbi additionally 2006 2007 2008 made significant sales japanese yen euros indian rupees canadian dollars due chinas currency exchange control regulations limited ability convert repatriate renminbi well ability engage foreign currency hedging activities china balance cash equivalents shortterm investments held china 2008 million december 31 2008 since china unpegged renminbi us dollar july 2005 december 31 2008 renminbi strengthened 15 versus us dollar however uncertain adjustments may made future may manage foreign currency exposures using forward option contracts hedge thus minimize exposure risk eventual net cash inflows outflows resulting foreign currency denominated transactions customers suppliers nonus subsidiaries however currently hedging transactions foreign currency balances currently hedged significant revaluation foreign currency exposures may materially adversely affect business results operation financial condition enter foreign exchange forward option contracts trading purposes given exposure international markets regularly monitor material foreign currency exposures use sensitivity analysis measure foreign currency risk computing potential decrease cash flows may result adverse beneficial changes foreign exchange rates relative functional currency variables held constant analysis covers underlying exposures foreign currency denominated financial instruments foreign currency exchange rates used based market rates effect december 31 2008 sensitivity analysis indicated hypothetical 10 adverse beneficial movement exchange rates would resulted loss gain fair values foreign currency denominated financial instruments 201 million december 31 2008 item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature certain investments anticipated declining interest rates negatively impact investment income maintain investment portfolio various holdings types maturities use derivative financial instruments place cash investments instruments meet high credit quality standards specified investment policy guidelines policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested money market funds rated aaa cash equivalents subject significant interest rate risk due short maturities instruments december 31 2010 carrying value cash equivalents approximated fair value table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2010 2009 equity investment risk invested several privatelyheld companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize foreign exchange rate risk multinational company conduct business wide variety currencies therefore subject market risk changes foreign exchange rates expect continue expand business globally expect increasing proportion business may denominated currencies us dollars result fluctuations foreign currencies may material impact business results operations financial condition historically majority foreigncurrency denominated sales made china denominated renminbi rmb additionally since 2006 made significant sales japanese yen euros indian rupees canadian dollars due chinas currency exchange control regulations limited ability convert repatriate rmb well ability engage foreign currency hedging activities china balance cash equivalents held china 2137 million december 31 2010 since china unpegged rmb us dollar july 2005 december 31 2010 rmb strengthened approximately 20 versus us dollar however uncertain adjustments may made future may manage foreign currency exposures using forward option contracts hedge thus minimize exposure risk eventual net cash inflows outflows resulting foreign currency denominated transactions customers suppliers nonus subsidiaries however currently hedging transactions foreign currency balances currently hedged significant revaluation foreign currency exposures may materially adversely affect business results operation financial condition enter foreign exchange forward option contracts trading purposes given exposure international markets regularly monitor material foreign currency exposures use sensitivity analysis measure foreign currency risk computing potential decrease cash flows may result adverse beneficial changes foreign exchange rates relative functional currency variables held constant analysis covers underlying exposures foreign currency denominated financial instruments foreign currency exchange rates used based market rates effect december 31 2010 sensitivity analysis indicated hypothetical 10 adverse beneficial movement exchange rates would resulted loss gain fair values foreign currency denominated financial instruments 199 million december 31 2010 item 8item 7a quantitative qualitative disclosures market risk exposed impact interest rate changes foreign currency exchange rates changes stock market interest rate risk exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature certain investments anticipated declining interest rates negatively impact investment income maintain investment portfolio various holdings types maturities use derivative financial instruments place cash investments instruments meet high credit quality standards specified investment policy guidelines policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested money market funds rated aaa cash equivalents subject significant interest rate risk due short maturities instruments december 31 2009 carrying value cash equivalents approximated fair value table represents carrying amounts related weightedaverage interest rates investment portfolio december 31 2009 2008 equity investment risk invested several privatelyheld companies well investment funds invest primarily privately held companies many still considered startup development stages investments inherently risky market technologies products development typically early stages may never materialize foreign exchange rate risk multinational company conduct business wide variety currencies therefore subject market risk changes foreign exchange rates expect continue expand business globally expect increasing proportion business may denominated currencies us dollars result fluctuations foreign currencies may material impact business results operations financial condition historically majority foreigncurrency denominated sales made china denominated renminbi additionally 2006 2007 2008 made significant sales japanese yen euros indian rupees canadian dollars due chinas currency exchange control regulations limited ability convert repatriate renminbi well ability engage foreign currency hedging activities china balance cash equivalents held china 1312 million december 31 2009 since china unpegged renminbi us dollar july 2005 december 31 2009 renminbi strengthened 15 versus us dollar however uncertain adjustments may made future may manage foreign currency exposures using forward option contracts hedge thus minimize exposure risk eventual net cash inflows outflows resulting foreign currency denominated transactions customers suppliers nonus subsidiaries however currently hedging transactions foreign currency balances currently hedged significant revaluation foreign currency exposures may materially adversely affect business results operation financial condition enter foreign exchange forward option contracts trading purposes given exposure international markets regularly monitor material foreign currency exposures use sensitivity analysis measure foreign currency risk computing potential decrease cash flows may result adverse beneficial changes foreign exchange rates relative functional currency variables held constant analysis covers underlying exposures foreign currency denominated financial instruments foreign currency exchange rates used based market rates effect december 31 2009 sensitivity analysis indicated hypothetical 10 adverse beneficial movement exchange rates would resulted loss gain fair values foreign currency denominated financial instruments 187 million december 31 2009 item 8 item 8 financial statements supplementary data index consolidated financial statements financial statement schedules report independent accountants board directors stockholders utstarcom inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity cash flows present fairly material respects financial position utstarcom inc subsidiaries company december 31 2000 1999 results operations cash flows three years ended december 31 2000 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion san francisco california january 24 2001 utstarcom inc consolidated balance sheets thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations thousands except per share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders equity thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1description business utstarcom inc company delaware corporation provides communications equipment including network access systems optical transmission products subscriber terminal products service providers operate wireless wireline networks companys operations conducted primarily foreign subsidiaries manufacture distribute support companys products international markets principally peoples republic china following lists companys active subsidiaries percentage ownership business subsidiary operates december 31 2000 note 2summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts company wholly majority 50 percent owned subsidiaries except guts accounted using equity method company voting control significant matters significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries equity affiliated companies shown separately consolidated financial statements investments affiliated companies none represent greater 10 percent ownership accounted using cost method restatement reclassification consolidated financial statements company restated reflect disposition nanjing utstarcom ltd nuts september 1999 see note 5 accordingly revenues costs expenses assets liabilities cash flows discontinued operations excluded respective captions consolidated balance sheets consolidated statements operations consolidated statements cash flows reported date disposition net assets discontinued operations income loss discontinued operations net cash used provided discontinued operations periods presented company retroactively accounted december 1999 acquisition wacos original investment wacos softbank corporation softbank december 1997 made company see note 7 certain reclassifications made prior years financial statements conform 2000 presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements notes consolidated financial statements continued note 2summary significant accounting policies continued reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents cash equivalents consist primarily highly liquid monetary instruments maturity three months less date purchase restricted cash consisted following december 31 restricted cash balances expected released within three months recorded treated part cash equivalents shortterm investments shortterm investments consisting primarily investments original maturities less twelve months accounted accordance statement financial accounting standards 115 sfas 115 accounting certain investments debt equity securities statement requires securities classified held maturities available sale trading debt securities company positive intent ability hold maturity marketable equity securities classified availableforsale carried fair value unrealized holding gains losses securities classified availableforsale carried separate component stockholders equity realized holdings gains losses securities classified availableforsale reported earnings fair value investments determined based quoted market prices cost debt securities adjusted amortization premiums accretion discounts maturity amortization interest income realized gains losses declines value judged temporary included interest income cost securities based specific identification inventories stated lower cost market net allowance obsolescence cost computed using standard cost approximates actual cost firstin firstout basis notes consolidated financial statements continued note 2summary significant accounting policies continued revenue recognition revenue sales equipment recognized delivery contractual obligations substantially complete remaining obligations inconsequential perfunctory collection resulting receivable reasonably assured revenue recognition equipment sales installations performed recognized final acceptance contractual obligations substantially complete remaining obligations inconsequential perfunctory collection resulting receivable reasonably assured multiple elements exist revenue allocated different elements based upon verifiable objective evidence recognized completion element warranty costs warranty provided terms companys contract period greater one year company provides costs time revenue recognition based upon prior experience property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets generally ranging two five years leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company generally depreciates assets following periods goodwill intangible assets goodwill intangible assets include excess costs acquired companies fair value net assets acquired workforce amortized straightline basis generally 3 5 years valuation goodwill intangible assets based forecasted discounted cash flows reassessed circumstances warrant impairment longlived assets statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires longlived assets certain intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized notes consolidated financial statements continued note 2summary significant accounting policies continued based fair value assets company considers requirements sfas 121 ongoing basis stockbased compensation company accounts employee stock option grants accordance accounting principles board apb opinion 25 accounting stock issued employees apb 25 adopted disclosureonly alternative statement financial accounting standards 123 accounting stockbased compensation sfas 123 value warrants options stock exchanged services nonemployees generally expensed period benefited warrants options valued using blackscholes option pricing model calculate expense company uses either fair value consideration received fair value equity instruments issued whichever reliably measurable comprehensive income comprehensive income defined includes changes equity net assets period nonowner sources accumulated comprehensive income loss shown consolidated statement shareholders equity december 31 2000 1999 1998 income taxes deferred income taxes recognized differences tax bases assets liabilities financial reporting amounts based enacted tax rates valuation allowances established necessary reduce deferred tax assets amount expected realized company provide us federal taxes undistributed earnings foreign subsidiaries affiliates considered reinvested indefinite period segment reporting company determined operate single segment providing communications equipment integrated suite network access systems optical transmission products subscriber terminal products disclosures fair value financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable debt carrying amounts cash equivalents shortterm investments accounts receivable payable approximate fair values short term nature instruments carrying amounts debt approximate fair values either short maturity variable interest rates instruments difference fixed interest rate payable current prevailing rate significant foreign currency translations operations companys subsidiaries conducted primarily china financial statements subsidiaries translated chinas renminbi functional currency us dollars accordance statement financial accounting standards 52 foreign currency notes consolidated financial statements continued note 2summary significant accounting policies continued translation sfas 52 accordingly foreign currency assets liabilities translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity foreign currency translation gains losses material years presented earnings loss per share basic earnings loss per share computed dividing income loss applicable common stockholders weighted average number shares companys common stock outstanding period diluted earnings loss per share determined manner basic earnings loss per share except numbers shares increased potentially dilutive common shares outstanding period potentially dilutive common shares consist employee stock options warrants restricted stock accounting pronouncements june 1998 financial accounting standards board fasb issued sfas 133 accounting derivatives hedging activities sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities july 1999 fasb issued sfas 137 accounting derivative instruments hedging activitiesdeferral effective date fasb statement 133 sfas 137 deferred effective date sfas 133 fiscal years beginning june 15 2000 company adopted sfas 133 january 1 2001 adoption expected materially impact financial statements september 2000 fasb issued sfas 140 sfas 140 accounting transfers servicing financial assets extinguishments liabilities revises standards accounting securitizations transfers financial assets collateral requires entities securitized financial assets provide specific disclosures sfas 140 effective transfers servicing financial assets extinguishments liabilities occurring march 31 2001 company adopted sfas 140 january 1 2001 adoption expected materially impact financial statements note 3accounting changes effective january 1 2000 company adopted staff accounting bulletin 101 sab 101 issued securities exchange commission december 1999 result adopting sab 101 company changed way recognizes revenue certain contracts previously led revenue recognized contract stages completed accepted light guidance issued sab 101 company changed method revenue recognition point contractual final acceptance addition certain contracts include service requirements revenue previously recognized costs accrued contractual acceptance consideration sab 101 revenues associated service requirements deferred service obligations completed due changes company recorded cumulative adjustment first quarter 2000 10 million net income taxes 0 001 per share basic diluted impact 2000 adopting sab 101 reduce net income cumulative effect accounting change 03 million effect basic diluted net income per share notes consolidated financial statements continued note 3accounting changes continued adopting new method accounting january 1 1998 would produced following pro forma results thousands except per share amounts note 4completion initial public offering march 3 2000 company completed initial public offering ipo company sold aggregate 11500000 shares common stock including overallotment option 1500000 shares 1800 per share sale shares common stock generated net proceeds approximately 1894 million deducting underwriting discounts commissions expenses offering approximately 176 million effective date offering convertible preferred stock outstanding converted 70377322 shares common stock note 5discontinued operations september 1999 company closed utstarcom nanjing inc nuts wholly owned subsidiary nuts engaged telephone network internet network services unrelated remaining company operations nuts sold substantially assets prior closure close nuts accounted discontinued operation companys previous interests net revenues expenses nuts operations prior september 30 1999 classified separately income loss discontinued operations income statements components income loss summarized follows companys cash flow statements include separately cash flows discontinued operations notes consolidated financial statements continued note 6supplemental disclosures cash flow information noncash investing financing activities follows note 7acquisition companies september 1996 company purchased 49 interest guts approximately 12 million february 1998 company acquired additional 2 interest guts 80000 increasing ownership interest 51 however company voting control significant matters guts investment results operations guts included consolidated financial statements using equity method accounting purchase additional interest accounted purchase resulting intangible asset insignificant excess purchase price fair value net assets february october 1997 company purchased total 49 voting stock wacos approximately 03 million october december 1997 softbank major stockholder company acquired 40 voting interest wacos 51 million december 1999 company issued 3691534 shares series g preferred stock exchange softbanks 4103465 shares wacos result common control existed company softbank wacos period ownership exchange shares made historic cost company retroactively accounted acquisition wacos original investment softbank made company december 1999 company completed purchase nonaffiliated minority interests wacos subsidiary issuance 832166 shares series g preferred stock 97 million common stock options valued using blackscholes model aggregate purchase price wacos approximately 280 million based upon independent appraisal willamette management associates assets acquired liabilities assumed allocated specifically identifiable tangible intangible assets acquired intangible assets included approximately 40 million inprocess research development charged operations december 1999 02 million assembled workforce approximately 236 million excess purchase price fair market values tangible identified intangible assets amortized periods three five years notes consolidated financial statements continued note 7acquisition companies continued values wacos inprocess research development projects estimated excess income approach management revenue operating expense projections reduced appropriate amounts reflect fair return net tangible collateral intangible assets employed realizing forecasted net incomes resulting forecasted excess income figures discounted present value using 40 rate return reflecting technological market risks associated subject technologies future products discounted excess incomes summed accordance methodology approved securities exchange commission reduced appropriate percentage completion factor project account anticipated remaining research development factors time wacos acquisition wacos engaged three distinct inprocess research development projects relation internet protocol based switching system projects various stages development none reached point technological feasibility established following presents allocation purchase price wacos note 8distribution shareholders august 1999 company distributed shareholders net assets previously consolidated yet unrelated business acquired 1997 business operated dissimilar market segment managed financed significant respects autonomous company financial statements prepared acquired business distributed original date purchase 1997 note 9inventories december 31 2000 1999 inventories consist following notes consolidated financial statements continued note 10property plant equipment december 31 2000 1999 property plant equipment consists following depreciation amortization expense 46 million 27 million 24 million years ended december 31 2000 1999 1998 respectively note 11longterm investments companys long term investments follows september 1996 company purchased 49 interest guts february 1998 company acquired additional 2 interest guts increasing ownership interest 51 however company voting control significant matters guts investment results operations guts accounted using equity method notes consolidated financial statements continued note 11longterm investments continued condensed financial information unconsolidated investments guts follows product sales guts years ended december 31 2000 1999 1998 131 million 84 million 56 million respectively product purchases guts years ended december 31 2000 1999 1998 68 million 79 million 89 million respectively may 2000 company purchased 10 interest softbank china holdings pte ltd softbank china investment softbank china investments less 20 owned accounted using cost method see note 13 discussion related party transactions note 12goodwill intangible assets december 31 2000 1999 goodwill intangible assets resulting companys acquisition wacos consist following amortization expense 49 million 03 million 01 million years ended december 31 2000 1999 1998 respectively notes consolidated financial statements continued note 13related party transactions debt shareholder december 31 2000 1999 consist following jitong company china company management consulting agreement paid utsc 87 million repayment loan made jitong softbank companys principal stockholder april 2000 company made repayment full softbank corporation payable noninterest bearing balance may 2000 company purchased 10 interest softbank china 90 owned softbank 80 million june 1998 company entered loan agreement softbank total 250 million december 31 1999 entire loan paid loan agreement terminated note 14third party debt following represents outstanding borrowings december 31 2000 1999 1 guaranteed company minority shareholder huts represents drawings companys line credit bank line allows borrowings 108434 2 collateralized 1500 deposited bank guaranteed huts line allows borrowings 3614 matures march 1 2001 3 guaranteed huts line allows borrowings 6024 matured october 2000 4 guaranteed utstarcomchina line allows borrowings 24096 matures june 2010 5 guaranteed huts line allows borrowings 6024 matures may 2001 notes consolidated financial statements continued note 14third party debt continued 6 guaranteed huts line allows borrowings 4819 matures june 2001 note 15other current liabilities current liabilities december 31 2000 1999 consist following note 16provision income taxes united states foreign income loss income taxes minority interest loss discontinued operations cumulative effect change accounting principles follows undistributed foreign earnings december 31 2000 amounted 913 million components provision income taxes follows notes consolidated financial statements continued note 16provision income taxes continued deferred income taxes arise temporary differences tax basis assets liabilities reported amounts financial statements summary components net deferred tax assets follows december 31 2000 company research development credit carryforwards approximately 21 million federal tax purposes expiring varying amounts 2017 2019 december 31 2000 company federal state net operating loss carryovers notes consolidated financial statements continued note 16provision income taxes continued 54 million 112 million respectively acquired wacos merger december 14 1999 federal net operating loss carryovers expire 2019 state net operating loss carryovers expire varying amounts 2002 2004 management believes companys ability use deferred tax assets limited based expectation able fully utilize either tax net operating losses research development credits generated companys research development center us company created full valuation allowance deferred tax assets utsc huts granted tax holidays started phase 1999 net impact tax holidays increase net income approximately 45 million 45 million 03 million years ended december 31 2000 december 31 1999 december 31 1998 respectively difference companys effective income tax rate united states america federal statutory rate reconciled high effective tax rate 1998 reflects valuation allowances net operating losses generated wacos management expects receive future benefit effect valuation allowances companys consolidated effective tax rates 1998 pronounced companys income loss taxes minority interest relatively small comparison wacos net operating losses years note 17common stock incentive plans stock option plans 1992 omnibus equity incentive plan april 12 1992 board directors adopted companys 1992 omnibus equity incentive plan companys stockholders ratified december 9 1994 1992 plan directors employees consultants eligible acquire shares common stock pursuant options stock purchase rights stock appreciation rights time adoption 2400000 shares common stock reserved issuance 1992 plan december 31 2000 1620328 shares authorized issuance 1992 plan options outstanding purchase shares common stock july 31 1995 board directors elected grant options 1992 plan 1995 stock plan july 31 1995 board directors adopted october 1995 companys stockholders approved companys 1995 stock plan 1995 plan officers notes consolidated financial statements continued note 17common stock incentive plans continued employees consultants eligible acquire shares common stock pursuant options stock purchase rights time adoption 3705232 shares common stock reserved issuance 1995 plan 1995 1996 companys board stockholders added additional 5400000 shares 1995 plan raising total number authorized shares reserved 1995 plan 9105232 december 31 2000 6711744 shares authorized issuance 1995 plan options purchase 3185650 shares common stock outstanding 1995 plan january 31 1997 board directors elected grant options 1995 plan upon adoption 1997 plan remaining unissued shares 1995 plan already subject options awards ceased reserved issuance 1995 plan 1997 stock plan january 31 1997 board directors adopted companys stockholders approved companys 1997 stock plan 1997 plan officers employees consultants eligible receive options purchase shares common stock purchase rights december 1999 board directors amended 1997 plan companys stockholders approved february 2000 december 31 2000 company authorized issue 12903841 shares subject options term 1997 plan number shares issuable plan increased annually first day fiscal year beginning 2001 amount equal lesser 6000000 shares 4 outstanding shares common stock date lesser amount determined board plan terminates january 2007 may terminated earlier board directors december 31 2000 options purchase 11989074 shares common stock outstanding 1997 plan compensation committee administers 1997 plan options granted 1997 plan may incentive stock options isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options nsos qualify compensation committee selects eligible persons options granted determines grant date amounts exercise prices vesting periods relevant terms options including whether options isos nsos exercise price isos granted 1997 plan may less 100 fair market value common stock grant date exercise price nsos determined compensation committee discretion options generally transferable life optionee options vest become exercisable determined compensation committee options may generally exercised time vest expiration date determined compensation committee however option may exercised 10 years grant date options generally terminate 12 months death permanent disability optionee ii 90 days termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year may exceed 100000 options excess limit treated nsos event company merged another corporation substantially companys assets sold outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option right options rights automatically vest become exercisable full period least fifteen days time option terminate notes consolidated financial statements continued note 17common stock incentive plans continued 1997 plan company may grant stock purchase rights eligible participants shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determines otherwise agreement grant company right repurchase stock upon voluntary involuntary termination employee reason including death disability purchase price repurchased shares original price paid may paid cancellation indebtedness owed company shares stock subject right repurchase lapse time december 31 2000 aggregate 21235913 shares common stock authorized issuance companys stock plans 15174724 subject outstanding options 155035 available grant summary activity plans follows options purchase 6937475 shares exercisable december 31 2000 notes consolidated financial statements continued note 17common stock incentive plans continued following table summarizes information respect stock options outstanding december 31 2000 company elected account employee stockbased compensation apb 25 provided following information required sfas 123 accounting stockbased compensation following assumptions used calculate fair value options granted weighted average fair value per share options granted 2000 1999 1998 754 325 082 respectively company public 1999 1998 zero volatility rate used notes consolidated financial statements continued note 17common stock incentive plans continued using method assumptions companys net income loss applicable common stock earnings loss per share pro forma basis would pro forma results necessarily indicative results may expected future additional grants made year options vest several years 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan purchase plan intended qualify employee stock purchase plan section 423 internal revenue code company reserved 2000000 shares common stock sale stock purchase plan number shares reserved sale plan increased annually first day fiscal year beginning 2001 amount equal lesser 4000000 shares 2 outstanding shares companys common stock date lesser amount determined board directors stock purchase plan administered board committee appointed board stock purchase plan implemented offering periods duration may exceed 24 months offering periods may contain interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 shall end last trading day april 30 2002 employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase companys common stock payroll deductions may exceed 15 employees total compensation stock may purchased plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value companys shares date purchase notes consolidated financial statements continued note 17common stock incentive plans continued participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant participants designated beneficiary case death certificate issued full shares participants account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term 10 years december 31 2000 rights purchase approximately 73811 shares outstanding purchase plan 1926189 shares available purchase plan deferred stock compensation connection grant certain stock options employees nonemployees members board directors company recorded deferred stock compensation 03 million 2000 representing difference deemed fair value common stock accounting purposes option exercise price options date grant deferred compensation presented reduction stockholders equity amortization recorded fouryear vesting period december 31 2000 approximately 65 million remained amortized corresponding vesting period respective option generally four years deferred stock compensation amortization expense 2001 2002 2003 expected 41 million 19 million 05 million respectively note 18401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees 401k plan permits require company may make matching contributions behalf eligible employees make salary reduction contributions 401k plan commencing plan year beginning january 1 2001 company elected begin making matching contributions behalf qualified employees participate 401k plan company contribute 050 dollar contributed qualified employees 401k plan maximum 3000 per employee per plan year companys matching contributions subject vesting schedule based upon longevity employee service company made contribution plan year presented note 19commitments contingencies july 24 2000 company entered agreement totaling approximately 107 million company agreed purchase software intellectual property hua starcom communication co ltd stable gain international ltd purchase certain related fixed notes consolidated financial statements continued note 19commitments contingencies continued assets hainan xinhuangpu investment co ltd also development employees transferred hainan xinhuangpu investment co ltd company transfer software intellectual property recorded upon completion government approvals upon completion transaction company expects use purchase accounting leases company leases certain facilities noncancelable operating leases expire various dates 2003 minimum future lease payments leases december 31 2000 follows rent expense years ended december 31 2000 1999 1998 22 million 18 million 18 million respectively litigation company subsidiaries may become involved legal proceedings claims litigation time arising ordinary course business opinion management outcome current legal proceedings claims litigation material effect companys consolidated operating results cash flows financial position guarantee conjunction sale equipment huts guaranteed bank loan incurred utsc customer december 31 2000 total amount debt guaranteed company 10 million debt carries interest rate 6993 per annum payable three installments final installment due december 30 2001 note 20operating risks financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts receivable company places temporary cash shortterm investments several financial institutions approximately 443 million 436 million companys cash deposit foreign accounts december 31 2000 1999 respectively company invests excess cash highly liquid investments original maturity twelve months less certificates deposit government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds money market funds company believes limited exposure risk notes consolidated financial statements continued note 20operating risks continued concentration credit risk major customers companys first second largest customers accounted 121 60 companys sales december 31 2000 70 02 accounts receivable respectively december 31 2000 companys first second largest customers accounted 300 110 companys sales 390 60 accounts receivable respectively december 31 1999 customer continuing operations accounted 10 companys sales 1998 90 companys sales 2000 entities affiliated government china state owned enterprises accounts receivable balances china government affiliated entities state owned enterprises 1538 million december 31 2000 838 million december 31 1999 company extends credit customers generally without requiring collateral company monitors exposure credit losses maintains allowances uncollectible accounts one vendor related party accounted 284 companys cost sales amount outstanding december 31 2000 country risks almost 99 companys sales year ended december 31 2000 made china accordingly companys business financial condition results operations may influenced political economic legal environment china general state chinas economy companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation beginning january 1 1999 chinas government required manufacturers telecommunications equipment connected public private telecommunications networks within china obtain network access license products sellers prohibited selling advertising sale equipment manufacturer obtained network access license may liable penalties amount three times earnings sale equipment sold beginning january 1 1999 without license failure obtain required licenses could permit authorities force company remove previously installed equipment could preclude company making sales unlicensed products china would substantially harm companys business june 2000 ministry information industry issued internal notice concluding review phsbased equipment companys pas system continue allowed chinas countylevel cities counties companys primary markets companys pas system large mediumsized cities companys pas system may used limited basis high concentration population campuses commercial buildings special development zones new citywide pas system deployments allowed large mediumsize cities evaluation group access networks ministry information industry recommended ministry information industry issue license companys pas system however company yet network access license company cannot provide assurance notes consolidated financial statements continued note 20operating risks continued license issued companys pas system addition assurance ministry information industry conduct reviewevaluation phsbased equipment change order regarding phsbased system future management also applied network access licenses products company longer manufacturing previously sold however company yet received access licenses assurance license issued management believes penalties fines payable noncompliance licensing requirements pas system products adverse effect companys business financial condition note 21quarterly results operations unaudited table revised account application sab 101 revenue recognition financial statements sab 101 net incomeloss per share computed independently quarters presented therefore sum quarterly net incomeloss per share may equal annual net incomeloss per share revised quarterly results unaudited results operations statements financial position previously reported companys interim 2000 financial statements filed form 10q revised reflect application sab 101 revenue recognition financial statements effective january 1 2000 proforma results operations three months ended december 31 1999 presented comparison purposes application sab 101 adopted october 1 1999 net effect revision pro forma combined financial information unaudited following unaudited pro forma information presents combined results operations acquisition minority interest wacos occurred beginning 1999 pro forma information necessarily indicative would occurred acquisition taken place january 1 1999 indicative future results operations see notes unaudited pro forma combined financial information detail accounting treatment utstarcom inc subsidiaries unaudited pro forma combined statements operations thousands except per share data wacos statement operations consolidated within utstarcoms statement operations adjustment required see accompanying notes unaudited pro forma combined financial information utstarcom inc subsidiaries notes unaudited pro forma combined financial information thousands except share per share data pro forma adjustments unaudited pro forma statement operations year ended 1999 follows 1 represents allocation purchase price wacos assembled workforce excess costs acquiring wacos fair value net assets acquired amortized period three five years 2 represents inprocess research development charge resulting acquisition minority interest wacos removed pro forma statement operations nonrecurring charge pro forma combined statement operations data presents companys consolidated results operations companys acquisition wacos occurred january 1 1999 assumed conversion companys outstanding preferred stock shares companys common stock effective upon closing companys initial public offering conversion occurred january 1 1999 date issuance pro forma information necessarily indicative would occurred acquisition made period indicative future results operations item 9item 8 financial statements supplementary data index consolidated financial statements report independent accountants board directors stockholders utstarcom inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity cash flows present fairly material respects financial position utstarcom inc subsidiaries company december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 3 consolidated financial statements 2000 company changed method accounting revenue recognition pricewaterhousecoopers llp san francisco california january 14 2002 utstarcom inc consolidated balance sheets thousands except share per share data see accompanying notes consolidated financial statementsitem 8 financial statements supplementary data index consolidated financial statements financial statement schedules omitted applicable required information shown consolidated financial statements notes thereto report independent accountants board directors stockholders utstarcom inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries company december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 3 consolidated financial statements 2000 company changed method accounting revenue recognition pricewaterhousecoopers llp san francisco california january 23 2003 utstarcom inc consolidated balance sheets thousands except share per share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations thousands except per share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders equity thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1description business utstarcom inc company delaware corporation designs manufactures markets wireline wireless broadband access switching equipment enables migration next generation ipbased networks companys operations conducted primarily foreign subsidiaries manufacture distribute support companys products international markets principally china note 2summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts company wholly majority 50 percent owned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries equity affiliated companies shown separately consolidated financial statements reclassifications certain reclassifications made prior years financial statements conform 2002 presentation reclassifications impact previously reported net income stockholders equity use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents cash equivalents consist highly liquid monetary instruments maturity three months less date purchase shortterm investments shortterm investments consist investments original maturities less twelve months accordance companys investment policy shortterm investments invested investment grade rated securities minimum better ratings currently companys shortterm investments aa better ratings marketable securities classified availableforsale carried fair value unrealized holding gains losses securities classified availableforsale recorded separate component stockholders equity realized gains losses reported earnings fair value investments based quoted market prices cost securities based specific identification december 31 2002 2001 shortterm investments availableforsale securities consisted thousands inventories stated lower cost market net allowance excess slowmoving obsolete inventory cost computed using standard cost approximates actual cost firstin firstout basis revenue recognition revenues sales telecommunications equipment recognized persuasive evidence arrangement exists delivery product occurred evidenced customer acceptance fee fixed determinable collectability reasonably assured fee due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met shipping handling costs recorded revenues costs revenues multiple elements exist arrangement fee allocated different elements based upon verifiable objective evidence fair value elements revenue recognized element earned provided undelivered elements essential functionality delivered elements revenues engineering service contracts sales telecommunications equipment involving significant production modification customization product services provided deemed essential functionality product recognized using percentage completion method project cost reasonably estimated cost cannot reasonably estimated completed contract method applied payments received prior revenue recognition recorded deferred revenue warranty costs warranty provided terms companys purchase contracts period generally ranging twelve twenty four months company provides costs time revenue recognition based assessment past warranty experience property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company generally depreciates assets following periods goodwill intangible assets goodwill intangible assets include excess costs acquired companies fair value tangible net assets acquired process research development intangible assets amortized straightline basis generally three five years adoption sfas 142 january 1 2002 goodwill longer amortized see note 10 rather goodwill tested annually impairment goodwill impairment charges 2002 2001 2000 impairment longlived assets longlived assets certain intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets longlived assets disposed sale measured lower book value fair value less cost sell capitalized software development costs software development costs accounted accordance sfas 86 accounting costs computer software sold leased otherwise marketed 2002 2001 company capitalized costs 34 million 20 million respectively upon establishment technological feasibility amortization capitalized development costs begins products available general release customers provided straightline basis remaining estimated economic life product generally three years amortization capitalized development costs 11 million 03 million 0 2002 2001 2000 respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage research development costs research development costs expensed incurred consist primarily salaries related costs employees engaged research design development activities cost parts prototypes equipment depreciation third party development expenses stockbased compensation company accounts employee stock option grants accordance accounting principles board opinion 25 accounting stock issued employees apb 25 adopted disclosureonly alternative sfas 123 amended sfas 148 accounting stockbased compensation sfas 123 apb 25 compensation expense based difference date grant fair value common stock exercise price option fair value warrants options stock exchanged services expensed period benefited warrants options valued using blackscholes option pricing model following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation thousands except per share data following assumptions used calculate fair value options granted weighted average fair value per share options granted 2002 2001 2000 916 1130 903 respectively comprehensive income comprehensive income includes changes equity net assets period nonowner sources accumulated comprehensive income loss shown consolidated statement stockholders equity income taxes deferred income taxes recognized differences tax bases assets liabilities financial statement amounts based enacted tax rates valuation allowances established necessary reduce deferred tax assets amount expected realized company provide us federal taxes undistributed earnings foreign subsidiaries affiliates considered reinvested indefinite period segment reporting company operates single segment providing telecommunications equipment integrated suite network access systems subscriber terminal products disclosures fair value financial instruments financial instruments consist cash equivalents shortterm investments accounts receivable payable accrued liabilities carrying amounts cash equivalents shortterm investments accounts receivable payable accrued liabilities approximate fair values shortterm nature instruments foreign currency translation operations companys subsidiaries conducted primarily china financial statements subsidiaries translated chinas renminbi functional currency us dollars accordance sfas 52 foreign currency translation accordingly foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity foreign currency transaction gains losses reported earnings 54 million losses 2002 material 2001 2000 earnings per share basic earnings per share eps computed dividing net income available common stockholders weighted average number shares companys common stock outstanding period diluted earnings per share determined manner basic earnings per share except number shares increased potentially dilutive common shares outstanding period potentially dilutive common shares consist employee stock options warrants restricted stock following summary calculation basic diluted eps thousands expect per share data years ended december 31 2002 2001 2000 options purchase approximately 2801200 1783248 226200 shares common stock respectively exercise prices greater fair market value companys stock included calculations effect would antidilutive recent accounting pronouncements july 2002 financial accounting standards board fasb issued sfas 146 accounting costs associated exit disposal activities addresses measurement timing recognition reporting costs associated exit disposal activities restructuring activities sfas 146 requires liability costs associated exit restructuring activities recognized liability incurred opposed time company formally approves commits exit plan set forth eitf issue 943 liability recognition certain employee termination benefits costs exit activity sfas 146 effective exit disposal activities initiated december 31 2002 company expect adoption impact consolidated financial statements november 2002 fasb issued fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosure guarantees entity issued including reconciliation changes entitys product warranty liabilities initial recognition initial measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements fin 45 effective financial statements interim annual periods ending december 15 2002 see note 13 company believes adoption standard material impact consolidated financial statements november 2002 emerging issues task force reached consensus issue 0021 revenue arrangements multiple deliverables issue addresses revenue arrangements multiple deliverables divided separate units accounting arrangement consideration allocated identified separate accounting units eitf 0021 effective fiscal periods beginning june 15 2003 company yet determined impact adopting eitf 0021 consolidated financial statements december 2002 fasb issued sfas 148 accounting stockbased compensation coststransition disclosure statement amends sfas 123 accounting stockbased compensation provides alternative methods transition entity voluntarily changes fair value based method accounting stockbased compensation also requires additional disclosures effects reported net income entitys accounting policy respect stockbased employee compensation account stockbased compensation accordance apb opinion 25 accounting stock issued employees adopted disclosureonly alternative sfas 123 company adopted disclosure provisions sfas 148 december 2002 see note 15 note 3accounting changes effective january 1 2000 company adopted staff accounting bulletin 101 sab 101 revenue recognition financial statements issued securities exchange commission december 1999 result adopting sab 101 company changed way recognizes revenue certain contracts previously led revenue recognized contract stages completed accepted light guidance issued sab 101 company changed method revenue recognition point contractual final acceptance addition certain contracts include service requirements revenue previously recognized costs accrued contractual acceptance consideration sab 101 revenues associated service requirements deferred service obligations completed due changes company recorded cumulative adjustment first quarter 2000 10 million net income taxes 0 001 per share basic diluted note 4completion initial public offering followon public offering resale public offering march 3 2000 company completed initial public offering ipo sold 11500000 shares common stock 1800 per share aggregate net proceeds approximately 1894 million august 3 2001 company completed followon public offering sold aggregate 7400000 shares common stock 2000 per share selling stockholders sold additional 2950000 shares common stock offering aggregate net proceeds company 1399 million february 28 2002 company sold 1500000 shares common stock connection resale public offering 10000000 shares common stock softbank america inc one companys stockholders aggregate net proceeds company 289 million note 5supplemental disclosures cash flow information noncash investing financing activities follows note 6acquisitions divestitures companies 2002 company completed number purchase acquisitions summarized follows thousands april 19 2002 company completed purchase issanni communications inc issanni develops ras remote access server local access technology company incorporates one products companys investment issanni 20 million prior acquisition purchase consideration outstanding shares issanni already held company prior acquisition 21 million 05 million held escrow undisclosed liabilities contingencies incurred issanni prior closing addition 20 million payable form earnout issanni shareholders record closing subject completion certain performance milestones 2002 2003 2004 earnout recorded additional purchase price earned amounts earned 2002 furthermore company adopted incentive program providing issuance 39876 shares common stock valued 10 million issanni employees continue perform services company shares vest earlier five years upon achievement certain performance milestones company records amount compensation expense ratably vesting period accelerate amortization milestones met amount purchase price allocated inprocess research development 07 million charged companys results operations alternative future uses existed acquisition date goodwill 02 million recorded connection acquisition expected deductible tax purposes results operations issanni included companys consolidated results operations beginning april 19 2002 september 1996 company purchased 49 interest guangdong utstarcom ltd guts one companys two primary manufacturing facilities february 1998 company acquired additional 2 interest guts increasing ownership interest 51 investment accounted using equity method prior companys acquisition remaining 49 ownership interest guts may 2002 company voting control significant matters december 18 2001 company entered agreement acquire remaining 49 ownership interest guts total consideration 36 million cash consideration paid first quarter 2002 final government approvals received may 2002 goodwill 33 million recorded connection acquisition expected deductible tax purposes guts whollyowned subsidiary company results operations included companys consolidated financial statements beginning june 1 2002 july 1997 company part business operations china acquired 88 interest utstarcom hangzhou communication co ltd since changed name utstarcom telecom co ltd huts one companys primary manufacturing facilities january 21 2002 company entered agreement acquire remaining 12 ownership interest joint venture company total consideration 145 million cash consideration 73 million paid january 2002 remaining consideration paid second quarter fiscal 2002 final government approvals received may 2002 goodwill 64 million recorded connection acquisition expected deductible tax purposes acquisitions issanni remaining interests huts guts recorded second quarter fiscal 2002 occurred january 1 2002 proforma net income 2002 would 1072 million 098 per share basic 094 per share fully diluted acquisitions occurred january 1 2001 proforma net income 2001 would 529 million 052 per share basic 049 per share fully diluted proforma revenues would 9839 million 2002 6359 million 2001 proforma adjustments include amortization fixed asset stepups intangible assets transactions occurred january 1 2002 october 16 2002 company acquired assets intellectual property shanghai yi yun telecom technology co ltd provider synchronous digital hierarchy sdh equipment consideration 02 million cash 342854 shares restricted stock valued 60 million acquisition recorded december 31 2002 consideration held escrow year outcome contingencies would allow escrowed shares ultimately issued free clear determinable beyond reasonable doubt addition company issued 514290 shares restricted stock valued 90 million acquirees employees restricted stock vests five years accelerated vesting upon achievement specified milestones stock treated deferred compensation july 24 2000 company entered agreement stable gain international ltd stable gain purchase intellectual property certain related fixed assets transfer development employees company amended purchase agreement company paid stable gain consideration 107 million form common stock company 03 million cash transfer common stock completed second quarter 2001 total purchase consideration 110 million allocated property equipment intangible assets goodwill purchase method accounting goodwill totaling 74 million recorded acquisition estimated life three years november 2001 company completed purchase advanced communication devices corporation acd 213 million comprised approximately one million shares companys common stock valued 199 million 09 million vested common stock options valued using blackscholes pricing model 05 million acquisitionrelated expenses acd system chip soc semiconductor company focusing lan ip switching technology whose current markets included taiwan china korea addition company adopted incentive plan providing issuance shares common stock valued 5 million acd employees continue perform services company shares vest earlier five years achievement certain performance milestones company recorded amount deferred compensation 08 million 13 million deferred compensation charged operations 2002 2001 respectively number shares issued acquisition calculated using average closing price common stock five trading days ended august 13 2001 date merger agreement signed acquisition accounted purchase results operations included companys consolidated financial statements since acquisition acd results operations prior acquisition material companys results operations pro forma basis acquisition cost allocated assets acquired based respective fair values intangible assets comprised intellectual property related acd ethernet technology amortized straightline basis estimated useful life three years accordance sfas 141 company amortizing goodwill acquisition company recorded 47 million charge purchased inprocess research development date acquisition acd technological feasibility established development acds ethernet digital subscriber line edsl chip design approximately 15 completed time acquisition estimated completion date project march 2003 october 2002 board directors authorized acd incentive program review committee review remaining acd incentive program milestones light certain changes strategic plans acd final approval revised milestones pending following table represents allocation purchase price acd note 7inventories december 31 2002 2001 inventories consist following note 8property plant equipment december 31 2002 2001 property plant equipment consists following depreciation expense 200 million 110 million 46 million years ended december 31 2002 2001 2000 respectively note 9longterm investments companys investments follows company invested 100 million softbank china investment fund established softbank corp focused investments internet companies china investment permits company participate anticipated growth internetrelated businesses china softbank corp related companies significant stockholders company companys investment constitutes 10 funding softbank china softbank corp contributing remaining 90 fund separate management team none companys employees employed fund many funds investments privately held companies many still considered startup development stages investments inherently risky market technologies products companies development typically early stages may never materialize company accounts investment equity method recorded losses 28 million 17 million 00 million 2002 2001 2000 respectively investment first quarter fiscal 2002 company invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder company fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy procedures total fund offering expected approximately 1500 million 2260 million investor contributing minimum 08 million fund separate management team none companys employees employed fund company accounts investment equity method accounting balance investment 20 million december 31 2002 company also invested directly number private technologybased companies early stages development investments accounted cost basis company continually evaluates carrying value investments possible impairment based achievement business objectives milestones financial condition prospects companies relevant factors 2002 2001 impairment charges respect private technology investments 30 million 17 million respectively investment impairment charges included income expense net consolidated statements operations june 2002 company invested 10 million global asia partners lp commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner fund size anticipated 100 million formed make private equity investments private preipo technology telecommunications companies funds geographic focus technology investments asia particular india china company accounts investment equity method accounting 2002 company purchased approximately 58 million shares common stock interwave communications inc technology company listed nasdaq approximately 30 million addition company received warrants purchase 20 million shares interwaves common stock 021 cents per share valued 03 million using blackscholes option pricing model company recorded charge 14 million fourth quarter 2002 reflect temporary decline carrying value marketable securities november 2002 company purchased approximately 05 million shares common stock china telecom initial public offering approximately 100 million china telecom leading provider wireline telephone data internet leased line services four economically developed regions china affiliates customers company china telecom listed new york stock exchange investment considered availableforsale company recorded temporary decline 09 million carrying value securities december 31 2002 comprehensive income equity note 10goodwill intangible assets december 31 2002 2001 goodwill acquired intangible assets consisted following amortization expense 24 million 75 million 49 million years ended december 31 2002 2001 2000 respectively estimated aggregate amortization expense intangibles five years beginning 2003 2007 25 million 24 million 01 million 00 million 00 million respectively goodwill increased 100 million 2002 goodwill totaling 63 million recorded acquisition remaining 12 ownership interest huts goodwill 33 million recorded acquisition remaining 49 ownership guts goodwill 04 million recorded acquisition issanni intangible assets increased 32 million 2002 increase due purchased technology recorded acquisition issanni estimated useful life purchased technology three years see note 6 july 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized instead tested impairment least annually sfas 142 also requires intangible assets definite useful lives amortized respective estimated useful lives estimated residual values reviewed impairment accordance sfas 144 accounting impairment disposal longlived assets sfas 142 adopted company january 1 2002 sfas 142 effect eliminating amortization goodwill commencing january 1 2002 however impairment reviews may result future periodic writedowns company completed required transitional assessment goodwill first quarter fiscal 2002 based assessment transition goodwill impairment charge company performed annual impairment review fourth quarter 2002 impairment goodwill noted reconciliation net income adjusted net income goodwill amortization twelve months ended december 31 2001 2000 follows thousands note 11debt following represents outstanding borrowings december 31 2002 2001 thousands outstanding debt repaid september 2002 gains losses early retirement debt company available borrowing facilities 3143 million december 31 2002 2601 million facilities expire 2003 542 million facilities expire 2008 2010 note 12other current liabilities current liabilities december 31 2002 2001 consist following note 13warranty obligations guarantees warranty obligations follows thousands certain companys sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products note 14provision income taxes united states foreign income loss income taxes minority interest cumulative effect change accounting principle follows thousands undistributed foreign earnings december 31 2002 amounted 290 million components provision benefit income taxes follows thousands deferred income taxes arise temporary differences tax bases assets liabilities reported amounts consolidated financial statements summary components net deferred tax assets follows thousands december 31 2002 company research development credit carryforwards approximately 51 million federal state tax purposes expiring varying amounts 2017 2022 december 31 2002 company federal state net operating loss carryforwards 31 million 78 million respectively federal net operating loss carryforwards expire 2019 state net operating loss carryforwards expire varying amounts 2004 2006 cannot utilized 2002 2003 management believes companys ability use deferred tax assets limited based expectation able fully utilize net operating losses purchase wacos december 1999 research development credits generated companys research development center new jersey company created valuation allowance deferred tax assets valuation allowance increased 02 million 06 million 2002 2001 respectively december 31 2002 company net operating loss carryforwards approximately 180 million hong kong expire carried forward indefinitely utsc huts granted tax holidays started phase 1999 net impact tax holidays increase net income approximately 100 million 67 million 45 million years ended december 31 2002 2001 2000 respectively difference companys effective income tax rate federal statutory rate reconciled 2001 audits companys federal income tax returns years ended december 31 1999 1998 1997 completed audits companys income tax returns underway december 31 2002 note 15common stock incentive plans stock option plans 1995 stock plan july 31 1995 board directors adopted october 1995 companys stockholders approved companys 1995 stock plan 1995 plan officers employees consultants eligible acquire shares common stock pursuant options stock purchase rights time adoption 3705232 shares common stock reserved issuance 1995 plan 1995 1996 companys board stockholders added additional 5400000 shares 1995 plan raising total number authorized shares reserved 1995 plan 9105232 december 31 2002 6711744 shares authorized issuance 1995 plan options purchase 523885 shares common stock outstanding 1995 plan january 31 1997 board directors elected grant options 1995 plan upon adoption 1997 plan remaining unissued shares 1995 plan already subject options awards ceased reserved issuance 1995 plan 1997 stock plan january 31 1997 board directors adopted companys stockholders approved companys 1997 stock plan 1997 plan officers employees consultants eligible receive options purchase shares common stock purchase rights december 1999 board directors amended 1997 plan companys stockholders approved february 2000 december 31 2002 company authorized issue 21092663 shares subject options term 1997 plan number shares issuable plan increased annually first day fiscal year beginning 2001 amount equal lesser 6000000 shares 4 outstanding shares common stock date lesser amount determined board plan terminates january 2007 may terminated earlier board directors december 31 2002 options purchase 13984861 shares common stock outstanding 1997 plan compensation committee administers 1997 plan options granted 1997 plan may incentive stock options isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options nsos qualify compensation committee selects eligible persons options granted determines grant date amounts exercise prices vesting periods relevant terms options including whether options isos nsos exercise price isos granted 1997 plan may less 100 fair market value common stock grant date exercise price nsos determined compensation committee discretion options generally transferable life optionee options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date options generally terminate 12 months death permanent disability optionee ii 90 days termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year may exceed 100000 options excess limit treated nsos event company merged another corporation substantially companys assets sold outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option right options rights automatically vest become exercisable full period least fifteen days time option terminate 1997 plan company may grant stock purchase rights eligible participants shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determines otherwise agreement grant company right repurchase stock upon voluntary involuntary termination employee reason including death disability purchase price repurchased shares original price paid may paid cancellation indebtedness owed company shares stock subject right repurchase lapse time 2001 director option plan march 2 2001 board directors adopted may 2001 companys stockholders approved companys 2001 director option plan 2001 director option plan directors employees company outside directors eligible receive options purchase shares common stocks directors horner atkins son toy outside directors grants options outside directors automatic nondiscretionary july 2001 board directors amended 2001 director option plan december 31 2002 company authorized issue 1200000 shares subject options plan terminates may 2011 may terminated earlier board directors december 31 2002 options purchase 395000 shares common stock outstanding 2001 director option plan compensation committee administers 2001 director plan upon approval 2001 director plan outside director automatically granted option purchase eighty thousand shares common stock first option date person first becomes outside director anniversary date director employee company ceases employment company become outside director shall receive option purchase twenty thousand shares common stock subsequent option companys first annual meeting stockholders following conversion outside director subsequent annual stockholder meeting thereafter provided serving outside director date time outside directors first option fully vested outside director shall automatically granted subsequent option anniversary date year provided outside director terms 2001 director plan exercise price option granted market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest follows 25 shares subject first option vest anniversary date grant subsequent option grants vest follows 100 shares subject subsequent option vest first anniversary date grant august 2002 company granted outside director options purchase 25000 shares common stock options vest twelve months acd 1996 1997 stock plan august 27 2001 board directors approved assumption outstanding vested stock options issued acd 1996 1997 stock plans upon acquisition acd total 868701 fully vested shares issued acd 1996 1997 stock plans converted 46105 utstarcom stock options date merger november 19 2001 summary activity plans follows following table summarizes information respect stock options outstanding exercisable december 31 2002 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan purchase plan intended qualify employee stock purchase plan section 423 internal revenue code company reserved 2000000 shares common stock sale stock purchase plan number shares reserved sale plan increased annually first day fiscal year beginning 2001 amount equal lesser 4000000 shares 2 outstanding shares companys common stock date lesser amount determined board directors stock purchase plan administered board committee appointed board stock purchase plan implemented offering periods duration may exceed 24 months offering periods may contain interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 ended last trading day april 30 2002 subsequent consecutive overlapping offering periods begin may 1 november 1 annually offering periods end twentyfour months thereafter employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase companys common stock payroll deductions may exceed 15 employees total compensation stock may purchased plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value companys shares date purchase participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant participants designated beneficiary case death certificate issued full shares participants account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term ten years total shares purchased plan 182437 118223 2002 2001 respectively december 31 2002 3533857 shares available purchase plan note 16deferred stock compensation connection grant certain stock options restricted common stock employees nonemployees members board directors connection certain acquisitions see note 6 company recorded net deferred stock compensation 87 million 47 million 03 million years ended december 31 2002 2001 2000 respectively representing fair value restricted stock difference fair value common stock option exercise price options date grant deferred compensation presented reduction stockholders equity amortization recorded vesting period related restricted stock options company recorded stock compensation expense 31 million 52 million 116 million year ended december 31 2002 2001 2000 respectively december 31 2002 approximately 118 million remained amortized corresponding vesting period respective option restricted share generally four five years note 17401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees attained age 21 401k plan intended qualify sections 401a 401m 401k internal revenue code 1986 amended code 401k plan trust intended qualify section 501a code contributions 401k plan eligible employees company investment earnings thereon taxable employees withdrawn contributions company may make expected deductible company companys eligible employees may elect reduce current eligible compensation one percent 1 fifty percent 50 subject maximum statutorily prescribed annual limit 11000 participants age 50 12000 participants age 50 salary reductions contributed behalf 401k plan 401k plan permits require company make matching contributions behalf eligible employees make salary reduction contributions 401k plan commencing plan year beginning january 1 2001 company elected begin making matching contributions behalf qualified employees participate 401k plan company contribute 050 dollar contributed qualified employees 401k plan maximum 3000 2002 2001 plan years companys matching contributions subject vesting schedule based upon longevity employee service company matching contributions 07 million 04 million 2002 2001 respectively note 18commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2007 minimum future lease payments leases december 31 2002 follows rent expense years ended december 31 2002 2001 2000 65 million 38 million 22 million respectively litigation october 31 2001 complaint filed united states district court southern district new york company directors officers various underwriters initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offering securities litigation 21 mc 92 april 2002 consolidated amended complaint filed matter company captioned utstarcom initial public offering securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers companys common stock march 2 2000 december 6 2000 claims directors officers dismissed without prejudice pursuant stipulation company believes meritorious defenses lawsuit defend lawsuit vigorously motions dismiss filed behalf company defendants coordinated proceeding motions currently pending court investment commitments june 2002 company invested 10 million global asia partners lp fund size anticipated 100 million formed make equity investments private preipo technology telecommunications companies asia company commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner note 19operating risks financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts receivable company places temporary cash shortterm investments several financial institutions approximately 1151 million 1280 million companys cash deposit foreign accounts december 31 2002 2001 respectively company invests excess cash highly liquid investments original maturities twelve months less certificates deposit government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds money market funds company believes limited exposure risk concentration credit risk major customers companys first second largest customers accounted 178 125 companys sales 2002 237 66 companys sales 2001 respectively 57 04 accounts receivable december 31 2002 355 103 accounts receivable december 31 2001 respectively companys first second largest customers accounted 121 84 companys net sales respectively 2000 approximately 84 90 companys net sales 2002 2001 2000 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 2380 million 1928 million respectively december 31 2002 2001 company extends credit customers generally without requiring collateral company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 84 companys sales year ended december 31 2002 made china accordingly companys business financial condition results operations may influenced political economic legal environment china general state chinas economy companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation chinas current regulatory structure telecommunications products company offers china must meet government industry standards network access license equipment must obtained without license equipment allowed connected public telecommunications networks sold china moreover company must ensure quality telecommunications equipment obtained network access license stable reliable may lower quality performance installed licensed products state councils product quality supervision department concert ministry information industry performs spot checks track supervise quality licensed telecommunications equipment publishes results spot checks regulations implementing requirements detailed applied court may interpreted enforced regulatory authorities number different ways company obtained required network access licenses an2000 platform company applied yet received network access license pas systems handsets based upon conversations ministry information industry company understands pas systems handsets considered still trial period sales companys pas systems handsets may continue made trial period license ultimately required network access licenses also required additional products company selling may sell china including mswitch platform company fails obtain required licenses company could prohibited making sales unlicensed products including pas systems handsets china would substantially harm business financial condition results operations companys counsel china advised chinas governmental authorities may interpret apply regulations respect licenses required ability sell product trial period manner inconsistent information received counsel china either could material adverse effect companys business financial condition note 20segment reporting company provides telecommunications equipment integrated suite network access systems subscriber terminal products company primarily operates two geographic areas china regions chief operating decision makers evaluate performance make operating decisions allocate resources based consolidated financial data gross profit operating income operations income taxes allocated specific individual departments within organization accordance sfas 131 disclosures segments enterprise related information company considered single reportable segment company required disclose certain information product revenues information geographic areas information major customers information longlived assets third quarter 2002 provinciallevel telecommunications service entity zhejiang province china began consolidate telecommunications purchasing decisions province result trend zhejiang province company grouped customers zhejiang province together treated one customer december 31 2002 company approximately 33 customers zhejiang province year ended december 31 2002 sales zhejiang province bbtc accounted 18 13 net sales respectively year ended december 31 2001 sales zhejiang province accounted 24 net sales year ended december 31 2000 sales hangzhou ptt accounted 12 net sales revenue attributable japan primarily due sales bb technologies corporation sales bb technologies corporation 1230 million 139 million 00 million year ended december 31 2002 2001 2000 respectively geographical area product sales data follows thousands longlived assets geography follows thousands note 21related party transactions company recognized revenue 1230 million 139 million 00 twelve months ended december 31 2002 2001 2000 respectively respect sales telecommunications equipment bb technologies corporation bbtc affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder company bbtc offers asynchronous digital subscriber line adsl coverage throughout japan marketed name yahoo company provides adsl technology bbtc contract competitively bid terms contract terms favorable unrelated parties included accounts receivable december 31 2002 08 million related agreement amounts included deferred revenue respect agreement december 31 2002 included accounts receivable respect agreement december 31 2001 135 million amounts included deferred revenue respect agreement december 31 2001 company invested softbank china restructuring fund 1 investment vehicles established softbank affiliates see note 9 august 29 2002 company completed repurchase six million shares companys common stock 729 million largest shareholder softbank corp part transaction softbank signed voluntary lock agreement stipulating sell companys common stock within next six months lock agreement end march 1 2003 coincides start companys blackout period insiders permitted sell shares blackout period begins march 1 2003 ends commencing close business second trading day following public release first quarter fiscal 2003 results april 2003 company recorded cost common stock repurchased related transaction costs 364 million additional paidin capital common stock based pro rata amount shares repurchased remaining 365 million recorded retained earnings accordance accounting principles board opinion 6 quarterly results operations unaudited quarterly financial data periods indicated follows net earnings per share computed independently quarters presented therefore sum quarterly net earnings per share may equal annual earnings per share item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules omitted applicable required information shown consolidated financial statements notes thereto report independent auditors board directors stockholders utstarcom inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries company december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp san francisco california february 27 2004 utstarcom inc consolidated balance sheets thousands see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements utstarcom inc subsidiaries consolidated statements stockholders equity thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1description business utstarcom inc company delaware corporation provides internet protocol ip networking product service platforms global service support company sells wireless wireline switching platforms operators fast growth established telecommunications markets around world company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks incorporated 1991 headquartered alameda california company research design operations new jersey china india note 2summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts company wholly majority 50 percent owned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries equity affiliated companies shown separately consolidated financial statements reclassifications certain reclassifications made prior years financial statements conform 2003 presentation reclassifications impact previously reported net income stockholders equity use estimates preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents cash equivalents consist instruments maturities three months less date purchase shortterm investments shortterm investments consist investments original maturities less twelve months accordance companys investment policy shortterm investments invested investment grade rated securities minimum better ratings currently companys shortterm investments aa better ratings marketable securities classified availableforsale carried fair value unrealized holding gains losses securities classified availableforsale recorded separate component stockholders equity unrealized losses securities classified availableforsale determined otherthan temporary losses reported earnings realized gains losses reported earnings fair value investments based quoted market prices december 31 2003 2002 shortterm investments availableforsale securities consisted thousands revenue recognition revenues sales telecommunications equipment recognized persuasive evidence arrangement exists delivery product occurred customer acceptance obtained fee fixed determinable collectability reasonably assured payment due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region shipping handling costs recorded revenues costs revenues expected losses contracts recognized immediately sales may generated complex contractual arrangements require significant revenue recognition judgments particularly areas multiple element arrangements multiple elements exist arrangement fee allocated different elements based upon verifiable objective evidence fair value elements governed eitf 0021 sec staff accounting bulletin 104 sab 104 multiple element arrangements primarily involve sale pas ipas equipment handsets installation training provision equipment different locations customer revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered element standalone value right return delivered elements vendor control undelivered elements final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment company entitled full payment company recognize revenue final acceptance granted customer acceptance considered substantive transaction additionally company recognize revenue cash payments received customers transactions customers final acceptance company records cash receipts customer advances defers revenue recognition final acceptance received multiple elements exist arrangement includes software considered incidental equipment services arrangement software softwarerelated elements recognized provisions statement position 972 amended emerging issues task force issue 0305 company allocates revenues element software arrangements based vendorspecific objective evidence vsoe element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion arrangement fee recognized revenue evidence fair value one undelivered elements exist revenue deferred recognized delivery elements occurs fair value established company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue related maintenance support contracts recognized ratably contract term revenues services less 10 revenues years company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash china may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards 48 revenue recognition right return exists sfas 48 company developed reasonable estimates stock exchanges estimates derived historical experience similar types sales similar products assessment collectability also factor determining whether revenue recognized company assesses collectability based number factors including payment history creditworthiness customer company request collateral customers international sales company often requires letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company recognizes revenue time collection becomes reasonably assured generally upon receipt cash nature business china emerging markets companys billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable booked company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained company provides warranty equipment handset sales period generally ranging twelve eighteen months time final acceptance company provides expected cost product warranties time revenue recognized based assessment past warranty experience accounts notes receivable company accepts bank notes commercial notes maturity dates three six months customers china normal course business estimates collectability trade receivables notes receivable allowance doubtful accounts maintained estimated losses trade receivables notes receivable company assesses collectability receivable determining whether creditworthiness customer deteriorated could result inability collect payment collectability doubtful company records allowance receivable customers financial condition deteriorate causing ability make payments suffer result allowances receivables would increased allowances doubtful accounts 312 million 263 million december 31 2003 2002 respectively inventories consist inventories held companys manufacturing facility warehouses customer sites prior signing contracts company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost net realizable value net writedowns excess slow moving obsolete inventory cost computed using standard cost approximates actual cost firstin firstout basis inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value deferred costsinventories customer sites contracts inventories customer sites contracts awaiting final acceptance classified deferred costs separate historically considered inventory stated lower cost net realizable value net reserves based upon assessment potential losses obsolescence lengthy acceptance process title risk loss inventory transferred customer upon delivery revenue cost sales recorded final acceptance received customer research development capitalized software development costs research development costs charged expense incurred costs incurred development software ultimately sold capitalized time technological feasibility attained related product ready release 2003 2002 company capitalized 42 million 34 million software development costs respectively amortization capitalized development costs 18 million 11 million 03 million 2003 2002 2001 respectively unamortized capitalized software development costs 2003 2002 75 million 45 million respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets land use rights related property leased company china amortized life lease leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company generally depreciates assets following periods company capitalizes interest incurred related construction property plant equipment ready use december 31 2003 company recorded 06 million interest construction progress applicable construction hangzhou manufacturing facility incurred interest expenses associated buildings construction 28 million year ended december 31 2003 company continue capitalize interest building placed service upon time amortization begin capitalized interest amortized straightline basis life building goodwill intangible assets company recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets annual goodwill impairment review performed fourth quarter year changes circumstances indicate potential impairment company currently operates single reportable segment without reporting units management evaluates performance makes operating decisions allocates resources based consolidated financial data company determines whether impairment goodwill necessary consolidated basis assessing potential impairment goodwill book value compared fair value fair value companys market capitalization date impairment assessed historically fair value exceeded book value impairments necessary impairment longlived assets longlived assets certain intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets longlived assets disposed sale measured lower book value fair value less cost sell stockbased compensation company accounts employee stock option grants accordance accounting principles board opinion 25 accounting stock issued employees apb 25 adopted disclosureonly alternative sfas 123 amended sfas 148 accounting stockbased compensation sfas 123 apb 25 compensation expense based difference date grant fair value common stock exercise price option fair value warrants options stock exchanged services nonemployees expensed period benefited warrants options valued using blackscholes option pricing model following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation thousands except per share data following assumptions used calculate fair value options granted weighted average fair value per share options granted 2003 2002 2001 1141 916 1130 respectively comprehensive income comprehensive income includes changes equity net assets period nonowner sources accumulated comprehensive income loss shown consolidated statement stockholders equity income taxes deferred income taxes recognized differences tax bases assets liabilities financial statement amounts based enacted tax rates valuation allowances established necessary reduce deferred tax assets amount expected realized company provide us federal taxes undistributed earnings foreign subsidiaries affiliates considered reinvested indefinite period segment reporting company operates single segment selling wireless wireline switching platforms operators fast growth established telecommunications markets around world disclosures fair value financial instruments financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable convertible subordinated debt purchased written call options accrued liabilities carrying amounts cash equivalents shortterm investments accounts receivable payable accrued liabilities approximate fair values shortterm nature instruments carrying amounts loan receivable approximates fair value based discounted value future cash flow expected received loan following table summarizes companys carrying values fair values financial instruments foreign currency translation operations companys subsidiaries conducted primarily china financial statements subsidiaries translated chinas renminbi functional currency us dollars accordance sfas 52 foreign currency translation accordingly foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity inventory purchases made japan consequentially portions accounts payable denominated japanese yen foreign currency transaction gains losses reported earnings 87 million 54 million losses 2003 2002 respectively material 2001 earnings per share basic earnings per share computed dividing net income available common stockholders weighted average number shares companys common stock outstanding period diluted earnings per share determined adjusting net income reported effect dilutive securities increasing number shares potentially dilutive common shares outstanding period potentially dilutive common shares consist employee stock options written call option warrants convertible subordinated notes following summary calculation basic diluted earnings per share thousands except per share data certain potential shares related employee stock options warrants outstanding years ended december 31 2003 2002 2001 excluded diluted per share computations since exercise prices greater average market price common shares period accordingly effect antidilutive years ended december 31 2003 2002 2001 shares totaled 176 million weighted average exercise price 3222 per share 28 million shares weighted average exercise price 2335 per share 18 million shares weighted average exercise price 2418 per share respectively company outstanding warrants issuance 32000 shares exercise price 250 per share december 31 2003 companys 78 convertible subordinated notes outstanding eligible conversion shares common stock 1000 aggregate principal amount notes converted company deliver approximately 420345 shares common stock companys stock price exceeds specified threshold december 31 2003 closing price companys common stock exceeded specified threshold effect increasing denominator diluted earnings per share 137 million additionally year ended december 31 2003 average price companys stock exceeded specified strike prices convertible bond hedge call option transactions company entered reduce potential dilution conversion notes bond hedge call option transactions may settled companys option either cash net shares expire march 1 2008 using treasury stock method fas 128 would effect decreasing denominator diluted earnings per share 31 million shares bond hedge transaction increasing denominator diluted earnings per share 12 million shares call option transaction however dilutive effect 12 million shares respect call option transaction included companys diluted earnings per share calculation convertible bond hedge fas 128 always antidilutive net income diluted eps computation reflects reduction interest expense 31 million year ended december 31 2003 would result assumed conversion 78 convertible subordinated notes company sold 121 million shares common stock january 2004 would dilutive effect earnings per share calculation refer note 23 additional detail stock issuance recent accounting pronouncements january 2003 financial accounting standards board issued interpretation 46 consolidation variable interest entities fin 46 fin 46r issued december 2003 fin 46 provides accounting guidance consolidation variable interest entities vie fin 46 applies public private business enterprises controlling interest business contractual relationship vie fin 46 requires consolidation existing noncontrolled affiliates vie unable finance operations without investor support investors exposure significant risks rewards ownership company adopted fin 46 quarter ended december 31 2003 adoption fin 46 impact consolidated financial statements april 2003 financial accounting standards board issued statement financial accounting standards 149 amendment statement 133 derivative instruments hedging activities sfas 149 statement amends sfas 133 provide clarification financial accounting reporting derivative instruments hedging activities adoption sfas 149 effective contracts entered modified june 30 2003 material effect companys consolidated financial condition results operations may 2003 financial accounting standards board issued statement financial accounting standards 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances many instruments previously classified equity company financial instruments adoption fas 150 expected impact companys consolidated financial statements december 17 2003 staff sec issued staff accounting bulletin 104 sab 104 revenue recognition supercedes sab 101 revenue recognition financial statements sab 104s primary purpose rescind accounting guidance contained sab 101 related multiple element revenue arrangements superceded result issuance eitf 0021 accounting revenue arrangements multiple deliverables additionally sab 104 rescinds secs revenue recognition financial statements frequently asked questions answers faq issued sab 101 codified sab 101 topic 13 selected portions faq incorporated sab 104 wording sab 104 changed reflect issuance eitf 0021 revenue recognition principles sab 101 remain largely unchanged issuance sab 104 adoption sab 104 materially affect companys revenue recognition policies companys results operations financial position cash flows note 3followon public offering resale public offering august 3 2001 company completed followon public offering sold aggregate 7400000 shares common stock 2000 per share selling stockholders sold additional 2950000 shares common stock offering aggregate net proceeds company 1399 million february 28 2002 company sold 1500000 shares common stock connection resale public offering 10000000 shares common stock softbank america inc one companys stockholders aggregate net proceeds company 289 million note 4supplemental disclosures cash flow information noncash activities follows note 5restricted cash shortterm investments december 31 2003 company restricted cash shortterm investments 244 million primarily comprised 205 million restricted shortterm investments standby letters credit 37 million time deposit required japanese tax purposes december 31 2002 company restricted cash 213 million comprised 98 million standby letters credit 115 million deposit required china regulatory authorities company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof note 6acquisitions divestitures companies commworks may 23 2003 company completed acquisition selected assets liabilities commworks division commworks 3com corporation delaware corporation 3com company paid 1000 million cash incurred related transaction related costs 93 million company funded consideration acquisition cash hand selected assets acquired included commworks portfolio carrierfocused voice data networking products customer support professional services addition company acquired licensed 3com intellectual property used commworks develops deploys carrierclass ipbased multiservice access servicecreation platforms telecommunications service providers company made preliminary allocation purchase price based part upon preliminary independent appraisal three months ended september 30 2003 company completed allocation purchase price commworks estimated amounts intangible assets goodwill changed due revised assumptions future revenues existing customers amount purchase price allocated inprocess research development iprd 13 million charged companys results operations alternative future uses existed acquisition date company recorded goodwill 523 million excess costs acquiring commworks fair value identified net assets acquired connection acquisition goodwill expected deductible tax purposes results operations commworks included companys consolidated results operations beginning acquisition date may 23 2003 assessing commworks iprd projects key characteristics products development considered well future prospects rate technology changes telecommunications equipment industry product life cycles projects stages development date acquisition commworks two projects development qualified iprd slap high density voice hdv 20 slap iprd project wireless division commworks objective slap develop interface connects utstarcoms products radio switch manufacturers products china order connect cellular network internet hdv 20 iprd project wireline product line commworks hdv 20 utilizes software technology increase data capacity voice internet protocol voip solutions significant risks associated technologies technological risks stem fact new technologies early stage development closing date commworks slap iprd project approximately 60 complete hdv 20 approximately 40 complete therefore significant risks associated reaching technological milestones time budget commercial risks associated competitive nature telecommunications equipment market significant additional costs required complete iprd projects slap product approximately 80 complete december 31 2003 commercialization expected first quarter fiscal 2004 remaining costs required complete project estimated 01 million hdv 20 product approximately 50 complete december 31 2003 commercialization expected first quarter fiscal 2004 remaining costs required complete project estimated 02 million following table summarizes final allocation purchase price commworks based upon final independent valuation final valuation resulted changes estimated fair value changes estimated useful lives intangible assets acquired change amount attributable goodwill mainly due revised assumptions future revenues existing customers company also recorded additional employeerelated liabilities estimated useful life purchased technology one five years estimated useful life customer relationships ten years estimated useful lives backlog trade names one two years following pro forma results operations reflect combined results company commworks years ended december 31 2003 2002 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods pro forma results operations include historical operations company commworks certain nonrecurring charges recorded commworks included including 150 million restructuring charge first second quarter 2002 150 million 61 million charge relating goodwill impairment recorded second quarter 2002 first quarter 2003 respectively rollingstreams june 30 2003 company completed acquisition rollingstreams systems ltd rollingstreams developmentstage company pursuant share exchange agreement rollingstreams designs streaming endtoend tvoverinternetprotocol tvoip solutions telecommunications operators broadband service providers companys investment rollingstreams 04 million prior acquisition purchase consideration outstanding shares rollingstreams already held company prior acquisition 301074 shares companys common stock addition company assumed outstanding rollingstreams options became options purchase aggregate 12742 shares companys common stock valued 05 million 301074 shares 164115 shares valued 58 million issued closing including 28696 held escrow undisclosed liabilities contingencies incurred rollingstreams prior closing breach share exchange agreement 136959 301074 shares payable form earnout period expiring 18 months closing subject achievement certain revenue milestones earnout period amount purchase price allocated iprd 62 million amount charged companys results operations alternative future uses existed acquisition date results operations rollingstreams included companys consolidated results operations beginning july 1 2003 date acquisition rollingstreams one project development qualified iprd mediaswitch endtoend solution designed telecom operators broadband service providers deliver broadcast quality tv ondemand entertainment services internet protocol networks mediaswitch considered iprd project significant risks associated development technology risks include technological commercial risks technological risks stem fact technology 70 complete december 31 2003 therefore significant risks associated reaching technological milestones time budget commercial risks associated lack market acceptance tvoip concept addition technological commercial risks stated significant additional costs required complete iprd project commercialization mediaswitch expected second quarter 2004 remaining costs required complete project estimated 45 million involves adding new features functionalities stabilizing software code following table represents final allocation purchase price rollingstreams allocation purchase price based upon independent valuation xebeo may 7 2003 company completed purchase assets xebeo communications inc xebeo 24 million cash xebeo develops manufactures optical packet switches enable telecommunications carriers provide single fiber multiservice access customers addition amount 07 million may payable based future contingencies related employment amount purchase price allocated iprd 19 million charged companys results operations alternative future uses existed acquisition date acquisition xebeo focusing resources development first product metrobridge optical packet switching solution considered development stage development metrobridge 60 complete closing date technological feasibility technology established technology future alternative uses therefore development metrobridge considered iprd product achieved technical milestones november 2003 available customer trials evaluations expected marketed sold third quarter 2004 commercial risks associated lack market acceptance product features use tvoip implementations following table represents final allocation purchase price xebeo based upon independent valuation shanghai yi yun october 16 2002 company acquired assets intellectual property shanghai yi yun telecom technology co ltd shanghai yi yun provider synchronous digital hierarchy equipment shortly thereafter claim surrounding potential infringement intellectual property acquired led possible recission transaction creating contingency whose outcome determinable beyond reasonable doubt transaction recorded march 2003 company determined none intellectual property acquired subject claim consideration 02 million cash 342854 shares restricted stock valued 60 million connection acquisition shanghai yi yun stockholders received part 342854 shares restricted stock executed indemnity escrow agreement favor company shares restricted stock placed escrow addition company issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one companys subsidiaries shares restricted stock vest five years 2007 accelerated vesting upon achievement specified milestones company treated 514290 shares restricted stock deferred compensation 2003 226302 shares vested upon achievement specified milestones acquisition enable company enter synchronous digital hierarchy transport market internally developed products goodwill 30 million recorded connection acquisition expected deductible tax purposes amount purchase price allocated inprocess research development 13 million charged companys results operations alternative future uses existed acquisition date following represents allocation purchase price shanghai yi yun huts guts december 18 2001 company entered agreement acquire remaining 49 ownership interest guts one companys two primary manufacturing facilities china total consideration 36 million cash order achieve 100 ownership joint venture january 21 2002 company entered agreement acquire remaining 12 ownership interest huts one companys two primary manufacturing facilities china total consideration 145 million cash result guts huts transactions closed may 2003 company able conduct operations china wholly owned subsidiaries issanni april 19 2002 company completed purchase issanni communications inc issanni companys investment issanni 20 million prior acquisition purchase consideration outstanding shares issanni already held company prior acquisition 21 million cash addition 20 million payable form earnout issanni shareholders record closing subject completion certain performance milestones 2002 2003 2004 earnout recorded additional purchase price earned milestones met december 31 2003 furthermore company adopted incentive program providing issuance 39876 shares common stock valued 10 million issanni employees continue perform services company shares vest earlier five years upon achievement certain performance milestones company records amount compensation expense ratably vesting period accelerate amortization milestones met amount purchase price allocated inprocess research development 07 million charged companys results operations alternative future uses existed acquisition date goodwill 02 million recorded connection acquisition expected deductible tax purposes results operations issanni included companys consolidated results operations beginning april 19 2002 advanced communication devices corporation november 2001 company completed purchase advanced communication devices corporation acd 213 million comprised approximately one million shares companys common stock valued 199 million 09 million vested common stock options valued using blackscholes pricing model 05 million acquisitionrelated expenses acd system chip soc semiconductor company focusing lan ip switching technology whose current markets included taiwan china korea addition company adopted incentive plan providing issuance shares common stock valued 5 million acd employees continue perform services company acquisition accounted purchase results operations included companys consolidated financial statements since acquisition association acquisition acd company allocated 01 million tangible net assets acquired 43 million identified intangible assets 47 million inprocess research development costs charged companys results operations alternative future use existed balance sheet date 122 million charged goodwill excess costs acquiring acd fair value identified net assets acquired note 7inventories deferred costsinventories customer sites contracts december 31 2003 2002 total inventories consist following thousands note 8accounts notes receivable company accepts bank notes receivable commercial notes receivable maturity dates three six months customers china normal course business company may discount notes banking institutions china sale notes reflected reduction current assets proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes receivable sold years ended december 31 2003 2002 2988 million 25 million respectively notes included companys consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 accounting transfers servicing financial assets extinguishment liabilities sfas 140 met sfas 140 upon transfer transferor entity must derecognize financial assets control surrendered transferee obtains control assets addition transferred assets isolated transferor beyond reach creditors transferee right without conditions constraints pledge exchange assets received costs settling transferring notes receivable 23 million immaterial years ended december 31 2003 2002 respectively included income expense net consolidated statements operations notes receivable available sale 114 million 120 million december 31 2003 december 31 2002 respectively note 9property plant equipment december 31 2003 2002 property plant equipment consists following depreciation expense 342 million 189 million 107 million years ended december 31 2003 2002 2001 respectively note 10longterm investments companys investments follows softbank china company 53 million investment softbank china investment fund established softbank corp focused investments internet companies china investment permits company participate anticipated growth internetrelated businesses china softbank corp related companies significant stockholders company companys investment constitutes 10 funding softbank china softbank corp contributing remaining 90 fund separate management team none companys employees employed fund many funds investments privately held companies many still startup development stages investments inherently risky markets technologies products companies development typically early stages may never materialize company accounts investment cost method recorded losses 02 million 28 million 17 million due temporary decline carrying value investment years ended december 31 2003 2002 2001 respectively restructuring fund first quarter fiscal 2002 company invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder company fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy procedures total fund offering expected approximately 1500 million 2260 million investor contributing minimum 08 million fund separate management team none companys employees employed fund company accounts investment equity method accounting year ended december 31 2003 company recorded equity losses 01 million recorded losses year ended december 31 2002 balance investment 19 million december 31 2003 global asia partners lp june 2002 company invested 10 million global asia partners lp additional 10 million june 2003 commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner fund size anticipated 100 million fund formed make private equity investments private preipo technology telecommunications companies funds geographic focus technology investments asia particular india china company accounts investment equity method accounting company recorded equity losses 02 million 01 million years ended december 31 2003 2002 respectively balance investment 17 million december 31 2003 interwave 2002 company purchased approximately 58 million shares common stock interwave communications inc technology company listed nasdaq approximately 30 million addition company received warrants purchase 20 million shares interwaves common stock 021 per share companys holdings adjusted 110 reverse stock split april 30 2003 06 million shares common stock warrants purchase 02 million shares interwaves common stock 210 per share warrants valued 07 million december 31 2003 using blackscholes optionpricing model company recorded increase carrying value common stock securities 13 million year ended december 31 2003 comprehensive income equity company recorded gain 04 million income expense 2003 reflect change fair value warrants loss 14 million 2002 income expenses reflect temporary decline carrying value marketable securities matsushita july 5 2002 company entered joint venture agreement matsushita communication industrial co ltd stockholder company jointly design develop manufacture sell telecommunication products company 49 ownership interest joint venture company registered share capital 100 million cash consideration 49 million payable company paid october 2002 company voting control significant matters joint venture company investment results operations joint venture company accounted using equity method accounting company recorded equity losses 48 million 02 million years ended december 31 2003 2002 respectively china telecom november 2002 company purchased approximately 05 million shares common stock china telecom initial public offering approximately 100 million china telecom listed new york stock exchange first second quarters 2003 company sold shares realizing loss 01 million china telecom leading provider wireline telephone data internet leased line services four economically developed regions china affiliates customers company investments company also invested directly number private technologybased companies early stages development investments accounted cost basis company continually evaluates carrying value investments possible impairment based achievement business objectives milestones financial condition prospects companies relevant factors year ended december 31 2003 impairment charges respect private technology investments years ended december 31 2002 2001 impairment charges respect private technology investments 30 million 17 million respectively note 11goodwill intangible assets december 31 2003 2002 goodwill acquired intangible assets consisted following thousands amortization expense 84 million 24 million 75 million years ended december 31 2003 2002 2001 respectively estimated aggregate amortization expense intangibles five years beginning 2004 2008 107 million 76 million 58 million 56 million 40 million respectively goodwill increased 554 million intangible assets increased 491 million year ended december 31 2003 increase year ended december 31 2003 mainly attributable goodwill 523 million intangible assets 449 million comprised purchased technology 142 million customer relationships 278 million intangibles 29 million recorded acquisition commworks based final purchase price allocation estimated useful life purchased technology one five years estimated useful life customer relationships ten years estimated useful lives backlog trade names one two years july 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized instead tested impairment least annually sfas 142 also requires intangible assets definite useful lives amortized respective estimated useful lives estimated residual values reviewed impairment accordance sfas 144 accounting impairment disposal longlived assets sfas 142 adopted company january 1 2002 sfas 142 effect eliminating amortization goodwill commencing january 1 2002 however impairment reviews may result future periodic writedowns company completed required transitional assessment goodwill first quarter fiscal 2002 based assessment transition goodwill impairment charge company performed annual impairment review fourth quarter 2003 2002 impairment goodwill noted reconciliation net income adjusted net income goodwill amortization year ended december 31 2001 follows thousands note 12debt following represents outstanding borrowings december 31 2003 2002 thousands company available borrowing facilities 5837 million december 31 2003 5294 million facilities expire 2004 543 million facilities expire 2008 2010 interest rates ranging approximately 45 60 company guaranteed debt included consolidated balance sheet march 12 2003 company completed offering 4025 million convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes bear interest rate 78 per annum convertible companys common stock conversion price 2379 per share subordinated present future senior debt company holders notes may convert notes price companys common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible approximately 420345 shares common stock concurrent issuance convertible notes company entered convertible bond hedge call option transaction cost 438 million convertible bond hedge allows company purchase 16918873 shares common stock 2379 per share party agreeement written call option allows holder purchase 16918873 shares companys common stock company 32025 per share bond hedge call option transactions may settled companys option either cash net shares expire march 1 2008 company recorded instruments cost carrying value december 31 2003 approximates original cost convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders equity accordance guidance emerging issues task force issue 0019 accounting derivative financial instruments indexed potentially settled companys stock note 13other current liabilities current liabilities december 31 2003 2002 consist following current liabilities primarily consist accrued contract costs relate purchases inventory installation services testing consulting work performed outside vendors company yet received payment accrued payroll compensation costs relate wages bonuses commissions earned yet paid warranty costs estimated costs equipment replacement repair accrued construction costs represent accruals work performed materials purchased relation facility built hangzhou note 14warranty obligations guarantees warranty obligations follows thousands certain companys sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof note 15provision income taxes united states foreign income loss income taxes minority interest cumulative effect change accounting principle follows thousands components provision benefit income taxes follows thousands establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change companys expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks effectiveness tax planning strategies various relevant jurisdictions changes companys income tax provision valuation deferred tax assets liabilities may affect annual effective income tax rate deferred income taxes arise temporary differences tax bases assets liabilities reported amounts consolidated financial statements summary components net deferred tax assets follows thousands deferred taxes recognized undistributed earnings foreign subsidiaries company intend repatriate earnings december 31 2003 undistributed earnings investments foreign subsidiaries amounted 4720 million december 31 2003 state net operating loss carryforwards 15 million tax effected state net operating loss carryforwards expire varying amounts 2004 2006 could utilized 2003 december 31 2003 company foreign net operating loss carryforwards approximately 08 million tax effected expire carried forward indefinitely 2003 company reversed valuation allowances attributable state research development credits company believes likely sufficient taxable income utilize credits companys subsidiaries utsc huts cuts hstc granted tax holidays started phase 1999 net impact tax holidays decrease tax expense approximately 53 million 100 million 67 million years ended december 31 2003 2002 2001 respectively difference companys effective income tax rate federal statutory rate reconciled 2001 audits companys federal income tax returns years ended december 31 1999 1998 1997 completed audits companys income tax returns underway december 31 2003 note 16common stock incentive plans stock option plans 1995 stock plan july 31 1995 board directors adopted october 1995 companys stockholders approved companys 1995 stock plan 1995 plan officers employees consultants eligible acquire shares common stock pursuant options stock purchase rights time adoption 3705232 shares common stock reserved issuance 1995 plan 1995 1996 companys board stockholders added additional 5400000 shares 1995 plan raising total number authorized shares reserved 1995 plan 9105232 december 31 2003 6711744 shares authorized issuance 1995 plan options purchase 88885 shares common stock outstanding 1995 plan january 31 1997 board directors elected grant options 1995 plan upon adoption 1997 plan remaining unissued shares 1995 plan already subject options awards ceased reserved issuance 1995 plan 1997 stock plan january 31 1997 board directors adopted companys stockholders approved companys 1997 stock plan 1997 plan officers employees consultants eligible receive options purchase shares common stock purchase rights december 1999 board directors amended 1997 plan companys stockholders approved february 2000 december 31 2003 company authorized issue 25464775 shares subject options term 1997 plan number shares issuable plan increased annually first day fiscal year beginning 2001 amount equal lesser 6000000 shares 4 outstanding shares common stock date lesser amount determined board plan terminates january 2007 may terminated earlier board directors december 31 2003 options purchase 12740174 shares common stock outstanding 1997 plan compensation committee administers 1997 plan options granted 1997 plan may incentive stock options isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options nsos qualify compensation committee selects eligible persons options granted determines grant date amounts exercise prices vesting periods relevant terms options including whether options isos nsos exercise price isos granted 1997 plan may less 100 fair market value common stock grant date exercise price nsos determined compensation committee discretion options generally transferable life optionee options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date options generally terminate 12 months death permanent disability optionee ii 90 days termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos event company merged another corporation substantially companys assets sold outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option right option right automatically vest become exercisable full period least fifteen days time option right terminate 1997 plan company may grant stock purchase rights eligible participants shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determines otherwise agreement grant company right repurchase stock upon voluntary involuntary termination employee reason including death disability purchase price repurchased shares original price paid may paid cancellation indebtedness owed company shares stock subject right repurchase lapse time stock purchase rights granted 2003 2002 2001 director option plan march 2 2001 board directors adopted may 2001 companys stockholders approved companys 2001 director option plan 2001 director option plan directors employees company outside directors eligible receive options purchase shares common stock directors horner atkins son toy outside directors grants options outside directors automatic nondiscretionary july 2001 board directors amended 2001 director option plan december 31 2003 company authorized issue 1200000 shares pursuant options 2001 director option plan terminates may 2011 may terminated earlier board directors december 31 2003 options purchase 320000 shares common stock outstanding 2001 director option plan compensation committee administers 2001 director plan pursuant terms 2001 director option plan outside director automatically granted option purchase eighty thousand shares common stock first option date person first becomes outside director anniversary date director employee company ceases employment company become outside director receives option purchase twenty thousand shares common stock subsequent option companys first annual meeting stockholders following conversion outside director subsequent annual stockholder meeting thereafter provided serving outside director date time outside directors first option fully vested outside director automatically granted subsequent option anniversary date year provided outside director terms 2001 director option plan exercise price option granted equal market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subsequent option grants vest 100 shares subject subsequent option first anniversary date grant issanni communications inc incentive program issanni plan established issuance total 39876 shares utstarcoms common stock specified former employees issanni communications inc issanni became utstarcoms employees connection utstarcoms acquisition issanni plan administered board directors committee appointed board participant issanni plan eligible earn vest designated number shares subject award shares made participant plan based upon attainment one six milestones related amount revenue generated issanni products 2002 2003 subject participants continued employment issanni company one subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares fifth anniversary acquisition issanni employee continues employed issanni company subsidiaries date regardless whether milestone attained shares subject award event become issuable whether milestones achieved whether fiveyear vesting schedule elapsed upon sale discontinuation company utstarcom international products inc ii sale substantially technology acquired utstarcom international products inc connection acquisition issanni iii employment termination certain issanni principals prior date participants shares earned participants service issanni company one subsidiaries terminated voluntarily cause company may exercise repurchase option respect participants unearned shares ii voluntarily cause death disability participant entitled receive shares participant would otherwise earned respect milestones achieved within 24 months participants termination iii result death disability participant estate entitled receive unearned portion shares respect milestones advanced communication devices corporation incentive program acd plan provides issuance additional 73637 shares utstarcoms common stock pursuant awards shares granted designated former employees advanced communication devices corporation acd became utstarcoms employees connection utstarcoms merger acd plan administered board directors company grant shares plan 2003 granted 31275 shares 52133 shares 2002 2001 respectively participant acd plan entitled earn vest designated number shares subject award made participant upon attainment one five milestones subject participants continued employment acd company subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares subject award fifth anniversary merger participant continued perform services acd company subsidiaries date regardless whether milestones obtained participants service acd company subsidiaries terminated cause applicable employer voluntarily participant result death disability participant forfeit shares subject award yet earned distributed participants service terminated reason participant entitled receive shares subject award respect milestones achieved within 12 months following participants termination forfeit shares unearned date termination 2003 nonstatutory stock option plan april 15 2003 board directors adopted companys 2003 nonstatutory stock option plan 2003 plan directors officers employees consultants company eligible granted options purchase shares companys common stock nonstatutory stock options qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended may granted 2003 plan december 31 2003 company authorized issue 1500000 shares pursuant options granted 2003 plan subject adjustment certain instances including stock splits stock dividends business combinations changes capitalization december 31 2003 options purchase 1438300 shares common stock outstanding 2003 plan 2003 plan administered compensation committee board directors compensation committee charged selecting eligible persons options granted determines number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii 90 days termination option holders service reason disability due option holders death however option may exercised ten years grant date event company merged another corporation substantially companys assets sold 2003 plan provides outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option automatically vest become exercisable full period determined compensation committee time option terminate summary activity plans follows following table summarizes information respect stock options outstanding exercisable december 31 2003 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan purchase plan intended qualify employee stock purchase plan section 423 internal revenue code company reserved 2000000 shares common stock sale stock purchase plan number shares reserved sale plan increased annually first day fiscal year beginning 2001 amount equal lesser 4000000 shares 2 outstanding shares companys common stock date lesser amount determined board directors stock purchase plan administered board committee appointed board stock purchase plan implemented offering periods duration may exceed 24 months offering periods may contain interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 ended last trading day april 30 2002 subsequent consecutive overlapping offering periods begin may 1 november 1 annually offering periods end twentyfour months thereafter employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase companys common stock payroll deductions may exceed 15 employees total compensation stock may purchased plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value companys shares date purchase participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant participants designated beneficiary case death certificate issued full shares participants account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term ten years total shares purchased plan 261103 182437 118223 2003 2002 2001 respectively december 31 2003 3272754 shares available purchase plan note 17deferred stock compensation connection grant certain stock options restricted common stock employees nonemployees members board directors connection certain acquisitions see note 6 company recorded net deferred stock compensation 03 million 87 million 47 million years ended december 31 2003 2002 2001 respectively representing fair value restricted stock difference fair value common stock option exercise price options date grant deferred compensation presented reduction stockholders equity amortization recorded vesting period related restricted stock options company recorded stock compensation expense 43 million 31 million 52 million year ended december 31 2003 2002 2001 respectively december 31 2003 approximately 78 million remained amortized corresponding vesting period respective option restricted share generally four five years note 18401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees attained age 21 401k plan intended qualify sections 401a 401m 401k internal revenue code 1986 amended code 401k plan trust intended qualify section 501a code contributions 401k plan eligible employees company investment earnings thereon taxable employees withdrawn contributions company may make expected deductible company companys eligible employees may elect reduce current eligible compensation one percent 1 fifty percent 50 subject maximum statutorily prescribed annual limit 12000 participants age 50 14000 participants age 50 year ended december 31 2003 11000 participants age 50 12000 participants age 50 year ended december 31 2002 salary reductions contributed behalf 401k plan 401k plan permits require company make matching contributions behalf eligible employees make salary reduction contributions 401k plan commencing plan year beginning january 1 2001 company elected begin making matching contributions behalf qualified employees participate 401k plan company contribute 050 dollar contributed qualified employees 401k plan maximum 5500 3000 2003 2002 plan years respectively companys matching contributions subject fiveyear vesting schedule based upon longevity employee service company matching contributions 21 million 07 million 04 million 2003 2002 2001 respectively note 19commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2008 minimum future lease payments leases december 31 2003 follows rent expense years ended december 31 2003 2002 2001 115 million 65 million 38 million respectively investment commitments december 31 2003 company invested total 20 million global asia partners lp fund size anticipated 100 million fund formed make private equity investments private preipo technology telecommunications companies asia company commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner purchase commitments company obligated purchase raw materials workinprocess inventory various orders one supplier expected fulfilled adverse consequences material operations financial condition company december 31 2003 total open commitments purchase orders approximately 23 million litigation october 31 2001 complaint filed united states district court southern district new york company directors officers various underwriters initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offering securities litigation 21 mc 92 april 2002 consolidated amended complaint filed matter company captioned utstarcom initial public offering securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers companys common stock march 2 2000 december 6 2000 companys directors officers dismissed without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss brought defendants including company order dismisses claims company except claim brought section 11 securities act 1933 alleges companys initial public offering registration statement contained untrue statements material fact omitted state material facts required stated registration statement necessary make statements therein misleading proposal made settlement release claims issuer defendants including utstarcom settlement subject number conditions including approval proposed settling parties court settlement occur litigation utstarcom continues utstarcom believes valid defenses intends defend case vigorously company unable currently estimate loss associated litigation company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty company believes final outcome matters material adverse impact financial position results operations note 20operating risks financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts receivable company places temporary cash shortterm investments several financial institutions approximately 3462 million 1417 million companys cash short term investments deposit foreign accounts december 31 2003 2002 respectively company invests excess cash highly liquid investments original maturities twelve months less certificates deposit government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds money market funds company believes limited exposure risk concentration credit risk major customers table outlines companys sales accounts receivable balances december 31 2002 largest customers approximately 76 84 90 companys net sales 2003 2002 2001 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 3040 million 2380 million respectively december 31 2003 2002 company extends credit customers china generally without requiring collateral global sales outside china company often requires letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 86 84 90 companys sales year ended december 31 2003 2002 2001 respectively made china accordingly political economic legal environment well general state chinas economy may influence companys business financial condition results operations companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation approximately 10 13 3 companys sales year ended december 31 2003 2002 2001 respectively made japan accordingly political economic legal environment general state japans economy may influence companys business financial condition results operations note 21segment reporting company sells wireless wireline switching platforms operators fast growth established telecommunications markets around world company primarily operates two geographic areas china regions chief operating decision makers evaluate performance make operating decisions allocate resources based consolidated financial data gross profit operating income operations income taxes allocated specific individual departments within organization accordance sfas 131 disclosures segments enterprise related information company considered single reportable segment company required disclose certain information product revenues information geographic areas information major customers information longlived assets china sales accounted 86 84 net sales 2003 2002 respectively 2003 provinciallevel telecommunications service entities continued consolidate telecommunications purchasing decisions province result consolidation trend customers grouped together province treated one customer december 31 2003 2002 approximately 31 customers giving effect consolidation 2003 hei long jiang province accounted 11 net sales 2002 sales zhejiang province accounted 18 sales softbank bb corporation sbbc accounted 13 net sales 2001 sales zhejiang guangdong provinces accounted 28 10 net sales respectively geographical area product sales data follows thousands longlived assets geography follows thousands note 22related party transactions company recognized revenue 1844 million 1230 million 139 million years ended december 31 2003 2002 2001 respectively respect sales telecommunications equipment sbbc affiliate softbank america inc significant stockholder company sbbc offers asynchronous digital subscriber line adsl coverage throughout japan marketed name yahoo bb company provides adsl technology sbbc contract competitively bid terms contract terms favorable unrelated parties included accounts receivable december 31 2003 2002 439 million 08 million respectively related agreement amounts included deferred revenue respect agreement december 31 2003 2002 company invested softbank china restructuring fund 1 investment vehicles established softbank corp affiliates see note 10 april 5 2003 company repurchased 80 million shares common stock beneficially owned softbank america inc purchase price 17385 per share total cost repurchase 1396 million including transaction fees connection repurchase transaction softbank america inc entered agreement company offer sell otherwise dispose companys common stock period one year subject number exceptions december 31 2003 softbank america inc beneficially owned approximately 141 companys outstanding stock july 17 2003 company entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank america inc terms agreement company loaned bb modem 101 million effective interest rate 1201 per annum purposes investing portfolio adsl modems associated modem rental agreements softbank bb corp formerly bb technologies affiliate softbank america inc softbank bb corp continue service modems modem rental agreements companys loan subordinated certain senior lenders bb modem repayments payable company fortytwo month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period companys recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loans company assesses loan impairment whenever events changes circumstances indicate carrying amount may recoverable company periodically reviews underlying quality asset pool securing loan assess whether impairment incurred needs recorded 2003 company recorded 05 million interest income respect loan receivable december 31 2003 approximately 112 million included longterm assets note 23subsequent event january 14 2004 company sold 121 million shares common stock 3925 per share banc america securities llc net proceeds approximately 4742 million company intends use net proceeds strategic general corporate purposes including limited acquisitions investments working capital expenditures quarterly results operations unaudited quarterly financial data periods indicated follows net earnings per share computed independently quarters presented therefore sum quarterly net earnings per share may equal annual earnings per share item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules page financial statements report independent registered public accounting firm consolidated balance sheets december 31 2004 2003 consolidated statements operations years ended december 31 2004 2003 2002 consolidated statements stockholders’ equity years ended december 31 2004 2003 2002 condensed consolidated statements cash flows years ended december 31 2004 2003 2002 notes consolidated financial statements financial statement schedules three years period ended december 31 2004 2003 2002 icondensed financial information registrant iivaluation qualifying accounts schedules omitted applicable required information shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders utstarcom inc completed integrated audit utstarcom inc’s “company” 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedules opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedules responsibility company’s management responsibility express opinion financial statements financial statement schedules based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements company adopted financial accounting standards board interpretation 46 2003 internal control financial reporting also audited management’s assessment included management’s report internal control financial reporting appearing item 9a controls procedures utstarcom inc maintain effective internal control financial reporting december 31 2004 1 company maintain effective controls financial reporting process due insufficient complement personnel level accounting knowledge experience training application generally accepted accounting principles commensurate company’s financial reporting requirements 2 company maintain effective controls identification accounting related party relationships related party transactions 3 company maintain effective controls monitoring accounting functions located outside us 4 company maintain effective control environment based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim financial statements prevented detected following material weaknesses identified included management’s assessment 1 december 31 2004 company maintain effective controls financial reporting process due insufficient complement personnel level accounting knowledge experience training application generally accepted accounting principles commensurate company’s financial reporting requirements material weakness contributed following control deficiencies relating preparation company’s financial statements individually considered material weaknesses company maintain effective controls revenue deferred revenue accounts associated cost sales specifically company’s controls processes procedures related recording review revenue deferred revenue accounts adequate ensure accounts completely accurately recorded particular following exceptions identified revenue recognition criteria properly assessed treatment upgrade protection multiple element arrangement nonstandard contractual terms conditions exceptions final acceptance confirmations received customers tracking proof delivery timing execution final acceptance confirmations identification appropriate costs associated selected sales transactions control deficiency resulted adjustments second quarter 2004 financial statements audit adjustments fourth quarter 2004 financial statements properly recognize revenue cost sales b company maintain effective controls inventory deferred costs inventory reserve accounts cost sales specifically company’s controls failed adequately identify document analyze conditions considered relative existence expected recoverability inventory deferred costs principally japan controls adequate properly track confirm inventory movements ensure timely recognition cost goods sold addition certain inventory purchases approved locally accordance company’s usual procurement polices procedures control deficiency resulted certain audit adjustments fourth quarter 2004 financial statements correct cost goods sold related inventory deferred costs accounts c company maintain effective controls processes accounting goodwill specifically company’s controls processes procedures related assessment impairment goodwill account sufficiently detailed identify instances impairment required generally accepted accounting principles control deficiency resulted audit adjustment fourth quarter 2004 financial statements recognize impairment company’s goodwill associated operations entity acquired substantially abandoned 2004 company maintain effective controls process translation accounts transactions denominated currency us dollars specifically company’s controls processes procedures related translation transactions account balances denominated currency us dollars failed identify utilize appropriate foreign exchange rates primarily related cash accounts receivable accounts payable comprehensive income accounts control deficiency resulted certain audit adjustments fourth quarter 2004 financial statements properly record unrealized foreign exchange gains e company maintain effective controls recording accrued expenses primarily china japan specifically company’s controls processes procedures related accrued expenses failed completely accurately record expenses proper period review open purchase orders invoices received part close process insufficient ensure 2004 yearend accrued expense balances completely accurately recorded proper period control deficiency resulted certain audit adjustments fourth quarter 2004 financial statements properly record certain accrued expense related income statement accounts f company maintain effective controls financial reporting process ensure accurate preparation review financial statements specifically company’s controls completeness accuracy review documentation close processes relating reconciliations journal entries spreadsheets international reporting packages review preparation monthly expenditure reports ineffective design execution addition company effective controls process identifying accumulating required supporting information ensure completeness footnote disclosures including support accounting positions taken nonroutine transactions goodwill impairment purchase accounting segment reporting accounting potential variable interest entities intercompany profit eliminations income tax accounting proper classification inventory deferred costs deferred revenue accounts receivable revenue cost goods sold control deficiencies resulted certain audit adjustments additional disclosures made 2003 2004 financial statements g company maintain effective controls completeness accuracy income tax provision related balance sheet accounts specifically part 2004 yearend close process certain errors related income taxes payable deferred income tax assets liabilities longterm assets prepaids current assets identified calculation company’s 2003 income tax provision control deficiency resulted restatement company’s financial statements quarters full year 2003 well audit adjustments fourth quarter 2004 financial statements adjust provision income taxes stockholders’ equity income taxes payable longterm assets prepaids current assets h company maintain effective controls relation segregation duties user access certain oracle business process applications effective controls place monitor user access instances either information technology finance personnel maintained access specific applications within oracle environment beyond needed perform individual job responsibilities deficiency related financial reporting inventory purchasing applications china financial reporting applications united states discussed certain control deficiencies resulted either restatement company’s financial statements quarters 2003 year ended december 31 2003 andor audit adjustments second fourth quarter 2004 financial statements additionally control deficiencies could individually aggregate result material misstatement annual interim financial statements would prevented detected accordingly management determined control deficiencies constitute material weaknesses 2 december 31 2004 company maintain effective controls identification accounting related party relationships related party transactions specifically company’s controls policies procedures ineffective identifying significant related party relationships transactions timely basis order relationships transactions appropriately reflected company’s financial statements accordance generally accepted accounting principles specifically previously undisclosed significant related party relationship identified 2004 financial close process related party also determined variable interest entity company determined primary beneficiary control deficiency resulted restatement company’s financial statements year ended december 31 2003 well audit adjustment 2004 financial statements additionally control deficiency could result material misstatement annual interim financial statements would prevented detected accordingly management determined control deficiency constitutes material weakness 3 december 31 2004 company maintain effective controls monitoring accounting functions located outside us company’s policies procedures respect review supervision accounting operations foreign locations principally japan china inadequate specifically corporate senior financial management provide adequate oversight accounting functions based principally japan china sufficient accurate information monitoring financial results nonus operations reviews local financial results inadequate either design operation detect errors company’s financial statements described items 1 2 additionally control deficiency could result material misstatement annual interim financial statements would prevented detected accordingly management determined control deficiency constitutes material weakness 4 december 31 2004 company maintain effective control environment financial reporting organizational structure adequate support size complexity operating activities locations company deficiencies local accounting operations lack senior finance director china sufficient depth skill application us generally accepted accounting principles inadequate understanding us generally accepted accounting principles local accounting staff resulted adjustments financial statements discussed items 13 addition cases certain key finance positions staffed individuals appropriate skills training experience meet objectives outlined job descriptions expected roles following specific areas examples corporate departments company additional skilled resources required tax external financial reporting revenue recognition treasury financial planning analysis corporate accounting control deficiency together material weaknesses described items 13 indicate company maintain effective control environment control deficiencies could result material misstatement annual interim financial statements would prevented detected accordingly management determined control deficiency constitutes material weakness material weaknesses considered determining nature timing extent audit tests applied audit 2004 consolidated financial statements opinion regarding effectiveness company’s internal control financial reporting affect opinion consolidated financial statements described management’s report internal control financial reporting management excluded audiovox communications corporation assessment internal control financial reporting december 31 2004 acquired company purchase business combination november 2004 also excluded audiovox communications corporation audit internal control financial reporting audiovox communications corporation whollyowned subsidiary whose total assets total revenues represent approximately 110 approximately 103 respectively related consolidated financial statement amounts year ended december 31 2004 opinion management’s assessment utstarcom inc maintain effective internal control financial reporting december 31 2004 fairly stated material respects based criteria established internal controlintegrated framework issued coso also opinion effects material weaknesses described achievement objectives control criteria utstarcom inc maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued coso pricewaterhousecoopers llp san jose california april 14 2005 utstarcom inc consolidated balance sheets thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders’ equity thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1description business utstarcom inc “company” delaware corporation provides internet protocol “ip” networking product service platforms global service support company sells wireless infrastructure broadband infrastructure handsets customer premise equipment operators fast growth established telecommunications markets around world company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks company incorporated 1991 headquartered alameda california note 2summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts company wholly majority 50 percent owned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries equity affiliated companies shown separately consolidated financial statements company also consolidates variable interest entities “vie” defined financial accounting standards board interpretation 46 “fin 46” “consolidation variable interest entities” restatement consolidated financial statements company filed amendment 1 annual report form 10k year ended december 31 2003 reflect restatement consolidated financial statements year ended december 31 2003 quarters ended march 31 2003 june 30 2003 september 30 2003 certain corresponding changes described part financial closing process year ended december 31 2004 company identified certain errors resulting restatement decreased provision income taxes increased net income 207 million year ended december 31 2003 addition result correction tax provision retained earnings increased 207 million additional paidin capital increased 09 million income taxes payable decreased 25 million longterm assets increased 216 million prepaids increased 28 million current assets reduced 53 million net effect cash provided operating activities result error evaluation errors related income tax provision company determined additional reclassification reported 2003 results required specifically cost sales income increased 35 million year ended december 31 2003 properly classify certain incentive payments received exports valueadded taxes china addition errors 2003 tax provision company correctly identified related party deemed variable interest entity company considered primary beneficiary accordance fasb interpretation 46 “fin 46” company corrected 2003 financial statements reflect consolidation variable interest entity mdc holding limited “mdc holding” affiliated entities mdc holding affiliated entities referred collectively “mdc” december 31 2003 consolidation resulted 55 million increase total assets 07 million increase total liabilities effect net income result consolidation furthermore impairment charge 74 million net taxes 13 million recorded reflect impairment mdc equipment subject revenue share arrangement due uncertainties surrounding customer’s subscriber income ability pay arrangement company determined impairment charge recorded 2003 conditions identified accordingly impairment charge 74 million net tax recorded decreased total assets equity 74 million december 31 2003 addition company identified following revisions classification preparation restated consolidated financial statements 1 cost sales related party revenue transactions presented separately cost sales nonrelated party revenue transactions years presented 2 certain longterm assets increased intangible assets decreased 17 million december 31 2003 3 changes restricted cash incorrectly categorized part operating cash flows instead investing cash flows accordance statement financial accounting standards 95 “statement cash flows” “sfas 95” accordingly company reflected change categorization consolidated statement cash flows three years period ended december 31 2003 change 2003 2002 increase cash flows operating activities decrease cash flows investing activities 32 million 213 million respectively change 2001 4 related party 31 owned individual related member company’s board directors associated transactions identified see note 22 consolidated financial statements use estimates preparation consolidated financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period estimates used revenue recognition allowance doubtful accounts sales returns reserves inventory deferred costs accrued product warranty costs tax valuation allowances goodwill impairments loss contingencies among others actual results could differ estimates 2004 company changed estimate related allowance doubtful accounts reflect new trends collection cycles primarily china december 31 2004 change estimate resulted 101 million lower allowance doubtful accounts would recorded using prior rates cash equivalents cash equivalents consist highly liquid instruments maturities three months less date purchase shortterm investments shortterm investments consist investments original remaining maturities three months less twelve months accordance company’s investment policy shortterm investments invested “investment grade” rated securities minimum better ratings currently company’s shortterm investments aa better ratings marketable securities classified availableforsale carried fair value unrealized holding gains losses securities classified availableforsale recorded separate component stockholders’ equity unrealized losses securities classified availableforsale determined otherthantemporary reported earnings realized gains losses reported earnings fair value investments based quoted market prices december 31 2004 2003 shortterm investments availableforsale securities consisted thousands longterm investments company investments various privately held companies investments funds investments less majorityowned affiliates exercise significant influence accounted equity method pursuant accounting principles board opinion 18 investments affiliates carried cost company monitors impairment makes appropriate reductions carrying value company determines impairment charge required based financial condition nearterm prospects companies revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery product occurred customer acceptance obtained fee fixed determinable collectability reasonably assured payment due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region shipping handling costs recorded revenues costs revenues expected losses contracts recognized identified sales may generated complex contractual arrangements require significant revenue recognition judgments particularly areas multiple element arrangements multiple elements exist arrangement fee allocated different elements based upon verifiable objective evidence fair value elements governed emerging issues task force issue “eitf” 0021 sec staff accounting bulletin 104 “sab 104” multiple element arrangements primarily involve sale personal access systems “pas” family wireless access handsets wireless consumer products core infrastructure equipment internet protocolbased pas “ipas” wireless access systems employ micro cell radio technology specialized handsets allowing service providers offer subscribers mobile fixed access telephone services multiple element arrangements include sale pas ipas equipment handsets installation training provision equipment different locations customer revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements company control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment company entitled full payment company recognize revenue final acceptance granted customer acceptance considered substantive transaction additionally company recognize revenue cash payments received customers transactions customer’s final acceptance company records cash receipts customer advances defers revenue recognition final acceptance received multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 amended eitf 0305 company allocates revenues element software arrangements based vendor specific objective evidence “vsoe” vsoe element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion arrangement fee recognized revenue evidence fair value one undelivered elements exist revenue deferred recognized delivery elements occurs fair value established company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue related maintenance support contracts recognized ratably contract term revenues services less 10 revenues years company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards 48 “revenue recognition right return exists” “sfas 48” company developed reasonable estimates stock exchanges estimates derived based historical experience similar types sales similar products company sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material company estimates amount rebate based upon terms individual arrangement historical experience future expectations price reductions company records estimate rebate amount time sale company also enters sales incentive programs comarketing arrangements certain wireless handset customers company records incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized company assesses collectability based number factors including payment history credit worthiness customer company request collateral customers international sales company often requires letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company recognizes revenue time collection becomes reasonably assured generally upon receipt cash occasionally company enters revenue sharing arrangements company collects revenues customer telecommunications service provider collects service revenues company enters revenue sharing arrangement company recognize revenue collection reasonably assured nature business china emerging markets company’s billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable booked company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained product warranty company provides warranty equipment handset sales period generally ranging one three years time final acceptance rarely company entered arrangements provide limited warranty services periods longer three years longest warranty period ten years company provides expected cost product warranties time revenue recognized based assessment past warranty experience accounts notes receivable company accepts bank notes commercial notes customers china normal course business estimates collectability trade receivables notes receivable notes typically noninterest bearing maturity dates three six months allowance doubtful accounts maintained estimated losses trade receivables notes receivable collection may longer reasonably assured company assesses collectability receivable determining whether creditworthiness customer deteriorated could result inability collect payment collectability doubtful company records allowance receivable customer’s financial condition deteriorate causing ability make payments suffer result allowances receivables may need increased greater concentration accounts receivable certain customers financial conditions specific individual customer may result increased concentration risk exposure allowances doubtful accounts 512 million 312 million december 31 2004 2003 respectively total receivables including accounts receivable related parties inventories consist inventories held company’s manufacturing facility warehouses customer sites prior signing contracts company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost net realizable value net writedowns excess slow moving obsolete inventory exception handset inventory personal communications division “pcd” based weighted average cost inventory cost computed using standard cost approximates actual cost firstin firstout basis inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value deferred costsinventories customer sites contracts inventories customer sites contracts awaiting final acceptance classified deferred costs title associated inventory transferred customer assumed risk physical loss deferred costs also includes labor related third party integrators freight deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time inventory held customer site viability payment including assessment product demand revenue sharing arrangement exists revenue cost sales recorded final acceptance received customer greater concentration inventory customer sites contract specific individual customer financial conditions specific individual customer may result increased concentration risk exposure inventory research development capitalized software development costs research development costs charged expense incurred research development costs include payroll related costs contractor fees facility expenses third party license fees allocations overhead costs incurred development software ultimately sold capitalized time technological feasibility attained related product ready general release 2004 2003 company capitalized 53 million 42 million software development costs respectively amortization capitalized development costs 30 million 18 million 11 million 2004 2003 2002 respectively unamortized capitalized software development costs 2004 2003 159 million 75 million respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets land use rights related property leased company china amortized life lease leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company generally depreciates assets following periods company capitalizes interest incurred related construction property plant equipment ready use 2004 2003 company recorded 14 million 06 million respectively capitalized interest applicable construction hangzhou manufacturing facility hangzhou manufacturing facility placed service october 2004 capitalized interest amortized straightline basis life building consolidation variable interest entities financial accounting standards board “fasb” issued fasb interpretation 46 “fin 46” fin 46 requires entity primary beneficiary variable interest entity “vie” assets liabilities results operations vie included consolidated financial statements entity company consolidated related party deemed vie company primary beneficiary goodwill intangible assets company recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets annual goodwill impairment review performed fourth quarter year changes circumstances indicate potential impairment exists fourth quarter 2004 company reorganized operations three reportable segments single operating segmentreporting unit company performed goodwill impairment analysis reporting unit level time impairment identified assessing potential impairment goodwill book value reporting unit compared fair value fair value determined based present value estimated future cash flows impairment longlived assets longlived assets certain intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets longlived assets disposed sale measured lower book value fair value less cost sell advertising costs company expenses advertising costs incurred payment customers marketing development costs accounted reduction revenue associated customers incurred years ended december 31 2004 2003 2002 advertising costs totaled 80 million 42 million 17 million respectively stockbased compensation company accounts employee stock option grants accordance accounting principles board opinion 25 “accounting stock issued employees” “apb 25” adopted disclosureonly alternative sfas 123 amended sfas 148 “accounting stock based compensation” “sfas 123” apb 25 compensation expense based difference date grant fair value common stock exercise price option fair value warrants options stock exchanged services nonemployees expensed period benefited warrants options valued using blackscholes optionpricing model december 31 2004 subcommittee company’s board directors “board” approved immediate full acceleration vesting stock options outstanding company’s 1997 stock option plan per share exercise price greater 2215 “acceleration” company amended relevant option agreements reflect acceleration company adopted acceleration anticipation impact fasb statement 123r requires expensing unvested options starting january 1 2006 result acceleration options purchase approximately 64 million shares company’s common stock became immediately exercisable december 31 2004 acceleration effect decreasing 2004 pro forma net income approximately 330 million acceleration impact financial statements year ended december 31 2004 expected impact company’s results operations upon adoption fasb statement 123r following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation thousands except per share data following assumptions used calculate fair values weighted average fair value per share options granted 2004 2003 2002 1138 1141 916 respectively weighted average fair value per share espp shares granted 2004 2003 2002 741 557 707 respectively comprehensive income comprehensive income includes changes equity net assets period nonowner sources accumulated comprehensive income loss shown consolidated statement stockholders’ equity december 31 components accumulated comprehensive income follows thousands income taxes company accounts income taxes liability method deferred income taxes recognized differences tax bases assets liabilities financial statement amounts based enacted tax rates valuation allowances established necessary reduce deferred tax assets amount expected realized company required adjust deferred tax asset liabilities period tax rates provisions income tax laws change company provide us federal taxes undistributed earnings foreign subsidiaries affiliates considered reinvested indefinite period segment reporting december 31 2004 company organized three reportable segments china international pcd china reportable segment comprised discrete administrative research development manufacturing sales support infrastructure international segment comprised operations geographic areas including nonchina asia europe middle east africa north south america resulting company’s acquisition selected assets audiovox communication corporation handset division audiovox corporation acquired business integrated company separate distinct operating division referred personal communications division “pcd” became third reportable segment company financial instruments derivatives financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable convertible subordinated debt purchased written call options accrued liabilities carrying amounts cash equivalents shortterm investments accounts receivable payable accrued liabilities approximate fair values shortterm nature instruments carrying amounts loan receivable approximates fair value based discounted value future cash flow expected received loan company uses derivative financial instruments manage exposures foreign currency exchange rate changes objectives holding derivatives include reducing eliminating efficiently managing economic impact exposures effectively possible derivative instruments recognized either assets liabilities balance sheet company measures instruments fair value recognizes changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged following table summarizes company’s carrying values fair values financial instruments foreign currency translation company operations conducted international subsidiaries financial statements subsidiaries translated respective functional currencies us dollars accordance sfas 52 “foreign currency translation” foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders’ equity inventory purchases made japan consequentially portions accounts payable denominated japanese yen foreign currency transaction gains losses reported earnings 08 million 87 million 54 million losses 2004 2003 2002 respectively earnings per share “eps” basic eps computed dividing net income available common stockholders weighted average number shares company’s common stock outstanding period diluted eps determined adjusting net income reported effect dilutive securities increasing number shares potentially dilutive common shares outstanding period potentially dilutive common shares consist employee stock options written call option warrants convertible subordinated notes vested acquisitionrelated stock options following summary calculation basic diluted eps thousands except per share data certain potential shares related employee stock options warrants outstanding years ended december 31 2004 2003 2002 excluded diluted per share computations since exercise prices greater average market price common shares period accordingly effect antidilutive years ended december 31 2004 2003 2002 shares totaled 240 million weighted average exercise price 3132 per share 176 million weighted average exercise price 3222 per share 28 million shares weighted average exercise price 2335 per share respectively december 31 2004 company’s 7¤8 convertible subordinated notes outstanding ineligible conversion shares common stock 1000 aggregate principal amount notes converted company deliver approximately 420345 shares common stock company’s closing stock price exceeds specified threshold last trading day immediately preceding fiscal quarter december 31 2004 closing price company’s common stock specified threshold september 2004 eitf reached consensus related eitf 048 “the effect contingently convertible debt diluted earnings per share” consensus requires contingently convertible debt instruments market price trigger treated traditional convertible debt instruments purposes computed earnings per share using “if converted” method eitf pronouncement effective conversion assumed diluted eps computation company entered convertible bond hedge call option transactions reduce potential dilution conversion notes bond hedge call option transactions may settled company’s option either cash net shares expire march 1 2008 year ended december 31 2004 average price company’s stock specified strike prices convertible bond hedge call option transactions company entered reduce potential dilution conversion notes twelve months ended december 31 2004 dilutive antidilutive effects call option bond hedge derived taking weighted average first second third fourth quarters accordance sfas 128 twelve months ended december 31 2004 would effect decreasing denominator diluted earnings per share 20 million shares bond hedge transaction increasing denominator diluted earnings per share 03 million shares call option transaction twelve months ended december 31 2003 would effect decreasing denominator diluted earnings per share 29 million shares bond hedge transaction increasing denominator diluted earnings per share 10 million shares call option transaction however dilutive effect 03 million shares twelve months ended december 31 2004 10 million shares twelve months ended december 31 2003 respect call option transaction included company’s diluted earnings per share calculation convertible bond hedge sfas 128 always antidilutive net income diluted eps computation reflects reduction interest expense 28 million 31 million years ended december 31 2004 2003 respectively would result assumed conversion 7¤8 convertible subordinated notes recent accounting pronouncements december 2004 financial accounting standards board “fasb” issued sfas 123 revised 2004 “sharebased payment” “sfas 123r” sfas 123r require company measure employee stockbased compensation awards using fair value method record expense consolidated financial statements addition adoption sfas 123r require additional accounting related income tax effects additional disclosure regarding cash flow effects resulting sharebased payment arrangements march 2005 securities exchange commission “sec” issued staff accounting bulletin 107 “sab 107” provides guidance regarding application sfas 123r sab 107 expresses views staff regarding interaction sfas 123r sharebased payment certain sec rules regulations provides staff’s views regarding valuation sharebased payment arrangements public companies particular sab 107 provides guidance related sharebased payment transactions nonemployees transition nonpublic public entity status valuation methods including assumptions expected volatility expected term accounting certain redeemable financial instruments issued sharebased payment arrangements classification compensation expense nongaap financial measures firsttime adoption sfas 123r interim period capitalization compensation cost related sharebased payment arrangements accounting income tax effects sharebased payment arrangements upon adoption sfas 123r modification employee share options prior adoption sfas 123r disclosures management’s discussion analysis “mda” subsequent adoption sfas 123r april 14 2005 sec approved new rule delays effective date sfas 123r annual periods beginning june 15 2005 adoption sfas 123r january 1 2006 expected material impact company’s consolidated results operations financial position statement cash flows company evaluating transition method pricing model alternatives upon adoption december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” sfas 153 addresses measurement exchanges nonmonetary assets redefines scope transactions measured based fair value assets exchanged sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption sfas 153 expected material effect company’s consolidated financial position results operations november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” “sfas 151” sfas 151 clarifies abnormal inventory costs idle facilities excess freight handling costs wasted materials spoilage required recognized current period charges provisions sfas 151 effective fiscal year beginning june 15 2005 adoption sfas 151 expected material impact company’s consolidated financial position results operations cash flows december 2004 fasb issued fsp fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” american jobs creation act 2004 provides onetime 85 dividends received deduction certain foreign earnings repatriated plan reinvestment united states provided certain criteria met fsp fas 1092 effective immediately provides accounting disclosure guidance repatriation provision fsp fas 1092 allows companies additional time evaluate effects law unremitted earnings purpose applying “indefinite reversal criteria” apb opinion 23 “accounting income taxesspecial areas” requires explanatory disclosures companies yet completed evaluation company currently evaluating effects repatriation provision impact consolidated financial statements company expect complete evaluation end 2006 range possible amounts unremitted earnings considered repatriation provision zero 541 million related potential range income tax zero 28 million note 3supplemental disclosures cash flow information noncash activities follows note 4shortterm restricted cash investments december 31 2004 company shortterm restricted cash investments 333 million primarily comprised 243 million restricted cash 86 million restricted shortterm investments held standby letters credit december 31 2003 company restricted cash shortterm investments 244 million primarily comprised 205 million restricted shortterm investments standby letters credit restricted cash 37 million time deposit required japanese tax purposes company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof finally company may issue letters credit support purchase commitments note 5acquisitions divestitures companies audiovox communications corporation november 1 2004 company completed acquisition audiovox communications corporation “acc” select assets liabilities including inventories prepaids payables accrued expenses right hire approximately 250 employees 1651 million cash company acquired acc’s sales service support infrastructure cdma handset brand access supplychain channels product marketing expertise key relationships cdma operators north south america goodwill created acquisition results decreased time market volume related synergies goodwill tax deductible purchase agreement allows purchase price adjustments based actual working capital balances date acquisition result working capital calculation purchase price increase 85 million company made additional payment 57 million cash 2004 paid remaining balance 28 million related working capital adjustment subsequent yearend additionally company incurred professional fees 46 million connection acquisition following table summarizes allocation purchase price acc based part upon independent valuation company acquired 477 million intangible assets principally consisting carrier dealer relationships noncompete agreement amount allocated inprocess research development fair value identifiable intangible assets estimated based part independent valuation intangible assets estimated useful lives ranging one ten years follows customer relationships ten years dealer relationships two years supplier relationships two years noncompete agreement four years trade name three years backlog one year results operations acc included company’s consolidated results operations beginning acquisition date november 1 2004 refer consolidated table pro forma results operations reflecting combined results company acc years ended december 31 2004 2003 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods telos technology inc may 19 2004 company completed acquisition substantially assets certain liabilities telos technology inc subsidiaries “telos” telos provider mobile switching products services voice data communication networks developing rural enterprise emerging wireless markets total consideration acquisition funded cash hand approximately 300 million company paid 290 million cash addition 10 million acquisitionrelated transaction costs within one year acquisition date additional payments totaling maximum 190 million may become payable based upon revenue recognized sale telos products event revenue milestones met original purchase price adjusted amount contingent payment accordance statement financial accounting standards 141 “business combinations” “sfas 141” existing technology acquired included entire telos product family code division multiple access “cdma” softswitch technology products supporting servers operations maintenance centers telos product line integrated company’s suite cdma products strengthening company’s existing cdma product portfolio addition developed product technology company acquired fixed assets inprocess research development “iprd” assembled workforce approximately 60 employees customer relationships recorded goodwill created acquisition results decreased time market cdma technologies goodwill tax deductible subsequent may 19 2004 acquisition telos company completed allocation purchase price based part upon independent valuation amount purchase price allocated iprd 14 million charged company’s results operations alternative future uses existed acquisition date company initially recorded goodwill 66 million connection acquisition third quarter 2004 company reduced purchase price goodwill associated acquisition 02 million reflect difference estimated actual professional services fees incurred related acquisition total company recorded 64 million goodwill related acquisition results operations telos included company’s consolidated results operations beginning acquisition date may 19 2004 acquisition date telos two projects development qualified iprd objective projects enhance functionality products designed comply cdma2000 technology standard assessing telos iprd projects company considered key product characteristics including product’s development stage acquisition date product’s life cycle product’s future prospects company also considered rate technology changes telecommunications equipment industry’s competitive environment economic outlook local global markets projects development enhancements existing products affect functionality existing products significant risk company faces complete projects within scope budget closing date projects approximately 20 30 complete respectively december 31 2004 one project completed project estimated completion date june 2005 estimated remaining costs complete 06 million following table summarizes allocation purchase price telos based upon independent valuation thousands estimated useful lives customer relationships existing technology intangible assets five years refer consolidated table pro forma results operations reflecting combined results company telos year ended december 31 2004 2003 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods hyundai syscomm inc april 27 2004 company completed acquisition assets substantially intellectual property certain employees certain contracts related hyundai syscomm inc’s “hsi” cdma infrastructure business markets outside korea subject attainment certain milestones transfer certain knowhow total consideration transaction approximately 123 million excluding transaction costs 18 million approximately 73 million cash paid closing date additional 30 million cash payable one year closing date remaining purchase price comprised 20 million paid company upon completion hsi training company’s manufacturing employees china terms training services agreement included purchase price 20 million payable upon completion certain revenue milestones event revenue milestones met original purchase price adjusted amount contingent payment accordance sfas 141 conjunction transaction company loaned hsi 32 million effective interest rate 12 per annum used hsi satisfy outstanding debt obligations principal amount loan due april 2005 company may offset hsi’s payment obligations outstanding 30 million purchase price liabilities terms transaction hsi company acquired existing technologies entered noncompete licensing agreements existing technologies acquired base transceiver station “bts” base station controller “bsc” product lines part asset purchase agreement company hsi entered training services agreement whereby hsi employees provide technical training company manufacturing staff china ninthmonth period subsequent acquisition technology technological knowhow strengthen company’s existing cdma product portfolio development future cdma technology addition acquiring existing technology company entered noncompete licensing agreements hsi noncompete agreement prohibits hsi competing company countries except korea four years consummation date licensing agreement requires hsi pay company 1 revenue royalty usage intellectual property company acquired terms acquisition fifteen years subsequent consummation date subsequent april 27 2004 acquisition hsi company completed allocation purchase price based part upon independent valuation company recorded goodwill 70 million connection acquisition results operations hsi included company’s consolidated results operations beginning acquisition date april 27 2004 following table summarizes final allocation purchase price hsi based upon final independent valuation thousands intangible assets estimated useful lives ranging three five years follows existing technology five years noncompete agreement three years intellectual property license agreement three years fourth quarter 2004 decision made substantially abandon acquired operations due integration difficulties thus entire goodwill intangibles written fourth quarter 2004 refer note 10 goodwill intangible assets discussion writeoff relation hsi acquisition refer consolidated table unaudited pro forma results operations reflecting combined results company hsi years ended december 31 2004 2003 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods unaudited pro forma results operations include historical operations company telos hsi acc thousands except per share data giga telecom inc october 29 2004 utstarcom cdma technologies korea limited liability company organized laws korea wholly owned subsidiary company entered asset purchase agreement giga telecom inc “giga” korean corporation develops manufactures wireless handsets pursuant asset purchase agreement related ancillary agreements company pay 186 million certain assets relating research development cdma wireless products 130 million paid cash closing 16 million paid company pursuant separate arrangement respect certain services rendered giga relating design wireless handsets company applied purchase price 40 million paid three separate installments tied certain product design production milestones closing transaction subject consent creditors holding less 80 giga’s aggregate debt including debt held certain financial institutions customary closing conditions including approvals andor clearances applicable governmental agencies including necessary transfer assets acquired transaction outside country certain material consents approvals transaction closed january 4 2005 see note 23 subsequent events commworks may 23 2003 company completed acquisition selected assets liabilities commworks division “commworks” 3com corporation delaware corporation “3com” company paid 1000 million cash incurred related transaction related costs 93 million company funded consideration acquisition cash hand selected assets acquired included commwork’s portfolio carrierfocused voice data networking products customer support professional services addition company acquired licensed 3com intellectual property used commworks develops deploys carrierclass ipbased multiservice access servicecreation platforms telecommunications service providers company made preliminary allocation purchase price based part upon preliminary independent appraisal three months ended september 30 2003 company completed allocation purchase price commworks estimated amounts intangible assets goodwill changed due revised assumptions future revenues existing customers amount purchase price allocated inprocess research development “iprd” 13 million charged company’s results operations alternative future uses existed acquisition date company recorded goodwill 523 million excess costs acquiring commworks fair value identified net assets acquired connection acquisition goodwill expected deductible tax purposes results operations commworks included company’s consolidated results operations beginning acquisition date may 23 2003 assessing commwork’s iprd projects key characteristics products development considered well future prospects rate technology changes telecommunications equipment industry product life cycles projects’ stages development date acquisition commworks two projects development qualified iprd approximately 60 40 complete fourth quarter 2004 projects completed following table summarizes final allocation purchase price commworks based upon final independent valuation final valuation resulted changes estimated fair value changes estimated useful lives intangible assets acquired change amount attributable goodwill mainly due revised assumptions future revenues existing customers company also recorded additional employeerelated liabilities estimated useful life purchased technology one five years estimated useful life customer relationships ten years estimated useful lives backlog trade names one two years following unaudited pro forma results operations reflect combined results company commworks years ended december 31 2003 2002 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods unaudited pro forma results operations include historical operations company commworks certain nonrecurring charges recorded commworks included including 150 million restructuring charge first second quarter 2002 150 million 61 million charge relating goodwill impairment recorded second quarter 2002 first quarter 2003 respectively rollingstreams june 30 2003 company completed acquisition rollingstreams systems ltd “rollingstreams” developmentstage company pursuant share exchange agreement rollingstreams designs streaming endtoend tvoverinternetprotocol “tvoip” solutions telecommunications operators broadband service providers company’s investment rollingstreams 04 million prior acquisition purchase consideration outstanding shares rollingstreams already held company prior acquisition 301074 shares company’s common stock addition company assumed outstanding rollingstreams options became options purchase aggregate 12742 shares company’s common stock valued 05 million 301074 shares 164115 shares valued 58 million issued closing including 28696 held escrow undisclosed liabilities contingencies incurred rollingstreams prior closing breach share exchange agreement shares distributed former shareholders rollingstreams within ten days sixmonth anniversary closing deducting claims 136959 301074 shares payable form earnout period expiring 18 months closing subject achievement certain revenue milestones earnout period 28696 shares held escrow released issued 2004 amount purchase price allocated iprd 62 million amount charged company’s results operations alternative future uses existed acquisition date results operations rollingstreams included company’s consolidated results operations beginning july 1 2003 operations considered immaterial pro forma presentation deemed necessary date acquisition rollingstreams one project development qualified iprd mediaswitch project 70 complete december 31 2003 december 31 2004 project completed cost anticipated following table represents final allocation purchase price rollingstreams allocation purchase price based part upon independent valuation xebeo may 7 2003 company completed purchase assets xebeo communications inc “xebeo” 24 million cash xebeo develops manufactures optical packet switches enable telecommunications carriers provide single fiber multiservice access customers addition amount 07 million may payable based future contingencies related employment results operations xebeo considered material pro forma presentation deemed necessary amount purchase price allocated iprd 19 million charged company’s results operations alternative future uses existed acquisition date acquisition xebeo focusing resources development first product metrobridge optical packet switching solution considered development stage development metrobridge 60 complete closing date technological feasibility technology established technology future alternative uses therefore development metrobridge considered iprd product achieved technical milestones november 2003 however product never commercialized following table represents final allocation purchase price xebeo based part upon independent valuation shanghai yi yun october 16 2002 company acquired assets intellectual property shanghai yi yun telecom technology co ltd “shanghai yi yun” provider synchronous digital hierarchy equipment shortly thereafter claim surrounding potential infringement intellectual property acquired led possible recision transaction creating contingency whose outcome determinable beyond reasonable doubt transaction recorded march 2003 company determined none intellectual property acquired subject claim consideration 02 million cash 342854 shares restricted stock valued 60 million connection acquisition shanghai yi yun stockholders received part 342854 shares restricted stock executed indemnity escrow agreement favor company shares restricted stock placed escrow addition company issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one company’s subsidiaries shares restricted stock vest five years 2007 accelerated vesting upon achievement specified milestones company treated 514290 shares restricted stock deferred compensation 2003 226302 shares vested upon achievement specified milestones results operations shanghai yi yun considered material proforma presentation deemed necessary acquisition enable company enter synchronous digital hierarchy transport market internally developed products goodwill 30 million recorded connection acquisition expected deductible tax purposes amount purchase price allocated inprocess research development 13 million charged company’s results operations alternative future uses existed acquisition date following represents allocation purchase price shanghai yi yun huts guts december 18 2001 company entered agreement acquire remaining 49 ownership interest guts one company’s two primary manufacturing facilities china total consideration 36 million cash order achieve 100 ownership joint venture january 21 2002 company entered agreement acquire remaining 12 ownership interest huts one company’s two primary manufacturing facilities china total consideration 145 million cash result guts huts transactions closed may 2003 company able conduct operations china wholly owned subsidiaries issanni april 19 2002 company completed purchase issanni communications inc “issanni” company’s investment issanni 20 million prior acquisition purchase consideration outstanding shares issanni already held company prior acquisition 21 million cash addition 20 million payable form earnout issanni shareholders record closing subject completion certain performance milestones 2002 2003 2004 earnout recorded additional purchase price earned milestones met december 31 2003 furthermore company adopted incentive program providing issuance 39876 shares common stock valued 10 million issanni employees continue perform services company shares vest earlier five years upon achievement certain performance milestones company records amount compensation expense ratably vesting period accelerate amortization milestones met amount purchase price allocated inprocess research development 07 million charged company’s results operations alternative future uses existed acquisition date goodwill 02 million recorded connection acquisition deductible tax purposes results operations issanni included company’s consolidated results operations beginning april 19 2002 note 6inventories december 31 2004 2003 inventories consist following thousands december 31 2004 2003 inventory balances segment thousands note 7accounts notes receivable company accepts commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months notes receivable available sale 270 million 114 million december 31 2004 december 31 2003 respectively company may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes receivable sold year ended december 31 2004 2988 million notes receivable sold year ended december 31 2003 notes sold included company’s consolidated balance sheets criteria sale treatment established statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishment liabilities” “sfas 140” met costs selling notes receivable 23 million year ended december 31 2003 note 8property plant equipment december 31 2004 2003 property plant equipment consists following depreciation expense 558 million 343 million 189 million years ended december 31 2004 2003 2002 respectively note 9longterm investments company’s investments follows softbank china company 53 million investment softbank china investment fund established softbank corp focused investments internet companies china investment permits company participate anticipated growth internet related businesses china softbank corp related companies significant stockholders company’s investment constitutes 10 funding softbank china softbank corp contributing remaining 90 fund separate management team none company’s employees employed fund many fund’s investments privately held companies many still startup development stages investments inherently risky markets technologies products companies development typically early stages may never materialize company accounts investment cost method company recorded losses 02 million 28 million due otherthantemporary decline carrying value investment years ended december 31 2003 2002 respectively refer note 22 related party transactions cellon international september 2001 company invested 20 million cellon international holdings corporation “cellon” cellon designs wireless terminals related technology handset manufacturers private distributors company invested additional 30 million april december 2002 december 31 2004 company 9 ownership interest cellon investment accounted cost method carrying value evaluated possible impairment based achievement business objectives milestones financial condition prospects company relevant factors december 31 2004 company recorded impairment investment company outstanding purchase commitments cellon refer note 22 related party transactions restructuring fund 1 first quarter fiscal 2002 company invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder company balance investment 18 million 19 million december 31 2004 2003 respectively fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy procedures total fund offering expected approximately 1500 million 2260 million investor contributing minimum 08 million fund separate management team none company’s employees employed fund company accounts investment equity method accounting company recorded immaterial equity losses years ended december 31 2004 2003 company recorded loss year ended december 31 2002 global asia partners lp june 2002 company invested 10 million global asia partners lp additional 10 million june 2003 commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner fund size anticipated 100 million fund formed make private equity investments private preipo technology telecommunications companies fund’s geographic focus technology investments asia particular india china company accounts investment equity method accounting balance investment 12 million 17 million december 31 2004 2003 respectively company recorded equity losses 05 million 02 million 01 million years ended december 31 2004 2003 2002 respectively fiberxon inc september 2002 company invested 20 million fiberxon inc “fiberxon” company develops sells optical modules related systems march 2004 company invested additional 10 million fiberxon investment accounted cost method carrying value evaluated possible impairment based achievement business objectives milestones financial condition prospects company relevant factors december 31 2004 company recorded impairment respect investment company outstanding purchase commitments fiberxon refer note 22 related party transactions interwave communications international ltd 2002 company purchased approximately 58 million shares common stock interwave communications international ltd technology company listed nasdaq approximately 30 million addition company received warrants purchase 20 million shares interwave’s common stock 021 per share company’s holdings adjusted 110 reverse stock split april 30 2003 06 million shares common stock warrants purchase 02 million shares interwave’s common stock 210 per share third quarter 2004 company sold shares interwave common stock average price 565 per share company recorded 21 million gain result sale within income fourth quarter 2004 company net share exercised warrants shares common stock sold shares 05 million resulting 03 million realized loss recorded within income expense december 31 2004 company longer owned investments interwave immenstar september 28 2004 company invested 20 million series preferred stock immenstar inc “immenstar” immenstar development stage company designing chip used company’s product investment accounted cost method gains losses recorded year ended december 31 2004 related investment matsushita joint venture july 5 2002 company entered joint venture agreement matsushita communication industrial co ltd stockholder company jointly design develop manufacture sell telecommunication products company 49 ownership interest joint venture company original registered share capital 100 million cash consideration 49 million payable company paid october 2002 company voting control significant matters joint venture company investment results operations joint venture company accounted using equity method accounting fourth quarter 2004 company contributed additional 93 million 49 interest 19 million capital call joint venture company recorded equity losses 19 million 48 million 02 million years ended december 31 2004 2003 2002 respectively gct semiconductor october 2004 company invested 30 million three million shares gct semiconductor inc “gct” series preferred stock 100 per share investment represents approximately 2 interest company designs develops markets integrated circuit solutions wireless communications industry investment accounted cost method gains losses recorded year ended december 31 2004 relation investment infinera july 2004 company invested 30 million 1339285 shares infinera corporation “infinera” series preferred stock 224 per share investment represents approximately 2 interest infinera develops optical telecommunications systems using photonic integrated circuits investment accounted cost method september 2004 infinera closed series e preferred stock round 060 per share result close proximity series e preferred stock financing rounds decrease share price rounds infinera company entered exchange agreement whereby company exchanged 669643 shares series preferred stock 2500000 shares series e preferred stock exchange company owns total 669643 shares series 2500000 shares series e preferred stock year ended december 31 2004 company recorded loss 11 million reflect otherthantemporary decrease fair value remaining series shares note 10goodwill intangible assets goodwill december 31 2004 2003 goodwill 1806 million 1002 million respectively goodwill increased 804 million year ended december 31 2004 attributable goodwill acquired audiovox communications corporation “acc” 741 million telos technology inc “telos” 64 million hyundai syscomm inc “hsi” 70 million fourth quarter 2004 decision made substantially abandon acquired operations hsi due integration difficulties thus entire goodwill intangibles associated hsi acquisition written fourth quarter 2004 addition goodwill decreased 01 million finalization purchase accounting commworks acquisition goodwill increased 554 million year ended december 31 2003 increase year ended december 31 2003 mainly attributable goodwill 523 million recorded acquisition commworks fourth quarter consummation acquisition acc company evaluated management operation reporting determined company operated three operating segments fourth quarter 2004 segments personal communications division “pcd” china international pcd includes legacy activities acc selected assets acquisition china segment represents company’s activities within china companies international segment includes nonchina nonpcd operations management determined segment reporting unit management reporting structures segment reporting level company reallocated goodwill segments reporting units reallocation reflected follows intangible assets december 31 2004 2003 intangible assets consisted following thousands amortization expense 156 million 84 million 24 million years ended december 31 2004 2003 2002 respectively estimated aggregate amortization expense intangibles five years beginning 2005 2009 231 million 189 million 160 million 127 million 69 million respectively significant foreign exchange impact related intangible assets weighted average amortization period class unamortized identifiable intangible assets includes intangible assets increased 542 million year ended december 31 2004 increase year ended december 31 2004 mainly attributable intangible asset recorded acquisitions 2004 including customersupplier relationships 347 million purchased technology 159 million intangibles 180 million offset amortization expenses year estimated useful lives customer relationships ten five years estimated life purchased technology five years estimated useful lives intangibles one four years second quarter 2004 company consummated acquisition hsi order gain foothold cdma infrastructure market company encountered difficulties integrating hsi operations company’s cdma operations acquisition fourth quarter 2004 company decided winddown legacy operations transfer employees support handset engineering korea decision substantially abandon operations occurred within nine months acquisition hsi operations integrated company therefore company written remaining values intangible assets associated acquisition including 31 million purchased technology 06 million related noncompete agreement 08 million related license agreement hsi writeoffs recorded “selling general administrative” expense statement operations year ended december 31 2004 intangible assets increased 491 million year ended december 31 2003 increase year ended december 31 2003 mainly attributable intangible assets 449 million comprised purchased technology 142 million customer relationships 278 million intangibles 29 million recorded acquisition commworks based final purchase price allocation estimated useful life purchased technology one five years estimated useful life customer relationships ten years estimated useful lives backlog trade names one two years note 11debt following represents outstanding borrowings december 31 2004 2003 thousands occasionally company issues shortterm notes payable vendors lieu trade accounts payable payment terms normally three nine months typically noninterest bearing december 31 2004 company loans various banks totaling 3500 million interest rates ranging 258 621 per annum bank loans mature 2005 included shortterm debt company bank loan connection equipment purchase resulting consolidation mdc january 10 2003 third party established bank loan shanghai pudong development bank purchase equipment obligations bank loan related equipment assumed company january 23 2003 subsequently transferred mdc december 31 2003 bank loan 82 million bears interest rate 494 per annum expires january 10 2006 years ended december 31 2004 2003 total interest expense related loan amounted 04 million company serve legal obligor loan march 12 2003 company completed offering 4025 million convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes bear interest rate 78 per annum convertible company’s common stock conversion price 2379 per share subordinated present future senior debt company holders notes may convert notes price company’s common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible approximately 420345 shares common stock expenses associated convertible subordinated notes issuance 117 million recorded longterm assets amortized life notes convertible subordinated notes include covenants surrounding timely filing financial reports securities exchange commission see note 24 subsequent events concurrent issuance convertible notes company entered convertible bond hedge call option transaction cost 438 million convertible bond hedge allows company purchase 169 million shares common stock 2379 per share party agreement written call option allows holder purchase 169 million shares company’s common stock company 32025 per share bond hedge call option transactions may settled company’s option either cash net shares expire march 1 2008 company recorded instruments cost carrying value december 31 2004 equaled original cost convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders’ equity accordance guidance eitf 0019 “accounting derivative financial instruments indexed potentially settled company’s stock” company credit facilities excluding 82 million bank loan resulting consolidation mdc totaling 7804 million 3880 million remained available borrowing december 31 2004 3880 million available credit facilities 3808 million facilities expire 2005 72 million facilities expire 2010 interest rates 621 guarantee facilities renewed company guaranteed debt included consolidated balance sheet company available borrowing facilities 5837 million december 31 2003 note 12other current liabilities current liabilities december 31 2004 2003 consist following thousands current liabilities primarily consist accrued contract costs relate purchases inventory installation services testing consulting work performed outside vendors company yet received invoices accrued payroll compensation costs relate wages bonuses commissions earned yet paid warranty costs estimated costs equipment replacement repair accrued construction costs represent accruals work performed materials purchased relation facility built hangzhou construction expected fully completed april 2005 note 13warranty obligations guarantees warranty obligations follows thousands certain company’s sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related company’s products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof company may issue commercial letters credit support purchase commitments note 14provision income taxes united states foreign income loss income taxes minority interest follows thousands components provision benefit income taxes follows thousands establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change company’s expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks changes company’s income tax provision valuation deferred tax assets liabilities may affect annual effective income tax rate deferred income taxes arise temporary differences tax bases assets liabilities reported amounts consolidated financial statements company recorded 917 million current deferred tax asset year ended december 31 2004 relation 2175 million deferred revenue recorded customer advances pertaining several agreements entered japan telecom co ltd 2004 refer note 22 related party transactions summary components net deferred tax assets follows thousands deferred taxes recognized undistributed earnings foreign subsidiaries company intend repatriate earnings december 31 2004 undistributed earnings investments foreign subsidiaries amounted 541 million december 31 2004 state net operating loss carryforwards 01 million tax effected net valuation allowance 03 million state net operating loss carryforwards expire varying amounts 2005 2007 could utilized 2004 december 31 2004 company foreign net operating loss carryforwards “nols” approximately 46 million tax effected 46 million valuation allowance provided nols expire carried forward indefinitely however given lack earnings management concluded losses meet likely standard contained fas 109 therefore placed valuation allowance losses company’s subsidiaries utsc huts cuts hstc granted tax holidays started phase 1999 income tax exemption hstc cuts ended december 31 2004 net impact tax holidays decrease tax expense approximately 162 million 380 million 100 million years ended december 31 2004 2003 2002 respectively difference company’s effective income tax rate federal statutory rate reconciled deferred tax rate adjustment 34 primarily due tax benefit 196 million resulting revaluation deferred tax assets china due statutory rate increases certain company’s subsidiaries china 15 24 fourth quarter 2004 significant audits company’s income tax returns underway december 31 2004 note 15common stock incentive plans stock option plans 1995 stock plan july 31 1995 board directors adopted october 1995 company’s stockholders approved company’s 1995 stock plan 1995 plan officers employees consultants eligible acquire shares common stock pursuant options stock purchase rights time adoption 3705232 shares common stock reserved issuance 1995 plan 1995 1996 company’s board stockholders added additional 5400000 shares 1995 plan raising total number authorized shares reserved 1995 plan 9105232 december 31 2004 6711744 shares authorized issuance 1995 plan options purchase 88885 shares common stock outstanding 1995 plan january 31 1997 board directors elected grant options 1995 plan upon adoption 1997 plan remaining unissued shares 1995 plan already subject options awards ceased reserved issuance 1995 plan 1997 stock plan january 31 1997 board directors adopted company’s stockholders approved company’s 1997 stock plan 1997 plan officers employees consultants eligible receive options purchase shares common stock purchase rights december 1999 board directors amended 1997 plan company’s stockholders approved february 2000 december 31 2004 company authorized issue 29645836 shares subject options plan term 1997 plan number shares issuable plan increased annually first day fiscal year beginning 2001 amount equal 6000000 shares 4 outstanding shares common stock date lesser amount determined board plan terminates january 2007 may terminated earlier board directors december 31 2004 options purchase 16827269 shares common stock outstanding 1997 plan compensation committee administers 1997 plan options granted 1997 plan may incentive stock options “isos” intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options “nsos” qualify compensation committee selects eligible persons options granted determines grant date amounts exercise prices vesting periods relevant terms options including whether options isos nsos exercise price isos granted 1997 plan may less 100 fair market value common stock grant date exercise price nsos determined compensation committee discretion options generally transferable life optionee options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date options generally terminate 12 months death permanent disability optionee ii 90 days termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos event company merged another corporation substantially company’s assets sold outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option right option right automatically vest become exercisable full period least fifteen days time option right terminate 1997 plan company may grant stock purchase rights eligible participants shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determines otherwise agreement grant company right repurchase stock upon voluntary involuntary termination employee reason including death disability purchase price repurchased shares original price paid may paid cancellation indebtedness owed company shares stock subject right repurchase lapse time stock purchase rights granted 2004 2003 2002 2001 director option plan march 2 2001 board directors adopted may 2001 company’s stockholders approved company’s 2001 director option plan 2001 director option plan directors employees company “outside directors” eligible receive options purchase shares common stock december 31 2004 directors horner atkins toy outside directors grants options outside directors automatic nondiscretionary july 2001 board directors amended 2001 director option plan december 31 2004 company authorized issue 1200000 shares pursuant options 2001 director option plan terminates may 2011 may terminated earlier board directors december 31 2004 options purchase 312000 shares common stock outstanding 2001 director option plan compensation committee administers 2001 director plan pursuant terms 2001 director option plan outside director automatically granted option purchase eighty thousand shares common stock “first option” date person first becomes outside director “anniversary date” director employee company ceases employment company become outside director receives option purchase twenty thousand shares common stock “subsequent option” company’s first annual meeting stockholders following conversion outside director subsequent annual stockholder meeting thereafter provided serving outside director date time outside director’s first option fully vested outside director automatically granted subsequent option anniversary date year provided outside director terms 2001 director option plan exercise price option granted equal market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subsequent option grants vest 100 shares subject subsequent option first anniversary date grant issanni communications inc incentive program issanni plan established issuance total 39876 shares utstarcom’s common stock specified former employees issanni communications inc “issanni” became utstarcom’s employees connection utstarcom’s acquisition issanni plan administered board directors committee appointed board participant issanni plan eligible earn vest designated number shares subject award shares made participant plan based upon attainment one six milestones related amount revenue generated issanni products 2002 2003 subject participant’s continued employment issanni company one subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares fifth anniversary acquisition issanni employee continues employed issanni company subsidiaries date regardless whether milestone attained shares subject award event become issuable whether milestones achieved whether fiveyear vesting schedule elapsed upon sale discontinuation company utstarcom international products inc ii sale substantially technology acquired utstarcom international products inc connection acquisition issanni iii employment termination certain issanni principals prior date participant’s shares earned participant’s service issanni company one subsidiaries terminated voluntarily cause company may exercise repurchase option respect participant’s unearned shares ii voluntarily cause death disability participant entitled receive shares participant would otherwise earned respect milestones achieved within 24 months participant’s termination iii result death disability participant estate entitled receive unearned portion shares respect milestones advanced communication devices corporation incentive program acd plan provides issuance additional 49030 shares utstarcom’s common stock pursuant awards shares granted designated former employees advanced communication devices corporation “acd” became utstarcom’s employees connection utstarcom’s merger acd plan administered board directors company grant shares plan 2004 2003 31275 shares granted 2002 participant acd plan entitled earn vest designated number shares subject award made participant upon attainment one five milestones subject participant’s continued employment acd company subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares subject award fifth anniversary merger participant continued perform services acd company subsidiaries date regardless whether milestone obtained participant’s service acd company subsidiaries terminated cause applicable employer voluntarily participant result death disability participant forfeit shares subject award yet earned distributed participant’s service terminated reason participant entitled receive shares subject award respect milestones achieved within 12 months following participant’s termination forfeit shares unearned date termination 2003 nonstatutory stock option plan april 15 2003 board directors adopted company’s 2003 nonstatutory stock option plan 2003 plan directors officers employees consultants company eligible granted options purchase shares company’s common stock nonstatutory stock options qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended may granted 2003 plan december 31 2004 company authorized issue 1500000 shares pursuant options granted 2003 plan subject adjustment certain instances including stock splits stock dividends business combinations changes capitalization december 31 2004 options purchase 1274287 shares common stock outstanding 2003 plan 2003 plan administered compensation committee board directors compensation committee charged selecting eligible persons options granted determines number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii 90 days termination option holder’s service reason disability due option holder’s death however option may exercised ten years grant date event company merged another corporation substantially company’s assets sold 2003 plan provides outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option automatically vest become exercisable full period determined compensation committee time option terminate summary activity plans follows following table summarizes information respect stock options outstanding exercisable december 31 2004 2000 employee stock purchase plan february 2000 company’s stockholders approved 2000 employee stock purchase plan purchase plan intended qualify “employee stock purchase plan” section 423 internal revenue code company reserved 28 million shares common stock sale stock purchase plan december 31 2004 number shares reserved sale plan increased annually first day fiscal year beginning 2001 amount equal 20 million shares 2 outstanding shares company’s common stock date lesser amount determined board directors stock purchase plan administered board committee appointed board stock purchase plan implemented offering periods duration may exceed 24 months offering periods may contain interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 ended last trading day april 30 2002 subsequent consecutive overlapping offering periods begin may 1 november 1 annually offering periods end twentyfour months thereafter employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase company’s common stock payroll deductions may exceed 15 employee’s total compensation stock may purchased plan price equal 85 fair market value company’s stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value company’s shares date purchase participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant’s designated beneficiary case death certificate issued full shares participant’s account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term ten years total shares purchased plan 445844 261103 182437 2004 2003 2002 respectively december 31 2004 2826910 shares available purchase plan note 16deferred stock compensation connection grant certain stock options restricted common stock employees nonemployees members board directors connection certain acquisitions see note 5 company recorded net deferred stock compensation 03 million 87 million years ended 2003 2002 respectively representing fair value restricted stock difference fair value common stock option exercise price options date grant company record net deferred stock compensation year ended december 31 2004 deferred compensation presented reduction stockholders’ equity amortization recorded vesting period related restricted stock options company recorded stock compensation expense 05 million 43 million 31 million year ended december 31 2004 2003 2002 respectively december 31 2004 approximately 61 million remained amortized corresponding vesting period respective option restricted share generally four five years november 2001 company completed purchase advanced communication devices corporation “acd” company adopted incentive plan providing issuance shares common stock valued 5 million acd employees continue perform services company stock granted part incentive programs related certain acquisitions see note 5 well acd acquisition noted vest five years 2007 accelerated vesting upon achievement specified milestones note 17401k plan january 1 2000 company adopted utstarcom inc 401k savings plan “401k plan” cashordeferred arrangement covers company’s eligible employees attained age 21 401k plan intended qualify sections 401a 401m 401k internal revenue code 1986 amended “code” 401k plan trust intended qualify section 501a code contributions 401k plan eligible employees company investment earnings thereon taxable employees withdrawn contributions company may make expected deductible company’s eligible employees may elect reduce current eligible compensation one percent 1 fifty percent 50 subject maximum statutorily prescribed annual limit 13000 participants age 50 16000 participants age 50 year ended december 31 2004 12000 participants age 50 14000 participants age 50 year ended december 31 2003 salary reductions contributed behalf 401k plan 401k plan permits require company make matching contributions behalf eligible employees make salary reduction contributions 401k plan commencing plan year beginning january 1 2001 company elected begin making matching contributions behalf qualified employees participate 401k plan company contribute 050 dollar contributed qualified employees 401k plan maximum 5500 2004 2003 plan years respectively company’s matching contributions subject fiveyear vesting schedule based upon longevity employee service company matching contributions 27 million 21 million 07 million 2004 2003 2002 respectively note 18commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2023 minimum future lease payments leases december 31 2004 follows rent expense years ended december 31 2004 2003 2002 173 million 115 million 65 million respectively investment commitments december 31 2004 company invested total 20 million global asia partners lp fund size anticipated 100 million fund formed make private equity investments private preipo technology telecommunications companies asia company commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner purchase commitments company obligated purchase raw materials workinprocess inventory various orders one supplier expected fulfilled adverse consequences material operations financial condition company december 31 2004 total open commitments purchase orders due within year approximately 5783 million company also entered various earnout agreements related certain acquisitions subject completion performance miletstones see note 5 contractual obligations commercial commitments obligations contractual obligations commercial commitments follows certain sales contracts include provisions customers would indemnified us event among things thirdparty claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees accrued amounts relation provisions claims made believe valid enforceable rights intellectual property embedded products litigation securities class action litigation october 26 2004 alleged former shareholder company filed class action complaint united states district court district idaho company two company’s directors andor officers purporting assert claims federal securities laws behalf class purchasers company’s publicly traded securities period april 16 2003 september 20 2004 among things complaint refers company’s disclosures “significant control deficiencies” related revenue recognition deferral revenue recognition particular transaction related lowering company’s financial guidance complaint alleges defendants previously made positive statements regarding company’s business financial performance false misleading statements among things failed disclose problems company’s internal controls revenue recognition policies procedures failed disclose revenue transaction issue would need deferred allegedly caused price company’s publicly traded securities artificially inflated complaint claims plaintiff class members damaged result thereof seeks monetary recovery favor unspecified amount four similar class action complaints later filed united states district court northern district california company several company’s directors officers idaho court california court competing motions filed appointment lead plaintiff approval lead plaintiffs’ counsel california court various motions consolidation actions filed well march 15 16 2005 california court entered orders consolidating cases pending court appointing lead plaintiff approving lead plaintiff’s counsel pursuant orders consolidated complaint filed court within 60 days thereafter april 6 2005 idaho court entered order appointing lead plaintiff approving lead plaintiff’s counsel class action litigation preliminary stages company cannot predict outcome litigation process inherently uncertain however company believes allegations claims litigation without merit company valid defenses intends contest allegations claims defend vigorously december 31 2004 loss amount accrued loss considered probable estimable shareholder derivative litigation august 31 september 2 2004 respectively two shareholder derivative actions filed superior court california alameda county alleged shareholders company purporting assert behalf claims breach fiduciary duty certain current former directors officers also naming company nominal defendant complaints actions refer company’s disclosures audit committee investigation revenue recognition issues “significant control deficiencies” related revenue recognition complaints allege individual defendants ignored problems company’s accounting internal control practices procedures breached fiduciary duties failing maintain adequate internal accounting controls make good faith efforts plaintiffs claim alleged breaches damaged company seek monetary recovery individual defendants favor company well equitable relief addition plaintiffs claim excused presuit demand requirements based allegations company’s board directors could fairly evaluated presuit demand thus demand would futile november 22 2004 court entered order consolidating two actions appointing lead plaintiffs’ counsel november 23 december 2 2004 two related shareholder derivative actions filed court january 13 2005 court consolidated two newer cases previously consolidated actions directed plaintiffs prepare file amended consolidated complaint plaintiffs filed january 31 2005 march 17 2005 company filed motion joined defendants’ seeking dismissal consolidated complaint failure adequately plead futility presuit demand derivative litigation preliminary stages company cannot predict outcome litigation process inherently uncertain however company believes plaintiffs’ allegations “demand futility” without merit company intends contest allegations vigorously december 31 2004 loss amount accrued loss considered probable estimable ipo allocation october 31 2001 complaint filed united states district court southern district new york company directors officers various underwriters company’s initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offering securities litigation 21 mc 92 april 2002 consolidated amended complaint filed matter company captioned utstarcom initial public offering securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers company’s common stock march 2 2000 december 6 2000 company’s directors officers dismissed without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss brought defendants including company order dismisses claims company except claim brought section 11 securities act 1933 alleges registration statement filed accordance ipo misleading june 2004 stipulation settlement release claims issuer defendants including company submitted court approval terms settlement approved would dismiss release claims participating defendants including company exchange dismissal insurance carriers would agree guarantee recovery plaintiffs underwriter defendants least 1 billion issuer defendants would agree assignment surrender plaintiffs certain claims issuer defendants may underwriters settlement subject number conditions including court approval settlement occur litigation company continues company believes valid defenses intends defend case vigorously total amount loss associated litigation determinable time therefore company unable currently estimate loss associated litigation starent patent infringement litigation company sued starent networks corporation “starent” patent infringement us district court northern district california march 22 2004 company filed complaint june 3 2004 company served complaint starent july 30 2004 starent filed served answer counterclaims august 30 2004 company served filed amended complaint company’s amended complaint company asserts starent infringes company’s patent manufacture use offer sale starent’s st16 intelligent mobile gateway company seeks inter alia compensatory damages injunctive relief starent filed answer amended complaint counterclaims september 17 2004 answer counterclaims starent denies company’s allegations seeks declaration patentinsuit infringed invalid unenforceable court held initial case management conference november 2 2004 scheduled hearing construe claims patentinsuit june 30 2005 time court hold additional case management conference schedule date trial february 17 2005 company filed motion preliminary injunction starent’s use sale offer sale products infringing feature hearing company’s motion set may 11 2005 company cannot reliably predict outcome litigation fenner investments patent infringement litigation january 6 2005 fenner investments ltd filed suit company codefendants juniper networks inc nokia inc nortel networks corp lucent technologies inc cisco systems inc us district court eastern district texas suit alleges unspecified products services infringe two fenner patents seeks compensatory injunctive relief march 1 2005 company filed motion dismiss complaint due improper venue hearing yet scheduled motion lawsuit initial stage possible reliably predict outcome relief could awarded litigation process inherently uncertain therefore company unable currently estimate loss associated litigation company intends contest allegations claims defend vigorously august 19 2004 company received letter new management team hyundai syscomm inc “hsi” stating consider asset purchase agreement dated february 26 2004 among hsi utsi dr seongik jang 3r inc “apa” various ancillary agreements entered connection closing related apa april 27 2004 null void due unfulfillment condition precedents material breach terms agreements condition precedents material breach terms specified letter hsi addition hsi made allegations arguments korean governmental agencies korean press alleging technology purchased company pursuant apa exported outside korea company believes none technology exported company korea foreign country addition company believes company materially complied provisions apa ancillary agreements hsi cannot void nullify agreements company taken continue take appropriate legal actions fully enforce rights apa ancillary agreements company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty company believes final outcome matters material adverse impact financial position results operations note 19hedging company uses derivative financial instruments manage exposures foreign currency exchange rate changes derivative instruments accounted pursuant sfas 133 “accounting derivative instruments hedging activities” amended sfas 138 “accounting certain derivative instruments certain hedging activities” “sfas 133” amended sfas 133 requires entity recognize derivatives either assets liabilities balance sheet measure instruments fair value recognize changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged beginning first quarter 2004 company hedges certain japanese yendenominated balance sheet exposures future movements foreign currency exchange rates using foreign currency forward contracts hedged transactions denominated us dollars behalf transactions denominated japanese yen pursuant foreign currency exchange hedging policy company may hedge anticipated transactions related payables denominated foreign currencies using forward foreign currency exchange rate contracts company hedged transactions gains losses fair value hedges intended offset gains losses revaluation japanese yendenominated recognized liabilities net result gains losses contracts revaluation included interest income expense insignificant year ended december 31 2004 company’s foreign currency forward contracts generally mature within three months derivative financial instruments held speculative trading purposes foreign currency forward contracts open december 31 2004 2003 2002 note 20operating risks financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts notes receivable company places temporary cash shortterm investments several financial institutions approximately 5898 million 3500 million company’s cash shortterm investments deposit foreign accounts december 31 2004 2003 respectively company invests excess cash highly liquid investments original maturities twelve months less certificates deposit government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds money market funds company believes limited exposure risk concentration credit risk major customers table outlines company’s sales accounts receivable balances respect company’s customers approximately 73 76 84 company’s net sales 2004 2003 2002 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 5823 million 3040 million respectively december 31 2004 2003 company extends credit customers china generally without requiring collateral global sales outside china company often requires letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 79 86 84 company’s sales year ended december 31 2004 2003 2002 respectively made china accordingly political economic legal environment well general state china’s economy may influence company’s business financial condition results operations company’s operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange company’s results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes china’s telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation approximately 6 10 13 company’s sales year ended december 31 2004 2003 2002 respectively made japan accordingly political economic legal environment general state japan’s economy may influence company’s business financial condition results operations note 21segment reporting december 31 2004 company organized around three operating segments china international pcd year ended december 31 2003 first three quarters 2004 company managed business single operating segment 2004 company continued expand focus markets operations outside china effective fourth quarter 2004 determined company’s chief operating decision makers accordance sfas 131 “disclosures segments enterprise related information” evaluating performance making operating decisions allocating resources based two operating segments namely china regions referred international “international” china operating segment comprised discrete administrative research development manufacturing sales support infrastructure remained largest market company derived majority revenue voice products pas ipas segment managed ceo coo utstarcom china international segment comprised operations geographic areas including nonchina asia europe middle east africa north south america revenues attributed various countries based location respective country’s principal offices november 1 2004 company acquired selected assets audiovox communication corporation wireless handset division audiovox corporation acquired business integrated company separate distinct operating division referred personal communications division “pcd” managed president pcd company determined also evaluate performance allocate resources division separate unit considered third operating segment pcd primarily derived revenue design sales variety handsets primarily support cdma markets north south america company evaluates performance allocates resources operating segments based segment gross profit accounting policies used measuring segment assets operating performance described note 2 certain operating expenses company’s corporate headquarters allocated included international segment addition none nonoperating items allocated following table sets forth certain financial information operating segments described 1 adjustments reflect elimination intersegment transactions investments subsidiaries geographical area product sales data follows thousands december 31 2004 2003 inventory balances segment follows thousands longlived assets geographical area follows thousands note 22related party transactions softbank company recognized revenue 1437 million 1844 million 1230 million years ended december 31 2004 2003 2002 respectively respect sales telecommunications equipment sbbc affiliate softbank corp softbank america inc significant stockholder company sbbc offers asynchronous digital subscriber line “adsl” coverage throughout japan marketed name “yahoo bb” addition company supports sbbc’s new fibertothehome service sales carrier class gigabit ethernet passive optical network “gepon” product well multiservice optical transport product “netring™” revenue recognized gepon netring™ products twelve months ended december 31 2004 934 million included accounts receivable december 31 2004 december 31 2003 868 million 439 million respectively related agreements insignificant amounts included deferred revenue respect agreements december 31 2004 amounts included deferred revenue respect agreements december 31 2003 august 2004 company entered several agreements japan telecom co ltd “jt” wholly owned subsidiary softbank corp related sale telecommunication equipment promotional services nature agreements contemplate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt company determined service activities revenue recorded net expected promotional spending company provided activities past cannot estimate fair value services company determined guidance sab 104 revenue related agreements deferred included customer advance abovementioned promotional activities complete company delivered majority equipment third fourth quarters 2004 promotional services discussed involve contracting third party promotional vendors turn facilitate marketing subscriber recruitment jt fibertothehome program fourth quarter 2004 company determined would end involvement jt promotional program completion contract discussed accordingly late fourth quarter 2004 first quarter 2005 company either cancelled assigned another party third party contracts promotional vendors related jt contract company expects satisfy equipment promotional obligations end first quarter 2005 terms agreements specify jt remit 50 percent contract value cash company within one month execution contract august 20 2004 remaining 50 percent due shortly delivery equipment cash received jt advance revenue recognition accounted customer advance company spends cash promotional activities spending accounted reduction customer advance december 31 2004 2175 million included customer advance related agreements company also entered agreement third quarter jt supply chassis equipment approximate value 75 million although equipment shipped customer third quarter considered linked ian8000 sale noted revenue contract deferred completion abovementioned promotional activities company invested softbank china restructuring fund 1 investment vehicles established softbank corp affiliates see note 9 july 17 2003 company entered mezzanine loan agreement bb modem rental plc “bb modem” affiliate softbank corp terms agreement company loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements sbbc continue service modems modem rental agreements company’s loan subordinated certain senior lenders bb modem repayments payable company 42month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period company’s recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modem’s modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loans company assesses loan impairment whenever events changes circumstances indicate carrying amount may recoverable company periodically reviews underlying quality asset pool securing loan assess whether impairment incurred needs recorded 2004 2003 company recorded 13 million 05 million respectively interest income respect loan receivable december 31 2004 2003 approximately 118 112 million respectively included longterm assets april 5 2003 company repurchased 80 million shares common stock beneficially owned softbank america inc purchase price 17385 per share total cost repurchase 1396 million including transaction fees connection repurchase transaction softbank america inc entered agreement company offer sell otherwise dispose company’s common stock period one year subject number exceptions december 31 2004 softbank america inc beneficially owned approximately 128 company’s outstanding stock august 29 2002 company completed repurchase 60 million shares common stock 729 million softbank america inc cellon october 2002 company entered license royalty agreement cellon international holding corporation “cellon” company 9 ownership interest company paid 08 million license certain technology development certain handset products china per terms royalty agreement company required pay cellon 3 per unit shipped minimum 01 million units agreement material overall financial results cellon company evaluated relationship cellon fin 46 determined consolidation necessary fiberxon company outstanding purchase commitment fiberxon company 11 ownership interest purchase component parts optical networking products addition company provided letter credit 50 million purchase raw materials manufacture component parts commitment fulfilled without adverse consequences material operations financial condition company purchases fiberxon totaled 151 million 2004 company 133 million accounts payable fiberxon december 31 2004 mitsubishi company recognized revenue 10 million year ending december 31 2004 melco affiliated member mitsubishi owns insignificant shares company addition company also made purchases mitsubishi approximately 974 million parts inventory 2004 3631 million 2003 1572 million 2002 december 31 2004 2003 company 64 million 127 million respectively accounts payable mitsubishi starcom products inc company obtains engineering consulting employee placement services starcom products inc “starcom” 31 owned individual related member company’s board directors company paid starcom 11 million 2004 14 million 2003 07 million 2002 engineering consulting employee placement services provided starcom note 23variable interest entity financial accounting standards board “fasb” issued fasb interpretation 46 “fin 46” fin 46 requires entity primary beneficiary variable interest entity “vie” assets liabilities results operations vie included consolidated financial statements entity company consolidated related party deemed vie company primary beneficiary beijing mdc telecom co ltd “mdc bj” formed 2001 2002 venture capital fund affiliation shareholder company made additional capital investment established mdc holding limited “mdc holding” affiliated entities mdc holding affiliated entities including mdc bj referred collectively “mdc” mdc business providing valueadded services short message voicemail ringtone services pas telecom networks company consolidated mdc vie company primary beneficiary december 31 2004 consolidation resulted 42 million increase total assets total liabilities equity effect net income result consolidation assets provided collateral mdc’s obligations mdc’s creditors recourse general credit company note 24subsequent events pursuant asset purchase agreement entered october 29 2004 utstarcom cdma technologies korea limited liability company organized laws korea wholly owned subsidiary company giga telecom inc “giga” korean corporation develops manufactures wireless handsets company completed acquisition january 4 2005 closing 130 million cash paid additional 20 million paid escrow account held company six months january 20 2005 company formed joint venture two parties provide mobile communication broadband ip related value added services mongolia according joint venture agreement joint venture capitalized 20 million cash equipment february 25 2005 company contributed 18 million capital company presently expects consolidate operations joint venture beginning first quarter 2005 march 31 2005 company filed current report form 8k securities exchange commission disclosing company would delay filing annual report form 10k year ended december 31 2004 delay results technical default company’s 7¤8 convertible subordinated notes due 2008 default would become event default unless company failed file 2004 form 10k within 60 days written notice default provided company either trustee indenture holders least 25 aggregate principal amount notes outstanding event default occur continuing trustee holders least 25 aggregate principal amount notes outstanding could declare unpaid principal accrued interest notes outstanding immediately due payable company believes technical default remediated filing 2004 form 10k quarterly results operations unaudited quarterly financial data periods indicated follows 1 november 1 2004 company completed acquisition audiovox communication corporation revenue two months ended december 31 2004 acquisition 2774 million 2 net income quarter ended december 31 2004 included 75 million charge associated impairment various assets including 70 million goodwill related substantial abandonment operations hyundai syscomm inc see note 10 consolidated financial statements 3 net income quarter ended june 30 2003 included charge 70 million inprocess research development associated various acquisitions 4 company filed amendment annual report form 10k year ended december 31 2003 reflect restatement consolidated financial statements year ended december 31 2003 see note 2 consolidated financial statements net earnings loss per share computed independently quarters presented therefore sum quarterly net earnings per share may equal annual earnings per share item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules omitted applicable required information shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders utstarcom inc completed integrated audits utstarcom incs 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedules opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries company december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index present fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedules responsibility companys management responsibility express opinion financial statements financial statement schedules based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements company restated 2004 2003 consolidated financial statements internal control financial reporting also audited managements assessment included managements report internal control financial reporting appearing item 9a utstarcom inc maintain effective internal control financial reporting december 31 2005 1 company maintain effective controls financial reporting process due insufficient complement personnel level accounting knowledge experience training application generally accepted accounting principles commensurate companys financial reporting requirements company maintain effective controls revenue deferred revenue accounts associated costs sales b company maintain effective controls inventory deferred costs inventory reserve accounts associated costs sales c company maintain effective controls accrued expenses primarily related china operations company maintain effective controls process ensure completeness accuracy preparation review consolidated financial statements e company maintain effective controls income tax provision related balance sheet accounts f company maintain effective controls segregation duties user access certain automated business process applications associated personal communications division 2 company maintain effective controls identification accounting related party relationships related party transactions 3 company maintain effective controls monitoring business unit affiliate accounting functions 4 company maintain effective control environment company failed prevent detect instances override related controls customer agreements b company maintain effective financial reporting organizational structure support size complexity operating activities locations company c company failed prevent detect noncompliance established policies procedures intended ensure compliance laws regulations based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions managements assessment effectiveness companys internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim consolidated financial statements prevented detected following material weaknesses identified included managements assessment december 31 2005 1 company maintain effective controls financial reporting process due insufficient complement personnel level accounting knowledge experience training application generally accepted accounting principles commensurate companys financial reporting requirements material weakness contributed following control deficiencies considered material weakness athe company maintain effective controls revenue deferred revenue accounts associated cost sales specifically companys controls recording review revenue deferred revenue accounts adequate ensure accounts completely accurately recorded particular revenue recognition criteria properly assessed respect transactions containing nonstandard contractual terms conditions including amendments side agreements identification appropriate costs associated certain sales transactions control deficiency resulted audit adjustments 2005 consolidated financial statements also resulted restatement companys consolidated financial statements years ended 2003 2004 quarter within years first three quarters 2005 properly recognize revenue cost sales bthe company maintain effective controls inventory deferred costs inventory reserve accounts associated cost sales specifically companys controls failed adequately identify document analyze conditions considered relative existence expected recoverability inventory deferred costs addition controls adequate properly track confirm inventory movements ensure completeness accuracy cost sales control deficiency resulted audit adjustments 2005 consolidated financial statements correct cost sales related inventory deferred costs accounts cthe company maintain effective controls accrued expenses primarily related china operations specifically companys controls including review accrued expenses part financial close process adequate ensure complete accurate recording accrued expenses proper period control deficiency resulted audit adjustments 2005 consolidated financial statements correct accrued expenses related income statement accounts dthe company maintain effective controls process ensure completeness accuracy preparation review consolidated financial statements specifically company effective controls process identifying accumulating reviewing required supporting information ensure completeness accuracy consolidated financial statements disclosures including support accounting positions taken respect nonroutine transactions assets liabilities affiliates segment reporting income tax accounting proper classification inventory deferred costs warranty reserves deferred revenue accounts receivable revenue cost sales control deficiency resulted audit adjustments additional disclosures 2005 consolidated financial statements correct aforementioned accounts disclosures ethe company maintain effective controls income tax provision related balance sheet accounts specifically company effective controls ensure completeness accuracy income taxes payable deferred income tax assets liabilities longterm assets prepaids current assets accounts related calculation companys estimated 2005 quarterly income tax provision control deficiency resulted audit adjustments third quarter 2005 consolidated financial statements correct provision income taxes stockholders equity income taxes payable longterm assets prepaids current assets fthe company maintain effective controls segregation duties user access certain automated business process applications associated personal communications division specifically company ensure controls sufficiently limited access information technology finance personnel automated applications information necessary performance individual job responsibilities control deficiency existed respect financial reporting revenue inventory purchasing applications associated personal communications division control deficiencies could result misstatement aforementioned financial statement accounts disclosures would result material misstatement annual interim consolidated financial statements would prevented detected 2 company maintain effective controls identification accounting related party relationships related party transactions specifically companys controls ineffective identifying significant related party transactions timely basis order transactions appropriately reflected companys consolidated financial statements accordance generally accepted accounting principles control deficiency could result misstatement companys consolidated financial statements would result material misstatement annual interim consolidated financial statements would prevented detected accordingly management determined control deficiency constitutes material weakness 3 company maintain effective controls monitoring business unit affiliate accounting functions company maintain effective controls review supervision business unit affiliate accounting operations specifically corporate senior financial management provide adequate oversight accounting functions based principally japan china new york addition sufficient accurate information effectively monitor financial results operations reviews local financial results inadequate either design operation detect errors companys consolidated financial statements described items 1 2 additionally control deficiency could result misstatement companys consolidated financial statements would result material misstatement annual interim consolidated financial statements would prevented detected accordingly management determined control deficiency constitutes material weakness 4 company maintain effective control environment specifically following material weaknesses identified within control environment athe company failed prevent detect instances override related controls customer agreements specifically control deficiency permitted override established controls allowing creation side agreements certain customers obligated company perform certain services without receipt additional consideration existence agreements communicated either companys financial reporting function independent registered public accounting firm bthe company maintain effective financial reporting organizational structure support size complexity operating activities locations company addition company maintain sufficient complement financial reporting personnel commensurate companys financial reporting requirements referenced 1 furthermore company maintain sufficient formalized consistent finance accounting policies procedures detect instances noncompliance existing policies procedures cthe company failed prevent detect noncompliance established policies procedures intended ensure compliance laws regulations specifically control deficiency may permitted violations certain securities exchange commission regulations related previous financial disclosures foreign corrupt practices act related alleged potential payments made government officials control deficiencies could result misstatement companys consolidated financial statements would result material misstatement annual interim consolidated financial statements would prevented detected accordingly management determined control deficiencies constitute material weaknesses material weaknesses considered determining nature timing extent audit tests applied audit 2005 consolidated financial statements opinion regarding effectiveness companys internal control financial reporting affect opinion consolidated financial statements opinion managements assessment utstarcom inc maintain effective internal control financial reporting december 31 2005 fairly stated material respects based criteria established internal controlintegrated framework issued coso also opinion effects material weaknesses described achievement objectives control criteria utstarcom inc maintained effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued coso pricewaterhousecoopers llp san jose california june 1 2006 utstarcom inc consolidated balance sheets thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders equity thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1description business utstarcom inc company delaware corporation provides internet protocol ip networking product service platforms global service support company sells wireless infrastructure broadband infrastructure handsets customer premise equipment operators fast growth established telecommunications markets around world company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks company incorporated 1991 headquartered alameda california note 2restatement financial statements company restated previously issued consolidated financial statements years ended december 31 2003 2004 accordingly consolidated balance sheets december 31 2004 2003 presented herein consolidated statements operations stockholders equity cash flows years ended appearing form 10k restated amounts previously reported addition restatement also impacts previously issued unaudited condensed consolidated financial statements interim reporting periods years ended december 31 2005 2004 2003 see quarterly financial data unaudited form 10k following notes consolidated financial statements presentation effects restatement financial results interim periods restatement follows completion investigation independent legal counsel assistance forensic accountants ordered direction audit committee companys board directors genesis independent investigation discovery december 2005 two previously unknown side letter agreements provided customer india 2004 2005 side letter agreements obligated company deliver variety software bug fixes features updates upgrades additional consideration contrary company policy side letter agreements withheld companys financial management companys independent registered public accounting firm therefore neither management companys independent registered public accounting firm able properly evaluate effect recognition revenue contracts customer independent investigations initial focus potential existence unknown side letter agreements customers investigation broadened encompass areas involving revenue recognition nonrevenue related areas ensure completeness investigation audit committee restrict scope independent investigation upon completion independent investigation team shared final findings audit committee companys independent registered public accounting firm financial management conducted followup procedures ensure information provided investigation team complete attempted locate additional relevant information evaluated initial accounting transactions given newly available additional information determine whether initial accounting appropriate based evaluation available information management concluded original amount revenue recognized contracts certain customers matters discovered part investigation constituted accounting errors making decision regarding whether restatement previously issued financial statements required consideration given individual aggregate effect potential restatement adjustments well qualitative issues enter materiality decisions following summary presents effects restatement previously reported operating results years ended december 31 2003 2004 millions except per share amounts restatement consists primarily adjustments errors timing revenues cost expenses recognized accordance generally accepted accounting principles see details restatement adjustments resulted change reported cash balances end restatement period december 31 2005 revenues contract costs profits deferred end restatement period recognized companys consolidated statements operations future periods conditions permit revenue recognition accordance generally accepted accounting principles met errors resulting restatement adjustments fall four categories revenue recognition accounting contracts multiple elements multiple element contracts company previously recognized revenue certain customer contracts features determined company delivered however result additional information obtained investigation determined instances customer delivered product contain features functionality specified customer contract cases missing features functionality part original product specifications product purchased thus company meet delivery criterion applicable accounting framework ie sab 104 sop 972 applicable revenue recognized instances cases company promised provide additional features functionality specified upgrades original product specifications therefore constitute additional contract deliverables however additional specified contract elements delivered time company recognized revenue arrangements company deferred revenue undelivered specified elements based fair value company requisite evidence fair value specified applicable accounting framework ie eitf 0021 sab 104 undelivered elements company deferred revenue recognized earlier point company developed evidence fair value undelivered elements called applicable accounting standard undelivered elements completely delivered restatement adjustments made defer recognition revenue related costs periods originally recorded time appropriate criteria revenue recognition met revenue restatements 2003 2004 related sales products services customers emerging markets outside china case revenue errors related restatements contracts customer india recently discovered side letter agreements withheld companys financial management companys independent registered public accounting firm former members companys management independent investigation also discovered documents containing changes contract terms concerning three significant international contracts communicated companys financial management companys independent registered public accounting firm without missing information company improperly recognized revenue contracts part restatement adjustment company deferred total 133 million gross profit december 31 2004 substantially amount related three significant international contracts 2005 64 million deferred amount recognized conditions necessary revenue recognized achieved remaining deferred amounts recognized future periods appropriate criteria revenue recognition met rebate accrual part restatement adjustments company accrued 31 million reduction revenues 2005 properly account timing companys estimated obligation customer rebates sales adjustments arising period adjustment impact prior periods inventory valuation inventory reserves established estimated obsolescence unmarketable inventory reduce inventories net carrying value lower cost net realizable value company established methodology determining inventory reserve required reporting period independent investigation however uncovered additional general inventory reserve 10 million provided increase cost sales second quarter 2003 apparently based growth gross inventory amounts quarter general inventory reserve unsupported companys accounting records reserving methodologies company reversed fourth quarter 2004 reduction cost sales companys inventory reserves december 31 2004 based established inventory reserving methodologies considered fairly stated date documentation amount reserve calculated necessary second quarter 2003 company eliminated inventory reserve part restatement reflect consistent use methodology establishing inventory reserves throughout restatement period company corrected miscellaneous items identified part restatement none individually significant companys consolidated financial position results operations cash flows period restatement period items involve errors timing items initially recorded restated present expense revenue proper period following tables summarize impact restatement adjustments previously reported net income basic diluted earnings per share years ended december 31 2004 2003 assets liabilities stockholders equity consolidated balance sheet december 31 2004 following tables summarize impact restatement adjustments previously issued consolidated statements operations years ended december 31 2004 2003 balance sheet following table presents impact restatement adjustments previously reported consolidated balance sheet december 31 2004 note 3summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts company wholly majority 50 percent owned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries equity affiliated companies shown separately consolidated financial statements company also consolidates variable interest entities defined financial accounting standards board interpretation 46 consolidation variable interest entities use estimates preparation consolidated financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period estimates used revenue recognition allowance doubtful accounts sales returns reserves inventory deferred costs accrued product warranty costs tax valuation allowances goodwill impairments loss contingencies among others actual results could differ estimates cash equivalents cash equivalents consist highly liquid instruments maturities three months less date purchase shortterm investments shortterm investments consist investments original remaining maturities three months less twelve months accordance companys investment policy shortterm investments invested investment grade rated securities minimum better ratings currently companys shortterm investments aa better ratings marketable securities classified availableforsale carried fair value unrealized holding gains losses securities classified availableforsale recorded separate component stockholders equity unrealized losses securities classified availableforsale determined otherthantemporary reported earnings realized gains losses reported earnings fair value investments based quoted market prices december 31 2005 2004 shortterm investments availableforsale securities consisted longterm investments company investments various privately held companies investments funds investments less majorityowned affiliates exercise significant influence accounted equity method pursuant accounting principles board opinion 18 equity method accounting investments common stock investments affiliates carried cost company monitors impairment makes appropriate reductions carrying value company determines impairment charge required based financial condition nearterm prospects companies revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery product occurred customer acceptance obtained fee fixed determinable collectibility reasonably assured payment due customer fixed determinable due extended payment terms revenue recognized payments become due customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region shipping handling costs recorded revenues costs revenues expected losses contracts recognized identified sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract revenue allocated different elements based upon proportion verifiable objective evidence fair value various elements governed emerging issues task force issue eitf 0021 accounting revenue arrangements multiple deliverables sec staff accounting bulletin 104 revenue recognition multiple element arrangements primarily involve sale equipment installation training provision equipment different locations customer revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements company control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time company establish verifiable objective evidence final customer acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment company entitled full payment company recognize revenue final acceptance granted customer acceptance considered substantive transaction additionally company recognize revenue cash payments received customers transactions customers final acceptance company records cash receipts customer advances defers revenue recognition final acceptance received multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 software revenue recognition amended eitf 0305 applicability sop 972 nonsoftware deliverables containing incidental software company allocates revenues element software arrangements based vendor specific objective evidence vsoe element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract revenue recognized revenue evidence fair value one undelivered elements exist revenue delivered undelivered elements deferred recognized delivery elements occurs vsoe established company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably contract term revenues services less 10 revenues years company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectibility cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards sfas 48 revenue recognition right return exists situations company developed reasonable estimates stock exchanges based historical experience similar types sales similar products company sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material company estimates amount rebate based upon terms individual arrangement historical experience future expectations price reductions records estimate rebate amount time sale company also enters sales incentive programs comarketing arrangements certain wireless handset customers company records incurred incentive reduction revenue sales revenue recognized assessment collectibility also factor determining whether revenue recognized company assesses collectibility based number factors including payment history creditworthiness customer company request collateral customers international sales company often requires letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company defers revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally company enters revenue sharing arrangements company collects revenues customer telecommunications service provider collects service revenues company enters revenue sharing arrangement company recognize revenue collection reasonably assured nature business china emerging markets companys billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable booked company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained product warranty company provides warranty equipment handset sales period generally ranging one three years time final acceptance rarely company entered arrangements provide limited warranty services periods longer three years longest warranty period ten years company provides expected cost product warranties time revenue recognized based assessment past warranty experience circumstances dictate accounts notes receivable company accepts bank notes commercial notes customers china normal course business estimates collectibility trade receivables notes receivable notes typically noninterest bearing maturity dates three six months allowance doubtful accounts maintained estimated losses trade receivables notes receivable collection may longer reasonably assured company assesses collectibility receivable determining whether creditworthiness customer deteriorated could result inability collect payment collectibility doubtful company records allowance receivable customers financial condition deteriorate causing ability make payments suffer result allowances receivables may need increased greater concentration accounts receivable certain customers financial conditions specific individual customer may result increased concentration risk exposure allowances doubtful accounts 678 million 512 million december 31 2005 2004 respectively total receivables including accounts receivable related parties inventories consist inventories held companys manufacturing facility warehouses customer sites prior signing contracts company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost net realizable value net writedowns excess slow moving obsolete inventory exception handset inventory personal communications division pcd based weighted average cost inventory cost computed using standard cost approximates actual cost firstin firstout basis inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value deferred costsinventories customer sites contracts inventories customer sites contracts awaiting final acceptance classified deferred costs title associated inventory transferred customer assumed risk physical loss deferred costs also includes labor related third party integrators freight deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time inventory held customer site viability payment including assessment product demand revenue sharing arrangement exists revenue cost sales recorded final acceptance received customer greater concentration inventory customer sites contract specific individual customer financial conditions specific individual customer may result increased concentration risk exposure inventory research development capitalized software development costs research development costs charged expense incurred research development costs include payroll related costs contractor fees facility expenses third party license fees allocations overhead costs incurred development software ultimately sold capitalized time technological feasibility attained related product ready general release 2005 2004 company capitalized 60 million 53 million software development costs respectively amortization capitalized development costs 39 million 30 million 18 million 2005 2004 2003 respectively unamortized capitalized software development costs 2005 2004 69 million 159 million respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets land use rights related property leased company china amortized life lease leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company generally depreciates assets following periods company capitalizes interest incurred related construction property plant equipment ready use 2004 company recorded 14 million capitalized interest applicable construction china headquarters hangzhou china headquarters facility placed service october 2004 capitalized interest amortized straightline basis life building consolidation variable interest entities financial accounting standards board interpretation 46 requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity company consolidated related party deemed vie company primary beneficiary fourth quarter 2005 company sold investment entity longer considered primary beneficiary result assets liabilities entity consolidated december 31 2005 company invested two additional entities considered vie included consolidated financial statements see note 24 goodwill intangible assets company recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets annual goodwill impairment review performed fourth quarter year changes circumstances indicate potential impairment exists third quarter 2005 company performed impairment analysis result changes business environment assessing potential impairment goodwill book value reporting unit compared fair value fair value determined based present value estimated future cash flows result analysis impairment charge recorded third quarter 2005 impairment longlived assets longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets longlived assets disposed sale measured lower book value fair value less cost sell advertising costs company expenses advertising costs incurred payment customers marketing development costs accounted reduction revenue associated customers incurred years ended december 31 2005 2004 2003 advertising costs totaled 82 million 80 million 42 million respectively stockbased compensation company accounts employee stock option grants accordance accounting principles board opinion 25 accounting stock issued employees apb 25 adopted disclosureonly alternative sfas 123 amended sfas 148 accounting stockbased compensation sfas 123 apb 25 compensation expense based difference date grant fair value common stock exercise price option fair value warrants options stock exchanged services nonemployees expensed period benefited warrants options valued using blackscholes optionpricing model december 31 2004 subcommittee companys board directors board approved immediate full acceleration vesting stock options outstanding companys 1997 stock option plan per share exercise price greater 2215 acceleration company amended relevant option agreements reflect acceleration company adopted acceleration anticipation impact sfas 123 requires expensing unvested options starting january 1 2006 result acceleration options purchase approximately 64 million shares companys common stock became immediately exercisable december 31 2004 acceleration effect decreasing 2004 pro forma net income approximately 330 million acceleration impact financial statements year ended december 31 2004 acceleration reduce required compensation charge 2006 136 million company adopts sfas 123r following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation following assumptions used calculate fair values weighted average fair value per share options granted 2005 2004 2003 429 1138 1141 respectively weighted average fair value per share employee stock purchase plan espp shares granted 2005 2004 2003 366 741 557 respectively comprehensive income comprehensive income includes changes equity net assets period nonowner sources accumulated comprehensive income loss shown consolidated statement stockholders equity december 31 components accumulated comprehensive income follows income taxes company accounts income taxes liability method deferred income taxes recognized differences tax bases assets liabilities financial statement amounts based enacted tax rates valuation allowances established necessary reduce deferred tax assets amount expected realized company required adjust deferred tax asset liabilities period tax rates provisions income tax laws change company provide us federal taxes undistributed earnings foreign subsidiaries affiliates considered reinvested indefinite period segment reporting fiscal 2005 company organized five reportable segments wireless infrastructure wireless broadband infrastructure broadband personal communications division pcd handsets service financial instruments derivatives financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable convertible subordinated debt purchased written call options accrued liabilities carrying amounts cash equivalents shortterm investments accounts receivable payable accrued liabilities approximate fair values shortterm nature instruments carrying amounts notes receivable approximates fair value based discounted value future cash flow expected received note company uses derivative financial instruments manage exposures foreign currency exchange rate changes objectives holding derivatives include reducing eliminating efficiently managing economic impact exposures effectively possible derivative instruments recognized either assets liabilities balance sheet company measures instruments fair value recognizes changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged following table summarizes companys carrying values fair values financial instruments foreign currency translation company operations conducted international subsidiaries financial statements subsidiaries translated respective functional currencies us dollars foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity inventory purchases made japan consequentially portions accounts payable denominated japanese yen foreign currency transaction loss reported earnings 99 million 2005 gain 08 million 87 million 2004 2003 respectively earnings per share eps basic eps computed dividing net income loss available common stockholders weighted average number shares companys common stock outstanding period diluted eps determined adjusting net income loss reported effect dilutive securities increasing number shares potentially dilutive common shares outstanding period potentially dilutive common shares consist employee stock options written call option warrants convertible subordinated notes vested acquisitionrelated stock options following summary calculation basic diluted eps potentially dilutive shares excluded computations diluted net loss per share year ended december 31 2005 effect would antidilutive following table summarizes potential shares common stock excluded diluted per share calculation effect including potential shares antidilutive certain potential shares related employee stock options warrants outstanding years ended december 31 2004 2003 excluded diluted per share computations since exercise prices greater average market price common shares period accordingly effect antidilutive years ended december 31 2004 2003 shares totaled 240 million weighted average exercise price 3132 per share 176 million weighted average exercise price 3222 per share respectively december 31 2005 companys 78 convertible subordinated notes outstanding ineligible conversion shares common stock 1000 aggregate principal amount notes converted company deliver approximately 420345 shares common stock companys closing stock price exceeds specified threshold last trading day immediately preceding fiscal quarter september 30 2005 last trading day third quarter fiscal 2005 closing price companys common stock specified threshold september 2004 eitf reached consensus related eitf 048 effect contingently convertible debt diluted earnings per share consensus requires contingently convertible debt instruments market price trigger treated traditional convertible debt instruments purposes computed earnings per share using converted method eitf pronouncement effective conversion assumed diluted eps computation company entered convertible bond hedge call option transactions reduce potential dilution conversion notes bond hedge call option transactions may settled companys option either cash net shares expire march 1 2008 year ended december 31 2005 average price companys stock specified strike prices convertible bond hedge call option transactions company entered reduce potential dilution conversion notes twelve months ended december 31 2004 dilutive antidilutive effects call option bond hedge derived taking weighted average first second third fourth quarters accordance sfas 128 earnings per share twelve months ended december 31 2004 would effect decreasing denominator diluted earnings per share 20 million shares bond hedge transaction increasing denominator diluted earnings per share 03 million shares call option transaction twelve months ended december 31 2003 would effect decreasing denominator diluted earnings per share 29 million shares bond hedge transaction increasing denominator diluted earnings per share 10 million shares call option transaction however dilutive effect 03 million shares twelve months ended december 31 2004 10 million shares twelve months ended december 31 2003 respect call option transaction included companys diluted earnings per share calculation convertible bond hedge sfas 128 always antidilutive net income diluted eps computation reflects reduction interest expense 28 million 31 million years ended december 31 2004 2003 respectively would result assumed conversion 78 convertible subordinated notes recent accounting pronouncements december 2004 financial accounting standards board fasb issued sfas 123 revised 2004 sharebased payment sfas 123r sfas 123r require company measure employee stockbased compensation awards using fair value method record expense consolidated financial statements addition adoption sfas 123r require additional accounting related income tax effects additional disclosure regarding cash flow effects resulting sharebased payment arrangements march 2005 securities exchange commission sec issued staff accounting bulletin 107 sab 107 provides guidance regarding application sfas 123r sab 107 expresses views staff regarding interaction sfas 123r sharebased payment certain sec rules regulations provides staffs views regarding valuation sharebased payment arrangements public companies particular sab 107 provides guidance related sharebased payment transactions nonemployees transition nonpublic public entity status valuation methods including assumptions expected volatility expected term accounting certain redeemable financial instruments issued sharebased payment arrangements classification compensation expense nongaap financial measures firsttime adoption sfas 123r interim period capitalization compensation cost related sharebased payment arrangements accounting income tax effects sharebased payment arrangements upon adoption sfas 123r modification employee share options prior adoption sfas 123r disclosures managements discussion analysis mda subsequent adoption sfas 123r april 14 2005 sec approved new rule delays effective date sfas 123r annual periods beginning june 15 2005 cumulative effect initial application statement recognized effective date sfas 123r allows two alternative transition methods modified prospective modified retrospective application modified prospective application compensation cost portion awards requisite service rendered outstanding effective date recognized requisite service rendered remaining service period compensation cost portion awards based grantdate fair value awards calculated either recognition pro forma disclosure sfas 123 new awards modified repurchased cancelled option date accounted provisions sfas 123r modified retrospective application prior period financial statements adjusted give effect fair value based method accounting compensation cost awards granted modified settled cash basis consistent pro forma disclosures required periods sfas 123 amended sfas 148 company adopt modified prospective application use blackscholes option pricing model determine fair value stock options employee stock purchase plan shares determination fair value stockbased payment awards date grant using optionpricing model affected companys stock price well assumptions regarding number complex subjective variables include expected stock price volatility term awards actual projected employee stock option exercise behaviors riskfree interest rate expected dividends company currently expects impact adoption sfas 123r increase compensation costs approximately 15 million 2006 december 2004 fasb issued sfas 153 exchanges nonmonetary assets amendment apb opinion 29 sfas 153 sfas 153 addresses measurement exchanges nonmonetary assets redefines scope transactions measured based fair value assets exchanged sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 adoption sfas 153 expected material effect companys consolidated financial position results operations november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 sfas 151 sfas 151 clarifies abnormal inventory costs idle facilities excess freight handling costs wasted materials spoilage required recognized current period charges provisions sfas 151 effective fiscal year beginning june 15 2005 adoption sfas 151 expected material impact companys consolidated financial position results operations cash flows june 2005 fasbs emerging issues task force eitf issued eitf issue 0502 meaning conventional convertible debt instrument eitf issue 0019 accounting derivative financial instruments indexed potentially settled companys stock retains exception paragraph 4 eitf issue 0019 conventional convertible debt instruments holder option convert instrument fixed number shares corresponding amount cash issuers discretion ability exercise option based either passage time b contingent event considered conventional purposes applying exception consensus applied prospective basis new modified instruments starting third quarter 2005 adoption eitf 0502 expected material effect companys consolidated financial statements results operations june 1 2005 fasb issued fasb statement 154 accounting changes error corrections sfas 154 require entities voluntarily make change accounting principles apply change retrospectively prior periods financial statements unless would impracticable sfas 154 supersedes accounting principles board opinion 20 accounting changes apb 20 previously required voluntary changes accounting principle recognized including current periods net income cumulative effect changing new accounting principle sfas 154 also makes distinction retrospective application accounting principle restatement financial statements reflect correction error sfas 154 entity changes method depreciation amortization depletion longlived nonfinancial assets change must accounted change accounting estimate apb 20 change would reported change accounting principle sfas 154 applies accounting changes error corrections made fiscal years beginning december 15 2005 adoption fas 154 expected material effect companys consolidated financial statements results operations note 4restricted cash investments december 31 2005 company shortterm restricted cash investments 537 million longterm restricted cash 03 million amounts primarily comprised restricted cash held commercial standby letters credit december 31 2004 company shortterm restricted cash investments 333 million longterm restricted cash 22 million amounts primarily comprised 269 million restricted cash 86 million restricted shortterm investments held standby letters credit company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof finally company may issue commercial letters credit support purchase commitments note 5acquisitions divestitures companies pedestal may 2005 company completed acquisition substantially assets certain liabilities pedestal networks inc pedestal develops designs universal broadband server ubs environmentally hardened linepowered remote ipbased digital subscriber line access multiplexer ip dslam acquisition intended assist companys expansion digital subscriber line dsl ipbased television iptv providing company strong remote broadband solution fully uscertified complements existing dsl iptv optical product families total consideration transaction 30 million approximately 26 million cash paid closing date additional 04 million cash payable one year closing date absence material breach original contractual terms acquisition accounted purchase method accounting existing technology acquired included entire pedestal family ip dslam ubs company intends integrate pedestal product line companys tripleplay products iptv solutions addition developed product technology company acquired fixed assets inprocess research development iprd customer relationships acquisition pedestal one project development related gigabit ethernet product qualified iprd gigabit ethernet project focused supporting majority pedestals products considered 95 complete december 31 2005 assessing pedestals iprd project company considered key product characteristics including products development stage acquisition date products life cycle products future prospects company also considered rate technology changes broadband equipment industry industrys competitive environment economic outlook local global markets amount purchase price allocated iprd 07 million charged companys results operations alternative future uses existed acquisition date results operations pedestal integrated broadband segment included companys consolidated statements operations beginning acquisition date may 13 2005 pro forma effects acquisition companys financial statements significant subsequent may 2005 acquisition pedestal company completed allocation purchase price based part upon independent valuation estimated useful lives customer relationships developed technology intangible assets two years five years respectively following table summarizes final allocation purchase price pedestal based part upon final independent valuation giga october 2004 company entered asset purchase agreement giga telecom inc giga korean corporation develops designs wireless handsets acquisition intended facilitate companys expansion cdma handset market company completed acquisition january 2005 closing 130 million cash paid additional 20 million paid escrow account six months released july 2005 total consideration acquisition funded cash hand approximately 190 million including 20 million acquisitionrelated transaction costs 15 million payment made previously applied purchase price earnout 05 million paid subsequently upon completion certain product design milestones following table summarizes allocation purchase price giga based part upon independent valuation excess purchase price fair value identified net assets approximately 154 million allocated goodwill assigned handsets segment goodwill tax deductible goodwill created acquisition results decreased time market design related synergies goodwill written september 2005 result intangible longlived asset impairment additional information regarding intangible longlived assets impairment refer note 10 goodwill intangible assets accordance eitf 041 accounting preexisting relationships parties business combination settlement gain 04 million relating preexisting royalty agreement recognized recorded research development expense consolidated statements operations purchased existing technology preexisting royalty agreement amortized within year results operations giga integrated handsets segment included companys consolidated statement operations subsequent acquisition pro forma effects acquisition companys financial statements significant audiovox communications corporation november 2004 company completed acquisition select assets liabilities audiovox communications corporation acc including inventories prepaids payables accrued expenses right hire approximately 250 employees company paid 1708 million cash 2004 additional 28 million cash 2005 incurred professional fees 46 million company acquired accs sales service support infrastructure code division multiple access cdma handset brand access supplychain channels product marketing expertise key relationships cdma operators north south america goodwill created acquisition results decreased time market volume related synergies goodwill written september 2005 result intangible longlived asset impairment see note 10 following table summarizes allocation purchase price acc based part upon independent valuation company acquired 477 million intangible assets principally consisting carrier dealer relationships noncompete agreement amount allocated inprocess research development fair value identifiable intangible assets estimated based part independent valuation intangible assets estimated useful lives ranging one ten years follows customer relationships ten years dealer relationships two years supplier relationships two years noncompete agreement four years trade name three years backlog one year results operations acc included companys consolidated results operations beginning acquisition date november 1 2004 following unaudited pro forma results operations reflect combined results company acc years ended december 31 2004 2003 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods telos technology inc may 2004 company completed acquisition substantially assets certain liabilities telos technology inc subsidiaries telos provider mobile switching products services voice data communication networks developing rural enterprise emerging wireless markets total consideration acquisition funded cash hand approximately 300 million company paid 290 million cash addition 10 million acquisitionrelated transaction costs within one year acquisition date additional payments totaling maximum 190 million may become payable based upon revenue recognized sale telos products 2005 earnout paid revenue milestones met existing technology acquired included entire telos product family cdma softswitch technology products supporting servers operations maintenance centers telos product line integrated companys suite cdma products strengthening companys existing cdma product portfolio addition developed product technology company acquired fixed assets inprocess research development iprd assembled workforce approximately 60 employees customer relationships recorded goodwill created acquisition results decreased time market cdma technologies goodwill tax deductible subsequent may 2004 acquisition telos company completed allocation purchase price based part upon independent valuation amount purchase price allocated iprd 14 million charged companys results operations alternative future uses existed acquisition date company initially recorded goodwill 66 million connection acquisition third quarter 2004 company reduced purchase price goodwill associated acquisition 02 million reflect difference estimated actual professional services fees incurred related acquisition total company recorded 64 million goodwill related acquisition goodwill written september 2005 result intangible longlived asset impairment see note 10 results operations telos included companys consolidated results operations beginning acquisition date may 19 2004 acquisition date telos two projects development qualified iprd objective projects enhance functionality products designed comply cdma2000 technology standard assessing telos iprd projects company considered key product characteristics including products development stage acquisition date products life cycle products future prospects company also considered rate technology changes telecommunications equipment industry industrys competitive environment economic outlook local global markets projects development enhancements existing products affect functionality existing products significant risk company faces complete projects within scope budget closing date projects approximately 20 30 complete respectively december 31 2005 projects completed following table summarizes allocation purchase price telos based upon independent valuation thousands estimated useful lives customer relationships existing technology intangible assets five years following unaudited pro forma results operations reflect combined results company telos years ended december 31 2004 2003 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods hyundai syscomm inc april 2004 company completed acquisition assets substantially intellectual property certain employees certain contracts related hyundai syscomm incs hsi cdma infrastructure business markets outside korea subject attainment certain milestones transfer certain knowhow total consideration transaction approximately 123 million excluding transaction costs 18 million approximately 73 million cash paid closing date additional 30 million cash payable one year closing date remaining purchase price comprised 20 million paid company upon completion hsi training companys manufacturing employees china terms training services agreement included purchase price 20 million payable upon completion certain revenue milestones event revenue milestones met original purchase price adjusted amount contingent payment accordance sfas 141 accounting impairment disposal longlived assets revenue milestones met december 31 2005 conjunction transaction company loaned hsi 32 million effective interest rate 12 per annum used hsi satisfy outstanding debt obligations principal amount loan due april 2005 year ended december 31 2005 company offset hsis payment obligations outstanding 30 million purchase price liabilities terms transaction hsi company acquired existing technologies entered noncompete licensing agreements existing technologies acquired base transceiver station base station controller product lines part asset purchase agreement company hsi entered training services agreement whereby hsi employees provide technical training company manufacturing staff china nine month period subsequent acquisition technology technological knowhow intended strengthen companys existing cdma product portfolio development future cdma technology addition acquiring existing technology company entered noncompete licensing agreements hsi noncompete agreement prohibits hsi competing company countries except korea four years consummation date licensing agreement requires hsi pay company 1 revenue royalty usage intellectual property company acquired terms acquisition fifteen years subsequent consummation date subsequent april 2004 acquisition hsi company completed allocation purchase price based part upon independent valuation company recorded goodwill 70 million connection acquisition results operations hsi included companys consolidated results operations beginning acquisition date april 2004 following table summarizes final allocation purchase price hsi based upon final independent valuation thousands intangible assets estimated useful lives ranging three five years follows existing technology five years noncompete agreement three years intellectual property license agreement three years company encountered difficulties integrating hsi operations acquisitions fourth quarter 2004 decision made substantially abandon acquired operations thus entire goodwill intangibles written 2004 writeoffs recorded selling general administrative expense statement operations year ended december 31 2004 following unaudited pro forma results operations reflect combined results company hsi years ended december 31 2004 2003 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods commworks may 2003 company completed acquisition selected assets liabilities commworks division commworks 3com corporation delaware corporation company paid 1000 million cash incurred related transaction related costs 93 million company funded consideration acquisition cash hand selected assets acquired included commworks portfolio carrierfocused voice data networking products customer support professional services addition company acquired licensed related intellectual property used commworks develops deploys carrierclass ipbased multiservice access servicecreation platforms telecommunications service providers three months ended september 30 2003 company completed allocation purchase price commworks amount purchase price allocated iprd 13 million charged companys results operations alternative future uses existed acquisition date company recorded goodwill 523 million excess costs acquiring commworks fair value identified net assets acquired connection acquisition goodwill except 31 million allocated service business segment written september 2005 result intangible longlived asset impairment see note 10 results operations commworks included companys consolidated results operations beginning acquisition date may 2003 assessing commworks iprd projects key characteristics products development considered well future prospects rate technology changes telecommunications equipment industry product life cycles projects stages development date acquisition commworks two projects development qualified iprd approximately 60 40 complete projects completed 2004 following table summarizes final allocation purchase price commworks based upon final independent valuation final valuation resulted changes estimated fair value changes estimated useful lives intangible assets acquired change amount attributable goodwill mainly due revised assumptions future revenues existing customers company also recorded additional employeerelated liabilities estimated useful life purchased technology one five years estimated useful life customer relationships ten years estimated useful lives backlog trade names one two years rollingstreams june 2003 company completed acquisition rollingstreams systems ltd rollingstreams developmentstage company pursuant share exchange agreement rollingstreams designs streaming endtoend tvoverinternetprotocol solutions telecommunications operators broadband service providers companys investment rollingstreams 04 million prior acquisition purchase consideration outstanding shares rollingstreams already held company prior acquisition 301074 shares companys common stock addition company assumed outstanding rollingstreams options became options purchase aggregate 12742 shares companys common stock valued 05 million 301074 shares 164115 shares valued 58 million issued closing including 28696 held escrow undisclosed liabilities contingencies incurred rollingstreams prior closing breach share exchange agreement shares distributed former shareholders rollingstreams within ten days sixmonth anniversary closing deducting claims 136959 301074 shares payable form earnout period expiring 18 months closing subject achievement certain revenue milestones earnout period 28696 shares held escrow released issued 2004 amount purchase price allocated iprd 62 million amount charged companys results operations alternative future uses existed acquisition date results operations rollingstreams included companys consolidated results operations beginning june 2003 operations considered immaterial pro forma presentation deemed necessary date acquisition rollingstreams one project development qualified iprd mediaswitch project 70 complete december 31 2003 project completed 2004 cost anticipated following table represents final allocation purchase price rollingstreams allocation purchase price based part upon independent valuation xebeo may 2003 company completed purchase assets xebeo communications inc xebeo 24 million cash xebeo develops manufactures optical packet switches enable telecommunications carriers provide single fiber multiservice access customers addition amount 07 million may payable based future contingencies related employment december 31 2005 contingencies met results operations xebeo considered material pro forma presentation deemed necessary amount purchase price allocated iprd 19 million charged companys results operations alternative future uses existed acquisition date acquisition xebeo focusing resources development first product metrobridge optical packet switching solution considered development stage development metrobridge 60 complete closing date technological feasibility technology established technology future alternative uses therefore development metrobridge considered iprd product achieved technical milestones november 2003 however product never commercialized following table represents final allocation purchase price xebeo based part upon independent valuation shanghai yi yun october 2002 company acquired assets intellectual property shanghai yi yun telecom technology co ltd shanghai yi yun provider synchronous digital hierarchy equipment shortly thereafter claim surrounding potential infringement intellectual property acquired led possible rescission transaction creating contingency whose outcome determinable beyond reasonable doubt transaction recorded march 2003 company determined none intellectual property acquired subject claim consideration 02 million cash 342854 shares restricted stock valued 60 million connection acquisition shanghai yi yun stockholders received part 342854 shares restricted stock executed indemnity escrow agreement favor company shares restricted stock placed escrow addition company issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one companys subsidiaries shares restricted stock vest five years 2007 accelerated vesting upon achievement specified milestones company treated 514290 shares restricted stock deferred compensation 2003 226302 shares vested upon achievement specified milestones vesting occurred december 31 2005 results operations shanghai yi yun considered material proforma presentation deemed necessary goodwill 30 million recorded connection acquisition goodwill written september 2005 result intangible longlived asset impairment amount purchase price allocated inprocess research development 13 million charged companys results operations alternative future uses existed acquisition date following represents allocation purchase price shanghai yi yun note 6inventories december 31 2005 2004 inventories consist following note 7accounts notes receivable company accepts bank notes commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months bank notes included shortterm investments commercial notes receivable available sale 21 million 270 million december 31 2005 2004 respectively company may discount bank notes commercial notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows 731 million bank notes 130 million commercial notes receivable sold year ended december 31 2005 notes receivable sold year ended december 31 2004 notes sold included companys consolidated balance sheets criteria sale treatment established sfas 140 accounting transfers servicing financial assets extinguishment liabilities met costs selling notes receivable 07 million year ended december 31 2005 august 2005 company entered committed receivables purchase agreement commercial bank whereby company may sell 1000 million eligible accounts receivable defined agreement contains provisions customary transactions nature including certain commitment fees 2005 receivables sold pursuant provisions agreement 2005 company recorded commitment fees 02 million note 8property plant equipment december 31 2005 2004 property plant equipment consists following depreciation expense 669 million 558 million 343 million years ended december 31 2005 2004 2003 respectively note 9longterm investments companys investments follows cellon international september 2001 company invested 20 million cellon international holdings corporation cellon designs wireless terminals related technology handset manufacturers private distributors company invested additional 30 million april december 2002 november 2005 company cellon entered agreement whereby company receive additional shares cellon preferred stock exchange contribution fixed assets transfer workforce place company cellon transaction completed first half 2006 december 31 2005 company 65 ownership interest cellon upon completion transaction assuming conversion outstanding preferred stock common percentage companys ownership approximately 11 investment accounted cost method carrying value evaluated possible impairment based achievement business objectives milestones financial condition prospects company relevant factors december 31 2005 company recorded impairment investment company outstanding purchase commitments cellon refer note 22 related party transactions softbank china company 53 million investment sb china holdings pte ltd softbank china investment fund established softbank corp focused investments internet companies china companys investment constitutes 10 funding softbank china softbank corp contributing remaining 90 softbank corp related companies significant stockholders company fund separate management team none companys employees employed fund company accounts investment cost method carrying value evaluated possible impairment whenever events changes circumstances significant adverse effect carrying value december 2005 company sold investment softbank china softbank corp 569 million incurred management fee transaction costs 44 million recognized gain 472 million recorded income net refer note 22 related party transactions restructuring fund 1 first quarter fiscal 2002 company invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder company fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy procedures total fund offering expected approximately 150 million 225 million investor contributing minimum 08 million fund separate management team none companys employees employed fund company accounts investment equity method accounting december 31 2005 company held 2 outstanding partnership units restructuring fund 1 company recorded equity gain 07 million received dividend 10 million year ended december 31 2005 company recorded immaterial equity losses received dividends years ended december 31 2004 2003 global asia partners lp june 2002 company invested 10 million global asia partners lp commitment invest maximum 50 million additional 10 million invested june 2003 06 million invested april 2005 remaining amount due times amounts shall specified one future capital calls issued general partner fund size anticipated 10 million fund formed make private equity investments private preipo technology telecommunications companies funds geographic focus technology investments asia particular india china company accounts investment equity method accounting december 31 2005 company held 49 outstanding partnership units global asia partners lp company recorded immaterial equity losses year ended december 31 2005 equity losses 05 million 02 million years ended december 31 2004 2003 respectively fiberxon inc september 2002 company invested 20 million fiberxon inc fiberxon company develops sells optical modules related systems march 2004 company invested additional 10 million fiberxon investment accounted cost method carrying value evaluated possible impairment based achievement business objectives milestones financial condition prospects company relevant factors december 31 2005 company recorded impairment investment company outstanding purchase commitments fiberxon refer note 22 related party transactions immenstar september 2004 company invested 20 million series preferred stock immenstar inc immenstar development stage company designing chip used companys product investment accounted cost method december 31 2005 company recorded impairment respect investment matsushita joint venture july 2002 company entered joint venture agreement matsushita communication industrial co ltd jointly design develop manufacture sell telecommunication products company 49 ownership interest joint venture company original registered share capital 100 million company contributed 49 million cash october 2002 another 93 million 49 interest 19 million capital call fourth quarter 2004 company voting control significant matters joint venture company investment results operations joint venture company accounted using equity method accounting company recorded equity losses 48 million 19 million 48 million years ended december 31 2005 2004 2003 respectively december 2005 joint venture board resolved terminate joint venture company estimates receive 05 million 2006 completion liquidation accordingly recorded loss 29 million reflect otherthantemporary decline value gct semiconductor october 2004 company invested 30 million gct semiconductor inc investment represents approximately 2 interest company designs develops markets integrated circuit products wireless communications industry investment accounted cost method december 31 2005 company recorded impairment investment xalted networks may 2005 company invested 20 million xalted networks xalted august 2005 company invested additional 10 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings company 9 ownership interest xalted accounts investment cost method december 31 2005 company recorded impairment investment infinera july 2004 company invested 30 million 1339285 shares infinera corporation infinera series preferred stock 224 per share investment represents approximately 2 interest infinera develops optical telecommunications systems using photonic integrated circuits investment accounted cost method september 2004 infinera closed series e preferred stock round 060 per share result close proximity series e preferred stock financing rounds decrease share price rounds infinera company entered exchange agreement whereby company exchanged 669643 shares series preferred stock 2500000 shares series e preferred stock exchange company owns total 669643 shares series 2500000 shares series e preferred stock year ended december 31 2004 company recorded loss 11 million reflect otherthantemporary decrease fair value remaining series shares december 31 2005 company recorded impairment investment note 10goodwill intangible assets intangible assets classified goodwill indefinite lives amortized intangible assets determinable lives amortized estimated useful lives company performs annual impairment test goodwill november 1st year company also tests impairment annual tests triggering event occurs may effect reducing fair value reporting unit respective carrying values conducting goodwill impairment analysis company calculates impairment charges based twostep test prescribed sfas 142 goodwill intangible assets sfas 142 using estimated fair value respective reporting units company uses present value future cash flows respective reporting units determine estimated fair value reporting unit implied fair value goodwill company also tests longlived assets companys assets groups potential impairment accordance sfas 144 accounting impairment disposal longlived assets sfas 144 companys longlived assets tested recoverability based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values company held series planning meetings september 2005 assess current business forecasts reporting units assessment analyzed various factors including reduction rate growth pas subscribers third quarter delay expected granting 3g licenses china japan challenges product quality primarily companys broadband reporting unit narrowing companys strategic focus related companys product offerings greater expected revenue margin decline due continued pricing pressures several companys key markets company concluded factors combined represented triggering event company determined significant adverse changes business outlook could indicate carrying value certain longlived assets groups may recoverable could indicate fair value companys reporting units may fair value result company performed interim impairment tests goodwill certain longlived tangible intangible assets goodwill company performed impairment analysis pursuant sfas 142 september 30 2005 reporting units company compared fair value reporting units carrying value company determined fair value reporting unit using present value comparable company techniques based part upon independent valuation fair values reporting units reconciled companys overall market capitalization september 30 2005 based impairment assessment noted goodwill impairment charge 1929 million estimated recorded three months ended september 30 2005 write full value goodwill wireless broadband handsets pcd business units second step goodwill impairment test broadband handsets segments completed third quarter wireless pcd units performed fourth quarter 2005 reaffirmed estimate third quarter goodwill fully impaired adjustment amount previously recorded beginning year goodwill reallocation changes carrying value companys goodwill january 1 2005 december 31 2005 reflected longlived assets company also tested longlived assets companys assets groups potential impairment current quarter accordance sfas 144 based analysis company determined undiscounted expected future cash flows broadband handset asset groups less carrying value net assets company determined relative estimated fair value tangible assets comparison similar assets wherever practical based quoted market prices taking consideration asset type age condition physical location asset result analysis company recorded impairment charge 141 million longlived tangible assets related broadband asset group 94 million longlived tangible assets related handset asset group addition company determined fair value technology intangible assets within broadband handset asset groups calculated using discounted future cash flows less carrying value net assets company recorded net asset writeoff 17 million december 31 2005 2004 intangible assets consisted following amortization expense 259 million 156 million 84 million years ended december 31 2005 2004 2003 respectively estimated aggregate amortization expense intangibles five years beginning 2006 2011 189 million 160 million 127 million 69 million 51 million respectively 157 million aggregate thereafter significant foreign exchange impact related intangible assets weighted average amortization period class unamortized identifiable intangible assets include following note 11debt following represents outstanding borrowings december 31 2005 2004 occasionally company issues shortterm notes payable vendors lieu trade accounts payable payment terms normally three nine months typically noninterest bearing december 31 2005 company loans various banks totaling 1988 million interest rates ranging 435 522 per annum bank loans mature 2006 included shortterm debt significant covenants associated loans company bank loan connection equipment purchase resulting consolidation mdc holding limited january 10 2003 third party established bank loan shanghai pudong development bank purchase equipment obligations bank loan related equipment assumed company january 23 2003 subsequently transferred mdc holding limited december 31 2003 bank loan 82 million interest rate 494 per annum repaid november 2005 years ended december 31 2005 2004 total interest expense related loan amounted 08 million 04 million respectively march 12 2003 company completed offering 4025 million convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes bear interest rate 78 per annum convertible companys common stock conversion price 2379 per share subordinated present future senior debt company holders notes may convert notes price companys common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible approximately 420345 shares common stock expenses associated convertible subordinated notes issuance 117 million recorded longterm assets amortized life notes 2005 company entered agreements exchange total 4988100 shares companys common stock fair value approximately 376 million approximately 571 million cash outstanding convertible notes aggregate principal amount 1279 million held five note holders exchanges considered early extinguishment debt aggregate fair value common stock cash less carrying value convertible notes accordingly company recorded gain net writeoff unamortized issuance expenses 314 million year ended december 31 2005 extinguishment accordance provisions accounting principles board opinion 26 early extinguishment debt concurrent issuance convertible notes company entered convertible bond hedge call option transaction cost 438 million 2005 convertible bond hedge call option amended result aforementioned early extinguishment convertible notes part amendment company received proceeds 14 million recorded additional paidin capital amended convertible bond hedge allows company purchase 115 million shares common stock 2379 per share party agreement written call option allows holder purchase 115 million shares companys common stock company 32025 per share bond hedge call option transactions may settled companys option either cash net shares expire march 1 2008 company recorded instruments cost carrying value december 31 2005 equaled original cost adjusted amendments related early extinguishment debt convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders equity accordance guidance eitf 0019 accounting derivative financial instruments indexed potentially settled companys stock company credit facilities totaling 7001 million 4829 million remained available borrowing december 31 2005 facilities expire 2006 interest rates 522 guarantee facilities renewed company guaranteed debt included consolidated balance sheet company available borrowing facilities 3880 million december 31 2004 note 12other current liabilities current liabilities december 31 2005 2004 consist following current liabilities primarily consist accrued contract costs relate purchases inventory installation services testing consulting work performed outside vendors company yet received invoices accrued payroll compensation costs relate wages bonuses commissions earned yet paid warranty costs estimated costs equipment replacement repair accrued taxes represent primarily value added sales taxes payable note 13warranty obligations guarantees warranty obligations follows thousands 2005 company incurred special warranty charge equipment sold sbbc japan telecom affiliates softbank corp softbank america inc 2003 2004 since agreement repair parts exceed companys normal warranty terms company recorded additional special warranty charge 117 million certain asynchronous digital subscriber line adsl products 40 million primarily related netring equipment 149 million gepon equipment products broadband infrastructure segment certain companys sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amount relation provisions claims made company believes valid enforceable rights intellectual property embedded products company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire six nine months date issuance without drawn beneficiary thereof company may issue commercial letters credit support purchase commitments note 14provision income taxes united states foreign income loss income taxes minority interest follows components income tax expense benefit follows deferred income taxes arise temporary differences tax basis assets liabilities reported amounts consolidated financial statements company reversed 917 million current deferred tax asset second quarter 2005 relation 2175 million deferred revenue recorded customer advances pertaining several agreements entered japan telecom co ltd 2004 company delivered received final acceptance equipment contemplated agreements 2005 therefore 917 million current deferred tax asset recorded 2004 reversed corresponding increase deferred tax provision 2005 refer note 22 related party transactions summary components net deferred tax assets follows deferred taxes recognized undistributed earnings foreign subsidiaries company intend repatriate earnings december 31 2005 undistributed earnings investments foreign subsidiaries amounted approximately 279 million determination amount deferred taxes earnings practicable since computation would depend number factors cannot known decision repatriate earnings made december 31 2005 us federal net operating loss carryforwards 122 million expire varying amounts 2015 2025 december 31 2005 state net operating loss carryforwards 733 million expire varying amounts 2015 2025 december 31 2005 company also net operating loss carryforwards nols china approximately 1806 million china net operating loss carryforwards expire 2010 december 31 2005 company nols countries us china nols approximately 472 million majority nols expire carried forward indefinitely december 31 2005 company us alternative minimum tax credit carryforwards 10 million indefinite life company also us research development credit carryforwards 107 million expire varying amounts 2010 2025 us foreign tax credits 237 million expire varying amounts 2011 2015 december 31 2005 company also foreign research development credit carryforwards 04 million expires 2015 2005 company impaired significant amount goodwill intangible assets result impairment company recorded 596 million deferred tax asset difference book bases tax bases impaired assets companys chinese subsidiaries granted tax holidays started phase 1999 income tax exemptions two companys subsidiaries ended december 31 2004 net impact tax holidays decrease tax expense approximately 162 million 380 million years ended december 31 2004 2003 respectively difference companys tax expense benefit tax based upon federal statutory rate federal statutory rate reconciled establishing deferred income tax assets liabilities make judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income record deferred tax assets liabilities evaluate need valuation allowances reduce deferred tax assets realizable amounts september 30 2005 believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets china united states foreign countries result review undertaken september 30 2005 concluded appropriate establish full valuation allowance net deferred tax assets china united states foreign countries wherein cumulative losses weigh heavily overall assessment tax provision impact deferred tax valuation allowance 2181 million primarily attributable tax expense related providing full valuation allowance net deferred tax assets december 31 2005 united states china 95 million increase tax expense due revaluation deferred tax assets recorded first second quarters 2005 statutory rate changes certain companys subsidiaries china three countries company historically profitable company determined valuation allowance necessary related deferred tax assets approximately 69 million companys income tax return 2003 tax year currently audit internal revenue service company also audit taxing authorities china note 15common stock incentive plans stock option plans 1997 stock plan january 31 1997 board directors adopted companys stockholders approved companys 1997 stock plan 1997 plan officers employees consultants eligible receive options purchase shares common stock purchase rights december 1999 board directors amended 1997 plan companys stockholders approved february 2000 december 31 2005 company authorized issue 34918320 shares subject options plan term 1997 plan number shares issuable plan increased annually first day fiscal year beginning 2001 amount equal 6000000 shares 4 outstanding shares common stock date lesser amount determined board plan terminates january 2007 may terminated earlier board directors december 31 2005 options purchase 18428666 shares common stock outstanding 1997 plan compensation committee administers 1997 plan options granted 1997 plan may incentive stock options isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options nsos qualify compensation committee selects eligible persons options granted determines grant date amounts exercise prices vesting periods relevant terms options including whether options isos nsos exercise price isos granted 1997 plan may less 100 fair market value common stock grant date exercise price nsos determined compensation committee discretion options generally transferable life optionee options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date options generally terminate 12 months death permanent disability optionee ii 90 days termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos event company merged another corporation substantially companys assets sold outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option right option right automatically vest become exercisable full period least fifteen days time option right terminate 1997 plan company may grant stock purchase rights eligible participants shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determines otherwise agreement grant company right repurchase stock upon voluntary involuntary termination employee reason including death disability purchase price repurchased shares original price paid may paid cancellation indebtedness owed company shares stock subject right repurchase lapse time 150000 stock purchase rights granted 2005 fair value 12 million four year vesting term employees company recorded compensation expense additional paid capital 01 million year ended december 31 2005 shares vested stock purchase rights granted 2004 2003 2001 director option plan march 2 2001 board directors adopted may 2001 companys stockholders approved companys 2001 director option plan 2001 director option plan directors employees company outside directors eligible receive options purchase shares common stock december 31 2005 directors horner atkins toy outside directors grants options outside directors automatic nondiscretionary july 2001 board directors amended 2001 director option plan december 31 2005 company authorized issue 1200000 shares pursuant options 2001 director option plan terminates may 2011 may terminated earlier board directors december 31 2005 options purchase 440000 shares common stock outstanding 2001 director option plan compensation committee administers 2001 director plan april 27 2006 board directors suspended action future grants stock options outside directors 2001 director option plan pursuant terms 2001 director option plan outside director automatically granted option purchase eighty thousand shares common stock first option date person first becomes outside director anniversary date director employee company ceases employment company become outside director receives option purchase twenty thousand shares common stock subsequent option companys first annual meeting stockholders following conversion outside director subsequent annual stockholder meeting thereafter provided serving outside director date time outside directors first option fully vested outside director automatically granted subsequent option anniversary date year provided outside director terms 2001 director option plan exercise price option granted equal market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subsequent option grants vest 100 shares subject subsequent option first anniversary date grant issanni communications inc incentive program issanni plan established issuance total 39876 shares utstarcoms common stock specified former employees issanni communications inc issanni became utstarcoms employees connection utstarcoms acquisition issanni plan administered board directors committee appointed board participant issanni plan eligible earn vest designated number shares subject award shares made participant plan based upon attainment one six milestones related amount revenue generated issanni products 2002 2003 subject participants continued employment issanni company one subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares fifth anniversary acquisition issanni employee continues employed issanni company subsidiaries date regardless whether milestone attained shares subject award event become issuable whether milestones achieved whether fiveyear vesting schedule elapsed upon sale discontinuation company utstarcom international products inc ii sale substantially technology acquired utstarcom international products inc connection acquisition issanni iii employment termination certain issanni principals prior date participants shares earned participants service issanni company one subsidiaries terminated voluntarily cause company may exercise repurchase option respect participants unearned shares ii voluntarily cause death disability participant entitled receive shares participant would otherwise earned respect milestones achieved within 24 months participants termination iii result death disability participant estate entitled receive unearned portion shares respect milestones advanced communication devices corporation incentive program acd plan provides issuance additional 49030 shares utstarcoms common stock pursuant awards shares granted designated former employees advanced communication devices corporation acd became utstarcoms employees connection utstarcoms merger acd plan administered board directors company grant shares plan 2005 2004 2003 participant acd plan entitled earn vest designated number shares subject award made participant upon attainment one five milestones subject participants continued employment acd company subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares subject award fifth anniversary merger participant continued perform services acd company subsidiaries date regardless whether milestone obtained participants service acd company subsidiaries terminated cause applicable employer voluntarily participant result death disability participant forfeit shares subject award yet earned distributed participants service terminated reason participant entitled receive shares subject award respect milestones achieved within 12 months following participants termination forfeit shares unearned date termination february 2006 company sold substantially assets selected liabilities semiconductor design business division including assets related prior acquisition acd result participants service company voluntarily terminated shares subject award yet earned distributed cancelled 2003 nonstatutory stock option plan april 15 2003 board directors adopted companys 2003 nonstatutory stock option plan 2003 plan directors officers employees consultants company eligible granted options purchase shares companys common stock nonstatutory stock options qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended may granted 2003 plan december 31 2005 company authorized issue 1500000 shares pursuant options granted 2003 plan subject adjustment certain instances including stock splits stock dividends business combinations changes capitalization december 31 2005 options purchase 1021510 shares common stock outstanding 2003 plan 2003 plan administered compensation committee board directors compensation committee charged selecting eligible persons options granted determines number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii 90 days termination option holders service reason disability due option holders death however option may exercised ten years grant date event company merged another corporation substantially companys assets sold 2003 plan provides outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option automatically vest become exercisable full period determined compensation committee time option terminate summary activity plans follows following table summarizes information respect stock options outstanding exercisable december 31 2005 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan purchase plan intended qualify employee stock purchase plan section 423 internal revenue code company reserved 1914934 shares common stock sale stock purchase plan december 31 2005 number shares reserved sale plan increased annually first day fiscal year beginning 2001 amount equal 20 million shares 2 outstanding shares companys common stock date lesser amount determined board directors stock purchase plan administered board committee appointed board stock purchase plan implemented offering periods duration may exceed 24 months offering periods may contain interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 ended last trading day april 30 2002 subsequent consecutive overlapping offering periods begin may 1 november 1 annually offering periods end twentyfour months thereafter employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase companys common stock payroll deductions may exceed 15 employees total compensation stock may purchased plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value companys shares date purchase participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant participants designated beneficiary case death certificate issued full shares participants account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term ten years total shares purchased plan 911976 445844 261103 2005 2004 2003 respectively note 16deferred stock compensation connection grant certain stock options restricted common stock employees nonemployees members board directors connection certain acquisitions see note 5 company recorded net deferred stock compensation 03 million 2003 representing fair value restricted stock difference fair value common stock option exercise price options date grant company record net deferred stock compensation 2005 2004 deferred compensation presented reduction stockholders equity amortization recorded vesting period related restricted stock options company recorded stock compensation expense 22 million 05 million 43 million years ended december 31 2005 2004 2003 respectively december 31 2005 approximately 35 million remained amortized corresponding vesting period respective option restricted share generally four five years november 2001 company completed purchase advanced communication devices corporation acd company adopted incentive plan providing issuance shares common stock valued 5 million acd employees continue perform services company february 2006 semiconductor design business division including assets related acd sold marvell technology group see note 25 subsequent event unvested restricted shares cancelled stock granted part incentive programs related certain acquisitions see note 5 vest five years 2007 accelerated vesting upon achievement specified milestones note 17401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees attained age 21 401k plan intended qualify sections 401a 401m 401k internal revenue code 1986 amended code 401k plan trust intended qualify section 501a code contributions 401k plan eligible employees company investment earnings thereon taxable employees withdrawn contributions company may make expected deductible company companys eligible employees may elect reduce current eligible compensation one percent 1 one hundred percent 100 subject maximum statutorily prescribed annual limit 14000 participants age 50 18000 participants age 50 year ended december 31 2005 salary reductions contributed behalf 401k plan 401k plan permits require company make matching contributions behalf eligible employees make salary reduction contributions 401k plan commencing plan year beginning january 1 2001 company elected begin making matching contributions behalf qualified employees participate 401k plan company contribute 050 dollar contributed qualified employees 401k plan maximum 5500 2005 2004 plan years companys matching contributions subject fiveyear vesting schedule based upon longevity employee service company matching contributions 32 million 27 million 21 million 2005 2004 2003 respectively note 18commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2011 minimum future lease payments leases december 31 2005 follows rent expense years ended december 31 2005 2004 2003 225 million 173 million 115 million respectively investment commitments december 31 2005 company invested total 26 million global asia partners lp fund size anticipated 10 million fund formed make private equity investments private preipo technology telecommunications companies asia company commitment invest maximum 50 million remaining amount due times amounts shall specified one future capital calls issued general partner company also entered various earnout agreements related certain acquisitions subject completion performance milestones see note 4 contractual obligations commercial commitments december 31 2005 companys obligations contractual obligations commercial commitments follows certain sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products litigation securities class action litigation beginning october 2004 several shareholder class actions alleging federal securities violations filed company various officers directors actions consolidated united states district court northern district california lead plaintiffs case filed first amended consolidated complaint july 26 2005 first amended complaint alleged violations securities exchange act 1934 brought behalf putative class shareholders purchased companys stock april 16 2003 september 20 2004 april 13 2006 lead plaintiffs filed second amended complaint adding new allegations extending end class period october 6 2005 addition company defendants plaintiffs also suing banc america securities llc softbank plaintiffs complaint seeks recovery damages unspecified amount litigation preliminary stage outcome cannot predicted management company believes claims meritorious nevertheless adverse outcome litigation occurred could material adverse effect companys results operations financial position cash flows governmental investigations company received notice formal inquiry staff securities exchange commission sec certain aspects companys financial disclosures prior reporting periods certain issues addition december 2005 us embassy mongolia informed company forwarded department justice doj allegations agent companys mongolia joint venture offered payments mongolian government official possible violation foreign corrupt practices act fcpa april 2006 company became aware agent company may made offer pay indian government official possible violation fcpa company audit committee authorized independent investigation matters company contact doj sec regarding investigation time company cannot predict governmental inquiry completed outcome governmental inquiry ipo allocation october 31 2001 complaint filed united states district court southern district new york company companys directors officers various underwriters initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offering securities litigation 21 mc 92 pretrial purposes april 2002 consolidated amended complaint filed matter company captioned utstarcom initial public offering securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers companys common stock march 2 2000 december 6 2000 companys directors officers dismissed without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss brought defendants including company order dismisses claims company except claim brought section 11 securities act 1933 alleges registration statement filed accordance ipo misleading june 2004 stipulation settlement release claims issuer defendants including company submitted court approval terms settlement approved would dismiss release claims participating defendants including company exchange dismissal insurance carriers would agree guarantee recovery plaintiffs underwriter defendants least 1 billion issuer defendants would agree assignment surrender plaintiffs certain claims issuer defendants may underwriters february 15 2005 court issued order granting conditional preliminary approval settlement august 31 2005 court entered order confirming preliminary approval settlement remains subject number conditions including final court approval total amount loss associated litigation determinable time therefore company unable currently estimate loss associated litigation starent patent infringement litigation company sued starent networks corporation starent patent infringement us district court northern district california march 22 2004 company filed complaint june 3 2004 company served complaint starent july 30 2004 starent filed served answer counterclaims august 30 2004 company served filed amended complaint companys amended complaint company asserts starent infringes utstarcom patent manufacture use offer sale starents st16 intelligent mobile gateway seek inter alia compensatory damages injunctive relief starent filed answer amended complaint counterclaims september 17 2004 answer counterclaims starent denies companys allegations seeks declaration patentinsuit infringed invalid unenforceable court held initial case management conference november 2 2004 february 17 2005 company filed motion preliminary injunction starents use sale offer sale products infringing feature court held hearing companys motion may 11 2005 denied companys motion june 17 2005 june 30 2005 court held hearing proper meaning construction claims patentinsuit entered order construing claims august 11 2005 september 20 2005 starent filed motion summary judgment noninfringement utstarcom filed motion summary judgment starent estopped asserting invalidity unenforceability october 4 2005 starent filed motion strike utstarcoms final infringement contentions november 7 2005 starents motion strike denied oral argument utstarcoms estoppel motion starents noninfringement motion held november 8 2005 december 6 2005 court granted starents motion summary judgment noninfringement december 12 2005 court dismissed moot starents counterclaims declaratory relief based invalidity unenforceability asserted patent february 2 2006 court entered judgment favor starent march 2 2006 utstarcom filed notice appeal company indicated believes adverse judgment material adverse effect business financial condition results companys operations february 16 2005 company filed second suit starent patent infringement us district court northern district california may 6 2005 company served complaint starent complaint company asserts starent infringes utstarcom patent starents development testing software upgrade customers installed st16 intelligent mobile gateways company seeks inter alia declaratory injunctive relief starent filed answer counterclaims may 31 2005 denying companys allegations seeking declaration patentinsuit infringed invalid unenforceable june 16 2005 company filed motion strike starents affirmative defense dismiss starents counterclaim alleging inequitable conduct pursuant parties stipulation company withdrew motion strike july 27 2005 starent filed amended answer counterclaims pleaded inequitable conduct allegations specificity utstarcom filed answer amended counterclaims august 10 2005 company indicated believes adverse judgment starents counterclaims material adverse effect business financial condition results companys operations however made evaluation possibility favorable unfavorable outcome fenner investments patent infringement litigation january 6 2005 fenner investments ltd fenner filed suit company codefendants juniper networks inc nokia inc nortel networks corp lucent technologies inc cisco systems inc us district court eastern district texas may 17 2005 fenner amended complaint add defendants ericsson inc ericsson ab telefonaktiebolaget lm ericsson alcatel usa inc suit alleged certain products infringe two fenner patents us patent nos 5561706 6819670 fenner sought compensatory injunctive relief march 20 2006 company agreed settle fenners claims part settlement fenner agreed dismiss prejudice claims company april 27 2006 court ordered dismissal prejudice fenners claims company result settlement telos technology inc arbitration november 22 2005 telos technology inc telos filed formal demand arbitration company jamsendispute san jose california demand arbitration seeks release 24 million escrow fund pursuant terms asset purchase agreement dated april 21 2004 escrow agreement dated may 19 2004 parties escrow fund created indemnify company certain losses associated companys purchase assets telos asserts companys refusal release escrowed funds constitutes breach contractual obligations agreements telos also seeks attorneys fees costs prejudgment interest amount 500000 response demand arbitration company denied breached contractual obligations january 2006 telos moved summary judgment claim company opposed motion march 6 2006 arbitrator issued ruling denying telos motion light ruling summary judgment telos dismissed claim arbitration without prejudice subject contractual right dispute future disbursement escrow telos technology inc litigation november 22 2005 plaintiffs telos technology inc telos technology canada inc telos technology bermuda ltd telos engineering limited collectively telos plaintiffs filed complaint company superior court california county santa clara complaint alleges five causes action including breach contract breach implied covenant good faith fair dealing fraudulent inducement intentional misrepresentation negligent misrepresentation arise asset purchase agreement parties dated april 21 2004 telos plaintiffs assert company breached express implied terms asset purchase agreement made representations telos plaintiffs negotiations never intended fulfill telos plaintiffs seek least 19 million damages unspecified punitive damages attorneys fees december 28 2005 telos plaintiffs filed first amended complaint alleging substantially facts seeking relief january 26 2006 company filed demurrer respect telos three tort causes action march 23 2006 court sustained companys demurrer three tort causes action allowed telos thirty days amend complaint april 12 2006 telos filed second amended complaint alleging substantially facts seeking relief first amended complaint company yet answered telos allegations second amended complaint intends file another demurrer tort causes action therein discovery recently begun trial date set cell communication ltd arbitration october 27 2005 company received notice demand arbitration filed cell communication ltd nigeria demand filed london court international arbitration lcia amended claim cell communication claims general damages 266 million special damages 15 million alternatively 41 million general damages connection alleged failures products purchased telos technology whose assets acquired company arbitrator selected lcia arbitrator ordered determination certain preliminary issues whether claims made cell communication irrecoverable matter english law hearing occurred may 26 2006 respect preliminary issues date substantive hearing scheduled company intends deny liability believes meritorious defenses company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty company believes final outcome matters material adverse impact financial position results operations note 19hedging company uses derivative financial instruments manage exposures foreign currency exchange rate changes derivative instruments accounted pursuant sfas 133 accounting derivative instruments hedging activities amended sfas 138 accounting certain derivative instruments certain hedging activities sfas 133 amended sfas 133 requires entity recognize derivatives either assets liabilities balance sheet measure instruments fair value recognize changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged beginning first quarter 2004 company hedged certain japanese yendenominated balance sheet exposures future movements foreign currency exchange rates using foreign currency forward contracts hedged transactions denominated us dollars behalf transactions denominated japanese yen pursuant foreign currency exchange hedging policy company may hedge anticipated transactions related payables denominated foreign currencies using forward foreign currency exchange rate contracts company hedged transactions 2005 gains losses fair value hedges intended offset gains losses revaluation japanese yendenominated recognized liabilities net result gains losses contracts revaluation included interest income expense insignificant year ended december 31 2004 companys foreign currency forward contracts generally mature within three months derivative financial instruments held speculative trading purposes foreign currency forward contracts open december 31 2005 2004 2003 note 20operating risks financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts notes receivable company places temporary cash shortterm investments several financial institutions approximately 5238 million 5898 million companys cash shortterm investments deposit foreign accounts december 31 2005 2004 respectively company invests excess cash highly liquid investments original maturities twelve months less certificates deposit government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds money market funds company believes limited exposure risk concentration credit risk major customers chinese carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier company groups china customers together province treats province one customer since level purchasing decisions made table outlines companys sales accounts receivable balances respect companys customers approximately 24 73 76 companys net sales 2005 2004 2003 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 2688 million 5823 million respectively december 31 2005 2004 company extends credit customers china generally without requiring collateral global sales outside china company often requires letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 32 79 86 companys sales year ended december 31 2005 2004 2003 respectively made china accordingly political economic legal environment well general state chinas economy may influence companys business financial condition results operations companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation approximately 16 6 10 companys sales year ended december 31 2005 2004 2003 respectively made japan accordingly political economic legal environment general state japans economy may influence companys business financial condition results operations note 21segment reporting company historically managed business single reportable segment 2004 company continued expand focus markets operations outside china effective fourth quarter 2004 determined companys chief operating decision makers accordance sfas 131 disclosures segments enterprise related information evaluating performance making operating decisions allocating resources based two operating segments china ii regions referred international november 1 2004 company acquired selected assets wireless handset division audiovox corporation acquired business integrated company separate distinct operating division referred personal communications division pcd company determined evaluate performance allocate resources division considered third operating segment result december 31 2004 company organized principally based geographical market locations three operating segments china ii international iii pcd segment consisted one reporting unit effective first quarter 2005 company elected reorganize business based principally upon product family realigned business five operating units broadband infrastructure ii wireless infrastructure iii handsets iv pcd v service operating unit represents reporting segment operating unit responsible worldwide production sales management company currently evaluates operating performance allocates resources reporting segments based segment gross profit cost sales direct expenses relation production assigned reporting segments corporate headquarters expenses nonoperating items allocated segments accounting policies used measuring segment assets operating performance used corporate consistently applied across segments summarized companys segment sales gross profit years ended december 31 2005 2004 2003 based new reporting segment structure assets segment follows sales attributed geographical area based upon location customer sales data geographical areas follows longlived assets consisting property plant equipment geographical area follows note 22related party transactions softbank company recognized revenue 3952 million 1437 million 1844 million years ended december 31 2005 2004 2003 respectively respect sales telecommunications equipment affiliates softbank corp softbank significant stockholder company softbank offers asynchronous digital subscriber line adsl coverage throughout japan marketed name yahoo bb company supports softbanks fibertothehome service sales carrier class gigabit ethernet passive optical network gepon product well multiservice optical transport product netring™ addition company supports softbanks new internet protocol television iptv sales rollingstream™ product included accounts receivable december 31 2005 december 31 2004 693 million 868 million respectively related transactions 2005 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period 163 million included long term deferred revenue respect agreements december 31 2005 additionally 63 million included current deferred revenue december 31 2005 insignificant amounts included deferred revenue december 31 2004 august 2004 company entered several agreements japan telecom co ltd jt wholly owned subsidiary softbank agreements relate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt company determined service activities revenue recorded net expected promotional spending company provided activities past could estimate fair value services company determined guidance sab 104 revenue related agreements could recognized goods services delivered company delivered received final acceptance equipment contemplated agreements quarter ended march 31 2005 december 31 2004 2175 million included customer advance related agreements december 31 2005 54 million included customer advance related softbank agreements promotional services discussed involved contracting third party promotional vendors turn facilitated marketing subscriber recruitment jt fibertothehome program fourth quarter 2004 company determined would end involvement jt promotional program completion contract discussed accordingly late fourth quarter 2004 first quarter 2005 company either cancelled assigned another party third party contracts promotional vendors related jt contract termination assignment third party promotional agreements well effective satisfaction companys obligations jt agreements satisfied revenue recognition criteria agreements net value promotional services value equipment delivered totaled 2048 million reported quarter ended march 31 2005 company also entered agreement jt third quarter 2004 supply chassis equipment shipped agreement considered linked ian8000 sale noted also deferred completion abovementioned promotional activities revenue recognition criteria related sale ian8000 equipment satisfied first quarter 2005 revenue related chassis sale 665 million reported quarter ended march 31 2005 year ended december 31 2005 sales softbank included 2801 million respect sales telecommunications equipment jt none 2003 2004 company invested softbank china restructuring fund 1 investment vehicles established softbank december 2005 company sold investment softbank china softbank 569 million incurred management fee transaction costs 44 million recognized gain 472 million refer note 9 longterm investments july 17 2003 company entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank corp terms agreement company loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements companys loan subordinated certain senior lenders bb modem repayments payable company 42month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period companys recourse nonpayment loan limited assets bb modem account subscriber payments made rights securitization transaction documents value bb modems serve collateral loan may decrease time may sufficient upon sale pay outstanding amounts loans company assesses loan impairment whenever events changes circumstances indicate carrying amount may recoverable company periodically reviews underlying quality asset pool securing loan assess whether impairment incurred needs recorded 2005 2004 company recorded 13 million interest income respect loan receivable december 31 2005 2004 approximately 90 million 118 million respectively included longterm assets april 5 2003 company repurchased 80 million shares common stock beneficially owned softbank purchase price 17385 per share total cost repurchase 1396 million including transaction fees connection repurchase transaction softbank entered agreement company offer sell otherwise dispose companys common stock period one year subject number exceptions december 31 2005 softbank beneficially owned approximately 122 companys outstanding stock august 29 2002 company completed repurchase 60 million shares common stock 729 million softbank acoustek intl corp company obtains consulting services acoustek intl corp acoustek employs individual related one companys officers company paid acoustek 01 million 2005 consulting services provided individual cellon october 2002 company entered license royalty agreement cellon international holding corporation cellon company ownership interest company paid 08 million license certain technology development certain handset products china per terms royalty agreement company required pay cellon 3 per unit shipped minimum 01 million units agreement material overall financial results cellon company evaluated relationship cellon fin 46 determined consolidation required november 2005 company entered agreement cellon expected completed first half 2006 exchange preferred shares cellon valued 50 million company transferred fixed assets net book value 29 million lease workforce place consisting 156 engineers additionally company amended license agreement made 50 million royalty prepayment exchange future product development december 31 2005 net book value assets transferred 29 million classified assets fiberxon company outstanding purchase commitment fiberxon company 7 ownership interest purchase component parts optical networking products addition company provided letter credit 50 million purchase raw materials manufacture component parts commitment expired 2005 purchases fiberxon totaled 97 million 2005 151 million 2004 company 03 million 133 million accounts payable fiberxon december 31 2005 2004 respectively matsushita joint venture july 2002 company entered joint venture agreement matsushita communication industrial co ltd jointly design develop manufacture sell telecommunication products company 49 ownership interest joint venture company performed engineering services joint venture approximately 28 million recognized revenue 2005 december 31 2005 company receivable 01 million december 2005 partners agreed dissolve joint venture see note 9 details global asia partners lp global asia partners lp venture capital fund formed make private equity investments private preipo technology telecommunications companies asia general partner fund also one companys sales agents june 2002 april 2005 company invested total 26 million fund december 31 2005 company 49 outstanding partnership units org inc company 49 ownership global asia partners lp turn significant shareholder org inc 2005 company sales 05 million org inc december 31 2005 company receivable 02 million deferred revenue 01 million spacetime january 2005 company formed joint venture two parties provide mobile communication broadband ip related value added services mongolia operations joint venture consolidated financial statements company december 31 2005 company 03 million included related party receivables 03 million long term debt related one joint venture partners spacetime golden communication technology usa inc spacetime starcom products inc company obtains engineering consulting employee placement services starcom products inc starcom 31 owned individual related one officers also member companys board directors company paid starcom 07 million 2005 11 million 2004 14 million 2003 engineering consulting employee placement services provided starcom xalted networks company received purchase orders xalted networks totaling approximately 13 million 2005 telecommunications equipment product typically sold company customers company charging ten percent procurement fee xalted obtaining reselling products equipment delivered 2005 revenue recognized revenue recognition process completed equipment cost included inventory december 31 2005 note 23restructuring costs second quarter fiscal 2005 company announced initiated restructuring plan rationalize cost structure response decline demand certain products addition restructuring plan designed allow company reduce operating costs product line primary goal improvements lower cost structure company 2005 company incurred 353 million expenses relation restructuring plan actions primarily consisting 152 million related severance payments ii 145 million asset impairments primarily related writeoff equipment licenses associated discontinued products included operating expenses iii 56 million inventory writeoff associated discontinued products included severance 18 million noncash reversal housing allowance accrual china restructuring expense related inventory writeoff included cost sales statements operations december 31 2005 approximately 1595 employees terminated placed workforce reduction programs following table displays roll forward restructuring plan associated costs included 353 million restructuring charge year ended december 31 2005 56 million recorded cost net sales 297 million recorded operating expense note 24variable interest entities financial accounting standards board fasb issued fasb interpretation 46 fin 46 fin 46 requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity 2004 2003 company consolidated related party deemed vie company primary beneficiary beijing mdc telecom co ltd mdc bj formed 2001 2002 venture capital fund affiliation shareholder company made additional capital investment established mdc holding limited mdc holding affiliated entities mdc holding affiliated entities including mdc bj referred collectively mdc business providing valueadded services short message voicemail ringtone services pas telecom networks 2003 2004 company consolidated mdc vie company primary beneficiary december 31 2004 consolidation resulted 42 million increase total assets total liabilities equity fourth quarter 2005 company sold equity interest terminated material commercial arrangements settled bank debt longer considered primary beneficiary result assets liabilities mdc consolidated december 31 2005 fourth quarter 2005 company provided interest free 124 million loan party china seed capital venture organized participate providing technical service networking technology equipment emerging market iptv products china loan partially secured indirect ownership interest venture payable 10 years may called early without penalty result foregoing fact ventures continuing viability heavily dependent provision network terminal equipment company determined venture vie company primary beneficiary venture therefore venture consolidated companys results december 31 2005 vie revenue 2005 net losses 09 million december 31 2005 consolidation vie represented 189 million total assets company december 31 2005 consisted cash 121 million current assets 63 million net fixed assets 05 million creditors vie recourse company first quarter 2005 company invested additional entity considered vie company primary beneficiary hold majority voting interest company established install develop operate pas network mongolia creditors vie recourse company december 2005 us embassy mongolia informed company forwarded department justice allegations agent joint venture offered payments mongolian government official possible violation foreign corrupt practices act audit committee authorized independent investigation matter result investigation company wrote 12 million intangibles established 26 million vat liability december 31 2005 investigation still ongoing consolidation entity resulted 60 million increase total assets total liabilities equity december 31 2005 first quarter 2006 company decided terminate joint venture arrangement wrote remaining net assets note 25subsequent events february 2006 company sold substantially assets selected liabilities semiconductor design business division including assets related prior acquisition advanced communications devices corporation marvell technology group ltd marvell 24 million cash net book value assets sold 29 million transaction costs approximately 04 million additionally marvell may pay additional 16 million upon certain defined milestones achieved march 16 2006 company filed current report form 8k securities exchange commission disclosing company would delay filing annual report form 10k year ended december 31 2005 delay results technical default companys 78 convertible subordinated notes due 2008 notes company received notice trustee notes asserting company failed file 2005 form 10k june 2 2006 failure would constitute event default pursuant indenture notes event default occur continuing trustee holders least 25 aggregate principal amount notes outstanding could declare unpaid principal accrued interest notes outstanding immediately due payable company believes technical default remediated filing 2005 form 10k may 5 2006 hong liang lu notified company resignation companys president chief executive officer chairman board effective december 31 2006 ying wu chief executive officer companys china operations vice chairman board assume position chief executive officer effective january 1 2007 thomas toy currently independent director company assume position chairman board effective january 1 2007 quarterly financial data unaudited described note 2 restatement quarterly periods years ended december 31 2005 2004 2003 restated following tables present unaudited quarterly financial information reflecting impact restatement consolidated balance sheets consolidated balance sheets consolidated balance sheets consolidated statements cash flows supplemental information adjustments following tables summarize adjustments net income loss earnings loss per share b segments following tables set forth information segment item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules omitted applicable required information shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders utstarcom inc completed integrated audits utstarcom inc’s consolidated financial statements internal control financial reporting december 31 2006 accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedules opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index present fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedules responsibility company’s management responsibility express opinion financial statements financial statement schedules based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion described note 1 consolidated financial statements company 275 million principal amount convertible notes maturing march 2008 certain credit facilities expire november december 2007 management’s plans regard matters also described note 1 discussed note 2 consolidated financial statements company restated 2005 2004 consolidated financial statements discussed note 3 consolidated financial statements effective january 1 2006 company changed method accounting stockbased compensation internal control financial reporting also audited management’s assessment included management’s annual report internal control financial reporting appearing item 9a utstarcom inc maintain effective internal control financial reporting december 31 2006 company maintain effective control environment company maintain effective financial reporting processes including sufficient formalized consistent finance accounting policies procedures company prevent detect instances noncompliance certain policies procedures exist b company failed prevent detect non compliance established policies procedures intended ensure compliance laws regulations ineffective control environment also contributed company’s failure prevent detect instances override related controls china customer agreements b company maintain effective controls us headquarters accounting inventory including finished goods customer sites inventory reserves deferred cost accounts associated cost sales c company maintain effective controls us headquarters inventory reserves losses customer contracts associated cost sales company maintain effective controls us headquarters accounting warranty reserves associated cost sales e company maintain effective controls accounting disclosure stockbased compensation expense f company maintain effective controls us headquarters process ensure complete accurate timely preparation review consolidated financial statements accordance generally accepted accounting principles gaap based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim financial statements prevented detected following material weaknesses identified included management’s assessment december 31 2006 1 company maintain effective control environment specifically following additional material weaknesses identified within control environment company maintain effective financial reporting processes including sufficient formalized consistent finance accounting policies procedures company prevent detect instances noncompliance certain policies procedures exist specifically company lacked formalized current accounting reporting policies procedures across certain operating locations various business cycles control deficiencies resulted adjustments including audit adjustments consolidated financial statements quarters ended march 31 2006 june 30 2006 september 30 2006 year ended december 31 2006 correct certain accounts described b company failed prevent detect non compliance established policies procedures intended ensure compliance laws regulations specifically control deficiency may permitted violations certain securities exchange commission “sec” regulations related previous financial disclosures foreign corrupt practices act “fcpa” related alleged potential payments made government officials 2 material weakness company’s control environment contributed existence following control deficiencies considered material weakness company failed prevent detect instances override related controls china customer agreements specifically control deficiency permitted override established controls china’s western sales region allowing existence undisclosed agreements customers obligated company provide products perform certain services without receipt additional consideration existence agreements communicated either company’s financial reporting function independent registered public accounting firm control deficiency resulted adjustments restate revenue deferred revenue accounts cost sales deferred cost accounts related income tax accounts retained earnings related financial disclosures company’s consolidated financial statements years ended december 31 2004 2005 quarters year ended december 31 2005 first two quarters year ended december 31 2006 b company maintain effective controls us headquarters accounting inventory including finished goods customer sites inventory reserves deferred cost accounts associated cost sales specifically company’s controls adequate properly track confirm inventory movements appropriate period ensure proper classification inventory deferred costs associated accounts purchase price variance ensure completeness accuracy recording cost sales revenue recognized processes always performed correctly timely inadequate management review calculation andor posting errors occurred control deficiency resulted adjustments including audit adjustments consolidated financial statements quarters ended march 31 2006 june 30 2006 september 30 2006 year ended december 31 2006 correct cost sales related inventory finished goods customer sites inventory reserves deferred costs accounts c company maintain effective controls us headquarters inventory reserves losses customer contracts associated cost sales specifically company’s controls designed operate effectively adequately identify document analyze inventory reserves losses customer contracts ensure related costs recorded appropriate period existing reserves adequate processes always performed correctly timely inadequate management review calculation andor posting errors occurred control deficiency resulted adjustments including audit adjustments consolidated financial statements quarters ended june 30 2006 september 30 2006 correct inventory reserves losses customer contracts associated cost sales company maintain effective controls us headquarters accounting warranty reserves associated cost sales specifically company’s controls failed adequately identify document analyze required supporting information ensure completeness accuracy valuation adequacy warranty reserves ensure related costs recorded appropriate period processes always performed correctly timely inadequate management review calculation andor posting errors occurred control deficiency resulted adjustments including audit adjustments consolidated financial statements quarters ended june 30 2006 september 30 2006 year ended december 31 2006 correct warranty reserves included current liabilities associated cost sales e company maintain effective controls accounting disclosure stockbased compensation expense specifically company maintain effective controls including monitoring ensure completeness existence valuation presentation stockbased compensation transactions related granting pricing accounting certain stockbased compensation awards related financial reporting awards accordance gaap control deficiency resulted misstatement stockbased compensation expense additional paidin capital accounts related income tax accounts retained earnings related financial disclosures resulted restatement consolidated financial statements years ended december 31 2004 2005 quarters year ended december 31 2005 first two quarters year ended december 31 2006 f company maintain effective controls us headquarters process ensure complete accurate timely preparation review consolidated financial statements accordance gaap specifically company effective controls process identifying accumulating reviewing required supporting information ensure completeness accuracy timely preparation review consolidated financial statements disclosures including statement cash flows segment reporting control deficiency resulted adjustments including audit adjustments consolidated financial statements quarters ended march 31 2006 june 30 2006 september 30 2006 year ended december 31 2006 additional disclosures 2006 consolidated annual financial statements correct aforementioned accounts disclosures material weaknesses described could result misstatement company’s consolidated financial statements would result material misstatement quarterly annual consolidated financial statements would prevented detected material weaknesses considered determining nature timing extent audit tests applied audit 2006 consolidated financial statements opinion regarding effectiveness company’s internal control financial reporting affect opinion consolidated financial statements opinion management’s assessment utstarcom inc maintain effective internal control financial reporting december 31 2006 fairly stated material respects based criteria established internal controlintegrated framework issued coso also opinion effects material weaknesses described achievement objectives control criteria utstarcom inc maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued coso pricewaterhousecoopers llp san jose ca october 10 2007 utstarcom inc consolidated balance sheets thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders’ equity thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1description business liquidity utstarcom inc “company” delaware corporation incorporated 1991 headquarters alameda california designs manufactures sells telecommunications infrastructure customer premises equipment wireless telephone handsets telecommunications service providers operators throughout world also provides telecommunications infrastructure installation operations maintenance services company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks company reported net losses quarter period beginning april 1 2005 continuing december 31 2006 resulted accumulated deficit 4942 million total stockholders’ equity reduced 7744 million december 31 2006 additionally december 31 2006 company shortterm debt china lines credit 1025 million maturing 2007 longterm debt outside china form 7¤8 convertible subordinated notes principal balance 2746 million matures march 2008 subsequent december 31 2006 company holders convertible subordinated notes entered two agreements prevent covenant defaults occurring company’s inability timely file required periodic reports containing financial statements sec first agreement increased interest rate convertible subordinated notes 7¤8 7625 effective january 9 2007 second agreement increased interest rate 10875 effective july 26 2007 additional information concerning company’s supplemental indentures see note 23 company’s cash shortterm investments aggregated 6712 million 4837 million held china december 31 2006 credit facilities china december 31 2006 totaled 6983 million 3575 million amount available working capital purposes company drawn 1025 million outstanding borrowings 3408 million available use support letters credit corporate guarantees facilities expire primarily november december 2007 company believes based upon recent financial performance financial position lenders may reduce total available credit negotiates renewals lines furthermore borrowing credit facilities subject bank’s current favorable opinion credit worthiness company’s china subsidiaries well bank funds available lending chinese banking regulations however company believes amounts credit lenders may make available borrowings made renewed lines credit sufficient meet planned uses credit facilities meet liquidity needs outside china company’s subsidiaries china ability transfer cash company china’s current exchange control regulations amount cash available transfer company’s china subsidiaries limited company’s liquidity needs china chinese government requirements china subsidiaries retain adequate capital levels china protect creditors funds available mandated employee benefits company believed china subsidiaries could freely transfer least 200 million company december 31 2006 nine months ended september 30 2007 china subsidiaries made transfers totaling 150 million although management believes company sufficient amount cash resources finance company’s anticipated working capital expenditure requirements next 12 months company enough cash outside china repay convertible notes due march 1 2008 management’s liquidity plans include partial complete refinancing convertible notes renewal lines credit china transfers cash subsidiaries china extent necessary needed liquidation certain investments andor seeking new financing arrangements company’s ability maintain sufficient liquidity also dependent achieving projected sales operating margin forecasts additional sources liquidity needed company would consider new debt equity offerings obtaining cash asset sales assurance transactions could consummated acceptable terms failure raise sufficient capital needed could material adverse effect business results operations financial position company note 2restatement financial statements consolidated balance sheet december 31 2005 consolidated statements operations stockholders’ equity cash flows years ended december 31 2004 2005 included herein restated amounts previously reported reasons restatement discussed china sales investigation audit committee company’s board directors “audit committee” engaged independent counsel conduct investigation sales china following determination internal audit group allegations improper activities sales office western region credible allegations made company employee using company’s whistle blower program independent counsel engaged forensic accountants group collectively referred investigating team rest discussion conducting procedures investigating team found instances customer contracts evidenced arrangement contained obligations company deliver software upgrades made available equipment sold additional consideration unspecified period could extend term contract additional contract obligation element “post contract support” cases investigating team found contract documentation transaction submitted sales office company’s china headquarters accounting purposes utilized company determining amount revenue recognized include evidence post contract support obligations accounting standards governing revenue recognition system sales require revenue deferred undelivered elements arrangement unless seller established vendor specific objective evidence “vsoe” fair value contract elements arrangements included undelivered elements revenue deferred based vsoe fair value underlying elements vsoe fair value represents price charged element sold separately since company sell element separately established vsoe undelivered elements revenue contracts required deferred recognized period company obligated provide post contract support upon completion investigative phase independent investigation audit committee management · conducted followup procedures attempt locate additional relevant information ensure company considered available information documents · evaluated accounting identified system sales using contract template documentation found sales contract files western region offices included calculating financial statement effects correcting accounting system sales contract template found sales offices contained post contract support obligations recognize revenue cost net sales estimated period post contract support · concluded result undelivered post contract support obligation company’s previously issued financial statements restated defer system sales contract revenue related cost net sales estimated period post contract support contract contained unspecified software upgrade rights audit committee concurred management’s decisions effect correcting improperly recognized revenue cost net sales reduce increase previously reported net sales gross profit net income following amounts thousands dollars consolidated balance sheets december 31 2005 2006 net reduction previously recognized net sales accounted deferred revenue 329 million 356 million respectively classified current 2521 million 2401 million respectively noncurrent related net reduction cost net sales 1853 million 1766 million respectively accounted deferred costs amounts recognized company’s consolidated statements operations estimated remaining period post contract support audit committee findings upon completing investigation audit committee concluded conditions practices relating systems contracts prevalent western region resulted primarily failure prevent detect instances override related controls china customer agreements lack proper management oversight unclear record retention policies procedures relating systems contracts inadequate employee training investigating team audit committee also concluded respect four regions western region evidence fraud misconduct reason suspect occurred investigating team audit committee also concluded credible evidence knowledge senior management china united states conditions practices related western region china discovered investigation audit committee concluded local management several sales offices western region china submit appropriate information company’s senior management china united states therefore prior years neither company’s management company’s independent registered accounting firm able properly evaluate effect information revenue recognition audit committee also concluded certain members management china bear varying degrees responsibility inadequate oversight activities result certain employees china either terminated placed suspension failure provide adequate oversight activities governance committee review historical stock option accounting november 2006 company announced commenced voluntary review historical stock option practices leadership nominating corporate governance committee company’s board directors “governance committee” following preliminary review management identified potential deficiencies discrepancies documentation stock option grants review considered option grant awards made period february 29 2000 shortly initial public offering company’s common stock august 2006 “review period” compliance various stockbased compensation accounting standards applicable review period rules company’s stock option plans guidance stock option accounting issued sec september 19 2006 letter considered applicable periods prior well subsequent issuance time review commenced governance committee consisted three members board directors independent directors mr allen lenzmeier appointed governance committee april 27 2007 governance committee engaged independent outside legal counsel assist review turn engaged forensic accounting experts collectively referred herein “review team” review team management governance committee decided group stock option grants six award categories based differences constituted substantive approval category company’s stock option granting practices well giving consideration risk intentional misstatement grant date guidance september 19 2006 letter determining date substantive approval stock option grant occurs recognizes depending company’s facts circumstances company may determine measurement date stock option grants may occur required granting actions occurredsuch final approval compensation committee alternative available review facts circumstances supports conclusion substantive approval occurs earlier required granting actions occurred evidence fraudulent manipulative conduct company’s option granting practices determining measurement date used review team management governance committee agreed use following definitions constituting proper measurement date generally dates used testing stated grant dates establishing corrected measurement dates review period company granted stock options approximately 34 million shares company’s common stock 197 grant dates review specifically examined appropriateness stated grant date approximately 90 stock options granted including stock option grants made directors officers broadbase options option grants made connection business acquisitions review included extensive examination company’s historical stock option practicesincluding information stock option administration human resource legal accounting department files records well email communications electronic database company’s stock option activity maintained third party information stored company hard drives backup tapes review team also conducted interviews individuals involved granting advising administering accounting stock options including current former management members board directors employees nonemployee professionals findings review summarized follows 1 apb 25 expense adjustment arising using corrected measurement date grants amount employee would pay exercise stock option grants exceeded quoted market price company’s common stock corrected measurement date therefore stock option grants contained intrinsic value corrected measurement date 2 number grants exceeds number grant dates certain grant dates one category stock option grants approved noncash compensation charge recognized expense grantee’s service period arises accounting principles board opinion 25 accounting stock issued employees “apb 25” accounting standard governing company’s stock option accounting 2005 stock option intrinsic value measurement date intrinsic value measured excess fair value date grant underlying common stock option’s exercise price company’s practice grant stock options exercise prices equal closing price underlying company common stock grant date use grant date measurement date stockbased compensation purposes previously company determined granted stock options intrinsic value grant dates compensation expense recognized however apb 25 states measurement date occur essential actions necessary grant option completed including final determination number shares granted employee director exercise price option grant approved requisite authority september 19 2006 letter publicly issued sec’s chief accountant focused companies registered sec need number shares exercise price award individual finalized measurement date letter clarifies sec staff’s view possible terms could change measurement date occurred even award’s terms actually changed based available evidence review found number shares individual employee entitled receive andor exercise price stock option grants determined finality stated grant date 53 tested grant dates company used later date measurement date principal reasons stated grant date qualifying measurement date apb 25 include · certain listings grantees officer level incomplete added modified stock option administration personnel grant approved compensation committee · certain grants compensation committee approval considered perfunctory date uwc document sent compensation committee members approval used stated grant date discretionary officer director grants rather date uwc signed compensation committee members therefore became effective · stock option review team unable locate contemporaneous documentation director officer broadbase new hire merit grants total 179 million stock options granted 53 tested grant dates 2000 2005 governance committee’s review found company used incorrect measurement dates using corrected measurement dates 103 million stock options intrinsic value exercise prices closing price company’s common stock corrected measurement date 76 million stock options exercise prices exceeded closing price company’s common stock therefore intrinsic value accounted apb 25 103 million stock options resulted increase noncash stockbased compensation expense 243 million 2000 2005 103 million stock options resulting additional noncash stockbased compensations expense 20 million options granted officers directors resulted 61 million additional noncash stockbased compensation expense cases correcting measurement date previously granted stock options additional taxable income employees arises additional payroll taxes due employee well company assumed responsibility additional payroll taxes plus related penalties interest arising restatement stockbased compensation including amounts otherwise payable stock option recipients company’s restated financial statements include 15 million accrual estimated expense holders stock options corrections made measurement dates aware improper measurement dates used company taken certain actions contemplating taking additional actions deal adverse personal income tax consequences may incurred holders stock options corrected measurement dates adverse personal income tax consequences arise exercise stock options vesting december 31 2004 corrected measurement dates cause exercise price fair market value company’s common stock measurement date “409a affected options” exercise would subject option holder penalty tax irc section 409a applicable similar penalty taxes california state tax laws company evaluated stock option exercises december 31 2006 determined exercises 409a affected options accordingly penalty tax incurred employees exercising stock options date company considering deal exercises 409a affected options occur 2007 beyond one alternative would offer amend 409a affected options change exercise price fair market price company’s common stock corrected measurement date amended options would subject taxation irc section 409a irs regulations option amendments completed december 31 2006 anyone executive officer member board directors received 409a affected options therefore prior december 31 2006 eight company’s current former executive officers directors executed irrevocable protective amendment election form whereby stock options automatically amended restate exercise price fair market value company’s common stock corrected measurement date future stock options would otherwise determined 409a affected options similar offer amend 409a affected options held nonofficer employees currently consideration decision reached offer cannot made company current sec reporting obligations review company also discovered stock option grant former officer modified 1998 connection termination employment resulted additional compensation expense change never included company’s stock option grant records additional compensation expense resulting change option’s terms approximately 12 million recorded previously discovery consistent review team’s finding certain instances lack formal documentation stock option granting process andor expected documentation missing stock option administration files addition review team found many instances lack selfauthenticating evidence corroborate cash exercises contemporaneous result findings issue backdating cash exercises inconclusive company’s accounting stockbased compensation changed fair value method 2006 required accounting standards ceased accounting stockbased compensation intrinsic value method pursuant apb 25 began accounting stockbased compensation pursuant statement financial accounting standards 123r sharebased payments “sfas 123r” method stock option grants fair value determined using option pricing model fair value used recognize noncash stockbased compensation expense company recognizes stock compensation expense straightline basis sfas 123r table shows effects correcting consolidated financial statements governance committee’s findings modification 1998 stock option grant former officer connection termination employment consistent historical accounting policy additional stockbased compensation expense recognized accelerated basis treating vesting tranche separate stock option grant graded vesting additionally table gives effect corrections accounting performance related stock options restricted stock grants first two quarters 2006 previously identified considered immaterial effects correcting errors company’s previous stock option accounting increase reduce previously reported noncash compensation expense payroll taxes income taxes net income following amounts thousands dollars following table shows company’s stockbased compensation expense previously reported impact restatement excluding payroll taxes stockbased compensation periods prior fiscal 2006 net income tax governance committee findings upon completing review governance committee concluded found evidence intent manipulate company’s operating results financial statements key finding governance committee deficiencies process stock options granted period company’s initial public offering 2000 least 2005 resulted accounting errors governance committee concluded certain members management bear varying degrees responsibility deficiencies process options granted governance committee’s review also concluded none current former employees directors company engaged intentional wrongdoing restatement impact financial statements following table presents decrease net income year result restating results china sales investigation historical stock option accounting review cumulative effect restatements december 31 2003 increase additional paidin capital deferred stockbased compensation 260 million 6467 million 6727 million decrease retained earnings 595 million 2374 million 1779 million decrease total stockholders’ equity 335 million 8877 million 8542 million changes restating previously issued financial statements investigations discussed company also corrected previously reported amounts corrected reporting 803 million net sales certain third party resellers 412 million associated cost net sales 2005 classify amounts related party net sales related party cost net sales classifications respectively 2006 company determined sales entities substance sales significant shareholder softbank corp classification accounts receivable sales similarly changed include accounts receivable related parties december 31 2005 consolidated balance sheet restated financial information following tables reflect impact china sales investigation changes noncash charges stockbased compensation expense related additional payroll taxes income tax effects well restatement correct classification related party transactions discussed · consolidated statements operations years ended december 31 2005 2004 · consolidated balance sheet december 31 2005 · consolidated statements cash flows years ended december 31 2005 2004 stock option grants corrected measurement dates also restated following tables using fair value based measurement principles sfas 123 accounting stockbased compensation “sfas 123” present pro forma effect stockbased compensation expense net income loss earnings loss per share amounts 2004 2005 using sfas 123’s fair value based method determine stockbased compensation expense rather using apb 25’s intrinsic value method disclosure required periods prior adoption sfas 123r tables also present impact changes previously reported gross profit segment information years ended december 31 2005 2004 resulting restatements sales recognition china noncash charges stockbased compensation expense related additional payroll taxes periods utstarcom inc consolidated statements operations thousands except per share amounts utstarcom inc consolidated balance sheets thousands except share data utstarcom inc consolidated statements cash flows thousands gross profit segment restated pro forma sfas 123 note 3summary significant accounting policies basis presentation accompanying consolidated financial statements include accounts company wholly majority 50 percent owned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries equity affiliated companies shown separately consolidated financial statements company also consolidates variable interest entities defined financial accounting standards board interpretation 46 “consolidation variable interest entities” see note 22 use estimates preparation consolidated financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period estimates used revenue recognition allowance doubtful accounts sales returns tax valuation allowances reserves inventory deferred costs accrued product warranty costs provisions contract losses goodwill longlived asset impairments stockbased compensation expense loss contingencies restructuring expenses among others actual results could differ estimates cash equivalents cash equivalents consist highly liquid instruments maturities three months less date purchase total cash shortterm investment balance december 31 2006 4837 million held china currency exchange controls exist result company’s ability make payments jurisdictions could limited ability transfer money china jurisdictions chinese law requires company’s subsidiaries domiciled china obtain government consent prior making certain payments company result approximately 200 million company’s consolidated net assets cannot transferred company subsidiaries china without first obtaining consent chinese government shortterm investments shortterm investments consist investments original remaining maturities three months less twelve months accordance company’s investment policy shortterm investments invested “investment grade” rated securities minimum better ratings currently company’s shortterm investments aa better ratings marketable securities classified availableforsale carried fair value unrealized holding gains losses securities classified availableforsale recorded separate component stockholders’ equity unrealized losses securities classified availableforsale determined otherthantemporary reported earnings realized gains losses reported earnings fair value investments based quoted market prices december 31 2006 2005 shortterm investments availableforsale securities consisted longterm investments company investments various publicly privately held companies investments funds equity securities publicly listed companies traded securities exchanges classified availableforsale carried fair value unrealized holding gains losses securities classified availableforsale recorded separate component stockholders’ equity investments less majorityowned privately held affiliates exercise significant influence accounted equity method investments affiliates carried cost company monitors otherthantemporary impairment makes appropriate reductions carrying value company determines impairment charge required based financial economic operational condition nearterm prospects companies revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements governed emerging issues task force issue “eitf” 0021 “accounting revenue arrangements multiple deliverables” sec staff accounting bulletin 104 “revenue recognition” multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements company control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time company establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment company entitled full payment company recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 “software revenue recognition” amended eitf 0305 “applicability sop 972 nonsoftware deliverables containing incidental software” company allocates revenues element software arrangements based vendor specific objective evidence “vsoe” fair value vsoe fair value element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases company agreed give software upgrade rights “when made available” basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element “post contract support” company established vsoe contract element accordingly revenues contracts recognized ratably period post contract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support company reviews assumptions regarding estimated post contract support periods regular basis company determines necessary revise company’s estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding post contract support periods different original assumptions contract revenues would recognized remaining expected period support contract accounting utilized contracts include requirement significant software modification customization utilized company generally accounts contracts using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements company unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process year ended december 31 2006 company recorded 321 million loss fixed price contract company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term revenues services less 10 revenues periods presented company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectibility cannot reasonably assured reseller arrangement revenue recognized upon sell end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards “sfas” 48 “revenue recognition right return exists” cases company developed reasonable estimates stock exchanges based historical experience similar types sales similar products company sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material company estimates amount rebate based upon terms individual arrangement historical experience future expectations price reductions records estimate rebate amount time sale company also enters sales incentive programs comarketing arrangements certain wireless handset customers company records incurred incentive reduction revenue sales revenue recognized assessment collectibility also factor determining whether revenue recognized company assesses collectibility based number factors including payment history credit worthiness customer company request collateral customers international sales company may require letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company defers revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally company enters revenue sharing arrangements company collects payment customer telecommunications service provider collects service revenues company enters revenue sharing arrangement company recognize revenue collection reasonably assured nature business china emerging markets company’s billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained company current deferred revenue 957 million 1019 million longterm deferred revenue 2610 million 2731 million december 31 2006 2005 respectively product warranty company provides warranty equipment handset sales period generally ranging one three years time final acceptance rarely company entered arrangements provide limited warranty services periods longer three years longest warranty period ten years company provides expected cost product warranties time revenue recognized based assessment past warranty experience circumstances dictate accounts notes receivable company accepts bank notes commercial notes customers china normal course business estimates collectibility trade receivables notes receivable notes typically noninterest bearing maturity dates three six months allowance doubtful accounts maintained estimated losses trade receivables notes receivable collection may longer reasonably assured company assesses collectibility receivable determining whether creditworthiness customer deteriorated could result inability collect payment collectibility doubtful company records allowance receivable customer’s financial condition deteriorate causing ability make payments suffer result allowances receivables may need increased greater concentration accounts receivable certain customers financial conditions specific individual customer may result increased concentration risk exposure allowances doubtful accounts 539 million 678 million december 31 2006 2005 respectively total receivables including accounts receivable related parties inventories consist product held company’s manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value net writedowns excess slow moving obsolete inventory exception handset inventory personal communications division “pcd” based weighted average cost inventory cost computed using standard cost approximates actual cost firstin firstout basis inventory written estimated obsolescence unmarketable inventory equal difference inventory cost estimated market value deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs also include costs associated third party integrators freight deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites specific individual customer financial conditions specific individual customer may result increased concentration risk exposure inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset per accounting research bulletin 43 “working capital current assets current liabilities” research development capitalized software development costs research development costs charged expense incurred research development costs include payroll related costs contractor fees facility expenses third party license fees allocations overhead costs purchased software costs incurred development software ultimately sold capitalized time technological feasibility attained related product ready general release 2006 2005 2004 company capitalized 10 million 60 million 53 million software development costs respectively amortization capitalized development costs 21 million 39 million 30 million 2006 2005 2004 respectively unamortized capitalized software development costs december 31 2006 2005 34 million 69 million respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets land use rights related property leased company china amortized life lease leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company generally depreciates assets following periods company capitalizes interest incurred related construction property plant equipment ready use 2004 company recorded 14 million capitalized interest applicable construction china headquarters hangzhou china headquarters facility placed service october 2004 capitalized interest amortized straightline basis life building goodwill intangible assets company recorded goodwill intangible assets connection business acquisitions management judgment required assessment related useful lives assumptions regarding ability successfully develop ultimately commercialize acquired technology assumptions regarding fair value recoverability assets annual goodwill impairment review performed fourth quarter year changes circumstances indicate potential impairment exists assessing potential impairment goodwill book value reporting unit compared fair value fair value determined based present value estimated future cash flows third quarter 2005 company performed impairment analysis result changes business environment result analysis impairment charge recorded third quarter 2005 see note 10 impairment longlived assets longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets longlived assets disposed sale measured lower book value fair value less cost sell see note 8 advertising costs company expenses advertising costs incurred payment customers marketing development costs accounted reduction revenue associated customers incurred years ended december 31 2006 2005 2004 advertising costs totaled 81 million 82 million 80 million respectively stockbased compensation prior january 1 2006 company accounted sharebased payment awards accounting principles board opinion 25 “accounting stock issued employees” “apb 25” provided required pro forma disclosures statement financial accounting standards 123 “accounting stockbased compensation” accordance apb 25 noncash compensation expense recognized options exercise price market price actual grant date based difference exercise price market price expense recognized ratably associated service period generally option vesting term january 1 2006 company adopted statement financial accounting standards 123 revised 2004 “sharebased payment” “sfas 123r” using modified prospective transition method stockbased compensation expense recognized period based value portion sharebased payment awards ultimately expected vest stockbased compensation expense recognized consolidated statement operations year ended december 31 2006 included compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions sfas 123 compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r november 10 2005 financial accounting standards board “fasb” issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” company adopted alternative transition method provided fasb staff position calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establishing beginning balance additional paidincapital pool “apic pool” related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r company accounts utilization windfall tax benefits based tax law ordering considered direct effects stockbased compensation purposes measuring windfall settlement award comprehensive income comprehensive income includes changes equity net assets period nonowner sources accumulated comprehensive income loss 2006 2005 2004 shown consolidated statement stockholders’ equity december 31 years indicated components accumulated comprehensive income reported consolidated balance sheets follows income taxes company accounts income taxes liability method deferred income taxes recognized differences tax bases assets liabilities financial statement amounts based enacted tax rates valuation allowances established necessary reduce deferred tax assets amount expected realized company required adjust deferred tax asset liabilities period tax rates provisions income tax laws change 2006 due recent developments business company determined earnings certain subsidiaries permanently reinvested outside united states company provides us taxes foreign undistributed earnings considered permanently reinvested outside united states apb 23 “accounting income taxesspecial areas” deferred income taxes must provided unremitted earnings foreign subsidiaries unless earnings could deemed permanently reinvested outside united states prior 2006 company provided us tax foreign unremitted earnings company intend repatriate earnings see note 14 segment reporting company four operating units network solutions personal communications division “pcd” handsets services network solutions operating unit provides products services two reporting segments broadband infrastructure “broadband” wireless infrastructure “wireless” financial instruments derivatives financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable convertible subordinated debt purchased written call options accrued liabilities carrying amounts cash equivalents shortterm investments accounts receivable payable accrued liabilities approximate fair values shortterm nature instruments carrying amounts notes receivable approximates fair value based discounted value future cash flow expected received note company may use derivative financial instruments manage exposures foreign currency exchange rate changes objectives holding derivatives include reducing eliminating efficiently managing economic impact exposures effectively possible derivative instruments recognized either assets liabilities balance sheet company measures instruments fair value recognizes changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged company hedged transactions 2006 2005 net gains losses resulting hedging activities year ended december 31 2004 insignificant following table summarizes company’s carrying values fair values financial instruments company determines fair value convertible debt related convertible bond hedge written call option using estimates fair values balance sheet date provided major securities firm fair value longterm investments determined based quoted market prices available information investees shortterm nature company’s bank loans company believes carrying value approximates fair value foreign currency translation company’s operations conducted international subsidiaries financial statements subsidiaries translated respective functional currencies us dollars foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders’ equity foreign currency transaction loss reported earnings 99 million 2005 gain 76 million 08 million 2006 2004 respectively recorded income net earnings per share “eps” basic eps computed dividing net income loss available common stockholders weighted average number shares company’s common stock outstanding period excludes unvested restricted shares diluted eps presents amount net income loss available share common stock outstanding period plus share common stock would outstanding assuming company issued shares common stock dilutive potential common shares outstanding period company’s potential common shares include employee stock options unvested restricted shares written call option warrants convertible subordinated notes vested acquisitionrelated stock options following summary calculation basic diluted eps years ended december 31 2006 2005 potential common shares dilutive net loss years basic dilutive eps following table summarizes total potential shares common stock excluded diluted per share calculation include would antidilutive period recent accounting pronouncements june 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” interpretation contains twostep approach recognizing measuring uncertain tax positions accounted accordance sfas 109 “accounting income taxes” first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon ultimate settlement company adopted provisions fin 48 january 1 2007 recording 14 million increase liability uncertain tax positions offset reduction opening balance retained earnings september 2006 fasb issued statement financial accounting standards 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply current accounting pronouncements require permit fair value measurements sfas 157 becomes effective company january 1 2008 upon adoption provisions sfas 157 applied prospectively limited exceptions company currently evaluating effects sfas 157 consolidated financial statements september 2006 securities exchange commission issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” “sab 108” sab 108 requires analysis misstatements using income statement rollover approach balance sheet iron curtain approach assessing materiality provides onetime cumulative effect transition adjustment sab 108 effective annual financial statements first fiscal year ending november 15 2006 company adopted sab 108 fourth quarter 2006 adoption sab 108 impact company’s consolidated financial statements february 2007 fasb issued statement financial accounting standard 159 “the fair value option financial assets financial liabilities” “sfas 159” statement permits require companies report fair value majority recognized financial assets financial liabilities firm commitments standard unrealized gains losses items fair value option elected reported earnings subsequent reporting date sfas 159 becomes effective company january 1 2008 company currently evaluating effects sfas 159 consolidated financial statements note 4restricted cash investments december 31 2006 company shortterm restricted cash investments 167 million longterm restricted cash 165 million included longterm assets december 31 2005 company shortterm restricted cash investments 537 million longterm restricted cash 03 million included longterm assets amounts primarily collateralize company’s issuances standby commercial letters credit note 5acquisitions sale assets sale assets marvell technology group ltd february 2006 company sold substantially assets selected liabilities semiconductor design business division marvell technology group ltd “marvell” company received 354 million cash net 06 million transaction costs additional 43 million cash paid marvell company august 2007 included cash received 160 million earned company result achieving certain defined milestones company received payment 160 million october 2006 assets sold include assets related prior acquisition advanced communications devices corporation 2001 systemonchip semiconductors connection sale assets company entered supply agreement marvell pursuant supply agreement company agreed purchase chipsets supplied marvell period five years chipsets included certain handset products designed manufactured company recognized gain sale assets 123 million 2006 gain determined based upon total net proceeds less net book value assets sold 29 million value supply agreement 202 million value allocated supply agreement included current longterm liabilities amortized proportion quantities chipsets purchased supply agreement next five years december 31 2006 approximately 17 million amortized cost sales pedestal may 2005 company completed acquisition substantially assets certain liabilities pedestal networks inc “pedestal” pedestal develops designs universal broadband server “ubs” environmentally hardened linepowered remote ipbased digital subscriber line access multiplexer “ip dslam” acquisition intended assist company’s expansion digital subscriber line “dsl” ipbased television “iptv” providing company strong remote broadband solution fully uscertified complements existing dsl iptv optical product families total consideration transaction 30 million approximately 26 million cash paid closing date additional 04 million paid may 2006 acquisition accounted purchase method accounting existing technology acquired included entire pedestal family ip dslam ubs company integrated pedestal product line company’s tripleplay products iptv solutions addition developed product technology company acquired fixed assets inprocess research development “iprd” customer relationships acquisition pedestal one project development related gigabit ethernet product qualified iprd gigabit ethernet project focused supporting majority pedestal’s products completed december 31 2006 assessing pedestal’s iprd project company considered key product characteristics including product’s development stage acquisition date product’s life cycle product’s future prospects company also considered rate technology changes broadband equipment industry’s competitive environment economic outlook local global markets amount purchase price allocated iprd 07 million charged company’s results operations alternative future uses existed acquisition date results operations pedestal integrated “broadband” segment included company’s consolidated statements operations beginning acquisition date may 13 2005 pro forma effects acquisition company’s financial statements significant subsequent may 2005 acquisition pedestal company completed allocation purchase price based part upon independent valuation estimated useful lives customer relationships developed technology intangible assets two years five years respectively following table summarizes final allocation purchase price pedestal giga october 2004 company entered asset purchase agreement giga telecom inc “giga” korean corporation develops designs wireless handsets acquisition intended facilitate company’s expansion cdma handset market company completed acquisition january 2005 closing 130 million cash paid additional 20 million paid escrow account six months released july 2005 total consideration acquisition funded cash hand approximately 190 million including 20 million acquisitionrelated transaction costs 15 million payment made previously applied purchase price earnout 05 million paid subsequently upon completion certain product design milestones following table summarizes allocation purchase price giga based part upon independent valuation excess purchase price fair value identified net assets approximately 154 million allocated goodwill assigned handsets segment goodwill tax deductible goodwill created acquisition results decreased time market design related synergies goodwill written september 2005 result intangible longlived asset impairment additional information regarding intangible longlived assets impairment refer note 10 goodwill intangible assets accordance eitf 041 “accounting preexisting relationships parties business combination” settlement gain 04 million relating preexisting royalty agreement recognized recorded research development expense consolidated statements operations purchased existing technology preexisting royalty agreement fully amortized results operations giga integrated “handsets” segment included company’s consolidated statement operations subsequent acquisition pro forma effects acquisition company’s financial statements significant audiovox communications corporation november 2004 company completed acquisition select assets liabilities audiovox communications corporation “acc” including inventories prepaids payables accrued expenses right hire approximately 250 employees company paid 1708 million cash 2004 additional 28 million cash 2005 incurred professional fees 46 million company acquired acc’s sales service support infrastructure code division multiple access “cdma” handset brand access supplychain channels product marketing expertise key relationships cdma operators north south america goodwill created acquisition resulted decreased timetomarket volume related synergies goodwill written september 2005 result intangible longlived asset impairment see note 10 following table summarizes allocation purchase price acc based part upon independent valuation company acquired 477 million intangible assets principally consisting carrier dealer relationships noncompete agreement amount allocated inprocess research development intangible assets estimated useful lives ranging one ten years follows customer relationships ten years dealer relationships two years supplier relationships two years noncompete agreement four years trade name three years backlog one year results operations acc included company’s consolidated results operations beginning acquisition date november 1 2004 following unaudited pro forma results operations reflect combined results company acc year ended december 31 2004 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods telos technology inc may 2004 company completed acquisition substantially assets certain liabilities telos technology inc subsidiaries “telos” telos provider mobile switching products services voice data communication networks developing rural enterprise emerging wireless markets total consideration acquisition funded cash hand approximately 300 million company paid 290 million cash addition 10 million acquisitionrelated transaction costs existing technology acquired included entire telos product family cdma softswitch technology products supporting servers operations maintenance centers telos product line integrated company’s suite cdma products strengthening company’s existing cdma product portfolio addition developed product technology company acquired fixed assets process research development “iprd” assembled workforce approximately 60 employees customer relationships recorded goodwill created acquisition resulted decreased time market cdma technologies goodwill tax deductible subsequent may 2004 acquisition telos company completed allocation purchase price based part upon independent valuation amount purchase price allocated iprd 14 million charged company’s results operations alternative future uses existed acquisition date company recorded goodwill 64 million connection acquisition goodwill written september 2005 result intangible longlived asset impairment see note 10 results operations telos included company’s consolidated results operations beginning acquisition date may 19 2004 acquisition date telos two projects development qualified iprd objective projects enhance functionality products designed comply cdma2000 technology standard assessing telos iprd projects company considered key product characteristics including product’s development stage acquisition date product’s life cycle product’s future prospects company also considered rate technology changes telecommunications equipment industry’s competitive environment economic outlook local global markets projects development enhancements existing products affect functionality existing products december 31 2005 projects completed following table summarizes allocation purchase price telos based upon independent valuation estimated useful lives customer relationships existing technology intangible assets five years following unaudited pro forma results operations reflect combined results company telos year ended december 31 2004 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods hyundai syscomm inc april 2004 company completed acquisition assets substantially intellectual property certain employees certain contracts related hyundai syscomm inc’s “hsi” cdma infrastructure business markets outside korea subject attainment certain milestones transfer certain knowhow total consideration transaction approximately 123 million excluding transaction costs 18 million approximately 73 million cash paid closing date additional 30 million cash paid one year closing date remaining purchase price comprised 20 million paid company upon completion hsi training company’s manufacturing employees china terms training services agreement included purchase price 20 million payable upon completion certain revenue milestones however revenue milestones met additional payments due agreement conjunction transaction company loaned hsi 32 million effective interest rate 12 per annum used hsi satisfy outstanding debt obligations principal amount loan due april 2005 year ended december 31 2005 company offset hsi’s payment obligations outstanding 30 million purchase price liabilities terms transaction hsi company acquired existing technologies entered noncompete licensing agreements existing technologies acquired base transceiver station base station controller product lines part asset purchase agreement company hsi entered training services agreement whereby hsi employees provide technical training company manufacturing staff china nine month period subsequent acquisition technology technological knowhow enabled company strengthen company’s existing cdma product portfolio development future cdma technology addition acquiring existing technology company entered noncompete licensing agreements hsi noncompete agreement prohibits hsi competing company countries except korea four years consummation date licensing agreement requires hsi pay company 1 revenue royalty usage intellectual property company acquired terms acquisition fifteen years subsequent consummation date subsequent april 2004 acquisition hsi company completed allocation purchase price based part upon independent valuation company recorded goodwill 70 million connection acquisition results operations hsi included company’s consolidated results operations beginning acquisition date april 2004 following table summarizes final allocation purchase price hsi intangible assets estimated useful lives ranging three five years follows existing technology five years noncompete agreement three years intellectual property license agreement three years company encountered difficulties integrating hsi operations acquisition fourth quarter 2004 decision made substantially abandon acquired operations thus entire goodwill intangibles written 2004 writeoffs recorded “selling general administrative” expense statement operations year ended december 31 2004 following unaudited pro forma results operations reflect combined results company hsi year ended december 31 2004 business combination occurred beginning period results purport indicative would occurred acquisition made date results operations may occur future periods note 6inventories december 31 2006 2005 inventories consist following note 7accounts notes receivable company accepts bank notes commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months bank notes included shortterm investments commercial notes receivable available sale 51 million 21 million december 31 2006 2005 respectively company may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes receivable sold year ended december 31 2006 731 million bank notes 130 million commercial notes receivable sold year ended december 31 2005 notes sold included company’s consolidated balance sheets criteria sale treatment established sfas 140 “accounting transfers servicing financial assets extinguishment liabilities” met costs selling notes receivable 07 million year ended december 31 2005 august 2005 company entered committed receivables purchase agreement “agreement” commercial bank whereby company may sell 1000 million eligible accounts receivable defined agreement contains provisions customary transactions nature including certain commitment fees 2006 2005 receivables sold pursuant provisions agreement company recorded commitment fees 05 million 02 million years ended december 31 2006 2005 respectively march 2007 agreement amended restated reflect purchase trade receivables shall sole discretion commercial bank associated commitment fees note 8property plant equipment december 31 2006 2005 property plant equipment consists following accordance sfas 144 “accounting impairment disposal longlived assets” “sfas 144” company periodically evaluates recoverability estimated lives longlived assets including property equipment whenever events changes circumstances indicate carrying amount may recoverable useful life changed tangible assets company determines relative estimated fair value comparison similar assets wherever practical based quoted market prices taking consideration asset type age condition physical location asset company’s intangible assets subject amortization tested recoverability based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values 2005 company determined relative estimated fair value tangible assets comparison similar assets wherever practical based quoted market prices taking consideration asset type age condition physical location asset result analysis company recorded impairment charge 141 million longlived tangible assets related broadband asset group 94 million longlived tangible assets related handset asset group depreciation expense 451 million 669 million 558 million years ended december 31 2006 2005 2004 respectively note 9longterm investments company’s investments follows gemdale 1996 company invested 13 million gemdale co ltd “gemdale” return 11 million nonnegotiable shares gemdale real estate company invests develops properties china primarily shanghai beijing shenzhen wuhan 2004 company received additional 88 million nonnegotiable shares dividends investment accounted cost method july 2006 august 2006 pursuant split share structure reform agreement china company transferred 60 million nonnegotiable gemdale shares holders negotiable gemdale shares exchange converting remaining 138 million nonnegotiable shares negotiable shares receivable additional shares valued 12 million december 31 2006 negotiable gemdale shares traded shanghai stock exchange 138 million negotiable shares subject transfer restriction august 2007 december 31 2006 company 2 ownership interest gemdale investment classified equity securities availableforsale recorded fair value unrealized gain investment related receivable totaling 326 million recorded comprehensive income year ended december 31 2006 company recorded 07 million dividends received income net cellon international september 2001 company invested 20 million cellon international holdings corporation “cellon” made additional investments 30 million cellon april december 2002 cellon designs wireless terminals related technology handset manufacturers private distributors november 2005 company cellon entered agreement company received consideration form preferred stock warrants cellon valued 55 million exchange transfer fixed assets net book value 30 million facilities lease workforce place consisting 156 employees transaction completed may 31 2006 gain sale assets 25 million recorded income net december 31 2006 additional shares obtained purchase transaction company 11 ownership interest cellon fourth quarter 2006 company’s review investment included limited review cellon’s cash position recent financing activities financing needs earningsrevenue outlook operational performance managementownership changes competition based deterioration cellon’s financial condition company determined carrying value investment amount fair value investment decline otherthan temporary december 31 2006 company recorded 135 million otherthantemporary impairment charge investment income net november 2005 company entered development service agreement cellon 50 million prepaid exchange future product development approximately 20 million prepaid amount used 2006 payments design services company may also use 50 million prepayment satisfaction royalties cellon may earn sales company products cellon designs development services agreement also obligates cellon pay company royalty certain technology shared company cellon used products developed sold customers company november 2007 fourth quarter 2006 company recorded operating expense 30 million writeoff prepayment connection company’s assessment financial condition cellon discussed additional information regarding company’s investment cellon see note 23 global asia partners lp global asia partners lp venture capital fund formed make private equity investments private preipo technology telecommunications companies asia june 2002 april 2005 company invested total 26 million fund december 31 2006 company 49 fund’s outstanding partnership units prior april 2005 company commitment invest maximum 50 million result reorganization capital contributions partners reached april 2005 capital contribution 06 million april 2005 final capital contribution made addition agreement allows partnership reinvest 25 million otherwise would available company future distributions company recorded equity losses years ended december 31 2006 2005 equity loss 05 million year ended december 31 2004 additional information regarding company’s investment global asia partners lp see note 23 fiberxon inc september 2002 company invested 20 million fiberxon inc “fiberxon” company develops sells optical modules related systems march 2004 company invested additional 10 million fiberxon investment accounted cost method carrying value evaluated possible impairment based achievement business objectives milestones financial condition prospects company relevant factors additional information regarding company’s investment fiberxon see note 23 immenstar september 2004 company invested 20 million series preferred stock immenstar inc “immenstar” immenstar development stage company designing chip used company’s products investment accounted cost method february 2007 immenstar acquired cortina systems inc exchange company’s investment immenstar company received 4 million shares series preferred stock cortina systems inc 18 million cash march 2007 entitled receive additional 02 million currently held escrow result acquisition company recorded gain investment 28 million income net owns 13 interest cortina systems inc fully diluted basis gct semiconductor october 2004 company invested 30 million gct semiconductor inc investment represents approximately 2 interest gct semiconductor inc designs develops markets integrated circuit products wireless communications industry investment accounted cost method xalted networks may 2005 august 2005 company invested 20 million 10 million respectively xalted networks “xalted” march 2006 company invested additional 03 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings company 11 ownership interest fully diluted basis xalted accounts investment cost method infinera july 2004 company invested 30 million 1339285 shares infinera corporation “infinera” series preferred stock 224 per share investment represents approximately 2 interest infinera develops optical telecommunications systems using photonic integrated circuits investment accounted cost method september 2004 infinera closed series e preferred stock round 060 per share result close proximity series e preferred stock financing rounds decrease share price rounds infinera company entered exchange agreement whereby company exchanged 669643 shares series preferred stock 2500000 shares series e preferred stock exchange company owns total 669643 shares series 2500000 shares series e preferred stock year ended december 31 2004 company recorded loss 11 million reflect otherthantemporary decrease fair value remaining series shares additional information regarding company’s investment infinera see note 23 matsushita joint venture july 2002 company entered joint venture agreement matsushita communication industrial co ltd jointly design develop manufacture sell telecommunication products company 49 ownership interest joint venture company original registered share capital 100 million company contributed 49 million cash october 2002 another 93 million 49 interest 19 million capital call fourth quarter 2004 investment results operations joint venture company accounted using equity method accounting company recorded equity losses 48 million 19 million years ended december 31 2005 2004 respectively december 2005 joint venture board resolved terminate joint venture company recorded loss 29 million reflect otherthantemporary decline value 2006 joint venture dissolved final distribution made april 2006 materially exceed carrying value investment restructuring fund 1 first quarter fiscal 2002 company invested 20 million restructuring fund 1 venture capital investment limited partnership established softbank investment corp affiliate softbank corp softbank america inc entity affiliated softbank corp significant stockholder company fund focuses leveraged buyout investments companies asia undergoing restructuring bankruptcy procedures fund separate management team none company’s employees employed fund company accounted investment equity method accounting 2005 company received 10 million dividends partnership dissolved july 2006 total cash distribution 30 million company 2006 company recorded gain investment 14 million 07 million respectively years ended december 31 2006 2005 company recorded immaterial equity losses year ended december 31 2004 note 10goodwill intangible assets goodwill intangible assets classified goodwill indefinite lives amortized company performs annual impairment test goodwill fourth quarter year company also tests impairment annual tests “triggering” event occurs may effect reducing fair value reporting unit respective carrying values conducting goodwill impairment analysis company calculates impairment charges based twostep test prescribed sfas 142 “goodwill intangible assets” “sfas 142” company uses present value future cash flows respective reporting units determine estimated fair value reporting unit implied fair value goodwill 2005 management held series planning meetings september assess business forecasts reporting units result various factors including reduction rate growth pas subscribers third quarter delay expected granting 3g licenses china japan challenges product quality primarily company’s broadband reporting unit narrowing company’s strategic focus related company’s product offerings greater expected revenue margin decline due continued pricing pressures several company’s key markets company concluded factors combined represented “triggering” event company determined significant adverse changes business outlook could indicate carrying value certain longlived assets groups may recoverable could indicate fair value company’s reporting units may fair value result company performed interim impairment tests goodwill certain longlived tangible intangible assets company performed impairment analysis pursuant sfas 142 september 30 2005 reporting units company compared fair value reporting units carrying value company determined fair value reporting unit using present value comparable company techniques based part upon independent valuation based upon impairment assessment company recorded goodwill impairment charges 1929 million 2005 impairment charges represented excess carrying amount reporting units’ goodwill implied fair value goodwill implied fair value goodwill residual fair value derived deducting fair value reporting unit’s assets liabilities estimated fair value based discounted cash flow model using revenue profit forecasts 2006 company identify instances goodwill impairment summary changes company’s goodwill years ended december 31 2005 2006 business segment follows amount goodwill december 31 2006 unchanged amount reported december 31 2005 entire amount 31 million allocated services operating segment intangible assets accordance sfas 144 “accounting impairment disposal longlived assets” “sfas 144” company periodically evaluates recoverability estimated lives intangible assets subject amortization whenever events changes circumstances indicate carrying amount may recoverable company’s intangible assets subject amortization tested recoverability based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values 2005 company determined fair value technology intangible assets within broadband handset asset groups calculated using discounted future cash flows less carrying value net assets company recorded net asset writeoff 17 million 2006 company record impairment charges related technology intangible assets circumstances events occurred indicated possible impairment december 31 2006 2005 intangible assets consisted following amortization expense 189 million 259 million 156 million years ended december 31 2006 2005 2004 respectively estimated aggregate amortization expense intangibles five years beginning 2007 2011 160 million 127 million 69 million 51 million 51 million respectively 106 million aggregate thereafter significant foreign exchange impact related intangible assets remaining weighted average amortization period class unamortized identifiable intangible assets include following note 11debt following represents outstanding borrowings december 31 2006 2005 december 31 2006 company loans various banks totaling 1025 million interest rates ranging 502 551 per annum bank loans mature 2007 included shortterm debt significant covenants associated loans company credit facilities totaling 6984 million 5719 million remained available borrowing december 31 2006 facilities expire 2007 guarantee facilities renewed company guaranteed debt included consolidated balance sheet company available borrowing facilities 4829 million december 31 2005 march 12 2003 company completed offering 4025 million 7¤8 convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes convertible company’s common stock conversion price 2379 per share subordinated present future senior debt company holders notes may convert notes price company’s common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible approximately 420345 shares common stock expenses associated convertible subordinated notes issuance 117 million recorded longterm assets amortized life notes 2005 company entered agreements exchange total 4988100 shares company’s common stock fair value approximately 376 million approximately 571 million cash outstanding convertible notes aggregate principal amount 1279 million held five note holders exchanges considered early extinguishment debt aggregate fair value common stock cash less carrying value convertible notes accordingly company recorded gain net writeoff unamortized issuance expenses 314 million year ended december 31 2005 extinguishment accordance provisions accounting principles board opinion 26 “early extinguishment debt” concurrent issuance convertible notes company entered convertible bond hedge call option transaction cost 438 million 2005 convertible bond hedge call option amended result aforementioned early extinguishment convertible notes part amendment company received proceeds 14 million recorded additional paidin capital amended convertible bond hedge allows company purchase 115 million shares common stock 2379 per share party agreement written call option allows holder purchase 115 million shares company’s common stock company 32025 per share bond hedge call option transactions may settled company’s option either cash net shares expire march 1 2008 company recorded instruments cost carrying value december 31 2005 equaled original cost adjusted amendments related early extinguishment debt convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders’ equity accordance guidance eitf 0019 “accounting derivative financial instruments indexed potentially settled company’s stock” november 15 2006 company received notice asserting failure timely file quarterly report form 10q period ended september 30 2006 caused default indenture related convertible notes cured within 60 days would cause event default information regarding subsequent solicitations consents holders notes see note 23 entitled “subsequent events” note 12other current liabilities current liabilities december 31 2006 2005 consist following current liabilities primarily consist accrued contract costs relate purchases inventory installation services testing consulting work performed outside vendors company yet received invoices loss contract reserve costs relate estimated loss contract accrued payroll compensation costs relate wages bonuses commissions earned yet paid warranty costs estimated costs equipment replacement repair accrued taxes represent primarily value added sales taxes payable note 13warranty obligations guarantees warranty obligations follows thousands 2005 company recorded special warranty charge equipment sold softbank 2003 2004 since agreement repair parts exceeded company’s normal warranty terms company recorded additional special warranty charges 117 million certain asynchronous digital subscriber line “adsl” products 40 million primarily related netring equipment 149 million gepon equipment products broadband infrastructure segment 2006 company recorded additional warranty charge 56 million consisting 29 million netring equipment 27 million gepon equipment sold softbank based results company’s analysis warranty costs incurred revised estimates remaining liability certain company’s sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related company’s products limitations maximum potential future payments guarantees company accrued amount relation provisions claims made company believes valid enforceable rights intellectual property embedded products note 14provision income taxes united states foreign income loss income taxes minority interest follows years indicated components income tax benefit follows years indicated establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change company’s expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks changes company’s income tax provision valuation deferred tax assets liabilities may affect annual effective income tax rate deferred income taxes arise temporary differences tax basis assets liabilities reported amounts consolidated financial statements company reversed 917 million current deferred tax asset second quarter 2005 relation 2175 million deferred revenue recorded customer advances pertaining several agreements entered japan telecom co ltd 2004 company delivered received final acceptance equipment contemplated agreements 2005 therefore 917 million current deferred tax asset recorded 2004 reversed corresponding increase deferred tax provision summary components net deferred tax assets follows years indicated apb 23 “accounting income taxesspecial areas” deferred income taxes must provided unremitted earnings foreign subsidiaries unless earnings could deemed permanently reinvested outside united states prior 2006 company provided us tax foreign unremitted earnings company intend repatriate earnings 2006 due recent developments business company determined earnings certain subsidiaries permanently reinvested outside united states accordingly company recorded us deferred income tax liability 439 million foreign earnings 2065 million considers permanently reinvested outside united states december 31 2006 company undistributed earnings approximately 695 million investments foreign subsidiaries considered permanently reinvested determination amount deferred taxes earnings practicable since computation would depend number factors cannot known decision repatriate earnings made december 31 2006 us federal net operating loss carryforwards 1027 million expire 2025 2026 december 31 2006 state net operating loss carryforwards 877 million expire varying amounts 2012 2026 management concluded federal state net operating losses meet likely standard contained sfas 109 “accounting income taxes” “sfas 109” therefore placed 411 million valuation allowance related deferred tax assets event tax benefits related valuation allowance realized immaterial amount would credited paidin capital december 31 2006 company also net operating loss carryforwards “nols” china approximately 753 million china net operating loss carryforwards expire varying amounts 2010 2011 management also concluded china net operating losses meet likely standard contained sfas 109 therefore placed 134 million valuation allowance related deferred tax assets december 31 2006 company nols countries us china nols approximately 544 million majority nols expire carried forward indefinitely however management concluded losses meet likely standard contained sfas 109 therefore placed valuation allowance 95 million related deferred tax assets december 31 2006 company us alternative minimum tax credit carryforwards 10 million indefinite life also us research development credit carryforwards 130 million 118 million expire varying amounts 2010 2026 12 million indefinite life company us foreign tax credits 304 million expire varying amounts 2012 2016 management concluded us tax credit carryforwards meet likely standard contained sfas 109 therefore placed 444 million valuation allowance related deferred tax assets december 31 2006 company foreign research development credit carryforwards 22 million expire varying amounts 2013 2016 2005 company impaired significant amount goodwill intangible assets result impairment recorded 596 million deferred tax asset difference book bases tax bases impaired assets 2005 company’s chinese subsidiaries granted tax holidays started phase 1999 income tax exemption two company’s subsidiaries ended december 31 2004 net impact tax holidays decrease tax expense approximately 162 million 380 million years ended december 31 2004 2003 respectively difference company’s tax expense benefit tax based upon federal statutory rate reconciled 2006 tax unremitted earnings 439 million attributable recording us deferred income taxes foreign earnings 2065 million company considers permanently reinvested outside united states establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts september 30 2005 company believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets china united states result review undertaken september 30 2005 company concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment 2006 change deferred tax valuation allowance 139 million primarily attributable tax expense related continuing provide full valuation allowance net deferred tax assets december 31 2006 united states china 2005 change deferred tax valuation allowance 2373 million primarily attributable tax expense related providing full valuation allowance company’s net deferred tax assets december 31 2005 united states china 119 million increase tax expense due revaluation deferred tax assets recorded 2005 statutory rate changes certain company’s subsidiaries china 2006 company recorded 290 million income tax benefit related settlement tax audit china 2003 2005 tax years utstarcom telecom co ltd “huts” hangzhou utstarcom telecom co ltd “hstc” two subsidiaries china acceptance tax holiday hstc company’s income tax returns 2003 2005 currently audit internal revenue service company also audit taxing authorities china recurring basis company provides tax reserves federal state international exposures relating audit results tax planning initiatives compliance responsibilities development reserves requires judgments tax issues potential outcomes timing critical estimate although outcome tax audits uncertain management’s opinion adequate provisions income taxes made result reviews actual outcomes differ materially estimates could material impact company’s results operations march 16 2007 china’s top legislature national people’s congress passed china corporate income tax law “cit law” cit law effective january 1 2008 cit law china’s dual tax system domestic enterprises foreign investment enterprises “fies” would effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises prior change tax law certain subsidiaries joint ventures located china enjoyed tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable utstarcom chongqing telecom co ltd “cuts” utstarcom telecom co ltd “huts” hangzhou utstarcom telecom co ltd “hstc” utstarcom china co ltd “utsc” company’s active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law targets certain industries reduced 15 tax rate certain qualified high technology enterprises fies established promulgation new law currently enjoy lower tax rates increase tax rates would gradually phased five years significant regulations regarding interpretation implementation new tax law still pending potential risk company’s subsidiaries may qualify reduced 15 tax rate therefore new law may adverse impact future tax expense china note 15common stock incentive plans stock option plans 2006 equity incentive plan 2006 equity incentive plan “2006 plan” implemented july 21 2006 adopted board directors june 6 2006 approved company’s stockholders july 21 2006 plan replaces 1997 plan 2001 plan 2003 plan collectively “prior plans” awards granted pursuant prior plans 2006 plan provides grant following types incentive awards stock options ii stock appreciation rights iii restricted stock iv restricted stock units v performance shares performance units vi stock cash awards “award” collectively “awards” eligible awards 2006 plan include employees directors consultants provide services company affiliates maximum aggregate number shares may awarded sold 2006 plan 4500000 shares plus shares reserved remain unissued prior plans july 21 2006 ii shares subject stock options similar awards granted prior plans expire become exercisable without exercised full shares issued pursuant awards granted prior plans forfeited repurchased company december 31 2006 number shares transferred prior plans 2006 plan totaled 6800545 december 31 2006 options purchase 62650 shares common stock outstanding 2006 plan board directors compensation committee board “compensation committee”administers 2006 plan “administrator” subject terms 2006 plan administrator sole discretion select employees consultants directors receive awards determine terms conditions awards interpret provisions 2006 plan outstanding awards options granted 2006 plan generally vest become exercisable four years awards granted 2006 plan generally transferable rights respect award granted participant generally may exercised participant’s lifetime participant provided however administrator’s approval participant may transfer award participant’s spouse former spouse pursuant courtapproved domestic relations order relates provision child support alimony payments marital property rights ii transfer award gift benefit participant’s immediate family exercise price stock options stock appreciation rights granted 2006 plan must least equal 100 fair market value common stock date grant least 110 fair market value incentive stock option “iso” granted stockholder greater 10 voting power company’s stock maximum term stock option granted participant must exceed seven years date grant five years iso granted stockholder greater 10 voting power common stock administrator determine terms conditions awards granted plan event “change control” company outstanding award assumed equivalent option right substituted successor corporation parent subsidiary successor corporation event successor corporation parent subsidiary successor corporation refuses assume substitute award participant fully vest right exercise outstanding options stock appreciation rights including shares awards would otherwise vested exercisable restrictions restricted stock lapse respect restricted stock units performance shares performance units performance goals vesting criteria deemed achieved target levels terms conditions met addition option stock appreciation right assumed substituted event change control administrator notify participant writing electronically option stock appreciation right fully vested exercisable period time determined administrator sole discretion option stock appreciation right terminate upon expiration period prior plansthe 1997 stock plan 2001 director option plan 2003 nonstatutory stock option plan 1997 stock plan prior implementation 2006 plan july 21 2006 officers employees consultants company affiliates eligible receive options purchase shares common stock purchase rights 1997 stock plan “1997 plan” january 31 1997 board directors adopted company’s stockholders approved 1997 plan december 1999 board directors amended 1997 plan company’s stockholders approved february 2000 1997 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2006 options purchase 18290317 shares common stock outstanding 1997 plan options granted 1997 plan prior july 21 2006 either isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options “nsos” qualify compensation committee oversaw selection eligible persons option grants determined grant date amounts exercise prices vesting periods relevant terms options including whether options would isos nsos exercise price isos granted 1997 plan could less 100 fair market value common stock grant date least 110 fair market value iso granted stockholder greater 10 voting power company’s stock exercise price nsos could determined compensation committee discretion options granted 1997 plan generally transferable life optionee 1997 plan options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date five years isos granted stockholder greater 10 voting power common stock options generally terminate 12 months death permanent disability optionee ii months termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos prior implementation 2006 plan company could also grant stock purchase rights eligible participants 1997 plan 1997 plan shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determined otherwise agreement granted company right repurchase restricted stock upon voluntary involuntary termination employee reason including death disability prior vesting purchase price repurchased shares original price paid could paid cancellation indebtedness owed company’s repurchase right lapsed rate determined compensation committee event company merged another corporation substantially company’s assets sold outstanding option stock purchase rights assumed equivalent option stock purchase right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option stock purchase right option right automatically vest become exercisable full period least fifteen days time option right terminate 2001 director option plan prior implementation 2006 plan july 21 2006 directors employees company “outside directors” eligible receive options purchase shares common stock 2001 director option plan “2001 plan” 2001 plan adopted board directors march 2 2001 approved company’s stockholders may 2001 july 2001 board directors amended 2001 plan 2001 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2006 options purchase 360000 shares common stock outstanding 2001 plan compensation committee administrator 2001 plan terms 2001 plan outside director automatically granted option purchase eighty thousand shares common stock “first option” date person first became outside director “anniversary date” director employee company ceased employment company become outside director could receive option purchase twenty thousand shares common stock “subsequent option” company’s first annual meeting stockholders following conversion outside director subsequent annual stockholder meeting thereafter provided serving outside director date time outside director’s first option fully vested outside director automatically granted subsequent option anniversary date year provided outside director terms 2001 plan exercise price option granted equaled market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subject outside director continuing serve director dates subsequent option grants vest 100 shares subject subsequent option first anniversary date grant 2003 nonstatutory stock option plan prior implementation 2006 plan july 21 2006 directors officers employees consultants company affiliates eligible receive options purchase shares company’s common stock 2003 nonstatutory stock option plan “2003 plan” 2003 plan adopted board directors april 15 2003 nonstatutory stock options would qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended could granted 2003 plan 2003 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2006 options purchase 909310 shares common stock outstanding 2003 plan 2003 plan administered compensation committee compensation committee oversaw selection eligible persons options would granted determined number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii three months termination option holder’s service reason disability due option holder’s death option however may exercised ten years grant date event company’s “change control” 2003 plan provides outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option automatically vest become exercisable full period determined compensation committee time option terminate issanni communications inc incentive program issanni plan established issuance total 39876 shares utstarcom’s common stock specified former employees issanni communications inc “issanni” became utstarcom’s employees connection utstarcom’s acquisition issanni plan administered board directors compensation committee participant issanni plan eligible earn vest designated number shares subject award shares made participant plan based upon attainment one six milestones related amount revenue generated issanni products 2002 2003 subject participant’s continued employment issanni company one subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares fifth anniversary acquisition issanni employee continues employed issanni company subsidiaries date regardless whether milestone attained shares subject award event become issuable whether milestones achieved whether fiveyear vesting schedule elapsed upon sale discontinuation company utstarcom international products inc ii sale substantially technology acquired utstarcom international products inc connection acquisition issanni iii employment termination certain issanni principals prior date participant’s shares earned participant’s service issanni company one subsidiaries terminated voluntarily cause company may exercise repurchase option respect participant’s unearned shares ii voluntarily cause death disability participant entitled receive shares participant would otherwise earned respect milestones achieved within 24 months participant’s termination iii result death disability participant estate entitled receive unearned portion shares respect milestones advanced communication devices corporation incentive program february 2006 company sold substantially assets selected liabilities semiconductor design operations including assets related prior acquisition acd result participants’ service company voluntarily terminated shares subject award yet earned distributed cancelled stock award stock option activity summary activity plans follows company granted restricted stock awards employees 2006 1997 plans awards generally vest period one four years date grant restricted stock awards voting rights common stock shares underlying restricted stock awards considered issued outstanding company expenses cost restricted stock awards determined fair market value shares date grant ratably period restrictions lapse grant restricted stock awards deducted shares available grant company’s stock option plan nonvested restricted stock december 31 2006 changes year ended december 31 2006 summarized year ended december 31 2005 company granted 150000 shares restricted stock weighted average grant date fair value 815 nonvested december 31 2005 shares restricted stock subject company’s right repurchase lapse period one four years repurchased shares recorded treasury stock average cost basis year ended december 31 2006 174844 shares restricted stock subject repurchase right company purchased employees directors total intrinsic value restricted stock vested year ended december 31 2006 06 million company also granted rights purchase 301133 shares restricted stock executive officers company allowed lapse unexercised march 2006 place february 2007 compensation committee board directors company determined certain executive officers based level performance company’s 2006 fiscal year eligible receive 203000 shares common stock aggregate committee’s determination subject compliance applicable law committee approve issuance performance stock later date performance stock included company’s computation stockbased compensation expense year ended december 31 2006 connection october 2002 acquisition shanghai yi yun telecom technology co ltd “shanghai yi yun” company issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one company’s subsidiaries shares restricted stock cliff vests five years 2007 accelerated vesting upon achievement specified milestones company treated 514290 shares restricted stock deferred compensation 2003 226302 shares vested upon achievement specified milestones december 31 2006 5110 shares forfeited resulting 282878 remaining shares outstanding vesting occurred december 31 2006 information regarding stock options outstanding december 31 2006 summarized intrinsic value represents total pretax intrinsic value calculated difference market value reported nasdaq december 31 2006 875 exercise price inthemoney shares years ended december 31 2006 2005 2004 total pretax intrinsic value options exercised 05 million 08 million 186 million respectively determined date exercise weighted average remaining contractual life options exercisable 60 years weighted average remaining contractual life options expected vest 89 years december 31 2006 2000 employee stock purchase plan february 2000 company’s stockholders approved 2000 employee stock purchase plan “espp” purchase plan intended qualify employee stock purchase plan section 423 internal revenue code company reserved 1914934 shares common stock sale stock purchase plan december 31 2006 number shares reserved sale plan increased annually first day fiscal year beginning 2001 amount equal 20 million shares 2 outstanding shares company’s common stock date lesser amount determined board directors stock purchase plan administered board committee appointed board stock purchase plan implemented concurrent offering periods duration may exceed 24 months offering period may contain four interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 ended last trading day april 30 2002 2006 purchases made scheduled purchase dates may november company suspended participation espp prior scheduled purchase dates result company current sec filings form 10k year ended december 31 2005 quarterly report form 10q quarter ended september 30 2006 respectively december 31 2006 offering periods commenced november 1 2005 june 29 2006 currently suspension employees remain participants respective offering periods resume participation suspension lifted employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase company’s common stock payroll deductions may exceed 15 employee’s total compensation stock may purchased plan price equal 85 fair market value company’s stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value company’s shares date purchase participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant’s designated beneficiary case death certificate issued full shares participant’s account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term ten years stockbased compensation sfas 123r requires use optionpricing models developed use valuing employee stock options company used blackscholes option pricing model “blackscholes model” method valuation sharebased awards granted prior december 31 2005 continued use blackscholes model subsequent sharebased payment awards blackscholes model developed use estimating fair value shortlived exchange traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility term awards actual projected employee stock option exercise behaviors riskfree interest rate expected dividends company uses historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options common stock available determine implied volatility company estimates expected term options granted based upon company’s historical exercise cancellation data vested options addition separate groups employees similar exercise behavior considered separately expected term employee stock purchase plan shares average remaining purchase periods offering period company bases risk free interest rate used option valuation model us treasury zerocoupon issues remaining terms similar expected term options company anticipate paying cash dividends foreseeable future therefore uses expected dividend yield zero option valuation model company required estimate forfeitures time grant revise estimates subsequent periods actual forfeitures differ estimates company uses historical data estimate prevesting option forfeitures record stockbased compensation expense awards expected vest prior january 1 2006 stockbased payment awards amortized accelerated basis treating vested tranche separate stock option grant graded vesting upon adoption sfas 123r january 1 2006 stockbased payment awards amortized straightline basis requisite service periods awards generally vesting periods fair value share based payment awards estimated using blackscholes option pricing model following assumptions december 31 2004 subcommittee company’s board directors “board” approved immediate full acceleration vesting stock options outstanding company’s 1997 stock option plan per share exercise price greater 2215 “acceleration” company amended relevant option agreements reflect acceleration company adopted acceleration anticipation impact sfas 123r result acceleration options purchase approximately 64 million shares company’s common stock became immediately exercisable december 31 2004 acceleration effect decreasing 2004 pro forma net income approximately 33 million acceleration impact financial statements year ended december 31 2004 estimated aggregate sfas 123r expense eliminated result acceleration vesting options approximately 35 million assuming material change employee retention behavior december 31 2006 299 million total unrecognized compensation cost measured related nonvested stock options restricted stock expected recognized weightedaverage period 26 years weighted average fair value options granted stock option plans years ended december 31 2006 2005 2004 307 425 1052 per share respectively total stockbased compensation cost recognized year ended december 31 2006 follows stockbased compensation expense year ended december 31 2006 reduced 24 million related options forfeited connection disposal company’s semiconductor design operations discussed note 5 result adopting sfas 123r january 1 2006 company’s income taxes net income year ended december 31 2006 approximately 103 million lower continued account stock incentive compensation intrinsic value method company continued use intrinsic value method effect basic diluted earnings per share would increase approximately 009 per share note 16401k plan january 1 2000 company adopted utstarcom inc 401k savings plan “401k plan” cashordeferred arrangement covers company’s eligible employees attained age 21 401k plan intended qualify sections 401a 401m 401k internal revenue code 1986 amended “code” 401k plan trust intended qualify section 501a code contributions 401k plan eligible employees company investment earnings thereon taxable employees withdrawn contributions company may make expected deductible company’s eligible employees may elect reduce current eligible compensation one percent 1 one hundred percent 100 subject maximum statutorily prescribed annual limit 15000 participants age 50 20000 participants age 50 year ended december 31 2006 salary reductions contributed behalf 401k plan 401k plan permits require company make matching contributions behalf eligible employees make salary reduction contributions 401k plan commencing plan year beginning january 1 2001 company elected begin making matching contributions behalf qualified employees participate 401k plan company contribute 050 dollar contributed qualified employees 401k plan maximum 5500 2006 2005 plan years company’s matching contributions subject fiveyear vesting schedule based upon longevity employee service company matching contributions 27 million 32 million 27 million 2006 2005 2004 respectively note 17commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2013 addition company entered noncancelable capital leases expiration dates 2011 minimum future lease payments leases december 31 2006 follows rent expense years ended december 31 2006 2005 2004 213 million 225 million 173 million respectively contractual obligations commercial commitments december 31 2006 company’s obligations contractual obligations commercial commitments follows letters credit company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire without drawn beneficiary thereof finally company may issue commercial letters credit support purchase commitments longterm purchase obligations december 31 2006 longterm purchase obligations include noncancelable agreements purchase components primarily connection last time buy agreements december 31 2006 total commitments agreements approximately 38 million additionally connection sale assets marvell company agreed purchase marvell certain chipsets included company’s pas handsets 2011 chipsets included certain handset products designed manufactured company investment commitments december 31 2006 company invested total 26 million global asia partners lp fund formed make private equity investments private preipo technology telecommunications companies asia company commitment invest maximum 50 million result reorganization capital contributions partners reached april 2005 company’s capital contribution 06 million april 2005 final capital contribution made addition agreement allows partnership reinvest 25 million otherwise would available us future distributions intellectual property certain sales contracts include provisions customers would indemnified us event among things third party claim customer intellectual property rights infringement related products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products litigation securities class action litigation beginning october 2004 several shareholder class actions alleging federal securities violations filed company various officers directors company actions consolidated united states district court northern district california caption utstarcom inc securities litigation master file c044908jwpvt lead plaintiffs case filed first amended consolidated complaint july 26 2005 first amended complaint alleged violations securities exchange act 1934 brought behalf putative class shareholders purchased stock april 16 2003 september 20 2004 april 13 2006 lead plaintiffs filed second amended complaint adding new allegations extending end class period october 6 2005 addition company defendants plaintiffs also suing softbank plaintiffs’ complaint seeks recovery damages unspecified amount june 2 2006 company individual defendants filed motion dismiss second amended complaint march 21 2007 court granted defendants’ motion dismissed plaintiffs’ second amended complaint court granted plaintiffs leave file third amended complaint plaintiffs filed may 25 2007 july 13 2007 company individual defendants filed motion dismiss motion strike third amended complaint september 4 2007 second shareholder class action complaint captioned peter rudolph v utstarcom et al case c074578 si filed united states district court northern district california company’s current former directors officers complaint alleges violations securities exchange act 1934 undisclosed improper accounting practices concerning company’s historical equity award grants plaintiff seeks unspecified damages behalf purported class purchasers company’s common stock july 24 2002 september 4 2007 due preliminary status lawsuits uncertainties related litigation company unable evaluate likelihood either favorable unfavorable outcome accordingly company unable time estimate effects complaints company’s financial position results operations cash flows governmental investigations company received notice formal inquiry staff securities exchange commission “sec” certain aspects company’s financial disclosures prior reporting periods certain issues addition december 2005 us embassy mongolia informed company forwarded department justice “doj” allegations agent company’s mongolia joint venture offered payments mongolian government official possible violation foreign corrupt practices act “fcpa” company audit committee authorized independent investigation possible violations fcpa company contact doj sec regarding investigation identified possible fcpa violations mongolia southeast asia india china well possible violations us immigration laws doj requested company voluntarily produce documents related investigation sec subpoenaed company documents company executed tolling agreements extending statute limitations fcpa issues investigation sec doj immigration issues investigation doj time company cannot predict inquiry completed outcome inquiry shareholder litigation november 17 2006 shareholder derivative complaint captioned ernesto espinoza v ying wu et al case rg06298775 filed certain company’s current former officers directors superior court county alameda california complaint alleges individual defendants among things breached duties unjustly enriched violated california corporations code connection timing stock option grants complaint names company nominal defendant seeks unspecified monetary damages individual defendants various forms injunctive relief february 2 2007 company individual defendants filed demurrers complaint april 11 2007 court sustained individual defendants’ demurrer overruled company’s demurrer ordered plaintiff file amended complaint ordered company answer original complaint plaintiff filed amended complaint company filed answer amended complaint august 21 2007 individual defendants filed demurrers amended complaint court sustained individual defendants’ demurrers ordered plaintiff file second amended complaint due preliminary status complaint uncertainties related litigation company unable evaluate likelihood either favorable unfavorable outcome accordingly company unable time estimate effects complaint company’s financial position results operations cash flows ipo allocation october 31 2001 complaint filed united states district court southern district new york company’s directors officers various underwriters company’s initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offering securities litigation 21 mc 92 pretrial purposes april 2002 consolidated amended complaint filed matter company captioned utstarcom initial public offering securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers company’s common stock march 2 2000 december 6 2000 company’s directors officers dismissed without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss brought defendants including company order dismissed claims company except claim brought section 11 securities act 1933 alleges registration statement filed accordance ipo misleading june 2004 stipulation settlement release claims issuer defendants including company submitted court approval terms settlement approved would dismissed released claims participating defendants including company august 2005 court preliminarily approved settlement december 2006 court appeals second circuit reversed court’s october 2004 order certifying class six test cases selected underwriter defendants plaintiffs coordinated proceedings company’s case one test cases class certification condition settlement unlikely settlement would receive final court approval june 25 2007 court entered order terminating proposed settlement based stipulation among parties settlement plaintiffs filed amended master allegations amended complaints six test cases unclear whether revised future settlement litigation proceeds company believes company meritorious defenses intend defend action vigorously total amount loss associated litigation determinable time therefore company unable currently estimate loss associated litigation passave litigation november 2005 company filed suit superior court california county santa clara passave inc “passave” breaches contract warranties connection semiconductor device sold passave ltd passave’s wholly­owned subsidiary company’s complaint alleges passave device known pas5001m3 chip exhibited certain operational malfunctions within fibertothehome product line thereby caused damage company parties entered settlement agreement dated august 7 2007 since dismissed claims prejudice utstarcom inc v starent patent infringement litigations company brought suit starent networks corporation “starent” patent infringement us district court northern district california complaint filed march 22 2004 later amended action company asserted starent infringed company’s patent u reg 6628671 manufacture use offer sale starent’s st16 intelligent mobile gateway company sought damages injunctive relief starent filed answer amended complaint counterclaims denying allegations seeking declaration patentinsuit infringed invalid unenforceable motion preliminary injunction making using selling infringing products methods brought court denied june 17 2005 claims construction hearing order september 20 2005 starent filed motion summary judgment noninfringement company filed motion summary judgment starent estopped asserting invalidity unenforceability december 6 2005 court granted starent’s motion summary judgment february 2 2006 court entered judgment favor starent dismissed case march 2 2006 company filed appeal federal circuit april 6 2007 reviewing parties’ briefs hearing oral argument april 2 2007 federal circuit without written opinion affirmed district court’s judgment dismissal case although federal circuit ruled company decision material adverse effect business financial condition results operations february 16 2005 company filed second suit starent patent infringement us district court northern district california complaint company asserts starent infringes utstarcom patent us reg 6829473 “the ‘473 patent” starent’s development testing software upgrade customer’s installed st16 intelligent mobile gateways company seeks declaratory injunctive relief starent subsequently filed answer counterclaims denying company’s allegations seeking declaration patentinsuit infringed invalid unenforceable june 16 2005 company filed motion strike starent’s affirmative defense dismiss starent’s counterclaim alleging inequitable conduct july 19 2005 parties stipulated starent would file amended answer counterclaim july 27 2005 company would withdraw company’s motion strike august 10 2005 company responded starent’s amended counterclaim filed july 27 2005 early december 2006 company filed reissue application ‘473 patent united states patent trademark office starent also filed reexamination ‘473 patent reexamination reissue currently copending litigation still preliminary stage outcome cannot predicted although company believes litigation merit nonetheless company believes adverse judgment starent’s counterclaims material adverse effect company’s business financial condition results operations may 8 2007 company filed third suit starent sixteen individual defendants former employees 3com’s commworks division company acquired certain assets may 2003 northern district illinois causes action include claims patent infringement misappropriation trade secrets intentional interference business relations prospective economic advantage declarations ownership certain patent rights complaint company asserts starent infringes utstarcom patents u reg nos 7173905 6978128 6963582 6975900 6684256 manufacture use offer sale starent’s st16 intelligent mobile gateway st40 multimedia code platform individual defendants starent misappropriated valuable company trade secrets improperly taking using company’s confidential proprietary information benefit starent individual defendants starent interfered company’s business relations prospective economic advantage using misappropriated information obtain enhance sales starent’s products several starent’s patent applications one issued patent based information obtained former employees company commworks basis belong utstarcom company seeks compensatory damages punitive damages injunctive relief court denied defendants motion dismiss misappropriation trade secrets claims august 30 2007 starent answered company’s complaint denying company’s allegations asserting number affirmative defenses counterclaims including noninfringement subject patents alleged tortious interference prospective economic advantage company filed motion dismiss counterclaims court ordered appointment special master handle discovery beginning company believes adverse judgment starent’s counterclaims material adverse effect company’s business financial condition results operations telemetrix inc arbitration october 19 2006 telemetrix inc “telemetrix” filed formal request arbitration company world intellectual property organization “wipo” geneva switzerland request arbitration sought unspecified damages arising contract telemetrix telos technology inc dated october 22 2003 company assumed telos’ rights obligations contract pursuant company’s purchase telos’ assets may 19 2004 telemetrix alleged nine causes action including breach contract fraud negligent misrepresentation interference contractual relations interference prospective economic advantage december 2006 company filed formal response request arbitration denying material factual allegations asserted telemetrix arbitrator selected parties august 2 2007 arbitrator granted pleading motion favor company due telemetrix’s failure allege sufficient facts support majority causes action august 17 2007 telemetrix filed amended statement claim alleging six causes action including breach contract fraud interference contractual relations interference prospective economic advantage previous hearing date december 1113 vacated hearing date rescheduled discovery begun telos technology inc litigation november 22 2005 plaintiffs telos technology inc telos technology canada inc telos technology bermuda ltd telos engineering limited collectively “telos plaintiffs” filed complaint company superior court california county santa clara complaint alleges five causes action including breach contract breach implied covenant good faith fair dealing fraudulent inducement intentional misrepresentation negligent misrepresentation arise asset purchase agreement parties dated april 21 2004 telos plaintiffs assert company breached express implied terms asset purchase agreement made representations telos plaintiffs negotiations never intended fulfill telos plaintiffs sought least 19 million damages unspecified punitive damages attorneys’ fees parties executed settlement agreement amount 45 million august 20 2007 case dismissed september 26 2007 prejudice litigation company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty company believes final outcome matters material adverse impact company’s financial position results operations cash flows note 18operating risks financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts notes receivable company places temporary cash shortterm investments several financial institutions approximately 5237 million 5238 million company’s cash shortterm investments deposit foreign accounts december 31 2006 2005 respectively company invests excess cash highly liquid investments original maturities twelve months less certificates deposit government sponsored entities notes commercial paper floating rate corporate bonds fixed income corporate bonds money market funds company believes limited exposure risk concentration credit risk major customers chinese carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier company groups china customers together province treats province one customer since level purchasing decisions made december 31 2006 jiangsu province accounts receivable balance approximately 11 total accounts receivable company december 31 2005 softbank balance approximately 16 company total balance accounts receivable december 31 2004 hebei province account receivable balance approximately 15 company total accounts receivable balance following customers accounted 10 company’s net revenues approximately 23 22 72 company’s net sales 2006 2005 2004 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 1704 million 2688 million respectively december 31 2006 2005 company extends credit customers china generally without requiring collateral global sales outside china company may require letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 32 30 79 company’s sales year ended december 31 2006 2005 2004 respectively made china accordingly political economic legal environment well general state china’s economy may influence company’s business financial condition results operations company’s operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange company’s results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes china’s telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation approximately 5 17 6 company’s sales year ended december 31 2006 2005 2004 respectively made japan accordingly political economic legal environment general state japan’s economy may influence company’s business financial condition results operations note 19segment reporting inception 2003 company managed business single reportable segment 2004 company continued expand focus markets operations outside china effective fourth quarter 2004 determined company’s chief operating decision makers accordance sfas 131 “disclosures segments enterprise related information” evaluating performance making operating decisions allocating resources based two operating segments china ii regions referred international “international” november 1 2004 company acquired selected assets wireless handset division audiovox corporation acquired business integrated company separate distinct operating division referred personal communications division “pcd” company determined evaluate performance allocate resources division considered third operating segment result december 31 2004 company organized principally based geographical market locations three operating segments china ii international iii pcd segment consisted one reporting unit effective first quarter 2005 company elected reorganize business based principally upon product family realigned business five operating units broadband infrastructure ii wireless infrastructure iii personal communications division “pcd” iv handsets v services company announced effective july 1 2006 newly created operating unit network solutions would begin offering products services combination broadband infrastructure wireless infrastructure reporting segments reporting segment operating unit responsible managing performance company currently evaluates operating performance allocates resources reporting segments based segment gross profit cost sales direct expenses relation production assigned reporting segments accounting policies used measuring segment assets operating performance used corporate consistently applied across segments summarized company’s segment sales gross profit years ended december 31 2006 2005 2004 based current reporting segment structure assets segment follows sales attributed geographical area based upon location customer sales data geographical areas follows longlived assets consisting property plant equipment geographical area follows note 20transactions related parties certain investees softbank company recognized revenue 1308 million 4753 million 1437 million years ended december 31 2006 2005 2004 respectively respect sales telecommunications equipment affiliates softbank corp “softbank” significant stockholder company softbank offers asynchronous digital subscriber line “adsl” coverage throughout japan marketed name “yahoo bb” 2006 company determined certain sales third party resellers substance sales softbank therefore company included amounts related party sales prior year amounts reclassified conform current period presentation company supports softbank’s fibertothehome service sales carrier class gigabit ethernet passive optical network “gepon” product well multiservice optical transport product “netringô” addition company supports softbank’s new internet protocol television “iptv” sales rollingstreamô product included revenue year ended december 31 2006 fee 312 million charged cancellation orders broadband products 100 million charged cancellation orders wireless products included accounts receivable december 31 2006 december 31 2005 299 million 834 million respectively related transactions 2006 2005 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period 115 million 196 million included long term deferred revenue respect agreements december 31 2006 2005 respectively additionally 116 million 80 million included current deferred revenue december 31 2006 2005 respectively december 31 2005 54 million included customer advances related softbank agreements august 2004 company entered several agreements japan telecom co ltd “jt” wholly owned subsidiary softbank agreements relate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt company determined service activities revenue recorded net expected promotional spending company provided activities past could estimate fair value services company determined guidance sab 104 revenue related agreements could recognized goods services delivered company delivered received final acceptance equipment contemplated agreements quarter ended march 31 2005 promotional services discussed involved contracting third party promotional vendors turn facilitated marketing subscriber recruitment jt fibertothehome program fourth quarter 2004 company determined would end involvement jt promotional program completion contract discussed accordingly late fourth quarter 2004 first quarter 2005 company either cancelled assigned another party third party contracts promotional vendors related jt contract termination assignment third party promotional agreements well effective satisfaction company’s obligations jt agreements satisfied revenue recognition criteria agreements net value promotional services value equipment delivered totaled 2048 million reported quarter ended march 31 2005 company also entered agreement jt third quarter 2004 supply chassis equipment shipped agreement considered linked ian8000 sale noted also deferred completion abovementioned promotional activities revenue recognition criteria related sale ian 8000 equipment satisfied first quarter 2005 revenue related chassis sale 665 million reported quarter ended march 31 2005 year ended december 31 2006 2005 sales softbank included 67 million 2801 million respectively regards sales telecommunications equipment service sold jt none 2004 company invested restructuring fund no1 venture capital investment limited partnership established softbank partnership dissolved july 2006 total cash distribution 30 million company 2006 company recorded gain investment 14 million 07 million respectively year ended december 31 2006 2005 company recorded immaterial equity loss year ended december 31 2004 july 17 2003 company entered mezzanine loan agreement bb modem rental plc “bb modem” affiliate softbank corp terms agreement company loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements company’s loan subordinated certain senior lenders bb modem repayments payable company 42month period january 31 2007 substantial portion principal amount loan repaid last 16 months period year ended 2006 2005 2004 company recorded 06 million 13 million 13 million respectively interest income respect loan receivable december 31 2006 approximately 10 million included prepaids current assets december 31 2005 loan balance approximately 90 million included longterm assets note receivable paid full january 2007 december 31 2006 softbank beneficially owned approximately 12 company’s outstanding stock acoustek int’l corp 2005 2006 company received consulting services acoustek int’l corp “acoustek” employed minnie huang spouse william huang company’s former senior vice president chief technology officer mr haung’s employment company terminated december 31 2006 company paid 01 million years 2006 2005 consulting services provided acoustek audiovox one company’s officers also serves director audiovox corporation “audiovox” year ended 2006 2005 company paid approximately 14 million 07 million respectively services audiovox cellon september 2001 company invested 20 million cellon international holdings corporation “cellon” made additional investments 30 million april december 2002 cellon designs wireless terminals related technology handset manufacturers private distributors november 2005 company cellon entered agreement company received consideration form preferred stock warrants cellon valued 55 million exchange transfer fixed assets net book value 30 million facilities lease workforce place consisting 156 employees transaction completed may 31 2006 gain sale assets 25 million recorded income december 31 2006 additional shares obtained purchase transaction company 11 ownership interest cellon fourth quarter 2006 company’s review investment included limited review cellon’s cash position recent financing activities financing needs earningsrevenue outlook operational performance managementownership changes competition based deterioration cellon’s financial condition company determined carrying value investment amount fair value investment decline otherthan temporary december 31 2006 company recorded 135 million otherthantemporary impairment charge investment income net november 2005 company entered development service agreement cellon 50 million prepaid exchange future product development approximately 20 million prepaid amount used year ended december 31 2006 payments design services company may also use prepayment satisfaction royalties cellon may earn sales company products cellon designs development services agreement also obligates cellon pay company royalty certain technology shared company cellon used products developed sold customers company november 2007 2006 royalty earned company related product developed sold customers company fourth quarter 2006 company recorded operating expense 30 million writeoff prepayment connection company’s assessment financial condition cellon discussed additional information regarding company’s investment cellon see note 23 fiberxon company outstanding purchase commitment fiberxon company 7 ownership interest purchase component parts optical networking products addition company provided letter credit 50 million purchase raw materials manufacture component parts commitment expired 2005 commitment arrangement 2006 purchases fiberxon totaled 26 million 97 million 151 million years ended december 31 2006 2005 2004 respectively company 04 million 03 million accounts payable fiberxon december 31 2006 2005 respectively additional information regarding company’s investment fiberxon see note 23 gct semiconductor company outstanding purchase commitment gct semiconductor inc “gct” company 2 ownership interest purchase component parts purchases gct totaled 63 million 19 million years ended december 31 2006 2005 respectively company 11 million accounts payable gct december 31 2006 2005 global asia partners lp global asia partners lp venture capital fund formed make private equity investments private preipo technology telecommunications companies asia general partner fund also sales agent company third quarter 2006 june 2002 april 2005 company invested total 26 million fund december 31 2006 company owned 49 fund’s outstanding partnership units company commitment invest maximum 50 million result reorganization capital contributions partners reached april 2005 company’s capital contribution 06 million april 2005 final capital contribution made addition agreement allows partnership reinvest 25 million otherwise would available us future distributions additional information regarding company’s investment global asia partners lp see note 23 matsushita joint venture july 2002 company entered joint venture agreement matsushita communication industrial co ltd jointly design develop manufacture sell telecommunication products company 49 ownership interest joint venture company performed engineering services joint venture approximately 28 million recognized revenue 2005 december 31 2005 company receivable 01 million december 2005 partners agreed dissolve joint venture dissolution completed 2006 mdc holding ltd company outstanding accounts receivable balance mdc holding inc “mdc” related pas system purchase 13 million december 31 2006 accounts receivable balance december 31 2005 certain employees company shareholders mdc december 31 2006 mdc business providing valueadded services short message voicemail ringtone services pas telecom networks org inc company 49 ownership global asia partners lp turn significant shareholder org inc company sales 16 million 05 million org inc 2006 2005 respectively company accounts receivable 10 million 02 million org inc december 31 2006 2005 respectively deferred revenue december 31 2006 01 million deferred revenue december 31 2005 starcom products inc company obtains engineering consulting employee placement services starcom products inc “starcom” 31 owned individual related one company’s former officers also member company’s board directors company paid less 01 million 2006 07 million 2005 11 million 2004 engineering consulting employee placement services provided starcom xalted networks may 2005 august 2005 company invested 20 million 10 million respectively xalted networks “xalted” march 2006 company invested additional 03 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings company 11 ownership interest company received purchase orders xalted networks totaling approximately 13 million 2005 telecommunications equipment product typically sold company customers company charges ten percent procurement fee xalted obtaining reselling products equipment delivered 2005 revenue recognized revenue recognition process completed note 21restructuring costs second quarter fiscal 2005 company announced initiated restructuring plan rationalize cost structure response decline demand certain products addition restructuring plan designed allow company reduce operating costs product line primary goal improvements lower cost structure company 2005 company incurred 353 million expenses relation restructuring plan actions primarily consisting 152 million related severance payments ii 145 million asset impairments primarily related writeoff equipment licenses associated discontinued products included operating expenses iii 56 million inventory writeoff associated discontinued products included severance 18 million noncash reversal housing allowance accrual china restructuring expense related inventory writeoff included cost sales consolidated statements operations result actions approximately 1595 employees terminated placed workforce reduction programs fiscal 2005 december 31 2005 headcount reductions plan completed year ended december 31 2006 company recorded reduction 11 million restructuring plan accrual primarily consisting 08 million asset impairmentexit cost ii 03 million related severance payments included asset impairmentexit cost 04 million noncash reversal related eo reserve discontinued products 01 million related higher expected sublease income company’s new jersey facility december 31 2006 company’s restructuring reserve balance 01 million primarily consists remaining lease liability new jersey facility company expects remaining balance paid fiscal year 2007 summary changes company’s restructuring accrual years ended december 31 2006 2005 follows included 353 million restructuring charge year ended december 31 2005 56 million recorded within cost net sales 297 million recorded operating expense note 22variable interest entities financial accounting standards board “fasb” issued fasb interpretation 46r “fin 46r” fin 46r requires entity primary beneficiary variable interest entity “vie” assets liabilities results operations vie included consolidated financial statements entity 2004 2003 company consolidated related party deemed vie company primary beneficiary beijing mdc telecom co ltd “mdc bj” formed 2001 2002 venture capital fund affiliation shareholder company made additional capital investment established mdc holding limited “mdc holding” affiliated entities mdc holding affiliated entities including mdc bj referred collectively “mdc” mdc business providing valueadded services text messaging voicemail ringtone services pas telecom networks 2003 2004 company consolidated mdc vie company primary beneficiary december 31 2004 consolidation resulted 42 million increase total assets total liabilities equity fourth quarter 2005 company sold equity interest terminated material commercial arrangements settled bank debt longer considered primary beneficiary result assets liabilities mdc consolidated december 31 2006 2005 company invested additional entity considered vie company primary beneficiary hold majority voting interest vie established install develop operate pas network mongolia creditors vie recourse company december 2005 us embassy mongolia informed company forwarded department justice allegations agent joint venture offered payments mongolian government official possible violation foreign corrupt practices act audit committee authorized independent investigation matter result investigation company wrote 12 million intangibles recorded 36 million inventory reserve goods shipped vie established 26 million vat liability december 31 2005 investigation still ongoing consolidation entity resulted 60 million increase total assets total liabilities equity december 31 2005 first quarter 2006 company decided terminate joint venture arrangement wrote 47 million net book value fixed assets november 2006 board directors vie approved dissolution joint venture result company ceased primary beneficiary vie asset liabilities vie consolidated december 31 2006 26 million vat liability reversed accordingly management concluded remote company would required pay tax joint venture fourth quarter 2005 company provided interest free 124 million loan party china seed capital venture organized participate providing technical service networking technology equipment emerging market iptv products china loan partially secured indirect ownership interest venture payable 10 years may called early without penalty result foregoing fact venture’s continuing viability heavily dependent provision network terminal equipment company determined venture vie company primary beneficiary venture therefore venture consolidated company’s financial statements december 31 2006 2005 vie 04 million insignificant revenue 2006 2005 respectively net losses 35 million 09 million 2006 2005 respectively consolidation vie represented 172 million 189 million total assets total liabilities equity company december 31 2006 2005 respectively liabilities vie consolidated company represent additional claims company’s general assets rather represent claims specific assets vie likewise assets vie consolidated company represent additional assets available satisfy claims company’s general assets creditors’ vie recourse company thereby limiting liability risks associated company’s variable interests vie note 23subsequent events first second supplemental indentures notice default receiving notice default referred note 11 company solicited obtained requisite consents holders convertible subordinated notes due march 2008 waiver effective january 9 2007 default may occurred prior date due delay filing noncompliance certain covenants company trustee entered first supplemental indenture dated january 9 2007 providing failure company comply certain covenants original indenture would result default event default may 31 2007 first supplemental indenture provided additional interest rate 675 per annum special interest notes january 9 2007 march 1 2008 maturity date notes unless notes earlier repurchased converted payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest result first supplemental indenture convertible subordinated notes accrued interest rate 7625 per annum january 9 2007 may 31 2007 company received notice default trustee notes asserting default occurred due indenture amended first supplemental indenture “the indenture” respect company’s convertible subordinated notes due march 2008 specific purported defaults referred notice default 1 company’s failure file quarterly report form 10q fiscal quarter ended september 30 2006 annual report form 10k year ended december 31 2006 quarterly report form 10q fiscal quarter ended march 31 2007 2 company’s failure deliver trustee officer’s certificate compliance company required indenture subsequently company solicited obtained requisite consents holders notes waiver effective july 26 2007 default may occurred prior date due delay filing noncompliance certain covenants company entered second supplemental indenture trustee dated july 26 2007 receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection company’s consent solicitation announced july 19 2007 second supplemental indenture provides convertible subordinated notes accrue additional interest rate 675 per annum special interest january 9 2007 including july 25 2007 b 10 per annum special interest july 26 2007 date notes paid prepaid redeemed converted otherwise cease outstanding special interest rate provided second supplemental indenture represents increase 325 per annum special interest rate 675 provided first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest second supplemental indenture also provides period including july 26 2007 including october 15 2007 “covenant reversion date” failure company comply covenants contained original agreement related filing reports required filed sec furnishing copies sec reports certain compliance certificates trustee constitute default ii second supplemental indenture default would deemed occurred result failure comply covenants default remains uncured continuing covenant reversion date default deemed occurred covenant reversion date committed receivables agreement march 30 2007 company amended restated committed receivables purchase facility citibank na provides sale 1000 million trade accounts receivable pcd segment reflect purchase trade receivables shall sole discretion citibank na impairment investment cellon liquidation assets fourth quarter 2006 company reviewed longterm investment cellon review included limited review cellon’s cash position recent financing activities financing needs earningsrevenue outlook operational performance managementownership changes competition based deterioration cellon’s financial condition resulted significant adverse changes cellon’s business fourth quarter 2006 company determined carrying value investment amount fair value investment decline otherthan temporary december 31 2006 company recorded 135 million otherthantemporary impairment charge investment income net recorded operating expense 30 million writeoff prepayment cellon june 18 2007 meeting cellon’s shareholders held resolution passed place cellon voluntary liquidation infinera initial public offering june 7 2007 infinera corporation “infinera” closed initial public offering 14000000 shares common stock price 1300 per share infinera also announced underwriters offering exercised full option purchase additional 2100000 shares infinera common stock bringing total initial public offering size 2093 million initial public offering company entitled convert 669643 shares series 2500000 shares series e preferred stock 792410 shares infinera’s common stock subject rule 144 trading restrictions 180 days lock period starting june 2007 december 2007 result initial public offering value infinera shares owned company readily determinable investment classified equity security availableforsale accordance sfas 115 “accounting certain investments debt equity securities” closing price per share infinera common stock june 29 2007 2492 value company’s investment 197 million second quarter 2007 company recorded unrealized gain 178 million comprehensive income representing difference fair value investment june 29 2007 initial investment amount 19 million fiberxon merger mrv communications july 1 2007 fiberxon investment company 7 ownership interest completed merger mrv communications “mrv” exchange company’s investment fiberxon company receive approximately 15 million cash 15 million shares mrv common stock deferred consideration approximately 27 million deferred consideration becomes payable upon completion certain milestones may reduced legitimate claims mrv certain matters related merger item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules omitted applicable required information shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders utstarcom inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index present fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintain material respects effective internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso material weaknesses internal control financial reporting related 1 noncompliance established policies procedures intended ensure compliance laws regulations 2 lack complete accurate matching cost sales upon recognition revenue recording reserves losses customer contracts associated cost sales 3 lack complete accurate timely preparation review consolidated financial statements accordance generally accepted accounting principles existed date material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement annual interim financial statements prevented detected timely basis material weaknesses referred described managements annual report internal control financial reporting appearing item 9a considered material weaknesses determining nature timing extent audit tests applied audit 2007 consolidated financial statements opinion regarding effectiveness companys internal control financial reporting affect opinion consolidated financial statements companys management responsible financial statements financial statement schedules maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report referred responsibility express opinions financial statements financial statement schedules companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions accompanying consolidated financial statements prepared assuming company continue going concern discussed note 1 consolidated financial statements company suffered recurring net losses negative cash flows operations significant debt obligations due march 1 2008 conditions raise substantial doubt companys ability continue going concern managements plans regard matters also described note 1 consolidated financial statements include adjustments might result outcome uncertainty discussed note 2 consolidated financial statements company changed manner accounts uncertain tax positions 2007 also discussed note 2 consolidated financial statements company changed manner accounts stockbased compensation 2006 companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 29 2008 utstarcom inc consolidated balance sheets thousands except share data see accompanying notes consolidated financial statements utstarcom inc consolidated balance sheets thousands except share data utstarcom inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders equity thousands except per share amounts see accompanying notes consolidated financial statements utstarcom inc consolidated statement cashflows thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1basis presentation liquidity utstarcom inc company delaware corporation incorporated 1991 headquarters alameda california designs manufactures sells telecommunications infrastructure customer premises equipment wireless telephone handsets telecommunications service providers operators throughout world also provides telecommunications infrastructure installation operations maintenance services company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks accompanying consolidated financial statements include accounts utstarcom inc company whollyand majorityowned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries shown separately consolidated financial statements accompanying consolidated balance sheets december 31 2007 2006 consolidated statements operations three years period ended december 31 2007 prepared company pursuant rules regulations securities exchange commission sec conformity generally accepted accounting principles united states america accompanying consolidated financial statements contemplate realization assets satisfaction liabilities normal course business company reported net losses 1956 million 1173 million 5326 million years ended december 31 2007 2006 2005 respectively december 31 2007 companys accumulated deficit aggregated 6912 million year ended december 31 2007 company used 2182 million cash operations december 31 2007 company cash equivalents 4374 million 2895 million transferred february 28 2008 trustee order assure repayment convertible subordinated notes due march 1 2008 notes amount includes principal payment 2746 million 149 million accrued interest december 31 2007 3224 million companys cash equivalents held subsidiaries china imposes currency exchange controls transfers funds outside china additionally available lines credits china significantly less available company historically existing credit facilities china expire fourth quarter 2008 factors raise substantial doubt companys ability continue going concern management believes developed liquidity plan executed successfully provide sufficient liquidity finance companys anticipated working capital expenditure requirements next 12 months managements liquidity plans include divesting companys noncore assets operations obtaining funding outside sources however assurance transactions could consummated acceptable terms addition managements ongoing efforts improve companys profitability cash flows management continues reexamine aspects companys business areas improvement continues focus companys fixed cost base improving working capital position better align operations market demand current sales levels however projected sales materialize management may need reduce expenses addition company may require additional equity debt financing future funds raised issuance stock debt securities could rights privileges preference senior common stock debt covenants could impose restrictions companys operations sale additional equity securities debt financing could result additional dilution companys current notes consolidated financial statements continued note 1basis presentation liquidity continued shareholders assurance additional financing required available terms satisfactory company consolidated financial statements include adjustments relating recoverability classification recorded assets amounts classification liabilities adjustments might necessary company unable continue going concern note 2summary significant accounting policies use estimates preparation consolidated financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period estimates used revenue recognition allowance doubtful accounts sales returns tax valuation allowances reserves inventory deferred costs accrued product warranty costs provisions contract losses goodwill longlived asset impairments stockbased compensation expense loss contingencies restructuring expenses among others actual results could differ materially estimates cash equivalents cash equivalents consist highly liquid instruments original maturities three months less approximately 15 cash equivalents held us december 31 2007 remainder held utstarcom entities throughout world cash equivalents invested institutional money market funds shortterm bank deposits similar short duration instruments fixed maturities overnight three months investments company accounts investments debt equity securities statement financial accounting standards sfas 115 accounting certain investments debt equity securities fasb staff position management determines appropriate classification securities time purchase reevaluates classification balance sheet date company follows guidance provided eitf 031 meaning otherthantemporary impairment application certain investments assess whether investments unrealized loss positions temporarily impaired realized gains losses declines value judged temporary determined based specific identification method reported statements operations company also made strategic investments publicly traded privately held companies promotion business strategic objectives companys investments publicly traded equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value comprehensive income investments equity securities nonpublicly traded companies accounted cost method cost method strategic investments company holds less 20 voting interest company ability exercise significant influence carried lower cost fair value types investments carried fair value cost appropriate company notes consolidated financial statements continued note 2summary significant accounting policies continued periodically reviews investments otherthantemporary declines fair value based specific identification method writes investments fair values otherthantemporary decline occurred fair value financial instruments carrying value companys financial instruments including cash equivalents accounts receivable accrued compensation accrued liabilities approximates fair market value due relatively short period time maturity fair value investments determined using quoted market prices securities similar financial instruments revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements governed emerging issues task force issue eitf 0021 accounting revenue arrangements multiple deliverables sec staff accounting bulletin 104 revenue recognition multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements company control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time company establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery equipment company entitled full payment company recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position 972 software notes consolidated financial statements continued note 2summary significant accounting policies continued revenue recognition amended eitf 0305 applicability sop 972 nonsoftware deliverables containing incidental software company allocates revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases company agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element post contract support company established vsoe contract element accordingly revenues contracts recognized ratably period post contract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support company reviews assumptions regarding estimated post contract support periods regular basis company determines necessary revise companys estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding post contract support periods different original assumptions contract revenues would recognized remaining expected period support revenue fixed priced contracts include requirement significant software modification customization recognized accordance sop 811 accounting performance constructiontype certain production type contracts instances company accounts contracts using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements company unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2006 2007 company recorded 321 million 62 million contract loss fixed price contract respectively company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term revenues services less 10 revenues periods presented company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sell end notes consolidated financial statements continued note 2summary significant accounting policies continued customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance statement financial accounting standards sfas 48 revenue recognition right return exists cases company developed reasonable estimates stock exchanges based historical experience similar types sales similar products company sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material company estimates amount rebate based upon terms individual arrangement historical experience future expectations price reductions records estimate rebate amount time sale company also enters sales incentive programs comarketing arrangements certain wireless handset customers company records incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized company assesses collectability based number factors including payment history credit worthiness customer company request collateral customers international sales company may require letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company defers revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally company enters revenue sharing arrangements company collects payment customer telecommunications service provider collects service revenues company enters revenue sharing arrangement company recognize revenue collection reasonably assured nature business china emerging markets companys billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained company current deferred revenue 1005 million 957 million longterm deferred revenue 2360 million 2610 million december 31 2007 2006 respectively product warranty company provides warranty equipment handset sales period generally ranging one two years time final acceptance rarely company entered arrangements provide limited warranty services periods longer two years company provides expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate time company may subject additional costs related nonstandard warranty claims customers occurs company estimates additional accruals based historical experience communication customers various assumptions company believes notes consolidated financial statements continued note 2summary significant accounting policies continued reasonable circumstances additional warranty accruals recorded period additional costs identified receivables although company evaluates customer credit worthiness prior sale company provides allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured company assesses collectability receivables based number factors including analysis creditworthiness companys historical payment history current economic conditions ability collect payment length time individual receivable balance outstanding companys policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging companys accounts receivable applying percentage based companys historical experience approach results allowance computed based aging receivables company evaluates percentages applied category aged accounts receivable periodically based actual history writeoffs collections refines formulabased approach accordingly use future periods company certain accounts receivable china outstanding significant period time company provides allowances receivables based criteria discussed company believes sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations company uses actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held companys manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting except pcd utilizes weighted average method accounting approximates fifo net writedowns excess slow moving obsolete inventory writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures company continually monitors inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period notes consolidated financial statements continued note 2summary significant accounting policies continued deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites contract specific individual customer financial conditions specific individual customer may result increased concentration risk exposure companys inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset per accounting research bulletin 43 working capital current assets current liabilities research development capitalized software development costs research development costs charged expense incurred company capitalizes software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability companys capitalized software development costs 2007 2006 2005 company capitalized 02 million 10 million 60 million software development costs respectively amortization capitalized software development costs 10 million 21 million 39 million 2007 2006 2005 respectively unamortized capitalized software development costs december 31 2007 2006 13 million 34 million respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets land use rights related property leased company china amortized life lease leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company capitalizes interest incurred related construction property plant equipment ready use capitalized interest amortized straightline basis life building notes consolidated financial statements continued note 2summary significant accounting policies continued company generally depreciates assets following periods goodwill intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based fair value assets received identifiable intangible assets comprised purchased trade names developed technologies customer supplier relationships intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based test future goodwill impairment tests could result charge earnings purchased intangibles finite lives amortized straightline basis respective estimated useful lives goodwill tested impairment annual basis annual tests certain circumstances written impaired purchased intangible assets goodwill amortized useful lives unless lives determined indefinite purchase intangible assets carried cost less accumulated amortization impairment longlived assets longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets longlived assets disposed sale measured lower book value fair value less cost sell accordance sfas 144 accounting impairment disposal longlived assets sfas 144 company periodically evaluates recoverability estimated lives longlived assets including property equipment whenever events changes circumstances indicate carrying amount may recoverable useful life changed tangible assets company determines relative estimated fair value comparison similar assets wherever practical based quoted market prices taking consideration asset type age condition physical location asset companys intangible assets subject amortization tested recoverability based undiscounted cash flows impaired written fair value based either discounted cash flows appraised values notes consolidated financial statements continued note 2summary significant accounting policies continued advertising costs company expenses advertising costs incurred payment customers marketing development costs accounted reduction revenue associated customers incurred years ended december 31 2007 2006 2005 advertising costs totaled 74 million 81 million 82 million respectively restructuring liabilities litigation contingencies company accounts restructuring plans statement financial accounting standards 146 accounting costs associated exit disposal activities sfas 146 statement financial accounting standards 112 employers accounting postemployment benefits sfas 112 company accounts litigation contingencies accordance statement financial accounting standards 5 accounting contingencies sfas 5 sfas 5 requires company record estimated loss contingency information available prior issuance companys financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated stockbased compensation prior january 1 2006 company accounted sharebased payment awards accounting principles board opinion 25 accounting stock issued employees apb 25 provided required pro forma disclosures statement financial accounting standards 123 accounting stockbased compensation accordance apb 25 noncash compensation expense recognized options exercise price market price actual grant date based difference exercise price market price expense recognized ratably associated service period generally option vesting term january 1 2006 company adopted statement financial accounting standards 123 revised 2004 sharebased payment sfas 123r using modified prospective transition method stockbased compensation expense recognized period based value portion sharebased payment awards ultimately expected vest stockbased compensation expense recognized consolidated statement operations year ended december 31 2006 included compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions sfas 123 compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r november 10 2005 financial accounting standards board fasb issued fasb staff position fas 123r3 transition election related accounting tax effects sharebased payment awards company adopted alternative transition method provided fasb staff position calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establishing beginning balance notes consolidated financial statements continued note 2summary significant accounting policies continued additional paidincapital pool apic pool related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r company accounts utilization windfall tax benefits based tax law ordering considered direct effects stockbased compensation purposes measuring windfall settlement award determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected term sharebased payment awards stock volatility company estimates expected term options granted based upon historical exercise cancellation data vested options company uses historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options companys common stock available determine implied volatility assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties compensation expense could materially different future changes subjective assumptions materially affect estimated value managements opinion existing valuation models may provide accurate measure fair value employee stock options addition company required estimate expected forfeiture rate recognize expense shares expected vest companys actual forfeiture rate materially different estimate stockbased compensation expense could significantly different company recorded current period accumulated comprehensive income comprehensive income includes changes equity net assets period nonowner sources comprehensive income loss 2007 2006 2005 shown consolidated statement stockholders equity december 31 years indicated components accumulated comprehensive income reported consolidated balance sheets follows notes consolidated financial statements continued note 2summary significant accounting policies continued income taxes company subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating companys tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain july 2006 financial accounting standards board fasb issued interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 requires income tax positions meet morelikelythannot recognition threshold recognized financial statements fin 48 tax positions previously failed meet morelikelythannot threshold recognized first subsequent financial reporting period threshold met previously recognized tax positions longer meet morelikelythannot threshold derecognized first subsequent financial reporting period threshold longer met company recognizes interest expense penalties related income tax matters part provision income taxes company adopted fin 48 january 1 2007 prior 2007 company established reserves taxrelated uncertainties based estimates whether extent additional taxes interest due company recognizes deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability companys deferred tax assets based assessment projected taxable income numerous factors could affect companys results operations future significant decline companys future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary company records valuation allowance reduce deferred tax assets amount management believes likely realized 2006 due developments business repatriations cash via dividends settlements intercompany accounts described note 1 basis presentation liquidity company made determination earnings certain subsidiaries permanently reinvested outside united states company provides us taxes foreign undistributed earnings considered permanently reinvested outside united states financial instruments derivatives financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable convertible subordinated debt purchased written call options accrued liabilities carrying amounts cash equivalents accounts receivable payable accrued liabilities approximate fair values shortterm nature instruments short term investments marked market approximate fair value carrying amounts notes receivable approximates fair value based discounted value future cash flow expected respect notes company may use derivative financial instruments manage exposures foreign currency exchange rate changes objectives holding derivatives include reducing eliminating efficiently managing economic impact exposures effectively possible derivative instruments recognized either assets liabilities balance sheet company measures instruments fair value recognizes changes fair value derivatives earnings notes consolidated financial statements continued note 2summary significant accounting policies continued period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged company hedged transactions 2007 2006 following table summarizes companys carrying values fair values financial instruments company determines fair value convertible debt related convertible bond hedge written call option using estimates fair values balance sheet date provided major securities firm fair value longterm investments determined based quoted market prices available information investees shortterm nature companys bank loans company believes carrying value approximates fair value foreign currency translation companys operations conducted international subsidiaries financial statements subsidiaries translated respective functional currencies us dollars foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity foreign currency translation gainloss transactions denominated functional currency reported earnings gain 46 million gain 76 million 2007 2006 respectively loss 99 million 2005 recorded income net earnings per share basic eps computed dividing net income loss available common stockholders weighted average number shares companys common stock outstanding period excludes unvested restricted shares diluted eps presents amount net income loss available share common stock outstanding period plus share common stock would outstanding assuming company issued shares common stock dilutive potential common shares outstanding period companys potential common notes consolidated financial statements continued note 2summary significant accounting policies continued shares include employee stock options unvested restricted shares written call option warrants convertible subordinated notes vested acquisitionrelated stock options following summary calculation basic diluted eps years ended december 31 2007 2006 2005 potential common shares dilutive net loss years therefore basic dilutive eps following table summarizes total potential shares common stock excluded diluted per share calculation include would antidilutive period recent accounting pronouncements september 2006 fasb issued statement financial accounting standards 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply current accounting pronouncements require permit fair value measurements fasb staff position 1572 effective date fasb statement 157 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually beginning first quarter fiscal 2009 measurement disclosure requirements related financial assets financial liabilities effective company beginning first quarter fiscal 2008 adoption sfas 157 financial assets financial liabilities expected significant impact results notes consolidated financial statements continued note 2summary significant accounting policies continued operations financial position company currently evaluating impact sfas 157 results operations financial position related nonfinancial assets nonfinancial liabilities beginning first quarter 2009 upon adoption provisions sfas 157 applied prospectively limited exceptions february 2007 fasb issued statement financial accounting standard 159 fair value option financial assets financial liabilities sfas 159 statement permits require companies report fair value majority recognized financial assets financial liabilities firm commitments standard unrealized gains losses items fair value option elected reported earnings subsequent reporting date sfas 159 becomes effective company january 1 2008 company currently evaluating effects sfas 159 consolidated financial statements june 2007 fasb ratified eitf 073 accounting nonrefundable advance payments goods services received use future research development activities eitf 073 eitf 073 requires nonrefundable advance payments goods services used rendered future research development activities deferred capitalized recognized expense goods delivered related services performed eitf 073 effective prospective basis fiscal years beginning december 15 2007 company currently evaluating impact pending adoption eitf 073 consolidated financial statements december 2007 fasb issued statement 141 revised business combinations sfas 141r standard changes accounting business combinations including measurement acquirer shares issued consideration business combination recognition contingent consideration accounting preacquisition gain loss contingencies recognition capitalized inprocess research development accounting acquisitionrelated restructuring cost accruals treatment acquisition related transaction costs recognition changes acquirers income tax valuation allowance sfas 141r effective fiscal years beginning december 15 2008 early adoption prohibited company assess impact sfas 141r future acquisition occurs december 2007 fasb issued statement 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 standard changes accounting noncontrolling minority interests consolidated financial statements including requirements classify noncontrolling interests component consolidated stockholders equity elimination minority interest accounting results operations earnings attributable noncontrolling interests reported part consolidated earnings additionally sfas 160 revises accounting increases decreases parents controlling ownership interest sfas 160 effective fiscal years beginning december 15 2008 early adoption prohibited company currently evaluating impact pending adoption sfas 160 consolidated financial statements note 3cash cash equivalents investments availableforsale securities included cash equivalents december 31 2007 december 31 2006 shortterm investments consisting entirely availableforsale securities 656 million 95 million december 31 2007 december 31 2006 respectively notes consolidated financial statements continued note 3cash cash equivalents investments continued company accepts bank notes receivable maturity dates three six months customers china normal course business company may discount bank notes banking institutions china sale notes reflected reduction cash equivalents shortterm investments proceeds settlement notes included cash flows operating activities consolidated statement cash flows bank notes sold 2007 2006 2005 company sold 731 million bank notes 130 million notes receivable see note 7 accounts notes receivable shortterm investments increased december 31 2007 december 31 2006 primarily due reclassification 424 million investments previously classified longterm shortterm evaluating companys ability intent liquidate certain investments publicly held companies fiscal quarter ended september 30 2007 company reclassified investments gemdale infinera longterm shortterm company expects sell part investments next twelve months use proceeds current operations availableforsale securities currently consist bank time deposits original maturity dates three months consist governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds investments recorded fair value unrealized holding gains losses reported component comprehensive income net related income tax effects realized gains losses reported earnings december 31 2007 longterm shortterm investments included 10 million unrealized holding loss 369 million unrealized holding gain recorded comprehensive income december 31 2006 longterm shortterm investments included 326 million 0 unrealized holding gains respectively recorded comprehensive income following table shows breakdown companys total investments december 31 2007 december 31 2006 thousands notes consolidated financial statements continued note 3cash cash equivalents investments continued gemdale co ltd gemdale real estate company invests develops properties china primarily shanghai beijing shenzhen wuhan december 31 2007 company 065 ownership interest gemdale investment classified equity securities availableforsale recorded fair value 2007 company sold portion investment approximately 545 million cash recorded gain 537 million income net 2008 company sold additional investment gemdale approximately 30 million infinera june 7 2007 infinera corporation infinera closed initial public offering 14000000 shares common stock price 1300 per share infinera also announced underwriters offering exercised full option purchase additional 2100000 shares infinera common stock bringing total initial public offering 2093 million initial public offering company converted 669643 shares series preferred stock 2500000 shares series e preferred stock 792410 shares infineras common stock subject rule 144 trading restrictions 180day lockup period june 2007 december 2007 result initial public offering value infinera shares owned company readily determinable investment classified equity security availableforsale accordance sfas 115 accounting certain investments debt equity securities 2007 company recorded net unrealized gain 99 million comprehensive income representing difference fair value investment december 31 2007 initial investment amount 19 million january february 2008 company sold common stock infinera total proceeds 92 million global asia partners lp global asia partners lp gap venture capital fund formed make private equity investments private preipo technology telecommunications companies asia june 2002 april 2005 company invested total 26 million fund december 31 2007 company owned 49 funds outstanding partnership units investment accounted equity method earnings equity interest gap 04 million 2007 resulted increase companys investment gap december 31 2007 earnings recognized equity interest gap december 31 2006 cortina systems immenstar september 2004 company invested 20 million series preferred stock immenstar inc immenstar development stage company designing chip used companys product investment accounted cost method february 2007 immenstar acquired cortina systems inc exchange companys investment immenstar company received 36 million shares series preferred stock cortina systems inc 0837 per share 18 million cash march 2007 entitled receive additional 04 million shares series preferred stock 0837 per share 02 million cash currently escrow result acquisition company recorded gain investment notes consolidated financial statements continued note 3cash cash equivalents investments continued 28 million income net owns 13 interest cortina systems inc fully diluted basis company accounts investment cortina systems inc using cost method mrvfiberxon july 1 2007 fiberxon investment company 7 ownership interest completed merger mrv communications mrv publiclytraded company exchange companys interest fiberxon company entitled receive 15 million cash 1519365 shares mrv common stock valued approximately 45 million deferred consideration approximately 27 million deferred consideration becomes payable upon completion certain milestones may reduced legitimate claims mrv certain matters related merger third quarter 2007 company paid cash consideration 15 million received 1519365 shares mrv common stock recognized gain investment 29 million investment classified equity securities availableforsale recorded fair value 2007 company recorded unrealized loss 10 million comprehensive income representing difference fair value investment december 31 2007 initial amount recorded 45 million mrv shares received 2007 gct semiconductor october 2004 company invested 30 million gct semiconductor inc investment represents approximately 2 interest gct semiconductor inc designs develops markets integrated circuit products wireless communications industry investment accounted cost method xalted networks may 2005 august 2005 company invested 20 million 10 million respectively xalted networks xalted march 2006 company invested additional 03 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings company 11 ownership interest fully diluted basis xalted accounts investment cost method note 4restricted cash december 31 2007 company shortterm restricted cash 64 million longterm restricted cash 202 million included longterm assets december 31 2006 company shortterm restricted cash investments 167 million longterm restricted cash 165 million included longterm assets amounts primarily collateralize companys issuances standby commercial letters credit note 5acquisitions sale assets sale assets marvell technology group ltd february 2006 company sold substantially assets selected liabilities semiconductor design business division marvell technology group ltd marvell company notes consolidated financial statements continued note 5acquisitions sale assets continued received 354 million cash net 06 million transaction costs closing additional 43 million cash paid marvell company recognized gain sale assets august 2007 achievement certain defined milestones included cash received 160 million earned company result achieving certain defined milestones company received payment 160 million october 2006 assets sold included assets related prior acquisition advanced communications devices corporation 2001 systemonchip semiconductors connection sale assets company entered supply agreement marvell pursuant supply agreement company agreed purchase chipsets supplied marvell period five years chipsets included certain handset products designed manufactured company recognized gain sale assets 123 million 2006 gain determined based upon total net proceeds less net book value assets sold 29 million value supply agreement 202 million value allocated supply agreement included current longterm liabilities amortized proportion quantities chipsets purchased supply agreement next five years december 31 2007 2006 approximately 13 million 17 million respectively amortized cost sales pedestal may 2005 company completed acquisition substantially assets certain liabilities pedestal networks inc pedestal develops designs universal broadband server ubs environmentally hardened linepowered remote ipbased digital subscriber line access multiplexer ip dslam acquisition intended assist companys expansion digital subscriber line dsl ipbased television iptv providing company strong remote broadband solution fully uscertified complements existing dsl iptv optical product families total consideration transaction 30 million approximately 26 million cash paid closing date additional 04 million paid may 2006 acquisition accounted purchase method accounting existing technology acquired included entire pedestal family ip dslam ubs company integrated pedestal product line companys tripleplay products iptv solutions addition developed product technology company acquired fixed assets inprocess research development iprd customer relationships acquisition pedestal one project development related gigabit ethernet product qualified iprd gigabit ethernet project focused supporting majority pedestals products completed december 31 2006 assessing pedestals iprd project company considered key product characteristics including products development stage acquisition date products life cycle products future prospects company also considered rate technology changes broadband equipment industry industrys competitive environment economic outlook local global markets amount purchase price allocated iprd 07 million charged companys results operations alternative future uses existed acquisition date notes consolidated financial statements continued note 5acquisitions sale assets continued results operations pedestal integrated broadband segment included companys consolidated statements operations beginning acquisition date may 13 2005 pro forma effects acquisition companys financial statements significant subsequent may 2005 acquisition pedestal company completed allocation purchase price estimated useful lives customer relationships developed technology intangible assets two years five years respectively following table summarizes final allocation purchase price pedestal giga october 2004 company entered asset purchase agreement giga telecom inc giga korean corporation develops designs wireless handsets acquisition facilitated companys expansion cdma handset market company completed acquisition january 2005 closing 130 million cash paid additional 20 million paid escrow account six months released july 2005 total consideration acquisition funded cash hand approximately 190 million including 20 million acquisitionrelated transaction costs 15 million payment made previously applied purchase price earnout 05 million paid subsequently upon completion certain product design milestones following table summarizes allocation purchase price giga excess purchase price fair value identified net assets approximately 154 million allocated goodwill assigned handsets segment goodwill created acquisition resulted decreased time market design related synergies goodwill written september 2005 result intangible longlived asset impairment notes consolidated financial statements continued note 5acquisitions sale assets continued additional information regarding intangible longlived assets impairment refer note 9 goodwill intangible assets accordance eitf 041 accounting preexisting relationships parties business combination settlement gain 04 million relating preexisting royalty agreement recognized recorded research development expense consolidated statements operations purchased existing technology preexisting royalty agreement fully amortized results operations giga integrated handsets segment included companys consolidated statement operations subsequent acquisition pro forma effects acquisition companys financial statements significant note 6inventories december 31 2007 2006 inventories consist following note 7notes receivable purchase agreement company accepts bank notes commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months bank notes included shortterm investments commercial notes receivable 126 million 51 million december 31 2007 2006 respectively company may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes receivable sold 2007 2006 2005 company sold 731 million bank notes 130 million notes receivable notes sold included companys consolidated balance sheets criteria sale treatment established sfas 140 accounting transfers servicing financial assets extinguishment liabilities met august 2005 company entered committed receivables purchase agreement commercial bank whereby company may sell 1000 million eligible accounts receivable defined agreement contains provisions customary transactions nature including certain commitment fees 2007 2006 receivables sold pursuant provisions agreement march 2007 agreement amended restated reflect purchase trade receivables shall sole discretion commercial bank associated commitment fees company recorded commitment fees 01 million 05 million years ended december 31 2007 2006 respectively notes consolidated financial statements continued note 8property plant equipment december 31 2007 2006 property plant equipment consists following discussed note 9 goodwill intangible assets companys impairment review indicated estimated future undiscounted cash flows would sufficient recover carrying values certain fixed assets segment result company recorded charge 11 million write assets company continues hold use estimated fair values 2005 company recorded impairment charge 141 million longlived tangible assets related broadband infrastructure asset group 94 million longlived tangible assets related handsets asset group included construction progress december 31 2007 119 million project costs related companys erp system upgraded 2007 computer software developed internal use capitalized accordance sop 981accounting costs computer software developed obtained internal use become operational early 2008 depreciation expense 392 million 451 million 669 million years ended december 31 2007 2006 2005 respectively note 9goodwill intangible assets goodwill 2007 management company conducted indepth strategic analysis aim define new corporate strategy review completed fourth quarter 2007 declines companys revenues excluding pcd segment appeared persistent evidenced continued decline fourth quarter 2007 fourth quarter 2007 taking drop consideration new strategic direction well persistent weak global industry economic conditions company revised near medium term revenue expectations downward significantly company also reviewed corresponding key assumptions overall strategic business manufacturing capacity plans material changes companys outlook plans company first able quantify fourth quarter 2007 2008 budgeting process triggered impairment review longlived assets result company notes consolidated financial statements continued note 9goodwill intangible assets continued performed interim impairment tests goodwill certain longlived tangible intangible assets accordance sfas 142 goodwill intangible assets sfas 142 company compared fair value assets carrying value fair values determined using present value method comparable company techniques based part upon independent valuation based upon impairment assessment company recorded goodwill impairment charges 31 million impairment charges represented excess carrying amount goodwill segment implied fair value implied fair value goodwill residual fair value derived deducting fair value reporting units assets liabilities estimated fair value based discounted cash flow model using revenue profit forecasts charges classified operating expenses consolidated statements operations 2006 company identify instances goodwill impairment amount goodwill december 31 2006 unchanged amount december 31 2005 management held series planning meetings september assess business forecasts reporting units result various factors including reduction rate growth pas subscribers third quarter delay expected granting 3g licenses china japan challenges product quality primarily companys broadband infrastructure reporting unit narrowing companys strategic focus related companys product offerings greater expected revenue margin decline due continued pricing pressures several companys key markets company concluded factors combined represented triggering event company determined significant adverse changes business outlook could indicate carrying value certain longlived assets groups may recoverable could indicate fair value companys reporting units may fair value result company performed impairment tests goodwill certain longlived tangible intangible assets based upon impairment assessment company recorded goodwill impairment charges 1929 million 2005 summary changes companys goodwill years ended december 31 2005 business segment follows intangible assets discussed fourth quarter 2007 company also determined undiscounted cash flows sufficient recover carrying value customer relationships technology intangible assets within segment company calculated fair values notes consolidated financial statements continued note 9goodwill intangible assets continued intangible assets using discounted future cash flows recorded intangible asset impairment charge 157 million operating expenses 2006 company record impairment charges related technology intangible assets circumstances events occurred indicated possible impairment 2005 company determined fair value technology intangible assets within broadband infrastructure handsets asset groups calculated using discounted future cash flows less carrying value net assets company recorded impairment charge 17 million december 31 2007 2006 intangible assets consisted following amortization expense 160 million 189 million 259 million years ended december 31 2007 2006 2005 respectively estimated aggregate amortization expense intangibles five years beginning 2008 2012 62 million 35 million 35 million 35 million 35 million respectively 46 million aggregate thereafter remaining weighted average amortization period class unamortized identifiable intangible assets include following notes consolidated financial statements continued note 10debt following represents outstanding borrowings december 31 2007 2006 december 31 2007 company loans various banks totaling 480 million interest rates ranging 575 710 per annum bank loans mature october december 2008 included shortterm debt 480 million loan 411 million credit facility matured december 2007 significant covenants associated loans december 31 2007 company credit facilities totaling 1521 million 411 million working capital purposes remaining 1110 million use support letters credits corporate guarantees december 31 2007 1453 million total credit facilities remained available facilities expire late 2008 guarantee facilities renewed december 31 2007 company guaranteed debt included consolidated balance sheet march 12 2003 company completed offering 4025 million 78 convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes convertible companys common stock conversion price 2379 per share subordinated present future senior debt company holders notes may convert notes price companys common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible 420345 shares common stock expenses associated convertible subordinated notes issuance 117 million recorded longterm assets amortized life notes concurrent issuance convertible notes company entered convertible bond hedge call option transaction convertible bond hedge amended allows company purchase 115 million shares common stock 2379 per share party agreement written call option amended allows holder purchase 115 million shares companys common stock company 32025 per share bond hedge call option transactions may settled companys option either cash net shares expire march 1 2008 company recorded instruments cost carrying value december 31 2007 equaled original cost adjusted amendments related early extinguishment debt convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders equity accordance notes consolidated financial statements continued note 10debt continued guidance eitf 0019 accounting derivative financial instruments indexed potentially settled companys stock effective january 9 2007 company holders remaining 2746 million convertible subordinated notes entered first supplemental indenture providing failure company comply certain provisions original agreement result default event default may 31 2007 convertible subordinated notes accrued additional 675 per annum special interest january 9 2007 march 1 2008 maturity date notes payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest result first supplemental indenture convertible subordinated notes bore stated interest rate 7625 subsequently company solicited obtained requisite consents holders notes waiver effective july 26 2007 default may occurred prior date due delay filing noncompliance certain covenants company entered second supplemental indenture trustee dated july 26 2007 receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection companys consent solicitation announced july 19 2007 second supplemental indenture provided convertible subordinated notes accrue additional interest rate 675 per annum special interest january 9 2007 including july 25 2007 b 10 per annum special interest july 26 2007 date notes paid prepaid redeemed converted otherwise cease outstanding special interest rate provided second supplemental indenture represented increase 325 per annum special interest rate 675 provided first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest february 28 2008 company transferred 2895 million trustee notes trustee order assure repayment notes mature march 1 2008 amount includes principal payment 2746 million 149 million accrued interest trustee instructed pay amounts note holders due notes consolidated financial statements continued note 11other current liabilities current liabilities december 31 2007 2006 consist following current liabilities primarily consist accrued contract costs relate purchases inventory installation services outside commission testing consulting work performed outside vendors company yet received invoices accrued warranty costs estimated costs equipment replacement repair accrued payroll compensation costs relate wages bonuses commissions earned yet paid accrued taxes represent value added sales taxes payable accrued interest expenses relate convertible subordinated notes accrued advertising expenses related certain customer advertising incentive programs accrued restructuring cost related remaining restructuring cost see note 20 restructuring cost details loss contract reserve 321 million december 31 2006 reclassified inventory reserves year ended december 31 2007 upon purchase inventory related specific loss contract originated december 2006 note 12warranty obligations guarantees warranty obligations included current liabilities follows thousands notes consolidated financial statements continued note 12warranty obligations guarantees continued 2005 company recorded special warranty charge equipment sold softbank 2003 2004 since agreement repair parts exceeded companys normal warranty terms company recorded special warranty charges 117 million certain asynchronous digital subscriber line adsl products 40 million primarily multiservice optical transport product netring™ equipment 149 million gigabit ethernet passive optical network gepon equipment 2006 company recorded additional warranty charge 56 million consisting 29 million netring equipment 27 million gepon equipment sold softbank based results companys analysis warranty costs incurred revised estimates remaining liability 2007 netring reserve reduced 23 million based change scope project warranty cost incurred estimated remaining liability addition previously established reserve 25 million 2005 reversed 2007 due cancellation retrofit project certain companys sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amount relation provisions claims made company believes valid enforceable rights intellectual property embedded products note 13provision income taxes united states foreign income loss income taxes minority interest follows notes consolidated financial statements continued note 13provision income taxes continued components provision benefit income taxes follows company adopted provisions fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 january 1 2007 result implementation fin 48 company recognized 14 million increase liability unrecognized tax benefits required accounted reduction january 1 2007 balance retained earnings january 1 2007 company 797 million gross unrecognized tax benefits recognized portion gross unrecognized tax benefits utbs would decrease provision income taxes increase companys net income 64 million impact net income reflects gross unrecognized tax benefits net certain deferred tax assets federal tax benefit state income tax items totaling 733 million adoption resulted reclassification tax liabilities totaling 64 million current noncurrent december 31 2007 companys gross unrecognized tax benefits totaled 797 million included long term liabilities net certain deferred tax assets federal tax benefit state income tax items totaling 713 million recognized portion gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 84 million total unrecognized tax benefits increase current period unrecognized tax benefits relate primarily allocations revenue costs among global operations company recognizes interest expense penalties related unrecognized tax benefits within income tax expense company accrued interest penalties approximately 22 million january 1 2007 approximately 32 million december 31 2007 company subject taxation us federal jurisdiction various us state foreign jurisdictions companys income tax returns 2003 2004 2005 tax years currently audit united states internal revenue service company also audit taxing authorities china recurring basis material jurisdictions company subject examination united states china companys tax years 1997 2007 still open examination china companys tax years 2003 2007 still notes consolidated financial statements continued note 13provision income taxes continued open examination united states company anticipate significant change total amount gross unrecognized tax benefits within next 12 months fin 48 established criteria recognizing continuing recognize morelikelythan tax positions may result income tax expense volatility future periods company believes adequately provided tax positions amounts asserted taxing authorities could greater companys accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved reconciliation change utb balance january 1 2007 december 31 2007 follows establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change companys expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks notes consolidated financial statements continued note 13provision income taxes continued summary components net deferred tax assets liabilities follows apb 23 accounting income taxesspecial areas deferred income taxes must provided unremitted earnings foreign subsidiaries unless earnings could deemed permanently reinvested outside united states 2007 company us deferred income tax liability 408 million foreign earnings 2298 million considers permanently reinvested outside united states december 31 2007 company still undistributed earnings approximately 131 million investments foreign subsidiaries considered permanently reinvested determination amount deferred taxes earnings practicable since computation would depend number factors cannot known decision repatriate earnings made december 31 2007 us federal net operating loss carryforwards 2270 million expire varying amounts 2025 2027 december 31 2007 state net operating loss carryforwards 1794 million expire varying amounts 2010 2027 management concluded federal state net operating losses meet likely standard contained sfas 109 accounting income taxes sfas 109 therefore recorded 876 million valuation allowance related deferred tax assets event tax benefits related valuation allowance realized immaterial amount would credited notes consolidated financial statements continued note 13provision income taxes continued paidin capital december 31 2007 company also net operating loss carryforwards nols china approximately 1513 million china net operating loss carryforwards expire varying amounts 2010 2012 management also concluded china net operating losses meet likely standard contained sfas 109 therefore recorded 358 million valuation allowance related deferred tax assets december 31 2007 company nols countries us china nols approximately 721 million majority nols expire carried forward indefinitely however management concluded losses meet likely standard contained sfas 109 therefore recorded valuation allowance 121 million related deferred tax assets december 31 2007 company us alternative minimum tax credit carryforwards 10 million indefinite life company also us research development credit carryforwards 145 million 25 million indefinite life 120 million credits expire varying amounts 2010 2027 company us foreign tax credits 345 million expire varying amounts 2012 2017 management concluded us tax credit carryforwards meet likely standard contained sfas 109 therefore recorded 490 million valuation allowance related deferred tax assets december 31 2007 company foreign research development credit carryforwards 33 million expire varying amounts 2015 2017 difference companys effective income tax rate federal statutory rate reconciled march 16 2007 chinas top legislature national peoples congress passed china corporate income tax law cit law cit law effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies would effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises notes consolidated financial statements continued note 13provision income taxes continued prior change tax law certain subsidiaries joint ventures located china enjoy tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc companys active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law targets certain industries reduced 15 tax rate certain qualified high technology enterprises fies established promulgation new law currently enjoy lower tax rates increase tax rates would gradually phased five years based cit law december 31 2007 companys subsidiaries qualified reduced 15 tax rate however significant regulations regarding interpretation implementation new tax law still pending companys subsidiaries may qualify reduced 15 tax rate future 2007 271 million tax benefit effect tax rate changes attributable revaluation companys deferred tax assets china related increase tax rates due new law discussed 2006 tax unremitted earnings 439 million attributable recording us deferred income taxes foreign earnings 2065 million company considers permanently reinvested outside united states establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts september 30 2005 company believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets china united states result review undertaken september 30 2005 company concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment 2007 change deferred tax valuation allowance 1055 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets december 31 2007 united states china 2005 change deferred tax valuation allowance 2373 million primarily attributable tax expense related providing full valuation allowance companys net deferred tax assets december 31 2005 united states china 2006 company recorded 290 million income tax benefit related settlement tax audit china 2003 2005 tax years utstarcom telecom co ltd huts hangzhou utstarcom telecom co ltd hstc two subsidiaries china acceptance tax holiday hstc notes consolidated financial statements continued note 14common stock incentive plans stock option plans 2006 equity incentive plan 2006 equity incentive plan 2006 plan implemented july 21 2006 adopted board directors june 6 2006 approved companys stockholders july 21 2006 plan replaces 1997 plan 2001 plan 2003 plan collectively prior plans awards granted pursuant prior plans 2006 plan provides grant following types incentive awards stock options ii stock appreciation rights iii restricted stock iv restricted stock units v performance shares performance units vi stock cash awards award collectively awards eligible awards 2006 plan include employees directors consultants provide services company affiliates maximum aggregate number shares may awarded sold 2006 plan 4500000 shares plus shares reserved remain unissued prior plans july 21 2006 ii shares subject stock options similar awards granted prior plans expire become exercisable without exercised full shares issued pursuant awards granted prior plans forfeited repurchased company december 31 2007 number shares transferred prior plans 2006 plan totaled 10509653 december 31 2007 options purchase 6247807 shares common stock outstanding 2006 plan board directors compensation committee board compensation committee administers 2006 plan administrator subject terms 2006 plan administrator sole discretion select employees consultants directors receive awards determine terms conditions awards interpret provisions 2006 plan outstanding awards options granted 2006 plan generally vest become exercisable four years awards granted 2006 plan generally transferable rights respect award granted participant generally may exercised participants lifetime participant provided however administrators approval participant may transfer award participants spouse former spouse pursuant courtapproved domestic relations order relates provision child support alimony payments marital property rights ii transfer award gift benefit participants immediate family exercise price stock options stock appreciation rights granted 2006 plan must least equal 100 fair market value common stock date grant least 110 fair market value incentive stock option iso granted stockholder greater 10 voting power companys stock maximum term stock option granted participant must exceed seven years date grant five years iso granted stockholder greater 10 voting power common stock administrator determine terms conditions awards granted plan event change control company outstanding award assumed equivalent option right substituted successor corporation parent subsidiary successor corporation event successor corporation parent subsidiary successor corporation refuses assume substitute award participant fully vest right exercise outstanding options stock appreciation rights notes consolidated financial statements continued note 14common stock incentive plans continued including shares awards would otherwise vested exercisable restrictions restricted stock lapse respect restricted stock units performance shares performance units performance goals vesting criteria deemed achieved target levels terms conditions met addition option stock appreciation right assumed substituted event change control administrator notify participant writing electronically option stock appreciation right fully vested exercisable period time determined administrator sole discretion option stock appreciation right terminate upon expiration period company repurchases cancels shares common stock forfeited respect tax liability associated certain vesting restricted stock restricted stock unit grants 2006 plan prior plansthe 1997 stock plan 2001 director option plan 2003 nonstatutory stock option plan 1997 stock plan prior implementation 2006 plan july 21 2006 officers employees consultants company affiliates eligible receive options purchase shares common stock purchase rights 1997 stock plan 1997 plan january 31 1997 board directors adopted companys stockholders approved 1997 plan december 1999 board directors amended 1997 plan companys stockholders approved february 2000 1997 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2007 options purchase 14888586 shares common stock outstanding 1997 plan options granted 1997 plan prior july 21 2006 either isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options nsos qualify compensation committee oversaw selection eligible persons option grants determined grant date amounts exercise prices vesting periods relevant terms options including whether options would isos nsos exercise price isos granted 1997 plan could less 100 fair market value common stock grant date least 110 fair market value iso granted stockholder greater 10 voting power companys stock exercise price nsos could determined compensation committee discretion options granted 1997 plan generally transferable life optionee 1997 plan options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date five years isos granted stockholder greater 10 voting power common stock options generally terminate 12 months death permanent disability optionee ii months termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos notes consolidated financial statements continued note 14common stock incentive plans continued prior implementation 2006 plan company could also grant stock purchase rights eligible participants 1997 plan 1997 plan shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determined otherwise agreement granted company right repurchase restricted stock upon voluntary involuntary termination employee reason including death disability prior vesting purchase price repurchased shares original price paid could paid cancellation indebtedness owed company companys repurchase right lapsed rate determined compensation committee event company merged another corporation substantially companys assets sold outstanding option stock purchase rights assumed equivalent option stock purchase right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option stock purchase right option right automatically vest become exercisable full period least fifteen days time option right terminate company repurchases cancels shares common stock forfeited respect tax liability associated certain vesting restricted stock grants 1997 plan 2001 director option plan prior implementation 2006 plan july 21 2006 directors employees company outside directors eligible receive options purchase shares common stock 2001 director option plan 2001 plan 2001 plan adopted board directors march 2 2001 approved companys stockholders may 2001 july 2001 board directors amended 2001 plan 2001 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2007 options purchase 360000 shares common stock outstanding 2001 plan compensation committee administrator 2001 plan terms 2001 plan outside director automatically granted option purchase eighty thousand shares common stock first option date person first became outside director anniversary date director employee company ceased employment company become outside director could receive option purchase twenty thousand shares common stock subsequent option companys first annual meeting stockholders following conversion outside director subsequent annual stockholder meeting thereafter provided serving outside director date time outside directors first option fully vested outside director automatically granted subsequent option anniversary date year provided outside director terms 2001 plan exercise price option granted equaled market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subject outside director continuing serve director dates subsequent option grants vest 100 shares subject subsequent option first anniversary date grant notes consolidated financial statements continued note 14common stock incentive plans continued 2003 nonstatutory stock option plan prior implementation 2006 plan july 21 2006 directors officers employees consultants company affiliates eligible receive options purchase shares companys common stock 2003 nonstatutory stock option plan 2003 plan 2003 plan adopted board directors april 15 2003 nonstatutory stock options would qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended could granted 2003 plan 2003 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2007 options purchase 710635 shares common stock outstanding 2003 plan 2003 plan administered compensation committee compensation committee oversaw selection eligible persons options would granted determined number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii three months termination option holders service reason disability due option holders death option however may exercised ten years grant date event companys change control 2003 plan provides outstanding option assumed equivalent option right substituted successor corporation parent subsidiary successor corporation refuses assume substitute option automatically vest become exercisable full period determined compensation committee time option terminate issanni communications inc incentive program issanni plan established issuance total 39876 shares utstarcoms common stock specified former employees issanni communications inc issanni became utstarcoms employees connection utstarcoms acquisition issanni plan administered board directors compensation committee participant issanni plan eligible earn vest designated number shares subject award shares made participant plan based upon attainment one six milestones related amount revenue generated issanni products 2002 2003 subject participants continued employment issanni company one subsidiaries day determination applicable milestone satisfied addition participant entitled receive unearned shares fifth anniversary acquisition issanni employee continues employed issanni company subsidiaries date regardless whether milestone attained shares subject award event become issuable whether milestones achieved whether fiveyear vesting schedule elapsed upon sale discontinuation company utstarcom international products inc ii sale substantially technology acquired utstarcom international products inc connection acquisition issanni iii employment termination certain issanni principals notes consolidated financial statements continued note 14common stock incentive plans continued prior date participants shares earned participants service issanni company one subsidiaries terminated voluntarily cause company may exercise repurchase option respect participants unearned shares ii voluntarily cause death disability participant entitled receive shares participant would otherwise earned respect milestones achieved within 24 months participants termination iii result death disability participant estate entitled receive unearned portion shares respect milestones advanced communication devices corporation incentive program february 2006 company sold substantially assets selected liabilities semiconductor design operations including assets related prior acquisition acd result participants service company voluntarily terminated shares subject award yet earned distributed cancelled stock award stock option activity past years company granted equity awards consisting primarily stock options fiscal 2007 company granted equity awards using mixture restricted stock units restricted shares stock options december 31 2007 2006 2005 number shares common stock available issuance pursuant future grants equity compensation plans 5973324 11238850 6345767 respectively following summarizes companys stock options activity notes consolidated financial statements continued note 14common stock incentive plans continued following summarizes companys restricted stock unit activity november 2007 compensation committee granted 962249 shares performancebased restricted stock units certain senior executive officers vesting performancebased restricted stock units 2007 awards two years award subject attainment goals determined compensation committee company may subject variable levels expense related primarily varying levels performance well fluctuations companys stock price awards marked market periodically prior date compensation committees determination performance company granted restricted stock awards employees 2006 1997 plans awards generally vest period one four years date grant restricted stock awards voting rights common stock shares underlying restricted stock awards considered issued outstanding company expenses cost restricted stock awards determined fair market value shares date grant ratably period restrictions lapse weighted average fair value restricted shares granted equity incentive plans years ended december 31 2007 2006 2005 296 769 815 per share respectively grant restricted stock awards deducted shares available grant companys stock option plan nonvested restricted stock december 31 2007 changes year ended december 31 2007 summarized year ended december 31 2007 14 million shares restricted stock vested longer subject repurchase rights company total fair value restricted stock vested year ended december 31 2007 48 million company also granted 73 million shares restricted stock notes consolidated financial statements continued note 14common stock incentive plans continued year ended december 31 2006 72442 shares restricted stock vested longer subject repurchase rights company total fair value restricted stock vested year ended december 31 2006 06 million company also granted rights purchase 301133 shares restricted stock executive officers company allowed lapse unexercised march 2006 place february 2007 compensation committee board directors company determined certain executive officers based level performance companys 2006 fiscal year eligible receive 203000 shares common stock aggregate november 30 2007 committee approved issuance 163000 shares remaining 40000 shares issuable forfeited result resignation executive officer performance stock included companys computation stockbased compensation expense year ended december 31 2006 related forfeiture recognized fiscal 2007 shares restricted stock vested fiscal 2005 connection october 2002 acquisition shanghai yi yun telecom technology co ltd shanghai yi yun company issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one companys subsidiaries shares restricted stock cliff vested five years 2007 accelerated vesting upon achievement specified milestones company treated 514290 shares restricted stock deferred compensation 2003 226302 shares vested upon achievement specified milestones 2007 281120 shares vested 6868 shares forfeited leaving outstanding shares remaining december 31 2007 notes consolidated financial statements continued note 14common stock incentive plans continued information regarding stock options outstanding december 31 2007 summarized intrinsic value represents total pretax intrinsic value calculated difference market value reported nasdaq december 31 2007 275 exercise price inthemoney shares years ended december 31 2007 2006 2005 total pretax intrinsic value options exercised immaterial amount 05 million 08 million respectively determined date exercise weighted average remaining contractual life options exercisable 58 years weighted average remaining contractual life options expected vest 60 years december 31 2007 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan espp purchase plan intended qualify employee stock purchase plan section 423 internal revenue code company reserved 1914934 shares common stock sale stock purchase plan december 31 2007 number shares reserved sale plan increased annually first day fiscal year beginning 2001 amount equal 20 million shares 2 outstanding shares companys common stock date lesser amount determined board directors stock purchase plan administered board committee appointed board notes consolidated financial statements continued note 14common stock incentive plans continued stock purchase plan implemented concurrent offering periods duration may exceed 24 months offering period may contain four interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 ended last trading day april 30 2002 employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase companys common stock payroll deductions may exceed 15 employees total compensation stock may purchased plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value companys shares date purchase participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant participants designated beneficiary case death certificate issued full shares participants account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term ten years stockbased compensation sfas 123r requires use optionpricing models developed use valuing employee stock options company used blackscholes option pricing model blackscholes model method valuation sharebased awards granted prior december 31 2005 continued use blackscholes model subsequent sharebased payment awards blackscholes model developed use estimating fair value shortlived exchange traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility term awards actual projected employee stock option exercise behaviors riskfree interest rate expected dividends company uses historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options common stock available determine implied volatility company estimates expected term options granted based upon companys historical exercise cancellation data vested options addition separate groups employees similar exercise behavior considered separately expected term employee stock purchase plan shares average remaining purchase periods offering period notes consolidated financial statements continued note 14common stock incentive plans continued company bases risk free interest rate used option valuation model us treasury zerocoupon issues remaining terms similar expected term options company anticipate paying cash dividends foreseeable future therefore uses expected dividend yield zero option valuation model company required estimate forfeitures time grant revise estimates subsequent periods actual forfeitures differ estimates company uses historical data estimate prevesting option forfeitures record stockbased compensation expense awards expected vest prior january 1 2006 stockbased payment awards amortized accelerated basis treating vested tranche separate stock option grant graded vesting upon adoption sfas 123r january 1 2006 stockbased payment awards amortized straightline basis requisite service periods awards generally vesting periods pro forma information required sfas 123r 2005 applied fair value recognition provisions sfas 123 options granted equity incentive plans follows notes consolidated financial statements continued note 14common stock incentive plans continued fair value share based payment awards estimated using blackscholes option pricing model following assumptions 1estimated assumptions used calculating fair value prior adoption sfas 123r december 31 2004 subcommittee companys board directors board approved immediate full acceleration vesting stock options outstanding companys 1997 stock option plan per share exercise price greater 2215 acceleration company amended relevant option agreements reflect acceleration company adopted acceleration anticipation impact sfas 123r result acceleration options purchase approximately 64 million shares companys common stock became immediately exercisable december 31 2004 estimated aggregate sfas 123r expense eliminated result acceleration vesting options approximately 35 million assuming material change employee retention behavior december 31 2007 approximately 310 million total unrecognized compensation cost measured related nonvested stock options restricted stock restricted stock units expected recognized weightedaverage period 21 years weighted average fair value options granted stock option plans years ended december 31 2007 2006 2005 164 307 425 per share respectively notes consolidated financial statements continued note 14common stock incentive plans continued total stockbased compensation cost recognized year ended december 31 2007 2006 2005 follows following table summarizes stockbased compensation expense recognized companys consolidated statement operations december 31 2007 sharebased compensation capitalized within inventory note 15401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees attained age 21 company contribute 050 dollar contributed qualified employees 401k plan maximum 5500 2007 2006 2005 plan years companys matching contributions subject fiveyear vesting schedule based upon longevity employee service company matching contributions 25 million 27 million 32 million 2007 2006 2005 respectively notes consolidated financial statements continued note 16commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2013 minimum future lease payments leases december 31 2007 follows rent expense years ended december 31 2007 2006 2005 199 million 213 million 225 million respectively contractual obligations commercial commitments december 31 2007 companys obligations contractual obligations commercial commitments follows letters credit company issues standby letters credit primarily support international sales activities outside china company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire without drawn beneficiary thereof finally company may issue commercial letters credit support purchase commitments longterm purchase obligations december 31 2007 longterm purchase obligations remaining term excess one year include noncancelable agreements purchase components primarily connection last time buy agreements ie vendors final production run certain inventory components notes consolidated financial statements continued note 16commitments contingencies continued december 31 2007 total commitments agreements approximately 31 million additionally company agreed purchase global data services verizon communications inc verizon december 31 2007 remaining commitment verizon agreement ceases longterm connection sale assets marvell technology group ltd marvell company agreed purchase marvell certain chipsets included companys pas handsets 2011 chipsets included certain handset products designed manufactured company investment commitments december 31 2007 company invested total 26 million global asia partners lp fund formed make private equity investments private preipo technology telecommunications companies asia company commitment invest maximum 50 million result reorganization capital contributions partners reached april 2005 companys capital contribution 06 million april 2005 final capital contribution made addition agreement allows partnership reinvest 25 million otherwise would available company future distributions 2007 partners agreed dissolve partnership soon practicably possible intellectual property certain sales contracts include provisions customers would indemnified company event among things third party claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products income tax obligations effective january 1 2007 company adopted provisions fin 48 december 31 2007 companys gross unrecognized tax benefits totaled 797 million included long term liabilities net certain deferred tax assets federal tax benefit state income tax items totaling 713 million recognized portion gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 84 million company included amounts table contractual obligations commercial commitments difficulty making reasonably reliable estimates timing cash settlements respective taxing authorities litigation securities class action litigation beginning october 2004 several shareholder class action lawsuits alleging federal securities violations filed company various officers directors company actions consolidated united states district court northern district california caption utstarcom inc securities litigation master file c044908jw pvt lead plaintiffs case filed first amended consolidated complaint july 26 2005 first amended complaint alleged violations securities exchange act 1934 brought behalf putative class shareholders purchased companys stock april 16 2003 notes consolidated financial statements continued note 16commitments contingencies continued september 20 2004 april 13 2006 lead plaintiffs filed second amended complaint adding new allegations extending end class period october 6 2005 addition company defendants plaintiffs also suing softbank plaintiffs complaint seeks recovery damages unspecified amount june 2 2006 company individual defendants filed motion dismiss second amended complaint march 21 2007 court granted defendants motion dismissed plaintiffs second amended complaint court granted plaintiffs leave file third amended complaint plaintiffs filed may 25 2007 july 13 2007 company individual defendants filed motion dismiss motion strike third amended complaint motion briefed argued yet decided court september 4 2007 second shareholder class action complaint captioned peter rudolph v utstarcom et al case c074578 si filed united states district court northern district california company current former directors officers complaint alleges violations securities exchange act 1934 undisclosed improper accounting practices concerning historical equity award grants plaintiff seeks unspecified damages behalf purported class purchasers companys common stock july 24 2002 september 4 2007 december 14 2007 court appointed james r bartholomew lead plaintiff january 25 2008 lead plaintiff filed amended complaint due preliminary status lawsuits uncertainties related litigation management unable evaluate likelihood either favorable unfavorable outcome accordingly management unable time estimate effects complaints financial position results operations cash flows governmental investigations september 2005 company received notice formal inquiry staff securities exchange commission sec certain aspects companys financial disclosures prior reporting periods certain issues addition december 2005 us embassy mongolia informed company forwarded department justice doj allegations agent companys mongolia joint venture offered payments mongolian government official possible violation foreign corrupt practices act fcpa company audit committee authorized independent investigation possible violations fcpa contact doj sec regarding investigation identified possible fcpa violations mongolia southeast asia india china well possible violations us immigration laws doj requested company voluntarily produce documents related investigation sec subpoenaed company documents company received grand jury subpoena requiring production documents related one aspect doj investigation training programs company sponsored company executed tolling agreements extending statute limitations fcpa issues investigation doj proceedings may result criminal civil sanctions penalties disgorgements company probable obligation company exists result outflow resources provision recorded amount reasonably estimated regulatory legal proceedings well government investigation often involve complex legal issues subject substantial uncertainties accordingly management exercises considerable judgment determining whether probable proceeding result outflow resources whether amount obligation notes consolidated financial statements continued note 16commitments contingencies continued reasonably estimated company periodically reviews status proceedings judgments subject change new information becomes available time company cannot predict inquiry completed outcome inquiry company unable reasonably estimate total amount loss associated proceedings judgment company may material adverse effect companys financial position results operations cash flows shareholder litigation november 17 2006 shareholder derivative complaint captioned ernesto espinoza v ying wu et al case rg06298775 filed certain companys current former officers directors superior court county alameda california complaint alleges individual defendants among things breached duties unjustly enriched violated california corporations code connection timing stock option grants complaint names company nominal defendant seeks unspecified monetary damages individual defendants various forms injunctive relief february 2 2007 company individual defendants filed demurrers complaint april 11 2007 court sustained individual defendants demurrer overruled companys demurrer ordered plaintiff file amended complaint ordered company answer original complaint plaintiff filed amended complaint company filed answer amended complaint august 21 2007 individual defendants filed demurrers amended complaint court sustained individual defendants demurrers ordered plaintiff file second amended complaint plaintiff yet filed second amended complaint due preliminary status complaint uncertainties related litigation management company unable evaluate likelihood either favorable unfavorable outcome accordingly management company unable time estimate effects complaint companys financial position results operations cash flows ipo allocation october 31 2001 complaint filed united states district court southern district new york company companys directors officers various underwriters companys initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offering securities litigation 21 mc 92 pretrial purposes april 2002 consolidated amended complaint filed matter company captioned utstarcom initial public offering securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers companys common stock march 2 2000 december 6 2000 companys directors officers dismissed without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss claims brought defendants including company order dismissed claims company except claim brought section 11 securities act 1933 alleges registration statement filed accordance ipo misleading june 2004 stipulation settlement release claims issuer defendants including company submitted court notes consolidated financial statements continued note 16commitments contingencies continued approval terms settlement approved would dismissed released claims participating defendants including company august 2005 court preliminarily approved settlement december 2006 court appeals second circuit reversed courts october 2004 order certifying class six test cases selected underwriter defendants plaintiffs coordinated proceedings companys case one test cases class certification condition settlement unlikely settlement would receive final court approval june 25 2007 court entered order terminating proposed settlement based stipulation among parties settlement plaintiffs filed amended master allegations amended complaints six test cases defendants cases moved dismiss plaintiffs also moved class certification six test cases defendants cases opposed unclear whether revised future settlement litigation proceeds management company believes company meritorious defenses management company intends defend action vigorously total amount loss associated litigation determinable time therefore management company unable currently estimate loss associated litigation utstarcom inc v starent patent infringement litigations february 16 2005 company filed suit starent patent infringement us district court northern district california complaint company asserted starent infringes utstarcom patent us reg 6829473 473 patent starents development testing software upgrade customers installed st16 intelligent mobile gateways company seeks declaratory injunctive relief starent subsequently filed answer counterclaims denying companys allegations seeking declaration patentinsuit infringed invalid unenforceable june 16 2005 company filed motion strike starents affirmative defense dismiss starents counterclaim alleging inequitable conduct july 19 2005 parties stipulated starent would file amended answer counterclaim july 27 2005 company would withdraw motion strike august 10 2005 company responded starents amended counterclaim filed july 27 2005 early december 2006 company filed reissue application 473 patent united states patent trademark office starent also filed reexamination 473 patent reexamination reissue currently copending litigation still preliminary stage stayed pending outcome reissue litigation outcome cannot predicted although management company believes litigation merit nonetheless management company believes adverse judgment starents counterclaims material adverse effect companys business financial condition results operations cash flows may 8 2007 company filed additional suit starent sixteen individual defendants former employees 3coms commworks division company acquired certain assets may 2003 northern district illinois causes action include claims patent infringement misappropriation trade secrets intentional interference business relations prospective economic advantage declarations ownership certain patent rights complaint company asserts starent infringes utstarcom patents u reg nos 7173905 6978128 6963582 6975900 6684256 manufacture use offer sale starents st16 intelligent mobile gateway st40 multimedia code platform individual defendants starent misappropriated valuable company trade secrets improperly taking using companys confidential proprietary information benefit notes consolidated financial statements continued note 16commitments contingencies continued starent individual defendants starent interfered companys business relations prospective economic advantage using misappropriated information obtain enhance sales starents products several starents patent applications one issued patent based information obtained former employees company commworks basis belong utstarcom company seeks compensatory damages punitive damages injunctive relief court denied defendants motion dismiss misappropriation trade secrets claims august 30 2007 starent answered companys complaint denying companys allegations asserting number affirmative defenses counterclaims including noninfringement subject patents alleged tortious interference prospective economic advantage company filed amended complaint allege additional related causes action starent moved dismiss certain causes action amended complaint court yet decided motion dismiss court appointed special master handle discovery issues related identification trade secrets discovery ongoing company believes adverse judgment starents counterclaims material adverse effect companys business financial condition results operations cash flows telemetrix inc arbitration october 19 2006 telemetrix inc telemetrix filed formal request arbitration company world intellectual property organization wipo geneva switzerland request arbitration sought unspecified damages arising contract telemetrix telos technology inc dated october 22 2003 company assumed telos rights obligations contract pursuant companys purchase telos assets may 19 2004 telemetrix alleged nine causes action including breach contract fraud negligent misrepresentation interference contractual relations interference prospective economic advantage december 2006 company filed formal response request arbitration denying material factual allegations asserted telemetrix arbitrator selected parties august 2 2007 arbitrator granted pleading motion favor company due telemetrixs failure allege sufficient facts support majority causes action august 17 2007 telemetrix filed amended statement claim alleging six causes action including breach contract fraud interference contractual relations interference prospective economic advantage evidentiary hearing scheduled july 2830 2008 discovery begun financial impact claims determinable time litigation company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty management company believes final outcome matters material adverse impact companys financial position results operations cash flows note 17concentration credit risk financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts notes receivable company places temporary cash shortterm investments several financial institutions approximately 4249 million 5237 million companys cash equivalents shortterm investments deposit foreign accounts december 31 2007 2006 respectively notes consolidated financial statements continued note 17concentration credit risk continued companys exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however companys interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature certain investments anticipated declining interest rates negatively impact companys investment income company maintains investment portfolio various holdings types maturities company use derivative financial instruments company places cash investments instruments meet high credit quality standards specified investment policy guidelines companys policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested governmentbacked notes commercial paper floating rate corporate bonds fixed income corporate bonds accordance investment policy shortterm investments invested investment grade rated securities minimum better ratings currently shortterm investments aa better ratings concentration credit risk major customers chinese carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier company groups china customers together province treats province one customer since level purchasing decisions made december 31 2007 sprint spectrum lp tmobile usa inc accounted approximately 16 15 respectively total accounts receivable company december 31 2006 jiangsu province accounts receivable balance approximately 11 total accounts receivable company following customers accounted 10 companys net revenues approximately 17 23 22 companys net sales 2007 2006 2005 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 1295 million 1704 million respectively december 31 2007 2006 company extends credit customers china generally without requiring collateral global sales outside china company may require letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts notes consolidated financial statements continued note 17concentration credit risk continued country risks approximately 23 32 30 companys sales year ended december 31 2007 2006 2005 respectively made china accordingly political economic legal environment well general state chinas economy may influence companys business financial condition results operations companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation approximately 3 5 17 companys sales year ended december 31 2007 2006 2005 respectively made japan accordingly political economic legal environment general state japans economy may influence companys business financial condition results operations note 18segment reporting fourth quarter 2007 company announced new organization structure align business units corporate strategy new organization structure changed reporting segments company measures performance allocates resources effective october 1 2007 new reporting segments follows •broadband infrastructurefocused companys world class portfolio broadband products •multimedia communicationsfocuses development market opportunities iptv solutions wireless infrastructure technologies •personal communications division pcdfocused distribution mobile handsets outside china •handsetsfocused mobile phone business continued focus pas handset market •servicesfocused providing services support broadband infrastructure multimedia communications product lines •otherincludes mobile solutions focused development sales services ipcdma market custom solutions focused customized telecommunication solution companys management makes financial decisions based information receives internal management system currently evaluates operating performance allocates resources reporting segments based segment revenue gross profit cost sales direct expenses relation production assigned reporting segments accounting policies used measuring segment assets operating performance used consolidated level notes consolidated financial statements continued note 18segment reporting continued summarized companys segment sales gross profit years ended december 31 2007 2006 2005 based current reporting segment structure company also summarized segment margin 2007 2006 based current reporting segment structure however information readily available 2005 included presentation company reclassified previously reported segment information conform current segment presentation based best efforts judgment notes consolidated financial statements continued note 18segment reporting continued segment margin includes direct expenses related operations segment direct product management research development expenses general corporate expenses include unallocated expenses sales marketing general administration common research development expenses equity award related charges amortization intangibles restructuring impairment charges company excludes items consistent manner internally evaluates performance segments assets segment follows notes consolidated financial statements continued note 18segment reporting continued sales attributed geographical area based upon location customer sales data geographical areas follows longlived assets consisting property plant equipment geographical area follows note 19related party transactions softbank affiliates company recognizes revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb company supports softbanks fibertothehome service sales carrier class gepon product well netring™ product addition company supports softbanks new internet protocol television iptv sales rollingstream™ product notes consolidated financial statements continued note 19related party transactions continued 2007 2006 2005 company recognized revenue 678 million 1308 million 4753 million respectively sales telecommunications equipment services affiliates softbank included revenue year ended december 31 2006 fee 312 million charged cancellation orders broadband products 100 million charged cancellation orders multimedia communications products included accounts receivable december 31 2007 2006 262 million 299 million respectively related transactions company immaterial amounts accounts payable softbank affiliates december 31 2007 2006 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period december 31 2007 companys customer advance balance related softbank agreements 03 million compared balance december 31 2006 current deferred revenue balance related softbank 56 million 116 million december 31 2007 december 31 2006 respectively december 31 2007 companys noncurrent deferred revenue balance related softbank 101 million compared 115 million december 31 2006 august 2004 company entered several agreements japan telecom co ltd jt wholly owned subsidiary softbank agreements relate sale ian8000 equipment specified value delivery dates well oral agreement subsequently converted specific service contracts manage sales promotional program jt company determined service activities revenue recorded net expected promotional spending july 17 2003 company entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank terms agreement company loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements companys loan subordinated certain senior lenders bb modem repayments paid company 42month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period year ended december 31 2007 2006 2005 company recorded immaterial amount 06 million 13 million respectively interest income respect loan receivable fully settled first quarter 2007 compared balance approximately 10 million december 31 2006 included prepaid current assets december 31 2007 softbank beneficially owned approximately 12 companys outstanding stock audiovox one companys officers also serves director audiovox corporation audiovox 2007 2006 2005 company paid approximately 21 million 14 million 07 million respectively services provided audiovox notes consolidated financial statements continued note 20restructuring cost fourth quarter 2007 company implemented restructuring plan reduce operating costs included worldwide reduction force approximately 11 companys headcount approximately 700 employees workforce reduction primarily united states china lesser degree international locations company incurred restructuring charge 145 million fourth quarter 2007 comprised largely cash payments associated onetime severance benefits facilities related cost quarter 113 million paid december 31 2007 remaining 32 million restructuring expense included current liabilities expected paid 2008 following table shows total amount costs incurred segment connection restructuring plan second quarter fiscal 2005 company announced initiated restructuring plan rationalize cost structure response decline demand certain products addition restructuring plan designed allow company reduce operating costs product line primary goal improvements lower cost structure company year ended december 31 2006 company recorded reduction 11 million restructuring plan accrual primarily consisting 08 million asset impairmentexit cost ii 03 million related severance payments third quarter 2007 remaining restructuring accrual paid 2005 restructuring plan complete 2005 company incurred 353 million expenses related restructuring plan actions primarily consisting 152 million related severance payments ii 145 million asset impairments primarily related writeoff equipment licenses associated discontinued products included operating expenses iii 56 million inventory writeoff associated discontinued products included severance 18 million noncash reversal housing allowance accrual china restructuring expense related inventory writeoff included cost sales consolidated statements operations result actions approximately 1595 employees terminated placed workforce reduction programs fiscal 2005 december 31 2005 headcount reductions plan completed included 353 million restructuring charge year ended december 31 2005 56 million recorded within cost net sales 297 million recorded operating expense notes consolidated financial statements continued note 21variable interest entities fourth quarter 2005 company provided interest free 124 million loan party china seed capital venture organized participate providing technical service networking technology equipment emerging market iptv products china loan partially secured indirect ownership interest venture payable 10 years may called early without penalty result foregoing fact ventures continuing viability heavily dependent provision network terminal equipment company determined venture vie company primary beneficiary venture therefore venture consolidated companys results december 31 2007 2006 2005 vie insignificant revenue three years period ended december 31 2007 net losses 75 million 35 million 09 million 2007 2006 2005 respectively consolidation vie represented 193 million 172 million total assets company december 31 2007 december 31 2006 liabilities vie consolidated company represent additional claims companys general assets rather represent claims specific assets vie likewise assets vie consolidated company represent additional assets available satisfy claims companys general assets creditors vie recourse company thereby limiting liability risks associated companys variable interests vie first quarter 2005 company invested additional entity considered vie company primary beneficiary hold majority voting interest vie established install develop operate pas network mongolia creditors vie recourse company december 2005 us embassy mongolia informed company forwarded department justice allegations agent joint venture offered payments mongolian government official possible violation foreign corrupt practices act audit committee authorized independent investigation matter result investigation company wrote 12 million assets established 26 million vat reserve december 31 2005 investigation still ongoing consolidation entity resulted 60 million increase total assets total liabilities equity december 31 2005 first quarter 2006 company decided terminate joint venture arrangement wrote remaining net assets approximately 47 million november 2006 board directors vie approved dissolution joint venture result company ceased primary beneficiary vie asset liabilities vie consolidated december 31 2006 26 million vat reserve reversed accordingly management concluded remote company would required pay tax dissolved joint venture notes consolidated financial statements continued note 22quarterly financial data unaudited notes consolidated financial statements continued note 22quarterly financial data unaudited continued 1gross profit fourth quarter 2006 unfavorably impacted 321 million loss contract provision 2net loss fourth quarter 2006 included 135 million temporary impairment charge longterm investment item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules page financial statements report independent registered public accounting firm consolidated balance sheets december 31 2008 2007 consolidated statements operations years ended december 31 2008 2007 2006 consolidated statements stockholders equity years ended december 31 2008 2007 2006 consolidated statements cash flows years ended december 31 2008 2007 2006 notes consolidated financial statements financial statement schedules icondensed financial information registrant iivaluation qualifying accounts reserves schedules omitted applicable required information shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders utstarcom inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index present fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintain material respects effective internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso material weaknesses internal control financial reporting related 1 lack complete accurate matching cost sales upon recognition revenue estimating recording reserves losses customer contracts 2 lack effective controls appropriate timely analysis monitoring underlying information related period end financial reporting process preparation consolidated financial statements existed date material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement annual interim financial statements prevented detected timely basis material weaknesses referred described managements annual report internal control financial reporting appearing item 9a considered material weaknesses determining nature timing extent audit tests applied audit 2008 consolidated financial statements opinion regarding effectiveness companys internal control financial reporting affect opinion consolidated financial statements companys management responsible financial statements financial statement schedules maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report referred responsibility express opinions financial statements financial statement schedules companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions accompanying consolidated financial statements prepared assuming company continue going concern discussed note 1 consolidated financial statements company suffered recurring losses negative cash flows operations conditions raise substantial doubt companys ability continue going concern managements plans regard matters also described note 1 consolidated financial statements include adjustments might result outcome uncertainty discussed note 2 consolidated financial statements company changed manner accounts uncertain tax positions 2007 companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california march 2 2009 utstarcom inc consolidated balance sheets see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders equity see accompanying notes consolidated financial statements utstarcom inc consolidated statements cashflows see accompanying notes consolidated financial statements notes consolidated financial statements note 1basis presentation liquidity utstarcom inc company delaware corporation incorporated 1991 headquarters alameda california designs manufactures sells telecommunications infrastructure customer premises equipment wireless telephone handsets telecommunications service providers operators throughout world also provides telecommunications infrastructure installation operations maintenance services company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks accompanying consolidated financial statements include accounts company whollyand majorityowned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements minority interest consolidated subsidiaries shown separately consolidated financial statements certain reclassifications made prior period amounts conform current period presentation reclassifications effect net income previously reported accompanying consolidated balance sheets december 31 2008 2007 consolidated statements operations three years period ended december 31 2008 prepared company pursuant rules regulations securities exchange commission sec conformity generally accepted accounting principles united states america accompanying consolidated financial statements presented basis company going concern going concern assumption contemplates realization assets satisfaction liabilities normal course business company incurred net losses 1503 million 1956 million 1173 million years ended december 31 2008 2007 2006 respectively company recorded operating losses 15 16 consecutive quarters period ended december 31 2008 december 31 2008 company accumulated deficit 8415 million company incurred net cash outflows operations 552 million 2251 million 2008 2007 respectively management expects company continue incur losses negative cash flows operations least next four quarters december 31 2008 company cash equivalents 3096 million 2008 million held subsidiaries china amount cash available transfer china subsidiaries use companys nonchina subsidiaries limited liquidity needs subsidiaries china chinese government mandated limitations including currency exchange controls transfers funds outside china companys committed sources borrowings credit facilities china borrowing facilities subject banks current favorable opinion credit worthiness companys china subsidiaries banks funds available lending chinese banking regulations practices result management cannot certain borrowings facilities adequate available meet companys liquidity requirements addition credit facilities expire august 2009 upon expiration facilities management certain new credit facilities available commercially reasonable terms even facilities renewed upon expiration based companys recent financial performance total available credit may reduced accordingly management certain borrowings companys credit facilities china adequate meet companys financing requirements notes consolidated financial statements continued 2008 company took number actions improve liquidity march 2008 company paid 2895 million retire companys convertible subordinated notes related accrued interest july 1 2008 company completed sale pcd proceeds 2191 million see note 3 addition company divested mobile solutions business unit july 2008 fourth quarter 2008 management initiated actions disband customs solutions business unit wind companys korea based handset operations result actions restructuring initiatives undertaken management companys yeartoyear quarterly selling general administrative research development operating expenses reduced 3540 december 2008 management announced initiatives including efforts eliminate functional duplications consolidation number functions companys china operations management believes initiatives executed successfully help achieve significant operating expense reductions fourth quarter 2009 enable companys fixed cost base better aligned operations market demand projected sales levels management expects increase significantly latter half 2009 compared first two quarters 2009 uncertainties sales levels may achieved 2009 heightened recent market turmoil global economic downturn level sales anticipated companys financial plan materialize company need take actions reduce costs expenses explore cost reduction options management believes company able achieve projected sales levels 2009 contain expenses cash used operations levels contemplated companys 2009 financial plan companys china nonchina operations sufficient liquidity finance working capital expenditure needs next 12 months company able execute 2009 financial plan successfully company may need obtain funds equity debt financings assurance additional financing required available terms satisfactory company funds raised future issuance preferred stock debt securities could rights privileges preference senior companys common stock newly issued debt could contain debt covenants impose restrictions companys operations sale newly issued debt equity securities could result additional dilution companys current shareholders recently global economies experienced significant downturn driven financial credit crisis continue challenge economies period time current macroeconomic environment significant risks uncertainties inherent managements ability forecast future results operating environment confronting company internally externally raises significant uncertainties improvements companys operating results cash flows liquidity anticipated companys 2009 financial plan managements initiatives control reduce costs maintaining growing companys revenue base fully implemented companys recurring losses expected negative cash flows operations raise substantial doubt companys ability continue going concern consolidated financial statements include adjustments relating recoverability classification recorded assets amounts classification liabilities adjustments may necessary entity unable continue going concern note 2summary significant accounting policies use estimates preparation consolidated financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets notes consolidated financial statements continued liabilities date consolidated financial statements reported amounts revenues expenses reporting period estimates used revenue recognition allowance doubtful accounts sales returns tax valuation allowances reserves inventory deferred costs accrued product warranty costs provisions contract losses recoverability goodwill intangible assets longlived asset impairments stockbased compensation expense loss contingencies restructuring expenses among others actual results could differ materially estimates cash equivalents cash equivalents consist highly liquid instruments original maturities three months less approximately 24 cash equivalents held us december 31 2008 remainder held utstarcom entities throughout world december 31 2008 million companys cash equivalents held subsidiaries china imposes currency exchange controls transfers funds outside china cash equivalents invested institutional money market funds shortterm bank deposits similar short duration instruments fixed maturities overnight three months net restricted assets china pursuant applicable regulations foreigninvested enterprises china may pay dividends accumulated profits determined accordance chinese accounting standards regulations calculating accumulated profits foreign investment enterprises china required allocate least 10 accumulated profits year fund certain reserve funds unless reserves reached 50 registered capital enterprises result restrictions chinas laws regulations companys china subsidiaries restricted ability transfer portion net assets us parent form dividends loans advances restricted portion amounted approximately 1861 million 40 companys total consolidated net assets december 31 2008 december 31 2008 company sufficient noncash assets available meet reserved net assets china restriction none companys cash balances legally restricted transfer investments company accounts investments debt equity securities statement financial accounting standards 115 sfas 115 accounting certain investments debt equity securities fasb staff position fsp sfas 1151 meaning otherthantemporary impairment application certain investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date company follows guidance provided emerging issues task force issue eitf 031 meaning otherthantemporary impairment application certain investments assess whether investments unrealized loss positions temporarily impaired realized gains losses declines value judged temporary determined based specific identification method reported statements operations company also made strategic investments publicly traded privately held companies promotion business strategic objectives companys investments publicly traded equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value comprehensive income investments equity securities nonpublicly traded companies company holds less 20 voting interest notes consolidated financial statements continued company ability exercise significant influence accounted cost method cost method investments carried lower cost fair value types investments carried fair value cost appropriate company periodically reviews investments otherthantemporary declines fair value based specific identification method writes investments fair values otherthantemporary decline occurred revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements governed eitf 0021 revenue arrangements multiple deliverables sec staff accounting bulletin 104 revenue recognition multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements company control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time company establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery installation equipment company entitled full payment company recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized provisions statement position sop 972 software revenue recognition amended eitf 0305 applicability statement position 972 nonsoftware deliverables arrangement containing morethanincidental software company allocates revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements notes consolidated financial statements continued delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases company agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element postcontract support company established vsoe contract element accordingly revenues contracts recognized ratably period postcontract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support company reviews assumptions regarding estimated post contract support periods regular basis company determines necessary revise companys estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding postcontract support periods different original assumptions contract revenues would recognized remaining expected period support revenue fixed priced contracts include requirement significant software modification customization recognized accordance sop 811 accounting performance constructiontype certain productiontype contracts instances company accounts contracts using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements company unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2008 2007 2006 company recorded approximately 184 million 62 million 321 million contract loss fixed price contract respectively contract loss recorded 2008 includes 34 million relating costs recorded prior periods impact recording priorperiod costs prior current periods material company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term revenues services less 10 revenues periods presented company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product revenue recognized accordance sfas 48 revenue recognition right return exists cases company developed reasonable estimates stock exchanges based historical experience similar types sales similar products notes consolidated financial statements continued company sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material company estimates amount rebate based upon terms individual arrangement historical experience future expectations price reductions records estimate rebate amount time sale company also enters sales incentive programs comarketing arrangements certain wireless handset customers company records incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized company assesses collectability based number factors including payment history credit worthiness customer company request collateral customers international sales company may require letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company defers revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally company enters revenue sharing arrangements company collects payment customer telecommunications service provider collects service revenues company enters revenue sharing arrangement company recognize revenue collection reasonably assured nature business china emerging markets companys billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained company current deferred revenue 1176 million 1005 million longterm deferred revenue 2101 million 2360 million december 31 2008 2007 respectively costs related deferred revenue also deferred revenue recognized see deferred costs product warranty company provides warranty equipment handset sales period generally ranging one two years time final acceptance rarely company entered arrangements provide limited warranty services periods longer two years company provides expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate time company may subject additional costs related nonstandard warranty claims customers occurs company estimates additional accruals based historical experience communication customers various assumptions company believes reasonable circumstances additional warranty accruals recorded period additional costs identified receivables although company evaluates customer credit worthiness prior sale company provides allowance doubtful accounts estimated loss trade notes receivable collection notes consolidated financial statements continued may longer reasonably assured company assesses collectability receivables based number factors including analysis creditworthiness companys historical collection history current economic conditions ability collect payment length time individual receivable balance outstanding companys policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging companys accounts receivable applying percentage based companys historical experience approach results allowance computed based aging receivables company evaluates percentages applied category aged accounts receivable periodically based actual history writeoffs collections refines formulabased approach accordingly use future periods company certain accounts receivable china outstanding significant period time company provides allowances receivables based criteria discussed company believes sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations company uses actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held companys manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting except pcd utilized weighted average method accounting approximates fifo net writedowns excess slow moving obsolete inventory writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures company continually monitors inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer notes consolidated financial statements continued greater concentration product customer sites contract specific individual customers financial conditions specific individual customers may result increased concentration risk exposure companys inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset per accounting research bulletin 43 working capital current assets current liabilities research development capitalized software development costs research development costs charged expense incurred company capitalizes software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability companys capitalized software development costs 2008 2007 2006 company capitalized 02 million 02 million 10 million software development costs respectively amortization capitalized software development costs 06 million 10 million 21 million 2008 2007 2006 respectively unamortized capitalized software development costs december 31 2008 2007 04 million 13 million respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets land use rights related property leased company china amortized life lease leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company capitalizes interest incurred related construction property plant equipment ready use capitalized interest recorded years ended december 31 2008 2007 2006 capitalized interest primarily arose construction companys manufacturing research development administrative offices facility hangzhou china amortized straightline basis life building company generally depreciates assets following periods depreciation expense 304 million 392 million 451 million years ended december 31 2008 2007 2006 respectively notes consolidated financial statements continued discussed note 8 impairment reviews resulted write downs carrying values certain equipment furniture software automobiles leasehold improvements approximately 223 million 11 million 2008 2007 respectively construction progress december 31 2007 included 119 million project costs resulting upgrading companys erp system 2007 computer software capitalized accordance statement position 981accounting costs computer software developed obtained internal use became operational early 2008 remaining carrying value erp system written fourth quarter 2008 see note 8 goodwill company reviews goodwill impairment accordance statement financial accounting standards 142 sfas 142 annual basis annual tests whenever events changes circumstances indicate carrying amount may recoverable based upon 2007 goodwill impairment assessment company recorded goodwill impairment charges 31 million year ended december 31 2007 result consolidated balance sheets december 31 2008 2007 contain goodwill balances see note 8 longlived assets including finitelived purchased intangible assets company amortizes purchased intangible assets finite lives estimated economic lives assets purchased intangible assets carried cost less accumulated amortization longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets longlived assets disposed sale measured lower book value fair value less cost sell result amortization asset sales impairment charges approximately 49 million 157 million 2008 2007 respectively companys consolidated balance sheet december 31 2008 contained balances finitelived purchased intangible assets see note 8 advertising costs company expenses advertising costs incurred payment customers marketing development costs accounted reduction revenue associated customers incurred years ended december 31 2008 2007 2006 advertising costs totaled 43 million 74 million 81 million respectively restructuring liabilities litigation contingencies company accounts restructuring plans statement financial accounting standards 146 accounting costs associated exit disposal activities sfas 146 statement financial accounting standards 112 employers accounting postemployment benefits sfas 112 company accounts litigation contingencies accordance statement financial accounting standards 5 accounting contingencies sfas 5 sfas 5 requires company record estimated loss contingency information available prior issuance companys financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated notes consolidated financial statements continued stockbased compensation statement financial accounting standards 123 revised 2004 sharebased payment sfas 123r requires measurement recognition compensation expense sharebased payment awards made employees directors based estimated fair values sfas 123r requires companies estimate fair value share based payment awards using optionpricing model value awards ultimately expected vest recognized expense requisite service periods companys consolidated statements operations stockbased compensation expense recognized companys consolidated statements operations years presented include compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions statement financial accounting standards 123 accounting stockbased compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r company elected alternative transition method provided fasb staff position fas 123r3 transition election related accounting tax effects sharebased payment awards calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establishing beginning balance additional paidincapital pool apic pool related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r company accounts utilization windfall tax benefits based tax law ordering considered direct effects stockbased compensation purposes measuring windfall settlement award see note 12 discussion stockbased compensation accumulated comprehensive income comprehensive income includes changes equity net assets period nonowner sources comprehensive income loss 2008 2007 2006 shown consolidated statement stockholders equity december 31 years indicated components accumulated comprehensive income reported consolidated balance sheets follows income taxes company subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating companys tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain july 2006 financial accounting standards board fasb issued interpretation 48 accounting notes consolidated financial statements continued uncertainty income taxesan interpretation fasb statement 109 fin 48 requires income tax positions meet morelikelythannot recognition threshold recognized financial statements fin 48 tax positions previously failed meet morelikelythannot threshold recognized first subsequent financial reporting period threshold met previously recognized tax positions longer meet morelikelythannot threshold derecognized first subsequent financial reporting period threshold longer met company recognizes interest expense penalties related income tax matters part provision income taxes company adopted fin 48 january 1 2007 prior 2007 company established reserves taxrelated uncertainties based estimates whether extent additional taxes interest due company recognizes deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability companys deferred tax assets based assessment projected taxable income numerous factors could affect companys results operations future significant decline companys future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary company records valuation allowance reduce deferred tax assets amount management believes likely realized 2006 due developments business repatriations cash via dividends settlements intercompany accounts described note 1 company made determination earnings certain subsidiaries permanently reinvested outside united states company provides us taxes foreign undistributed earnings considered permanently reinvested outside united states financial instruments derivatives financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable convertible subordinated debt purchased written call options accrued liabilities company adopted sfas 157 fair value measurements sfas 157 first quarter 2008 material impact financial statements company new disclosures required sfas 157 included note 4 carrying amounts cash equivalents accounts receivable payable notes receivable accrued liabilities approximate fair values shortterm nature instruments short term investments marked market approximate fair value shortterm nature investments company may use derivative financial instruments manage exposures foreign currency exchange rate changes objectives holding derivatives include reducing eliminating efficiently managing economic impact exposures effectively possible derivative instruments recognized either assets liabilities balance sheet company measures instruments fair value recognizes changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged company hedged transactions 2008 2007 notes consolidated financial statements continued following table summarizes companys carrying values fair values financial instruments company determines fair value convertible debt related convertible bond hedge written call option using estimates fair values balance sheet date provided major securities firm fair value longterm investments determined based quoted market prices available information investees shortterm nature companys bank loans company believes carrying value approximates fair value foreign currency translation companys operations conducted international subsidiaries local currency functional currency financial statements subsidiaries translated respective functional currencies us dollars foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity foreign currency translation gainloss transactions denominated functional currency included income net companys consolidated statements operations connection remeasurement process company recorded loss 99 million 2008 gain 46 million 76 million 2007 2006 respectively earnings per share basic earnings per share eps computed dividing net income loss available common stockholders weighted average number shares companys common stock outstanding period excludes nonvested restricted stock diluted eps presents amount net income loss available share common stock outstanding period plus share common stock would outstanding assuming company issued shares common stock dilutive potential common shares outstanding period companys potentially dilutive common shares include convertible subordinated notes prior maturity outstanding stock options nonvested restricted stock restricted stock units employee stock purchase plan espp shares years ended december 31 2008 2007 2006 potential common shares dilutive net loss years therefore basic dilutive eps following table summarizes total potential shares common stock notes consolidated financial statements continued excluded diluted per share calculation include would antidilutive period variable interest entities financial accounting standards board fasb issued fasb interpretation 46r fin 46r fin 46r requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity company evaluates investments periodically triggering events occur application fin 46r recent accounting pronouncements december 2007 fasb issued statement 141 revised business combinations sfas 141r standard changes accounting business combinations including measurement acquirer shares issued consideration business combination recognition contingent consideration accounting preacquisition gain loss contingencies recognition capitalized inprocess research development accounting acquisitionrelated restructuring cost accruals treatment acquisition related transaction costs recognition changes acquirers income tax valuation allowance sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company assess impact sfas 141r future acquisition occurs december 2007 fasb issued statement 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 standard changes accounting noncontrolling minority interests consolidated financial statements including requirements classify noncontrolling interests component consolidated stockholders equity elimination minority interest accounting results operations earnings attributable noncontrolling interests reported part consolidated earnings additionally sfas 160 revises accounting increases decreases parents controlling ownership interest sfas 160 effective fiscal years beginning december 15 2008 early adoption prohibited company currently evaluating impact pending adoption sfas 160 consolidated financial statements march 2008 fasb issued statement 161 disclosures derivative instruments hedging activities sfas 161 amends expands disclosure requirements fasb statement 133 accounting derivative instruments hedging activities sfas 133 intent provide users financial statements enhanced understanding entity uses derivative instruments b derivative instruments related hedged items accounted sfas 133 related interpretations c derivative instruments related hedged items affect entitys financial position financial performance notes consolidated financial statements continued cash flows sfas 161 requires qualitative disclosures objectives strategies using derivatives quantitative disclosures fair value amounts gains losses derivative instruments disclosures creditriskrelated contingent features derivative instruments statement applies entities derivative instruments sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 since sfas 161 provides additional disclosure requirements impact companys financial position results operations upon adoption april 2008 fasb issued fasb staff position fsp 1423 determination useful life intangible assets fsp 1423 amends factors entity consider developing renewal extension assumptions used determining useful life recognized intangible assets fasb statement 142 goodwill intangible assets new guidance applies prospectively intangible assets acquired individually group assets business combinations asset acquisitions fsp 1423 effective financial statements issued fiscal years interim periods beginning december 15 2008 early adoption prohibited company assess impact fsp 1423 acquires intangible assets future may 2008 fasb issued fasb staff position apb 141 accounting convertible debt instruments may settled cash upon conversion apb 141 apb 141 requires liability equity components convertible debt instruments may settled cash upon conversion including partial cash settlement separately accounted manner reflects issuers nonconvertible debt borrowing rate resulting debt discount amortized period convertible debt expected outstanding additional noncash interest expense apb 141 effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years retrospective application periods presented required except instruments outstanding periods presented annual financial statements period adoption outstanding earlier period since company currently debt securities company anticipate adoption apb 141 impact financial condition results operations cash flows november 2008 fasb ratified eitf 086 equity method investment accounting considerations eitf 086 eitf 086 clarifies initial carrying value equity method investment determined accordance sfas 141r otherthantemporary impairment equity method investment recognized accordance fsp apb 181 accounting investor proportionate share accumulated comprehensive income investee accounted equity method accordance apb opinion 18 upon loss significant influence eitf 086 effective prospective basis fiscal years beginning december 15 2008 interim periods within fiscal years adopted company first quarter fiscal year 2009 company assessing potential impact adoption eitf 086 consolidated results operations financial condition november 2008 fasb ratified eitf 087 accounting defensive intangible assets eitf 087 eitf 087 applies defensive assets acquired intangible assets acquirer intend actively use intends hold prevent competitors obtaining access asset eitf 087 clarifies defensive intangible assets separately identifiable accounted separate unit accounting accordance sfas 141r sfas 157 fair value measurements sfas 157 eitf 087 effective intangible assets acquired fiscal years beginning december 15 2008 adopted notes consolidated financial statements continued company first quarter fiscal year 2009 company assessing potential impact adoption eitf 087 consolidated results operations financial condition november 2008 fasb ratified eitf issue 088 accounting instrument embedded feature settlement amount based stock entitys consolidated subsidiary eitf 088 eitf 088 clarifies whether financial instrument payoff counterparty based whole part stock entitys consolidated subsidiary indexed reporting entitys stock therefore precluded qualifying first part scope exception paragraph 11 sfas 133 accounting derivative instruments hedging activities within scope eitf 0019 accounting derivative financial instruments indexed potentially settled companys stock eitf 088 effective fiscal years beginning december 15 2008 interim periods within fiscal years adopted company first quarter fiscal year 2009 company currently assessing potential impact adoption eitf 088 consolidated results operations financial condition first quarter fiscal year 2008 company adopted following accounting standards september 2006 financial accounting standards board fasb issued statement financial accounting standards 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements provisions standard apply current accounting pronouncements require permit fair value measurements upon adoption provisions sfas 157 applied prospectively limited exceptions effective january 1 2008 company adopted measurement disclosure requirements sfas 157 relates financial assets financial liabilities measured fair value recurring basis october 2008 fasb issued fasb staff position fas 1573 determining fair value financial asset market asset active fsp 1573 clarified application fas 157 fsp 1573 provides guidance fair value financial asset determined market financial asset inactive fsp 1573 effective upon issuance including prior periods financial statements issued adoption sfas 157 financial assets financial liabilities material impact companys financial condition results operations new disclosures required sfas 157 included note 4 february 2008 fasb issued fasb staff position 1572 effective date fasb statement 157 fsp 1572 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recorded disclosed fair value recurring basis therefore company delayed application sfas 157 nonfinancial assets nonfinancial liabilities january 1 2009 company currently evaluating impact sfas 157 nonfinancial assets nonfinancial liabilities companys financial position results operations company expect adoption statement material impact consolidated financial statements subsequent reporting periods company continues monitor additional implementation guidance issued addresses fair value measurements nonfinancial assets nonfinancial liabilities disclosed fair value consolidated financial statements least annual basis february 2007 fasb issued statement financial accounting standard 159 fair value option financial assets financial liabilities sfas 159 statement permits require companies report fair value majority recognized financial assets financial liabilities firm commitments standard unrealized gains losses items fair value option elected reported earnings subsequent reporting date notes consolidated financial statements continued company adopted sfas 159 first quarter 2008 company chosen elect fair value option items already required measured fair value accordance accounting principles generally accepted united states result adoption sfas 159 impact companys financial position results operations note 3divestitures beginning fourth quarter 2007 company launched number initiatives including potential divestitures noncore assets focus core growth technologies including iptv ipbased softswitch broadband devices third quarter 2008 company completed divestitures utstarcom personal communications llc mobile solutions business unit utstarcom personal communications llc pcd july 1 2008 company completed sale utstarcom personal communications llc whollyowned subsidiary company pcd personal communications devices llc pcd llc entity controlled aig global investment group certain investors total sale consideration company based primarily working capital pcd closing transaction subject certain adjustments upon final settlement working capital adjustments fourth quarter 2008 total sale consideration company 2377 million 2008 company recorded net cash proceeds 2191 million sale pcd represented total sale consideration 2377 million less 86 million transaction costs 100 million held escrow december 31 2008 company recorded additional 13 million transaction costs incurred yet paid 100 million held escrow held period one year secure indemnification claims made purchaser included prepaids current assets consolidated balance sheet december 31 2008 company also invested 16 million equity securities representing approximately 25 interest pcd llc pursuant terms divestiture agreement company may entitled receive additional 50 million earnout payment 2011 based achievement cumulative earnings levels pcd llc december 31 2010 previously pcd reportable segment company recorded 38 million gain sale pcd net assets 2008 following table summarizes components gain sale thousands notes consolidated financial statements continued concurrent closing transaction company entered threeyear supply agreement pcd llc whereby company indicated intent supply handset products pcd llc due expected ongoing direct cash flows pursuant supply agreement sale pcd assets meet criteria presentation discontinued operation sfas 144 accounting impairment disposal longlived assets sfas 144 mobile solutions business unit msbu july 31 2008 company completed divestiture mobile solutions business unit msbu global private equity firm third quarter 2008 company recorded net gain divestiture 39 million gain resulted transferring net liabilities approximately 90 million netted cash payments made company approximately 51 million including transaction related costs 03 million net liability primarily consisted deferred revenue liabilities totaling 278 million offset deferred costs assets approximately 188 million previously msbu reported part companys segment concurrent closing transaction company entered manufacturing agreement whereby company continue develop manufacture wireless ipbased products sale divested entity due ongoing direct cash flows pursuant manufacturing agreement sale msbu assets meet criteria presentation discontinued operation sfas 144 sale assets marvell technology group ltd february 2006 company sold substantially assets selected liabilities semiconductor design business division marvell technology group ltd marvell assets sold included assets related prior acquisition advanced communications devices corporation 2001 systemonchip semiconductors company recognized gain sale assets 123 million 2006 gain determined based upon total net proceeds less net book value assets sold 29 million value supply agreement 202 million included cash received 160 million earned company result achieving certain defined milestones company received payment 160 million october 2006 upon satisfaction certain escrow conditions company received additional 43 million cash august 2007 recorded consolidated statement operations gain divestiture 2007 connection sale assets company entered supply agreement marvell purchase chipsets companys handset products next five years value allocated supply agreement 202 million included current longterm liabilities amortized proportion quantities chipsets purchased supply agreement five years ended december 31 2008 2007 2006 approximately 88 million 13 million 17 million respectively amortized cost sales note 4cash cash equivalents investments cash equivalents consisting primarily bank deposits money market funds recorded cost approximates fair value shortterm nature instruments availableforsale securities included cash equivalents december 31 2008 december 31 2007 shortterm investments consisting bank notes availableforsale securities 43 million 656 million december 31 2008 december 31 2007 respectively notes consolidated financial statements continued company accepts bank notes receivable maturity dates three six months customers china normal course business company may discount bank notes banking institutions china sale notes reflected reduction cash equivalents shortterm investments proceeds settlement notes included cash flows operating activities consolidated statement cash flows company sold 305 million bank notes recorded costs 04 million result discounting notes 2008 bank notes sold 2007 2006 see note 6 shortterm investments decreased december 31 2008 december 31 2007 primarily due sale investments carrying value 424 million december 31 2007 availableforsale securities investments recorded fair value see unrealized holding gains losses reported component comprehensive income net related income tax effects realized gains losses reported earnings december 31 2008 longterm investments included 33 million unrealized holding loss recorded accumulated comprehensive income unrealized holding gain loss shortterm investments december 31 2007 longterm shortterm investments included 10 million unrealized holding loss 369 million unrealized holding gain respectively following table shows breakdown companys total investments december 31 2008 december 31 2007 thousands gemdale co ltd gemdale real estate company invests develops properties china primarily shanghai beijing shenzhen wuhan investment classified equity securities availableforsale recorded fair value 2007 company sold portion investment approximately 545 million cash recorded gain 537 million income expense net first quarter 2008 company sold remaining investment notes consolidated financial statements continued approximately 329 million cash recorded gain 324 million income expense net december 31 2007 gemdale included shortterm investments infinera corporation infinera develops optical telecommunications systems using photonic integrated circuits infinera became public company result initial public offering june 2007 investment classified equity security availableforsale recorded fair value 2007 company recorded net unrealized gain 99 million comprehensive income representing difference fair value investment december 31 2007 initial investment amount 19 million first quarter 2008 company sold investment infinera total proceeds 92 million recognized gain 73 million income expense net december 31 2007 infinera included shortterm investments global asia partners lp global asia partners lp gap venture capital fund formed make private equity investments private preipo technology telecommunications companies asia june 2002 april 2005 company invested total 26 million fund december 31 2007 company owned 49 funds outstanding partnership units investment accounted equity method earnings equity interest gap 01 million 04 million 2008 2007 respectively earnings recognized equity interest gap 2006 third quarter 2008 companys review investment included limited review gaps cash position recent financing activities financing needs earningsrevenue outlook operational performance managementownership changes competition based review company determined carrying value investment exceeded fair value investment decline otherthantemporary result third quarter 2008 company recorded 22 million writedown value investment income expense net cortina systems immenstar september 2004 company invested 20 million series preferred stock immenstar inc immenstar development stage company designed chip used companys product investment accounted cost method february 2007 immenstar acquired cortina systems inc cortina exchange companys investment immenstar company received 36 million shares series preferred stock cortina 0837 per share 18 million cash march 2007 received additional 04 million shares series preferred stock 0837 per share 02 million cash escrow 2008 result acquisition company recorded gain investment 28 million income net 2007 05 million 2008 company owns approximately 1 interest cortina december 31 2008 2007 accounts investment cortina using cost method mrvfiberxon july 1 2007 fiberxon investment company 7 ownership interest completed merger mrv communications mrv publiclytraded company notes consolidated financial statements continued active market exchange companys interest fiberxon company entitled receive 15 million cash 1519365 shares mrv common stock valued approximately 45 million deferred consideration approximately 27 million deferred consideration becomes payable upon completion certain milestones may reduced legitimate claims mrv certain matters related merger third quarter 2007 company received cash consideration 15 million 1519365 shares mrv common stock recognized gain investment 29 million 2008 2007 company recorded unrealized loss 24 million 10 million respectively comprehensive income representing change fair value investment 2008 2007 respectively company ability intent hold investment recovery fair value company consider investment otherthantemporarily impaired december 31 2008 mrv investment accounted sfas 115 accounting certain investments debt equity securities equity securities availableforsale recorded fair value gct semiconductor october 2004 company invested 30 million gct semiconductor inc investment represents approximately 2 interest gct semiconductor inc designs develops markets integrated circuit products wireless communications industry investment accounted cost method xalted networks may 2005 august 2005 company invested 20 million 10 million respectively xalted networks xalted march 2006 company invested additional 03 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings company 9 11 ownership interest december 31 2008 december 31 2007 respectively fully diluted basis xalted accounts investment using cost method fitel first international telecom corporation fitel publiclytraded company active market taiwan provider telecommunications data transmission services taiwan hong kong providing mobile paging mobile data wireless services company invested 01 million july 2003 20 million march 2008 fitel december 31 2007 company less 2 ownership interest fitel 2007 fitel voluntarily temporarily delisted publiclytraded market raising funds private placement developing new wimax business prior delisting investment accounted sfas 115 third quarter 2008 fitel filed petition reorganization taiwanese law result filing management reevaluated carrying value investment including reviewing fitels cash position recent financing activities financing needs earningsrevenue outlook operational performance managementownership changes competition based review company recorded 21 million writedown value investment income expense net third quarter 2008 notes consolidated financial statements continued pcd llc connection divestiture pcd company invested 16 million shares common stock representing approximately 25 ownership interest pcd llc investment accounted cost method turnstone october 2008 company invested 48 million turnstone environment technologies llc tet established fourth quarter 2008 exchange 5180788 series preferred units representing approximately 22 voting interest december 31 2008 500000 series preferred warrants exercise price 09265 per unit expiration term 5 years company obligated make capital contributions tets mission secure licensing rights environmentally friendly renewable energy technologies distribution various emerging markets initial focus india tet considered variable interest entity vie company primary beneficiary hold majority voting interest asset liabilities operating results vie determined immaterial december 31 2008 therefore consolidated creditors vie recourse company thereby limiting liability risks associated companys variable interests vie see note 20 fair value measurements discussed note 2 effective january 1 2008 company adopted sfas 157 relates financial assets liabilities measured reported fair value recurring basis although adoption sfas 157 materially impact financial condition results operations cash flows company required provide additional disclosures part financial statements accordance fsp 1572 company deferred adoption sfas 157 relates nonfinancial assets liabilities measured fair value nonrecurring basis fas 157 clarifies fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions sfas 157 establishes threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly quoted prices less active markets level 3 unobservable inputs respect little market data require company develop assumptions hierarchy requires company use observable market data available minimize use unobservable inputs determining fair value recurring basis company measures certain financial assets fair value including marketable securities december 31 2008 companys money market funds investment mrv recorded fair value classified within level 1 fair value hierarchy company financial assets liabilities measured fair value december 31 2008 notes consolidated financial statements continued note 5restricted cash december 31 2008 company shortterm restricted cash 168 million longterm restricted cash 182 million included longterm assets december 31 2007 company shortterm restricted cash 64 million longterm restricted cash 202 million included longterm assets amounts primarily collateralize companys issuances standby commercial letters credit note 6notes receivable purchase agreement company accepts bank notes commercial notes receivable customers china normal course business notes typically noninterest bearing maturity dates three six months bank notes included shortterm investments commercial notes receivable 111 million 126 million december 31 2008 2007 respectively company may discount notes banking institutions china sale notes reflected reduction notes receivable proceeds settlement notes included cash flows operating activities consolidated statement cash flows notes sold included companys consolidated balance sheets criteria sale treatment established sfas 140 accounting transfers servicing financial assets extinguishments liabilities met notes receivable sold 2008 2007 august 2005 company entered committed receivables purchase agreement financial institution whereby company could sell 1000 million eligible accounts receivable defined agreement march 2008 company terminated agreement receivables sold pursuant arrangement premiums penalties incurred company connection termination agreement company recorded immaterial commitment fees years ended december 31 2008 2007 2006 notes consolidated financial statements continued note 7balance sheet details following tables provide details selected balance sheet items thousands note 8longlived assets third quarter 2008 company divested intangible assets net carrying amount approximately 158 million connection sale pcd see note 3 fourth quarter 2008 company decided exit csbu market recorded charge approximately 49 million writeoff remaining unamortized balance customer relationships intangible asset arising companys previous acquisition commworks result companys consolidated balance sheet december 31 2008 contains balances finitelived intangible assets subject amortization fourth quarter 2008 companys internal forecasts revised downwards take account rapidly deteriorating business environment addition combined effect recurring operating losses sustained decline companys stock price determined notes consolidated financial statements continued aggregate significant adverse change business climate triggering event longlived assets impairment analysis company determined longlived asset groups company considers held used operations based upon certain factors including assessing lowest level identifiable cash flows largely independent cash flows groups assets liabilities asset groups consist companys operating segments entitywide assets companys china headquarters building estimates future cash flows developed 2009 budgeting process indicated companys business segments inability fully recover carrying value segments assets entitywide level inability fully recover carrying value asset group accordingly company tested carrying values december 31 2008 property plant equipment impairment asset groups except companys china headquarters building testing involved estimating fair value exchange transaction asset group comparing fair value carrying value asset grouping recording impairment charges reduce carrying value estimated fair value cases preimpairment carrying value asset group estimated fair value company made various estimates discussed management believes reasonable appropriate determining estimated fair values companys asset groups december 31 2008 concluding fair values management also considered part results appraisals made december 31 2008 valuation firms fair value companys facility hangzhou china certain companys equipment furniture software automobiles leasehold improvements company obtained confirm reasonableness estimates companys manufacturing research development administrative offices facility hangzhou china carrying value approximately 1674 million december 31 2008 largest single asset subject impairment testing management initially considered whether using comparable market transaction activity market comparison approach estimate current fair value hangzhou facility would feasible sufficiently objective circumstances discovered secondary market similar industrial properties derive sales data sufficiently robust place primary reliance valuation approach therefore management primarily used income capitalization approach estimate fair value valuation approach involves estimating current market rental facility analysis rents similar facilities either locality comparable districts using applicable capitalization rate estimate fair value resulted determining estimated fair value hangzhou facility approximately 1832 million december 31 2008 approximately 158 million greater carrying value impairment charge recorded estimated fair value hangzhou facility exceeded carrying value company also tested individually significant equipment furniture software automobiles leasehold improvements located china india japan korea united states impairment primarily using cost approach estimate related fair values determine tested assets estimated fair value december 31 2008 adjustment factors applied assets original cost first estimate current replacement cost estimate deductions estimated current replacement costs recognize effects deterioration obsolescence causes well deinstallation costs effort resulted impairment charge approximately 223 million consisted 119 million companys enterprise resource planning erp system 67 million equipment furniture 37 million primarily capitalized software notes consolidated financial statements continued management believes reasonably possible additional impairment charges would reduce carrying values companys property plant equipment may arise 2009 company unable achieve operating results anticipated companys 2009 financial plan 2007 light current market conditions management conducted indepth strategic analysis completed fourth quarter 2007 define new corporate strategy review management challenged key assumptions companys overall strategic business manufacturing capacity plans light continued declines companys revenues excluding pcd segment appeared persistent result company revised near medium term revenue expectations downward significantly take account persistent weak global industry economic conditions new strategic direction well declines revenues company experienced material changes companys outlook plans company first able quantify fourth quarter 2007 result strategic review 2008 budgeting process triggered impairment review longlived assets based upon 2007 goodwill impairment assessment company recorded goodwill impairment charges approximately 31 million year ended december 31 2007 impairment charges represented excess carrying amount goodwill segment implied fair value consolidated balance sheets december 31 2008 2007 contain goodwill balances company also determined estimated undiscounted cash flows within segment sufficient recover carrying value certain longlived assets company calculated estimated fair values intangible assets subject amortization segment using expected discounted future cash flows recorded asset impairment charge approximately 105 million customer relationships 52 million existing technology intangible assets approximate 11 million impairment charge recorded recognize impairment carrying value certain equipment segment well december 31 2008 2007 intangible assets consisted following amortization expense 41 million 160 million 189 million years ended december 31 2008 2007 2006 respectively 2006 company record impairment charges related technology intangible assets circumstances events occurred indicated possible impairment notes consolidated financial statements continued note 9debt following represents outstanding borrowings december 31 2008 2007 december 31 2008 company bank loans outstanding december 31 2007 company loans various banks totaling 480 million interest rates ranging 575 710 per annum december 31 2008 company credit facility china totaling 2638 million 1466 million working capital purposes remaining 1172 million use support letters credit corporate guarantees facility entered third quarter 2008 requires collateralization working capital draws excess 293 million andor nonworking capital draws excess 440 million december 31 2008 2190 million total credit facility remained available china line credit expires third quarter 2009 december 31 2008 company guaranteed debt included condensed consolidated balance sheet march 21 2008 company entered credit agreement providing 750 million secured revolving credit facility subject accounts receivable inventory borrowing base formula used second quarter 2008 fund companys general working capital requirements second quarter company repaid outstanding borrowings credit agreement june 30 2008 connection entry agreement sale pcd see note 3 company terminated commitments credit agreement upon termination credit agreement company expensed remaining unamortized debt issuance costs approximately 11 million march 12 2003 company completed offering 4025 million 78 convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes convertible companys common stock certain conditions conversion price 2379 per share subordinated present future senior debt company initial conversion price 1000 principal amount notes convertible 420345 shares common stock expenses associated convertible subordinated notes issuance 117 million recorded longterm assets amortized life notes concurrent issuance convertible notes company entered convertible bond hedge call option transaction convertible bond hedge amended allowed company purchase 115 million shares common stock 2379 per share party agreement written call option amended allowed holder purchase 115 million shares companys common stock company 32025 per share bond hedge call option transactions expired march 1 2008 notes consolidated financial statements continued company recorded instruments cost carrying value december 31 2007 equaled original cost adjusted amendments related early extinguishment debt convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders equity accordance guidance eitf 0019 accounting derivative financial instruments indexed potentially settled companys stock effective january 9 2007 company holders remaining 2746 million convertible subordinated notes entered first supplemental indenture providing failure company comply certain provisions original agreement result default event default may 31 2007 convertible subordinated notes accrued additional 675 per annum special interest january 9 2007 march 1 2008 maturity date notes payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest result first supplemental indenture convertible subordinated notes bore stated interest rate 7625 subsequently company solicited obtained requisite consents holders notes waiver effective july 26 2007 default may occurred prior date due delay filing noncompliance certain covenants company entered second supplemental indenture trustee dated july 26 2007 receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection companys consent solicitation announced july 19 2007 second supplemental indenture provided convertible subordinated notes accrue additional interest rate 675 per annum special interest january 9 2007 including july 25 2007 b 10 per annum special interest july 26 2007 date notes paid prepaid redeemed converted otherwise cease outstanding special interest rate provided second supplemental indenture represented increase 325 per annum special interest rate 675 provided first supplemental indenture result second supplemental indenture convertible subordinated notes stated interest rate 10875 payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest march 3 2008 company repaid convertible subordinated notes 2895 million included principal payment 2746 million accrued interest 149 million notes consolidated financial statements continued note 10warranty obligations guarantees warranty obligations included current liabilities follows thousands 2005 company recorded special warranty charge equipment sold softbank 2003 2004 since agreement repair parts exceeded companys normal warranty terms company recorded special warranty charges 117 million certain asynchronous digital subscriber line adsl products 40 million primarily multiservice optical transport product netring™ equipment 149 million gigabit ethernet passive optical network gepon equipment 2006 company recorded additional warranty charge 56 million consisting 29 million netring equipment 27 million gepon equipment sold softbank based results companys analysis warranty costs incurred revised estimates remaining liability 2007 netring reserve reduced 23 million based change scope project warranty cost incurred estimated remaining liability addition previously established reserve 25 million 2005 reversed 2007 due cancellation retrofit project remaining reserve balance related softbank special warranty costs 15 million december 31 2008 certain companys sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amount relation provisions claims made company believes valid enforceable rights intellectual property embedded products note 11provision income taxes united states foreign income loss income taxes minority interest follows notes consolidated financial statements continued components provision benefit income taxes follows company adopted provisions fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 january 1 2007 december 31 2008 companys gross unrecognized tax benefits totaled 928 million included long term liabilities net certain deferred tax assets federal tax benefit state income tax items totaling 821 million recognized portion gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 107 million total unrecognized tax benefits increase current period unrecognized tax benefits relate primarily allocations revenue costs among companys global operations december 31 2007 companys gross unrecognized tax benefits totaled 797 million included long term liabilities net certain deferred tax assets federal tax benefit state income tax items totaling 713 million recognized portion gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 84 million total unrecognized tax benefits increase current period unrecognized tax benefits relate primarily allocations revenue costs among companys global operations company recognizes interest expense penalties related unrecognized tax benefits within income tax expense company accrued interest penalties approximately 32 million december 31 2007 approximately 39 million december 31 2008 company subject taxation us federal jurisdiction various us state foreign jurisdictions companys income tax returns 2003 2004 2005 tax years audited united states internal revenue service company paid 02 million year connection audit company also audit taxing authorities china recurring basis material jurisdictions company subject examination united states china companys tax years 1998 2008 still open examination china companys tax years 2003 2008 still open examination united states company believes reasonably possible amount gross unrecognized tax benefits related resolution income tax matters could reduced notes consolidated financial statements continued approximately 266 million next 12 months income tax audits settled statute limitations expire portion 266 million gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 13 million fin 48 established criteria recognizing continuing recognize morelikelythan tax positions may result income tax expense volatility future periods company believes adequately provided tax positions amounts asserted taxing authorities could greater companys accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved summary companys unrecognized tax benefits follows establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change companys expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks notes consolidated financial statements continued summary components net deferred tax assets follows apb 23 accounting income taxesspecial areas deferred income taxes must provided unremitted earnings foreign subsidiaries unless earnings deemed permanently reinvested outside united states 2008 company us deferred income tax liability 330 million foreign earnings 1501 million considers permanently reinvested outside united states december 31 2008 company still undistributed earnings approximately 518 million investments foreign subsidiaries considered permanently reinvested determination amount deferred taxes earnings practicable since computation would depend number factors cannot known decision repatriate earnings made december 31 2008 companys us federal net operating loss carryforwards 2138 million expire varying amounts 2025 2028 december 31 2008 state net operating loss carryforwards 1380 million expire varying amounts 2010 2028 company concluded federal state net operating losses meet likely standard contained sfas 109 accounting income taxes sfas 109 therefore placed 836 million valuation allowance related deferred tax assets event tax benefits related valuation allowance realized immaterial amount would credited paidin capital december 31 2008 company also net operating loss carryforwards nols china approximately 2172 million china net operating loss carryforwards expire varying amounts 2010 2013 company notes consolidated financial statements continued also concluded china net operating losses meet likely standard contained sfas 109 therefore placed 447 million valuation allowance related deferred tax assets december 31 2008 company nols countries us china nols approximately 872 million majority nols expire carried forward indefinitely however company concluded losses meet likely standard contained sfas 109 therefore placed valuation allowance 134 million related deferred tax assets december 31 2008 company us alternative minimum tax credit carryforwards 10 million indefinite life company also us research development credit carryforwards 144 million 25 million credits indefinite life 119 million credits expire varying amounts 2010 2028 company us foreign tax credits 588 million expire varying amounts 2012 2018 company concluded us tax credit carryforwards meet likely standard contained sfas 109 therefore placed 742 million valuation allowance related deferred tax assets december 31 2008 company foreign research development credit carryforwards 04 million expire 2018 company also concluded foreign research development credit carryforwards meet likely standard contained sfas 109 therefore placed 04 million valuation allowance related deferred tax assets difference companys effective income tax rate federal statutory rate reconciled march 16 2007 chinas top legislature national peoples congress passed china corporate income tax law cit law cit law became effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises notes consolidated financial statements continued prior change tax law certain subsidiaries joint ventures located china enjoyed tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc companys active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law targets certain industries reduced 15 tax rate certain qualified high technology enterprises fies established promulgation new law currently enjoy lower tax rates increase tax rates would gradually phased five years fourth quarter 2008 two companys china subsidiaries huts utsc approved reduced 15 tax rate approval lasts three years retroactive january 1 2008 138 million tax expense effect tax rate changes attributable revaluation companys deferred tax assets china related decrease tax rates due huts utsc qualifying reduced 15 tax rate 2008 discussed 2007 271 million tax benefit effect tax rate changes attributable revaluation companys deferred tax assets china related increase tax rates due passage new law discussed based cit law december 31 2007 companys subsidiaries qualified reduced 15 tax rate 2006 tax unremitted earnings 439 million attributable recording us deferred income taxes foreign earnings 2065 million company considers permanently reinvested outside united states establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts september 30 2005 company believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets china united states result review undertaken september 30 2005 company concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment 2008 change deferred tax valuation allowance 126 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets december 31 2008 united states china 2007 change deferred tax valuation allowance 1055 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets december 31 2007 united states china 2008 income tax benefit 249 million related tax credits primarily attributable increase amount foreign tax credits generated united states due foreign withholding taxes paid repatriations dividends companys foreign operations 2006 company recorded 290 million income tax benefit related settlement tax audit china 2003 2005 tax years utstarcom telecom co ltd huts hangzhou utstarcom telecom co ltd hstc two subsidiaries china acceptance tax holiday hstc notes consolidated financial statements continued note 12common stock incentive plans stock incentiveplans december 31 2008 company stock incentive plans described substantially outstanding awards subject potential accelerated vesting event change control company repurchases cancels shares common stock forfeited respect tax liability associated certain vesting restricted stock restricted stock unit grants plans 2006 equity incentive plan 2006 equity incentive plan 2006 plan implemented july 21 2006 adopted board directors june 6 2006 approved companys stockholders july 21 2006 plan replaces 1997 plan 2001 plan 2003 plan collectively prior plans awards granted pursuant prior plans 2006 plan provides grant following types incentive awards stock options ii stock appreciation rights iii restricted stock iv restricted stock units v performance shares performance units vi stock cash awards award collectively awards eligible awards 2006 plan include employees directors consultants provide services company affiliates maximum aggregate number shares may awarded sold 2006 plan 4500000 shares plus shares reserved remain unissued prior plans july 21 2006 ii shares subject stock options similar awards granted prior plans expire become exercisable without exercised full shares issued pursuant awards granted prior plans forfeited repurchased company december 31 2008 number shares transferred prior plans 2006 plan totaled 20900238 december 31 2008 options purchase 4174301 shares common stock outstanding 2006 plan board directors compensation committee board compensation committee administers 2006 plan administrator subject terms 2006 plan administrator sole discretion select employees consultants directors receive awards determine terms conditions awards interpret provisions 2006 plan outstanding awards options granted 2006 plan generally vest become exercisable four years awards granted 2006 plan generally transferable rights respect award granted participant generally may exercised participants lifetime participant provided however administrators approval participant may transfer award participants spouse former spouse pursuant courtapproved domestic relations order relates provision child support alimony payments marital property rights ii transfer award gift benefit participants immediate family exercise price stock options stock appreciation rights granted 2006 plan must least equal 100 fair market value common stock date grant least 110 fair market value incentive stock option iso granted stockholder greater 10 voting power companys stock maximum term stock option granted participant must exceed seven years date grant five years iso granted stockholder greater 10 voting power common notes consolidated financial statements continued stock administrator determine terms conditions awards granted plan prior plansthe 1997 stock plan 2001 director option plan 2003 nonstatutory stock option plan 1997 stock plan prior implementation 2006 plan july 21 2006 officers employees consultants company affiliates eligible receive options purchase shares common stock purchase rights 1997 stock plan 1997 plan 1997 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2008 options purchase 3632600 shares common stock outstanding 1997 plan options granted 1997 plan prior july 21 2006 either isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options nsos qualify compensation committee oversaw selection eligible persons option grants determined grant date amounts exercise prices vesting periods relevant terms options including whether options would isos nsos exercise price isos granted 1997 plan could less 100 fair market value common stock grant date least 110 fair market value iso granted stockholder greater 10 voting power companys stock exercise price nsos could determined compensation committee discretion options granted 1997 plan generally transferable life optionee 1997 plan options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date five years isos granted stockholder greater 10 voting power common stock options generally terminate 12 months death permanent disability optionee ii three months termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos prior implementation 2006 plan company could also grant stock purchase rights eligible participants 1997 plan 1997 plan shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determined otherwise agreement granted company right repurchase restricted stock upon voluntary involuntary termination employee reason including death disability prior vesting purchase price repurchased shares original price paid could paid cancellation indebtedness owed company companys repurchase right lapsed rate determined compensation committee 2001 director option plan prior implementation 2006 plan july 21 2006 directors employees company outside directors eligible receive options purchase shares common stock 2001 director option plan 2001 plan 2001 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2008 options purchase 360000 shares common stock outstanding 2001 plan compensation committee administrator 2001 plan notes consolidated financial statements continued terms 2001 plan exercise price option granted equaled market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subject outside director continuing serve director dates subsequent option grants vest 100 shares subject subsequent option first anniversary date grant 2003 nonstatutory stock option plan prior implementation 2006 plan july 21 2006 directors officers employees consultants company affiliates eligible receive options purchase shares companys common stock 2003 nonstatutory stock option plan 2003 plan nonstatutory stock options would qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended could granted 2003 plan 2003 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2008 options purchase 594635 shares common stock outstanding 2003 plan 2003 plan administered compensation committee compensation committee oversaw selection eligible persons options would granted determined number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii three months termination option holders service reason disability due option holders death option however may exercised ten years grant date stock award stock option activity past years company granted equity awards consisting primarily stock options fiscal 2008 company granted equity awards using mixture restricted stock units restricted stock options december 31 2008 2007 2006 number shares common stock available issuance pursuant future grants equity compensation plans 10710921 5973324 11238850 respectively october 1 2008 company completed tender offer exchange certain outstanding employee stock options purchase shares companys common stock eligible exchange outstanding options vested unvested held current employees excluding directors executive officers granted companys 1997 stock plan exercise price greater equal 600 per share included options exercise price less fair market value companys common stock date grant subject terms conditions tender offer company accepted exchange cancelled options purchase aggregate 6072818 shares weighted average exercise price 1415 per share issued new options purchase aggregate 1983920 shares exercise price 324 per share closing stock price companys common stock october 1 2008 new options granted companys 2006 equity incentive plan generally vest two years exchange ratio number options canceled pursuant offer exceeded number options granted connection offer result incremental expense recognized notes consolidated financial statements continued incremental compensation expense resulting completion tender offer following summarizes companys stock options activity november 2007 compensation committee granted 962249 shares performancebased restricted stock units certain senior executive officers february 26 2008 committee determined based companys executive officers level performance companys 2007 fiscal year 783324 shares underlying previously granted performancebased restricted stock units earned 50 vesting immediately 50 vesting february 28 2009 performancebased restricted stock unit fair value 299 per share equals closing price companys common stock nasdaq stock market measurement date february 26 2008 february 2008 compensation committee also granted additional 1073333 performancebased awards certain senior executive officers subject attainment goals determined compensation committee third quarter 2008 233333 contingently issuable shares forfeited result employee terminations company may subject variable levels expense related primarily varying levels performance well fluctuations companys stock price awards marked market reporting period prior date compensation committees determination performance 2006 1997 plans company granted restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units awards generally vest period one four years date grant restricted stock voting rights common stock shares underlying restricted stock considered currently issued outstanding restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding expense awards based fair market value shares date grant recognized straightline basis requisite service period weighted average fair value restricted stock awards granted equity incentive plans years ended december 31 2008 2007 2006 291 296 769 respectively grant restricted stock awards deducted shares available grant companys stock plan notes consolidated financial statements continued nonvested restricted stock december 31 2007 changes year ended december 31 2008 summarized year ended december 31 2008 26 million shares restricted stock awards vested total fair value restricted stock awards vested measured date vesting year ended december 31 2008 84 million company also granted 60 million restricted stock awards year ended december 31 2007 14 million shares restricted stock awards vested total fair value restricted stock vested year ended december 31 2007 48 million company also granted 73 million shares restricted stock awards year ended december 31 2006 72442 shares restricted stock vested longer subject repurchase rights company total fair value restricted stock vested year ended december 31 2006 06 million company also granted rights purchase 301133 shares restricted stock executive officers company allowed lapse unexercised march 2006 place february 2007 compensation committee board directors company determined certain executive officers based level performance companys 2006 fiscal year eligible receive 203000 shares common stock aggregate november 30 2007 committee approved issuance 163000 shares remaining 40000 shares issuable forfeited result resignation executive officer performance stock included companys computation stockbased compensation expense year ended december 31 2006 related forfeiture recognized fiscal 2007 connection october 2002 acquisition shanghai yi yun telecom technology co ltd shanghai yi yun company issued 514290 shares restricted stock valued time 90 million shanghai yi yun employees hired one companys subsidiaries shares restricted stock cliff vested five years 2007 accelerated vesting upon achievement specified milestones company treated 514290 shares restricted stock deferred compensation 2003 226302 shares vested upon achievement specified milestones 2007 281120 shares vested 6868 shares forfeited leaving outstanding shares remaining december 31 2007 notes consolidated financial statements continued following table summarizes significant ranges outstanding exercisable stock options december 31 2008 thousands except years share prices intrinsic value represents total pretax intrinsic value calculated difference market value reported nasdaq december 31 2008 185 exercise price inthemoney shares years ended december 31 2008 2007 total pretax intrinsic value options exercised negligible year ended december 31 2006 total pretax intrinsic value options exercised 05 million determined date exercise weighted average remaining contractual life options exercisable 40 years weighted average remaining contractual life options expected vest 47 years december 31 2008 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan espp purchase plan intended qualify employee stock purchase plan section 423 internal revenue code company reserved 1180261 shares common stock sale stock purchase plan december 31 2008 stock purchase plan administered board committee appointed board stock purchase plan implemented concurrent offering periods duration may exceed 24 months offering period may contain four interim purchase periods shares purchased stock purchase plan held separate accounts participant first offering period began march 2000 ended last trading day april 30 2002 employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permits eligible employees purchase companys common stock payroll deductions may exceed 15 employees total compensation stock may purchased notes consolidated financial statements continued plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower however board directors may discretion provide price shares common stock purchased plan shall 85 fair market value companys shares date purchase participants may purchase shares common stock value greater 25000 calendar year participants may increase decrease payroll deductions time offering period subject limits imposed board directors participant withdraws stock purchase plan contributions used purchase shares shall refunded participant withdrawn may participate stock purchase plan next offering period event retirement cessation employment reason contributions yet used purchase shares refunded participant participants designated beneficiary case death certificate issued full shares participants account board directors may terminate amend stock purchase plan subject stockholder approval circumstances unless terminated earlier board stock purchase plan term ten years stockbased compensation sfas 123r requires use optionpricing models developed use valuing employee stock options company used blackscholes option pricing model blackscholes model method valuation sharebased awards granted prior december 31 2005 continued use blackscholes model subsequent sharebased payment awards blackscholes model developed use estimating fair value shortlived exchange traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility term awards actual projected employee stock option exercise behaviors riskfree interest rate expected dividends company uses historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options companys common stock available determine implied volatility company estimates expected term options granted based upon companys historical exercise cancellation data vested options addition separate groups employees similar exercise behavior considered separately expected term employee stock purchase plan shares average remaining purchase periods offering period company bases risk free interest rate used option valuation model us treasury zerocoupon issues remaining terms similar expected term options company anticipate paying cash dividends foreseeable future therefore uses expected dividend yield zero option valuation model company required estimate forfeitures time grant revise estimates subsequent periods actual forfeitures differ estimates company uses historical data estimate prevesting option forfeitures record stockbased compensation expense awards expected vest prior january 1 2006 stockbased payment awards amortized accelerated basis treating vested tranche separate stock option grant graded vesting following adoption sfas 123r january 1 2006 stockbased payment awards amortized straightline basis requisite service periods awards generally vesting periods notes consolidated financial statements continued fair value stockbased payment awards estimated using blackscholes option pricing model following assumptions december 31 2008 approximately 221 million total unrecognized compensation cost measured related nonvested stock options restricted stock restricted stock units expected recognized weightedaverage period 23 years weighted average fair value options granted stock plans years ended december 31 2008 2007 2006 146 164 307 per share respectively 2008 stockbased compensation expense includes approximately 15 million resulting award modifications related retirement one companys executives following table summarizes stockbased compensation expense recognized companys consolidated statement operations december 31 2008 stockbased compensation capitalized within inventory stockbased compensation 2008 includes 25 million charges relating prior periods resulting correction forfeiture rate application impact recording priorperiod charges prior current periods material note 13401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees attained age 21 company contributed 050 dollar contributed qualified employees 401k plan maximum 5500 2008 2007 2006 plan years companys matching contributions subject fiveyear vesting schedule based upon longevity notes consolidated financial statements continued employee service company matching contributions 19 million 25 million 27 million 2008 2007 2006 respectively note 14commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2013 minimum future lease payments leases december 31 2008 follows rent expense years ended december 31 2008 2007 2006 173 million 199 million 213 million respectively contractual obligations commercial commitments letters credit company issues standby letters credit primarily support international sales activities outside china support purchase commitments december 31 2008 company approximately 735 million outstanding letters credit 553 million due less year 182 million due one three years company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire without drawn beneficiary thereof finally company may issue commercial letters credit support purchase commitments longterm purchase obligations connection sale assets marvell technology group ltd marvell company agreed purchase marvell certain chipsets included companys pas handsets 2011 chipsets included certain handset products designed manufactured company intellectual property certain sales contracts include provisions customers would indemnified company event among things third party claim customer intellectual property rights infringement related companys products limitations notes consolidated financial statements continued maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products uncertain tax positions effective january 1 2007 company adopted provisions fin 48 december 31 2008 companys gross unrecognized tax benefits totaled 928 million included long term liabilities net certain deferred tax assets federal tax benefit state income tax items totaling 821 million recognized portion gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 107 million litigation securities class action litigation beginning october 2004 several shareholder class action lawsuits alleging federal securities violations filed company various officers directors company actions consolidated united states district court northern district california caption utstarcom inc securities litigation master file c044908jw pvt lead plaintiffs case filed first amended consolidated complaint july 26 2005 first amended complaint alleged violations securities exchange act 1934 brought behalf putative class shareholders purchased companys stock april 16 2003 september 20 2004 april 13 2006 lead plaintiffs filed second amended complaint adding new allegations extending end class period october 6 2005 addition company defendants plaintiffs also suing softbank plaintiffs complaint seeks recovery damages unspecified amount june 2 2006 company individual defendants filed motion dismiss second amended complaint march 21 2007 court granted defendants motion dismissed plaintiffs second amended complaint court granted plaintiffs leave file third amended complaint plaintiffs filed may 25 2007 july 13 2007 company individual defendants filed motion dismiss motion strike third amended complaint march 14 2008 court granted defendants motion dismissed plaintiffs third amended complaint court granted plaintiffs leave file fourth amended complaint plaintiffs filed may 14 2008 june 13 2008 consistent courts march 14 2008 dismissal order company individual defendants filed objections form content fourth amended complaint july 24 2008 court overruled objections september 8 2008 company individual defendants filed motion dismiss motion strike certain allegations fourth amended complaint september 4 2007 second shareholder class action complaint captioned peter rudolph v utstarcom et al case c074578 si filed united states district court northern district california company current former directors officers complaint alleges violations securities exchange act 1934 undisclosed improper accounting practices concerning companys historical equity award grants plaintiff seeks unspecified damages behalf purported class purchasers companys common stock july 24 2002 september 4 2007 december 14 2007 court appointed james r bartholomew lead plaintiff january 25 2008 lead plaintiff filed amended complaint april 14 2008 court granted defendants motion dismiss amended complaint court notes consolidated financial statements continued granted lead plaintiff leave file second amended complaint later may 16 2008 filed lead plaintiff may 16 2008 june 6 2008 defendants filed motion dismiss second amended complaint august 21 2008 court granted part denied part motion dismiss due preliminary status lawsuits uncertainties related litigation management unable evaluate likelihood either favorable unfavorable outcome accordingly management unable time estimate effects complaints companys financial position results operations cash flows governmental investigations may 1 2008 us securities exchange commission sec announced final settlement agreement company connection investigation commenced sec september 2005 investigation involved companys financial disclosures prior reporting periods historic option grant awards practices certain historical sales contracts china matters without admitting denying allegations secs complaint company consented permanent injunction future violations certain booksandrecords internal control provisions federal securities laws monetary penalties assessed company connection investigation mr lu companys chief executive officer time settlement current chairman board directors individually entered settlement agreement sec without admitting denying allegations secs complaint mr lu agreed pay civil penalty 100000 consented permanent injunction similar terms company december 2005 us embassy mongolia informed company forwarded department justice doj allegations agent companys mongolia joint venture offered payments mongolian government official possible violation foreign corrupt practices act fcpa company audit committee authorized independent investigation possible violations fcpa contact doj sec regarding investigation identified possible fcpa violations mongolia southeast asia india china well possible violations us immigration laws doj requested company voluntarily produce documents related investigation sec subpoenaed company documents company received grand jury subpoena requiring production documents related one aspect doj investigation training programs company sponsored sec indicated regards travel arrangements provided customers china connection certain systems contracts conduct violations company executed tolling agreements extending statute limitations fcpa issues investigation doj proceedings may result criminal civil sanctions penalties disgorgements company probable obligation company exists result outflow resources provision recorded amount reasonably estimated regulatory legal proceedings well government investigation often involve complex legal issues subject substantial uncertainties accordingly management exercises considerable judgment determining whether probable proceeding result outflow resources whether amount obligation reasonably estimated company periodically reviews status proceedings judgments subject change new information becomes available time company cannot predict inquiry completed outcome inquiry company unable reasonably estimate total amount loss associated notes consolidated financial statements continued proceedings judgment company may material adverse effect companys financial position results operations cash flows shareholder derivative litigation november 17 2006 shareholder derivative complaint captioned ernesto espinoza v ying wu et al case rg06298775 filed certain companys current former officers directors superior court county alameda california complaint alleges individual defendants among things breached duties unjustly enriched violated california corporations code connection timing stock option grants complaint names company nominal defendant seeks unspecified monetary damages individual defendants various forms injunctive relief february 2 2007 company individual defendants filed demurrers complaint april 11 2007 court sustained individual defendants demurrer overruled companys demurrer ordered plaintiff file amended complaint ordered company answer original complaint plaintiff filed amended complaint company filed answer amended complaint august 21 2007 individual defendants filed demurrers amended complaint court sustained individual defendants demurrers ordered plaintiff file second amended complaint september 26 2008 plaintiff filed second amended complaint november 21 2008 company individual defendants filed demurrers second amended complaint due preliminary status complaint uncertainties related litigation management company unable evaluate likelihood either favorable unfavorable outcome accordingly management company unable time estimate effects complaint companys financial position results operations cash flows ipo allocation october 31 2001 complaint filed united states district court southern district new york company companys directors officers various underwriters companys initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offering securities litigation 21 mc 92 pretrial purposes april 2002 consolidated amended complaint filed matter company captioned utstarcom initial public offering securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers companys common stock march 2 2000 december 6 2000 companys directors officers dismissed without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss claims brought defendants including company order dismissed claims company except claim brought section 11 securities act 1933 alleges registration statement filed accordance ipo misleading june 2004 stipulation settlement release claims issuer defendants including company submitted court approval terms settlement approved would dismissed released claims participating defendants including company august 2005 court preliminarily approved settlement december 2006 court appeals second circuit reversed notes consolidated financial statements continued courts october 2004 order certifying class six test cases selected underwriter defendants plaintiffs coordinated proceedings companys case one test cases class certification condition settlement unlikely settlement would receive final court approval june 25 2007 court entered order terminating proposed settlement based stipulation among parties settlement plaintiffs filed amended master allegations amended complaints six test cases march 26 2008 court largely denied defendants motion dismiss amended complaints parties reached global settlement litigation advised court settlement remains subject court approval insurers would pay full amount settlement share allocated company would bear financial liability company well officer director defendants previously dismissed action pursuant tolling agreements would receive complete dismissals case uncertain whether settlement receive final court approval settlement receive final court approval litigation company continues company believes meritorious defenses intends defend action vigorously utstarcom inc v starent patent infringement litigations february 16 2005 company filed suit starent patent infringement us district court northern district california complaint company asserted starent infringes utstarcom patent us reg 6829473 473 patent starents development testing software upgrade customers installed st16 intelligent mobile gateways company seeks declaratory injunctive relief starent subsequently filed answer counterclaims company filed motion dismiss starents counterclaim july 19 2005 parties stipulated starent would file amended answer counterclaim company responded starents amended counterclaim early december 2006 company filed reissue application 473 patent united states patent trademark office starent also filed reexamination 473 patent reexamination reissue currently copending litigation still preliminary stage stayed pending outcome reissue litigation outcome cannot predicted although management company believes litigation merit nonetheless management company believes adverse judgment starents counterclaims material adverse effect companys business financial condition results operations cash flows may 8 2007 company filed additional suit starent sixteen individual defendants former employees 3coms commworks division company acquired certain assets may 2003 northern district illinois causes action include claims patent infringement misappropriation trade secrets intentional interference business relations prospective economic advantage declarations ownership certain patent rights company seeks compensatory damages punitive damages injunctive relief court denied defendants motion dismiss misappropriation trade secrets claims august 30 2007 defendants answered companys complaint denying companys allegations asserting number affirmative defenses counterclaims company filed amended complaint allege additional related causes action starent moved dismiss certain causes action amended complaint may 30 2008 company amended complaint remove suit us patent 6978128 add additional factual allegations relating defendants case july 23 2008 court dismissed companys trade secret contractbased counts company asked court clarify ruling filed motion leave file fourth amended complaint containing trade secret contractbased counts initially granting defendants motion strike complaint court reconsidered order granted company leave notes consolidated financial statements continued file fourth amended complaint filed defendants moved dismiss various counts complaint company opposing motion august 27 2008 company moved dismiss starents counterclaims december 5 2008 court partially granted motion january 9 2009 starent filed amended counterclaims noninfringement invalidity unenforceability asserted patents tortuous interference prospective economic advantage trade secret misappropriation january 26 2009 company filed answer counterclaims asserted various affirmative defenses discovery motion practice ongoing court appointed special master handle discovery issues related identification trade secrets summary judgment motions company believes adverse judgment starents counterclaims material adverse effect companys business financial condition results operations cash flows telemetrix inc arbitration october 19 2006 telemetrix inc telemetrix filed formal request arbitration company world intellectual property organization wipo geneva switzerland request arbitration sought unspecified damages arising contract telemetrix telos technology inc dated october 22 2003 company assumed telos rights obligations contract pursuant companys purchase telos assets may 19 2004 telemetrix alleged nine causes action including breach contract fraud negligent misrepresentation interference contractual relations interference prospective economic advantage december 2006 company filed formal response request arbitration denying material factual allegations asserted telemetrix arbitrator selected parties august 2 2007 arbitrator granted pleading motion favor company due telemetrixs failure allege sufficient facts support majority causes action august 17 2007 telemetrix filed amended statement claim alleging six causes action including breach contract fraud telemetrix seeks damages totaling approximately 750000 plus costs attorneys fees evidentiary hearing occurred july 2830 2008 november 7 2008 arbitrator issued final award favor company claims awarded company immaterial amount attorneys fees litigation company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty management company believes final outcome matters material adverse impact companys financial position results operations cash flows note 15concentration credit risk financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts notes receivable company places temporary cash shortterm investments several financial institutions approximately 2469 million 4249 million companys cash equivalents shortterm investments deposit foreign accounts december 31 2008 2007 respectively companys exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected notes consolidated financial statements continued either 10 increase decrease interest rates due mainly short term nature investment portfolio however companys interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature certain investments anticipated declining interest rates negatively impact companys investment income company maintains investment portfolio various holdings types maturities company use derivative financial instruments company places cash investments instruments meet high credit quality standards specified investment policy guidelines companys policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested money market funds rated aaa concentration credit risk major customers chinese carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier company groups china customers together province treats province one customer since level purchasing decisions made december 31 2008 companys accounts receivable balance included amounts due pcd llc representing approximately 39 total accounts receivable company december 31 2007 sprint spectrum lp tmobile usa inc accounted approximately 16 15 respectively total accounts receivable company following customers accounted 10 companys net revenues sales verizon tmobile sprint spectrum lp primarily pcd segment sold july 2008 see note 3 approximately 16 17 23 companys net sales 2008 2007 2006 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 862 million 1295 million respectively december 31 2008 2007 company extends credit customers china generally without requiring collateral global sales outside china company may require letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 27 23 32 companys sales year ended december 31 2008 2007 2006 respectively made china accordingly political economic legal notes consolidated financial statements continued environment well general state chinas economy may influence companys business financial condition results operations companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation note 16segment reporting fourth quarter 2007 company announced new organization structure align business units corporate strategy new organization structure changed reporting segments company measures performance allocates resources effective october 1 2007 new reporting segments follows •multimedia communicationsfocused development market opportunities iptv solutions wireless infrastructure technologies •broadband infrastructurefocused companys world class portfolio broadband products •handsetsfocused mobile phone business continued focus pas cdma handset market well data cards markets handset sales pcd llc commenced july 1 2008 sale pcd included segment •servicesfocused providing services support companys broadband infrastructure multimedia communications product lines •personal communications division pcdfocused distribution mobile handsets mainly united states july 1 2008 company sold pcd llc see note 3 •otherincludes mobile solutions focused development sales services ipcdma market custom solutions focused customized telecommunication solutions july 31 2008 company divested mobile solutions business unit see note 3 fourth quarter 2008 company initiated actions disband custom solutions business unit companys management makes financial decisions based information receives internal management system currently evaluates operating performance allocates resources reporting segments based segment revenue gross profit cost sales direct expenses relation production assigned reporting segments accounting policies used measuring segment assets operating performance used consolidated level summarized companys segment net sales gross profit segment margin year ended december 31 2008 2007 2006 based current reporting segment structure previously allocated revenues services segment multimedia communications notes consolidated financial statements continued broadband infrastructure segment sales china reclassified respective segments 2007 2006 conform current years segment presentation notes consolidated financial statements continued segment margin includes direct expenses related operations segment direct product management research development expenses general corporate expenses include unallocated expenses sales marketing general administration common research development expenses equity award related charges amortization intangibles restructuring impairment charges company excludes items consistent manner internally evaluates performance segments assets segment follows methodology used allocate certain assets segments revised 2008 assets segment december 31 2007 reclassified conform current years segment presentation notes consolidated financial statements continued sales attributed geographical area based upon location customer sales data geographical areas follows longlived assets consisting property plant equipment geographical area follows note 17related party transactions softbank affiliates company recognizes revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb company supports softbanks fibertothehome service sales carrier class gepon product well netring™ product addition company supports softbanks new internet protocol television iptv sales rollingstream™ product 2008 2007 2006 company recognized revenue 383 million 678 million 1308 million respectively sales telecommunications equipment services affiliates softbank included revenue year ended december 31 2006 fee 312 million charged cancellation orders broadband products 100 million charged cancellation orders multimedia communications products included accounts receivable december 31 2008 2007 92 million 262 million respectively related transactions company immaterial amounts accounts payable softbank affiliates december 31 2008 2007 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period december 31 2008 2007 companys customer advance balance related softbank agreements 07 million 03 million respectively current deferred revenue balance related softbank 40 million 56 million december 31 2008 december 31 2007 respectively december 31 2008 notes consolidated financial statements continued companys noncurrent deferred revenue balance related softbank 92 million compared 101 million december 31 2007 july 17 2003 company entered mezzanine loan agreement bb modem rental plc bb modem affiliate softbank terms agreement company loaned bb modem 101 million effective interest rate 1201 per annum purpose investing portfolio adsl modems associated modem rental agreements softbank continue service modems modem rental agreements companys loan subordinated certain senior lenders bb modem repayments paid company 42month period january 31 2007 substantial portion principal amount loan schedule repaid last 16 months period year ended december 31 2007 2006 company recorded immaterial amount 06 million respectively interest income respect loan receivable fully settled first quarter 2007 december 31 2008 softbank beneficially owned approximately 12 companys outstanding stock audiovox prior sale pcd july 1 2008 one companys former officers served director audiovox corporation audiovox 2008 2007 2006 company paid approximately 08 million 21 million 14 million respectively services provided audiovox note 18restructuring fourth quarters fiscal 2008 2007 company announced restructuring initiatives focused aligning companys cost base revenues december 31 2008 companys total restructuring accrual 95 million company continues review business opportunities reduce operating expenses focus executing strategy based core competencies cost efficiencies 2008 plan fiscal 2008 company recorded 131 million restructuring charges included 122 million severance benefits 05 million costs associated cancellation customer projects 03 million lease termination costs charges primarily related global reduction force across functions employee terminations certain noncore operations company process winding total number employees affected totaled approximately 700 including 400 china 200 korea 100 locations including united states payment accrued amounts related severance benefits aggregating 80 million december 31 2008 expected completed second quarter fiscal 2009 2007 plan fourth quarter 2007 company implemented restructuring plan 2007 plan reduce operating costs first quarter 2008 company completed planned reduction force reducing companys headcount approximately 12 approximately 800 employees workforce reduction primarily united states china lesser degree international locations notes consolidated financial statements continued company incurred restructuring charge 145 million fourth quarter 2007 comprised largely cash payments associated onetime severance benefits facilities related cost fourth quarter 2007 113 million paid december 31 2007 remaining 32 million restructuring expense included current liabilities december 31 2008 restructuring accrual 2007 plan included within liabilities approximately 08 million related lease obligation settled remaining lease term expires fiscal year 2010 activity accrued restructuring balances related plans described follows years ended december 31 2007 2008 following table shows total amount costs incurred segment connection restructuring programs notes consolidated financial statements continued note 19other income expense net income expense net consists following note 20variable interest entities october 2008 company made investment turnstone environment technologies llc tet delaware limited liability company formed purpose licensing developing energy efficient renewable cooling solutions cell towers telecommunications industry exchange 22 interest tet company contributed 48 million cash company currently representation tets board directors ability control management operation decisions tet operations tet preliminary stages entity actively seeking additional investors company intend obligation fund future losses make additional contributions investment described december 31 2008 tet effect entirely funded companys initial investment capital contributions current investors substantive company determined venture variable interest entity vie company primary beneficiary exposed majority variable interest entitys expected losses therefore company required consolidate vies financial statements fin 46r consolidation variable interest entities however company consolidate financial statements vie 2008 operations variable interest entity material consolidated balance sheet statement operations company fourth quarter 2005 company provided interest free 124 million loan party china seed capital venture organized participate providing technical service networking technology equipment emerging market iptv products china loan partially secured indirect ownership interest venture payable 10 years could called early without penalty result foregoing fact ventures continuing viability heavily dependent provision network terminal equipment company determined venture vie company primary beneficiary venture therefore company required consolidate vies financial statements consolidation vie prior years significant impact companys consolidated financial statements march 2008 company received repayment full loans principal balance eliminating interest vie resulting reconsideration companys position primary beneficiary based reconsideration event management concluded company longer primary beneficiary fin 46r longer required consolidate vies financial statements companys consolidated statement notes consolidated financial statements continued operations year ended december 31 2008 includes operating results vie february 2008 point vie deconsolidated companys financial statements first quarter 2008 company recorded 82 million gain upon repayment loan deconsolidation included income expense net management expects continuing involvement ongoing entitys business supplier iptv equipment company determined conditions presentation discontinued operation met note 21quarterly financial data unaudited first fourth quarter 2008 company identified recorded additional contract loss reserves 18 million 16 million respectively relating 2006 2007 priorperiod charges related loss contracts resulted understatement cost sales related understatement net loss 2006 2007 company also identified recorded additional 25 million charge fourth quarter 2008 relating correction forfeiture rate application stock compensation expense associated prior periods priorperiod charge resulted understatement operating expenses related understatement net loss 2006 2007 impact priorperiod charges material prior annual interim period notes consolidated financial statements continued impact recording charges 2008 material consolidated financial statements year ended december 31 2008 item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules page financial statements report independent registered public accounting firm consolidated balance sheets december 31 2010 2009 consolidated statements operations years ended december 31 2010 2009 2008 consolidated statements stockholders equity years ended december 31 2010 2009 2008 consolidated statements cash flows years ended december 31 2010 2009 2008 notes consolidated financial statements quarterly financial data unaudited financial statement schedules icondensed financial information registrant iivaluation qualifying accounts reserves schedules omitted applicable required information shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders utstarcom inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index present fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintain material respects effective internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso material weaknesses internal control financial reporting related 1 lack effective controls appropriate timely analysis monitoring underlying information related periodend financial reporting process preparation consolidated financial statements 2 lack adequate segregation duties appropriate approval requirements nonroutine transactions relating cash management existed date material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement annual interim financial statements prevented detected timely basis material weaknesses referred described managements annual report internal control financial reporting appearing item 9a considered material weaknesses determining nature timing extent audit tests applied audit 2010 consolidated financial statements opinion regarding effectiveness companys internal control financial reporting affect opinion consolidated financial statements companys management responsible financial statements financial statement schedules maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report referred responsibility express opinions financial statements financial statement schedules companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts noncontrolling interests 2009 companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers zhong tian cpas limited company shanghai peoples republic china march 16 2011 utstarcom inc consolidated balance sheets see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders equity see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1basis presentation liquidity utstarcom inc company delaware corporation incorporated 1991 headquarters currently beijing china designs sells internet protocol ipbased telecommunications infrastructure products telecommunications service providers operators throughout world also provides telecommunications infrastructure installation operations maintenance services company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks accompanying consolidated financial statements include accounts company whollyand majorityowned subsidiaries variable interest entities significant intercompany accounts transactions eliminated preparation consolidated financial statements noncontrolling interests consolidated subsidiaries shown separately consolidated financial statements accompanying consolidated balance sheets december 31 2010 2009 consolidated statements operations three years period ended december 31 2010 prepared company pursuant rules regulations securities exchange commission sec conformity generally accepted accounting principles united states america gaap accompanying consolidated financial statements presented basis company going concern going concern assumption contemplates realization assets satisfaction liabilities normal course business company incurred net losses attributable utstarcom inc 651 million 2257 million 1503 million years ended december 31 2010 2009 2008 respectively company recorded operating losses 23 24 consecutive quarters period ended december 31 2010 december 31 2010 company accumulated deficit 11323 million company incurred net cash outflows operations 922 million 674 million 552 million 2010 2009 2008 respectively december 31 2010 company cash equivalents 3515 million 2137 million held subsidiaries china imposes currency exchange controls certain transfers funds china amount cash available transfer china subsidiaries use companys nonchina subsidiaries limited liquidity needs subsidiaries china restriction currency exchange chinesegovernment mandated limitations including currency exchange controls certain transfers funds outside china subsidiaries accumulated profit 847 million december 31 2010 determined accordance chinese accounting standards could paid dividends china subsidiaries paid aggregate 150 million dividends us parent company year ended december 31 2007 another 100 million february 2008 cash transfers offset eliminated preparing consolidated cash flow statements principal source funding nonchina operations periods made february 2009 china subsidiaries paid additional 50 million dividends us parent company however going forward amount cash available transfer china subsidiaries limited liquidity needs subsidiaries china restriction currency exchange chinese government mandated requirements including currency exchange controls certain transfers funds outside china december 31 2010 approximately 287 million available credit facilities second quarter 2010 entered two credit facilities totaling 294 million credit facilities notes consolidated financial statements continued note 1basis presentation liquidity continued used issuance certain letters credit guarantees facilities expire second quarter 2011 global economies experienced significant downturn driven financial credit crisis continue challenge economies period time current macroeconomic environment significant risks uncertainties inherent managements ability forecast future results operating environment confronting company internally externally raises significant uncertainties past years company took number actions improve liquidity march 2008 company paid 2895 million retire companys convertible subordinated notes related accrued interest july 1 2008 company completed sale pcd see note 3 addition company divested mobile solutions business unit july 2008 fourth quarter 2008 management initiated actions disband customs solutions business unit wind companys korea based handset operations announced initiatives including efforts eliminate functional duplications consolidation number functions companys china operations june 2009 management expanded initiatives include worldwide reduction workforce outsourcing manufacturing operations optimizing research development spending focus selected products companys yearoveryear 2008 2009 2010 selling general administrative research development operating expenses decreased significantly year management believes continuing efforts streamline operations enable companys fixed cost base better aligned operations market demand projected sales levels projected sales materialize company need take actions reduce costs expenses explore cost reduction options december 2009 company entered sale leaseback agreement sale manufacturing research development administrative offices facility hangzhou china another third party approximately 1388 million leaseback portion facility may 31 2010 company received sales proceeds met criteria consummation sale hangzhou facility see note 6 additional information saleleaseback transaction may 31 2010 company buyer agreed conditions precedent closing met leaseback commenced june 1 2010 company decided terminate lease hangzhou facility june 2011 notified landlord december 8 2010 six months advance according termination clause lease agreement february 1 2010 company entered agreements strategic relationship beijing etown international investment development co ltd beiid included proposed investment 485 million companys common stock beiid two unrelated investment funds elite noble limited shah capital opportunity fund lp stock purchase agreements subsequently amended may 4 2010 june 4 2010 july 7 2010 respectively investment transactions closed september 2010 terms agreements revised utstarcom received cash 346 million net issuance costs issued approximately 181 million shares common stock option purchase additional 40 million shares common stock approximately 81 million november 8 2010 option expired unexercised december 31 2010 see note 10 additional information management believes continuing efforts streamline operations enable fixed cost base better aligned operations market demand projected sales level management believes companys china nonchina operations sufficient liquidity finance working capital expenditure needs excess 12 months furthermore company notes consolidated financial statements continued note 1basis presentation liquidity continued concentrated business asia particularly china india japan unforeseen prolonged economic political risks markets could impact companys customers making respective investment decisions could material impact foregoing assessment assurance additional financing required available terms satisfactory company funds raised future issuance preferred stock debt securities could rights privileges preference senior companys common stock newly issued debt could contain debt covenants impose restrictions companys operations sale newly issued debt equity securities could result additional dilution companys current shareholders note 2summary significant accounting policies use estimates preparation consolidated financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period significant judgment estimates used revenue recognition allowance doubtful accounts sales returns tax valuation allowances inventory writedown deferred costs accrued product warranty costs provisions contract losses recoverability goodwill intangible assets longlived asset impairments stockbased compensation expense loss contingencies restructuring expenses among others actual results could differ materially estimates cash equivalents cash equivalents consist highly liquid instruments original maturities three months less approximately 18 645 million cash equivalents held us december 31 2010 remainder held utstarcom entities throughout world december 31 2010 approximately 61 2137 million companys cash equivalents held subsidiaries china imposes currency exchange controls transfers funds outside china cash equivalents invested institutional money market funds shortterm bank deposits similar short duration instruments fixed maturities overnight three months restricted cash december 31 2010 company shortterm restricted cash 160 million longterm restricted cash 84 million included longterm assets december 31 2009 company shortterm restricted cash 264 million longterm restricted cash 106 million included longterm assets amounts primarily collateralize companys issuances standby commercial letters credit investments companys investments consist principally bank notes equity securities publicly traded privately held companies companys investments publicly traded equity securities accounted asc 320 investment debt equity securities classified availableforsale investments recorded fair value unrealized gains losses notes consolidated financial statements continued note 2summary significant accounting policies continued included separate component accumulated comprehensive income net tax 2009 company sold remaining investment publicly traded equity securities investments equity securities privately held companies company holds less 20 voting interest company ability exercise significant influence accounted asc 325 investmentsother using cost method cost method investments carried lower cost fair market value investments equity securities privately held companies hold less 50 voting interest ability exercise significant influence accounted asc 323 investmentsequity method joint ventures using equity method company recognizes impairment charge decline fair value investments cost basis judged otherthantemporary making determination company reviews several factors determine whether losses otherthantemporary including limited length time investment unrealized loss position ii extent fair value less cost iii financial condition near term prospects issuer iv companys intent ability hold investment period time sufficient allow anticipated recovery fair value revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements company control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time company establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery installation equipment company entitled full payment company recognize notes consolidated financial statements continued note 2summary significant accounting policies continued revenue final acceptance granted customer acceptance considered substantive transaction sales contracts company enters typically include customer acceptance provisions require customer issue final acceptance certificate evidence customers acceptance products services circumstances company unable enforce payment terms receipt final acceptance certificate payment conditions dependent issuance final acceptance certificate companys products generally deployed within core network telecommunications customers acceptance terms products services include initial test onsite testing trial running based companys past experience customers acceptance process larger complex projects may take longer twelve months result customer run prolonged rigorous tests ensure companys products work seamlessly customers existing network telecommunication customer runs unique tests equipment performance vary based equipment works combination customers equipment software conditions given uncertainty customer acceptance customer completes internal testing procedures company waits issuance final acceptance certificate support assertion delivery products services occurred significant customer contracts involving larger complex projects onsite testing multiple locations taking product warranty product title occurs acceptance products services acceptance substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized accordance specific guidance recognizing software revenue company allocates revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements deferred delivery elements occurs vsoe fair value undelivered elements established cases company agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element postcontract support company established vsoe contract element accordingly revenues contracts recognized ratably period postcontract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support company reviews assumptions regarding estimated post contract support periods regular basis company determines necessary revise companys estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding postcontract support periods different original assumptions contract revenues would recognized remaining expected period support due china telecommunication industry restructuring launch 3g services china ministry industry information technology china announced pas services china phased notes consolidated financial statements continued note 2summary significant accounting policies continued january 1 2012 second third quarter 2009 company streamlined sales service research development operations pas handsets infrastructure equipment company perform new research development pas products maintains small support team assist customers warranty matters later part third quarter 2009 early part fourth quarter 2009 company contacted pas infrastructure customers held discussions pas products future october 2009 company notified pas infrastructure customers china longer provide upgrades support pas products beyond december 31 2011 consequently company determined remaining expected period support 2 years fourth quarter 2009 hence deferred revenue associated pas infrastructure recognized ratably beginning fourth quarter 2009 fourth quarter 2011 december 31 2010 approximately 934 million deferred revenue associated pas infrastructure sales accelerated amortization period support revenue fixed priced contracts include requirement significant software modification customization recognized using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements company unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2010 2009 2008 company recorded approximately 26 million 49 million 184 million contract loss fixed price contract respectively contract loss recorded 2008 includes 34 million relating costs recorded prior periods impact recording prior period costs period prior 2008 material company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product cases company developed reasonable estimates stock exchanges based historical experience similar types sales similar products company sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material company estimates amount rebate based upon terms individual arrangement historical experience future expectations price reductions records estimate rebate amount time sale company also enters sales incentive programs notes consolidated financial statements continued note 2summary significant accounting policies continued comarketing arrangements certain wireless handset customers company records incurred incentive reduction revenue sales revenue recognized fourth quarter 2009 company substantially completed winddown handset business therefore arrangements significant 2010 significant future assessment collectability also factor determining whether revenue recognized company assesses collectability based number factors including payment history creditworthiness customer company request collateral customers international sales company may require letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company defers revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally company enters revenue sharing arrangements company collects payment customer telecommunications service provider collects service revenues company enters revenue sharing arrangement company recognize revenue collection reasonably assured nature business china emerging markets companys billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained company current deferred revenue 1830 million 1708 million longterm deferred revenue 1222 million 1609 million december 31 2010 2009 respectively costs related deferred revenue also deferred revenue recognized see deferred costs product warranty company provides warranty equipment handset sales period generally ranging one two years time final acceptance times company entered arrangements provide limited warranty services periods longer two years company provides expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate company assesses adequacy recorded warranty liability every quarter makes adjustments liabilities necessary specific warranty accruals reversed upon expiration warranty period recorded reduction cost sales time company may subject additional costs related nonstandard warranty claims customers occurs company estimates additional accruals based historical experience communication customers various assumptions company believes reasonable circumstances additional warranty accruals recorded period additional costs identified receivables although company evaluates customer credit worthiness prior sale company provides allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured company assesses collectability receivables based number factors including analysis creditworthiness companys historical collection history notes consolidated financial statements continued note 2summary significant accounting policies continued current economic conditions ability collect payment length time individual receivable balance outstanding companys policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging companys accounts receivable applying percentage based companys historical experience approach results allowance computed based aging receivables company evaluates percentages applied category aged accounts receivable periodically based actual history writeoffs collections refines formulabased approach accordingly use future periods company certain accounts receivable china outstanding significant period time company provides allowances receivables based criteria discussed company believes sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations company uses actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held companys manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting competitive pricing pressures company continually monitors inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized due prolonged acceptance periods tests existence undelivered elements postcontract support including software update rights company vendor specific objective evidence fair value deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded notes consolidated financial statements continued note 2summary significant accounting policies continued final acceptance received customer greater concentration product customer sites contract specific individual customers financial conditions specific individual customers may result increased concentration risk exposure companys inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset research development capitalized software development costs research development costs charged expense incurred company capitalizes software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability companys capitalized software development costs 2010 2009 2008 company capitalized immaterial software development costs amortization capitalized software development costs 01 million 02 million 06 million 2010 2009 2008 respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company capitalizes interest incurred related construction property plant equipment ready use capitalized interest recorded years ended december 31 2010 2009 2008 company generally depreciates assets following periods depreciation expense 56 million 128 million 304 million years ended december 31 2010 2009 2008 respectively goodwill intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination goodwill amortized tested annually impairment fourth quarter fiscal year annual tests event occurs circumstances change accordance asc 350 would likely notes consolidated financial statements continued note 2summary significant accounting policies continued reduce fair value carrying amount impairment testing goodwill performed reporting unit level fair value reporting units generally determined using discounted cash flow analysis approach uses significant estimates assumptions including projected future cash flows timing cash flows discount rates reflecting risk inherent future cash flows perpetual growth rates determination appropriate comparable entities determination whether premium discount applied comparables addition estimates future cash flows two significant estimates involved determination fair value reporting units discount rates perpetual growth rate applied terminal values used discounted cash flow analysis discount rates used cash flow models goodwill impairment testing considers market industry data well specific risk factors reporting unit perpetual growth rates individual reporting units purposes terminal value determination generally set initial threeyear forecasted period although certain reporting units utilized longer forecasted periods based historical experience market industry data intangible assets resulting acquisitions entities accounted using acquisition method accounting estimated management based fair value assets received intangible assets finite useful lives mainly consist technologies noncompete agreement amortized straightline basis generally four years ended december 31 2010 2008 amortization asset sales impairment charges approximately 02 million 49 million respectively companys consolidated balance sheet december 31 2009 zero balances purchased intangible assets consolidated balance sheet december 31 2010 138 million goodwill 50 million intangible assets see note 11 impairment longlived assets longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets see note 6 longlived assets disposed sale measured lower book value fair value less cost sell advertising costs company expenses advertising costs incurred payment customers marketing development costs accounted reduction revenue associated customers incurred years ended december 31 2010 2009 2008 advertising costs totaled 07 million 08 million 43 million respectively notes consolidated financial statements continued note 2summary significant accounting policies continued restructuring liabilities litigation contingencies company accounts restructuring plans using guidance provided asc 420 exit disposal cost obligations asc 712 compensationnonretirement postemployment benefits company accounts litigation contingencies accordance asc 450 contingencies requires company record estimated loss contingency information available prior issuance companys financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated third party commissions company records accruals commissions payable third parties normal course business commissions recorded based terms contracts company third parties paid pursuant contracts consistent companys accounting policies commissions recorded cost net sales period liability incurred management performed continues perform followup procedures respect accrued commissions upon completion followup procedures accrued commissions claimed statute limitations expired company reverses accruals reversals recorded statement operations period management determines accruals longer necessary assistance china counsel company concluded certain accrued commissions statute limitations expired august november 2010 two years formal communication sent agents year ended december 31 2010 approximately 60 million released cost net sales result expiration statute limitations years ended december 31 2009 2008 respectively company reversed approximately 08 million 45 million accrued commissions payable reversals recorded cost net sales stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value stockbased compensation expense restricted stock awards measured based closing fair market value companys common stock date grant stockbased compensation expense stock options estimated grant date based options fair value calculated blackscholes option pricing model blackscholes model stockbased compensation expensed ratably straightline basis requisite service period generally vesting term sharebased payment awards accumulated comprehensive income comprehensive income includes changes equity net assets period nonowner sources comprehensive income loss 2010 2009 2008 shown consolidated statement stockholders equity december 31 two years indicated notes consolidated financial statements continued note 2summary significant accounting policies continued components accumulated comprehensive income reported consolidated balance sheets follows accumulated comprehensive income includes material amounts related noncontrolling interests income taxes company subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating companys tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain company recognizes tax benefit expense uncertain tax position likely tax position sustained examination taxing authorities based technical merits position company recognizes interest expense penalties related income tax matters part provision income taxes company recognizes deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability companys deferred tax assets based assessment projected taxable income numerous factors could affect companys results operations future significant decline companys future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary company records valuation allowance reduce deferred tax assets amount management believes likely realized company provides us taxes foreign undistributed earnings considered permanently reinvested outside united states financial instruments derivatives financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable accrued liabilities first quarter 2008 company adopted new accounting guidance related fair value measurements new accounting guidance material impact financial statements company new disclosures required accounting guidance included note 4 carrying amounts cash equivalents bank notes accounts receivable payable notes receivable accrued liabilities approximate fair values shortterm nature instruments fair value long term investments equity securities determined based quoted market prices available information investees notes consolidated financial statements continued note 2summary significant accounting policies continued company may use derivative financial instruments manage exposures foreign currency exchange rate changes objectives holding derivatives include reducing eliminating efficiently managing economic impact exposures effectively possible derivative instruments recognized either assets liabilities balance sheet company measures instruments fair value recognizes changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged company hedged transactions 2010 2009 2008 foreign currency translation companys operations conducted international subsidiaries local currency functional currency financial statements subsidiaries translated respective functional currencies us dollars foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity foreign currency translation gainloss transactions denominated functional currency included income net companys consolidated statements operations connection remeasurement process company recorded gain 80 million 2010 gain 63 million 2009 loss 99 million 2008 earnings per share basic earnings per share eps computed dividing net income loss available common stockholders weighted average number shares companys common stock outstanding period excludes nonvested restricted stock diluted eps presents amount net income loss available share common stock outstanding period plus share common stock would outstanding assuming company issued shares common stock dilutive potential common shares outstanding period companys potentially dilutive common shares include outstanding stock options nonvested restricted stock restricted stock units convertible subordinated notes prior maturity march 1 2008 employee stock purchase plan espp shares prior termination espp effective may 15 2009 years ended december 31 2010 2009 2008 potential common shares dilutive net loss years therefore basic dilutive eps following table summarizes total potential shares common stock excluded diluted per share calculation include would antidilutive period notes consolidated financial statements continued note 2summary significant accounting policies continued variable interest entities accounting guidance requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity company evaluates investments periodically triggering events occur recent accounting pronouncements june 2009 fasb issued authoritative guidance requiring enterprise perform analysis determine whether enterprises variable interest interests give controlling financial interest variable interest entity analysis identifies primary beneficiary variable interest entity one power direct activities variable interest entity significantly impact entitys economic performance obligation absorb losses entity could potentially significant variable interest guidance effective beginning annual reporting period commencing november 15 2009 adopted company first quarter fiscal year 2010 adoption substantive impact companys consolidated financial statements september 2009 fasb issued new standards revenue recognition multiple deliverables new standards impact determination individual deliverables included multipleelement arrangement may treated separate units accounting additionally new standards modify manner transaction consideration allocated across separately identified deliverables longer permitting residual method allocating arrangement consideration new standards effective company beginning first quarter fiscal year 2011 however early adoption permitted company adopted standards january 2011 currently assessing potential impact guidance companys consolidated financial statements september 2009 fasb issued new standards accounting certain revenue arrangements include software elements new standards amend scope preexisting software revenue guidance removing guidance nonsoftware components tangible products certain software components tangible products new standards effective company beginning first quarter fiscal year 2011 however early adoption permitted company adopted standards january 2011 currently assessing potential impact guidance companys consolidated financial statements january 2010 fasb issued amended standards require additional fair value disclosures disclosure requirements effective two phases first quarter 2010 company adopted requirements disclosures inputs valuation techniques used measure fair value well disclosures significant transfers hierarchy levels beginning first quarter 2011 amended standards required presentation disaggregated activity within reconciliation fair value measurements using significant unobservable inputs level 3 company adopted standards january 2011 currently assessing potential impact guidance companys consolidated financial statements december 2010 fasb issued amended standards requiring enterprise perform step 2 goodwill impairment test reporting units carrying amounts zero negative likely goodwill reporting units impaired notes consolidated financial statements continued note 2summary significant accounting policies continued amendments effective fiscal years interim periods within years beginning december 15 2010 early adoption permitted company adopt standards first quarter fiscal year 2011 currently assessing potential impact guidance consolidated financial statements december 2010 fasb issued amended standards require supplementary pro forma disclosures business combinations amendments effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2010 early adoption permitted company adopt standards first quarter fiscal year 2011 currently assessing potential impact guidance companys consolidated financial statements note 3divestitures beginning fourth quarter 2007 company launched number initiatives including potential divestitures noncore assets focus core growth technologies including iptv ipbased softswitch broadband devices third quarter 2008 company completed divestitures utstarcom personal communications llc mobile solutions business unit third quarter 2009 company completed sale korea operations year ended 2010 company completed divestitures china packet data services node assets emea operations ip messaging us pdsn assets remote access server product line china packet data services node pdsn assets third quarter 2010 company completed sale china pdsn assets divested assets part multimedia communications segment close transactions company remained primary obligor certain sales contracts place prior close transaction company allocated proceeds component sales agreement based relative fair values recorded gain 16 million upon closing transaction september 2010 company record sales related cost net sales future periods related completion existing contracts company determined sale product line meet criteria presentation discontinued operation companys continuing involvement emea operations september 2010 company entered agreement transfer emea europe middle east africa operations consideration however december 31 2010 transaction completed company transfer obligations existing sales contracts buyer 2010 company recognized expenses approximately 09 million divestiture loss obligations primarily arising local statutory requirements severance fund transferred employees miscellaneous operational costs 2010 company paid approximately 07 million buyer remaining accrued balance 02 million expected paid first quarter 2011 buyer agreed take obligations company determined sale emea operations meet criteria presentation discontinued operation emea meet definition component entity company continued involvement emea operations notes consolidated financial statements continued note 3divestitures continued ip messaging us pdsn assets june 2010 company completed sale ip messaging us pdsn assets part strategy focus core ipbased product offerings divested assets located north america caribbean latin america regions part multimedia communications segment consideration approximately 17 million net liabilities transferred included approximately 04 million cash proceeds plus potential additional contingent consideration 16 million based future cash collection transferred receivables gain 21 million net taxes recognized june 2010 reduction operating expenses third fourth quarter 2010 company received 09 million contingent consideration recognized additional gain divestiture company determined sale product lines meet criteria presentation discontinued operation product lines meet definition component entity sale remote access server product line january 2010 company completed sale certain assets liabilities related remote access server ras product line received total consideration approximately 15 million primary ras product total control 1000 transaction gateway offers market proven processing platform carrierclass transaction network service providers enterprises dialup connectivity first quarter 2010 company transferred net liabilities approximately 03 million connection transaction recorded net gain 18 million reduction operating expenses company determined divestiture ras product line meet criteria presentation discontinued operation ras product line meet definition component entity korea operations july 31 2009 company completed sale korea operations entity founded former employee received total consideration approximately 20 million connection transaction company recorded net loss 13 million 2009 included amount 22 million foreign currency losses previously carried accumulated comprehensive income realized upon completion sale liquidation subsidiary company determined divestiture korea operations meet criteria presentation discontinued operation korea operations meet definition component entity utstarcom personal communications llc pcd july 1 2008 company completed sale utstarcom personal communications llc whollyowned subsidiary company pcd personal communications devices llc pcd llc entity controlled aig global investment group certain investors company divested substantially assets liabilities pcd total sale consideration company based primarily working capital pcd closing transaction subject certain adjustments upon final settlement working capital adjustments fourth quarter 2008 total sale consideration company 2377 million 2008 notes consolidated financial statements continued note 3divestitures continued company recorded net cash proceeds 2191 million sale pcd represented total sale consideration 2377 million less 86 million transaction costs 100 million held escrow december 31 2008 company recorded additional 13 million transaction costs incurred yet paid company also invested 16 million equity securities pcd llc representing approximately 26 interest pcd llc company recorded 38 million gain sale pcd net assets 2008 following table summarizes components gain sale thousands second quarter 2009 company recorded additional 14 million gain resulting adjustment reflect actual transaction related costs total gain sale pcd net assets includes proceeds 100 million held escrow disbursed company july 2009 pursuant original terms divestiture agreement company potentially entitled receive 500 million earnout payment 2011 based achievement cumulative earnings levels pcd llc december 31 2010 prior june 30 2008 pcd reportable segment company concurrent closing divestiture transaction company entered threeyear supply agreement pcd llc whereby company indicated intent supply handset products pcd llc connection winddown korea operations december 2008 furnished pcd llc 180days notice termination supply agreement due continuing direct cash flows pursuant supply agreement beyond oneyear assessment period starting date sale pcd assets meet criteria presentation discontinued operation june 30 2009 company entered settlement agreement release settlement agreement pcd llc resolve certain product quality issues settlement agreement company waived right earnout payments granted call option pcd llc companys 16 million investment equity securities pcd llc company also agreed pay pcd llc total 111 million recorded warranty costs approximately 84 million see note 8 reduction revenue approximately 27 million third quarter 2009 pcd llc elected exercise call option repurchase 2199214 class units owned company received cash 16 million september 2009 transferred equity holdings class units pcd llc gain loss recorded transfer carrying value equity holdings equal proceeds received 2009 gross profit reduced approximately 246 million result certain transactions pcd llc consisting 111 million claim settlement approximately notes consolidated financial statements continued note 3divestitures continued 260 million costs inventory writedowns net realizable value writedowns excess inventory warranty reserves related transactions pcd llc offset partially 125 million benefit related sales handsets pcd llc 2009 previously written zero carrying value fourth quarter 2008 upon entering settlement agreement company performed reassessment concluded assessment period discontinued operations presentation required extend beyond oneyear period following disposition pcd accordance asc 205205523 result given cash flows generated disposed component significant throughout assessment period beyond would appropriate reclassify pcd discontinued operation presentation mobile solutions business unit msbu july 31 2008 company completed divestiture mobile solutions business unit msbu global private equity firm company sold assets liabilities related msbu including certain intellectual property technology rights exception cash accounts related canadian gst taxes except products intellectual property rights relating companys core cdma product pdsn third quarter 2008 company recorded net gain divestiture 39 million gain resulted transferring net liabilities approximately 90 million netted cash payments made company approximately 51 million including transaction related costs 03 million net liability primarily consisted deferred revenue liabilities totaling 278 million offset deferred costs assets approximately 188 million previously msbu reported part companys segment responsible development sales services companys wireless ipcdmaipgsm product line pdsn product line concurrent closing transaction company entered manufacturing agreement whereby company continue develop manufacture wireless ipbased products sale divested entity due ongoing direct cash flows pursuant manufacturing agreement sale msbu assets meet criteria presentation discontinued operation note 4cash cash equivalents investments cash equivalents consisting primarily bank deposits money market funds recorded cost approximates fair value shortterm nature instruments availableforsale securities included cash equivalents december 31 2010 december 31 2009 shortterm investments consist bank notes 05 million 10 million december 31 2010 december 31 2009 respectively company accepts bank notes receivable maturity dates three six months customers china normal course business company may discount bank notes banking institutions china year ended december 31 2010 bank notes sold company sold 99 million 305 million bank notes recorded costs less 01 million 04 million result discounting notes 2009 2008 respectively longterm investments privatelyheld companies accounted cost method company recognizes impairment charge decline fair value investments cost basis judged otherthantemporary making determination company reviews several factors determine whether losses notes consolidated financial statements continued note 4cash cash equivalents investments continued otherthantemporary including limited length time investment unrealized loss position ii extent fair value less cost iii financial condition near term prospects issuer iv companys intent ability hold investment period time sufficient allow anticipated recovery fair value availableforsale securities subject fair value accounting december 31 2010 2009 longterm investments december 31 2010 2009 privatelyheld companies accounted cost equity method following table shows breakdown companys total investments december 31 2010 december 31 2009 cortina september 2004 company invested 20 million series preferred stock immenstar inc immenstar development stage company designed chip used companys product investment accounted cost method february 2007 immenstar acquired cortina systems inc cortina exchange companys investment immenstar company received 36 million shares series preferred stock cortina 0837 per share 18 million cash march 2007 received additional 04 million shares series preferred stock 0837 per share 02 million cash escrow 2008 result acquisition company recorded gain investment 28 million income net 2007 05 million 2008 company owns approximately 1 interest cortina december 31 2010 2009 accounts investment cortina using cost method gct semiconductor october 2004 company invested 30 million series preferred stock gct semiconductor inc gct investment represents approximately 2 interest gct semiconductor inc designs develops markets integrated circuit products wireless communications industry investment accounted cost method xalted networks may 2005 august 2005 company invested 20 million 10 million respectively xalted networks xalted march 2006 company invested additional 03 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings company less notes consolidated financial statements continued note 4cash cash equivalents investments continued 10 ownership interest december 31 2010 2009 fully diluted basis xalted accounts investment using cost method third quarter 2009 management reevaluated carrying value investment including reviewing xalteds cash position recent financing activities financing needs earningsrevenue outlook operational performance competition based review company determined decline xalteds fair value otherthantemporary recorded 17 million impairment charge investment income net third quarter 2009 sbi neo technology investment lps sbi 2008 company invested 05 million sbi exchange approximately 2 partnership interest partnerships investment objective invest unlisted listed companies japan overseas engaged high growth businesses including businesses focused information technology environment first quarter 2010 company contributed additional 07 million sbi december 31 2010 maintains approximately 2 partnership interest company concluded controlling interest sbi power direct activities sbi significantly impact entitys economic performance affiliates related party controlling interest sbi see note 17 company accounts investment sbi using cost method aceland investment limited december 2010 invested 21 million aceland investments limited aceland formed zte hk limited us investment objective participate investment wireless city planning operated softbank develop xgp business approximately 35 interest aceland december 31 2010 accounts investment aceland using equity method fair value measurements pursuant accounting guidance fair value measurements subsequent updates fair value defined price would received selling asset paid transfer liability orderly transaction market participants measurement date fair value marketbased measurement determined based assumptions market participants would use pricing asset liability accounting guidance also establishes threetier fair value hierarchy requires company use observable market data available minimize use unobservable inputs determining fair value fair value hierarchy prioritizes inputs three levels may used measuring fair value follows level 1observable inputs quoted prices active markets identical assets liabilities level 2inputs quoted prices active markets identical assets liabilities observable either directly indirectly level 3unobservable inputs based companys assumptions january 2010 fasb issued amended standards require additional fair value disclosures disclosure requirements effective two phases first quarter 2010 company adopted requirements disclosures inputs valuation techniques used measure fair value well disclosures significant transfers hierarchy levels beginning first notes consolidated financial statements continued note 4cash cash equivalents investments continued quarter 2011 amended standards require presentation disaggregated activity within reconciliation fair value measurements using significant unobservable inputs level 3 amended standards significantly impact companys consolidated financial statements december 31 2010 company assets liabilities measured fair value recurring basis companys money market funds included cash equivalents recorded cost approximates fair value classified within level 1 fair value hierarchy fair value certain companys financial instruments measured fair value including accounts receivable accounts payable current liabilities approximates carrying amount short maturities december 31 2009 company determined result sale leaseback transaction entered december 2009 see note 6 net book value hangzhou facility excess fair value due apparent decline value company conducted recoverability test entitywide asset determined carrying value net assets company exceeded undiscounted cash flows expected result use eventual disposition asset group companys assessment fair value management placed primary reliance market approach third party offer result analysis reduced companys overall assessment fair value property 333 million accordingly company recorded noncash impairment charge 333 million fourth quarter 2009 companys overall assessment fair value property december 31 2009 based level 2 inputs year ended december 31 2010 company assets liabilities measured fair value nonrecurring basis note 5balance sheet details following tables provide details selected balance sheet items 1includes finished goods customer sites approximately 235 million 338 million december 31 2010 2009 respectively customer taken possession based specific contractual terms title yet passed customer notes consolidated financial statements continued note 5balance sheet details continued inventories approximately 06 million held companys manufacturing outsource partner recorded prepaids current assets consolidated balance sheet december 31 2010 inventories held manufacturing outsource partner december 31 2009 company recorded 146 million inventory writedown 2010 msan mstp two international customer contracts due reduction product demands note 6longlived assets december 2009 company entered property transfer leaseback agreement sale leaseback agreement sale manufacturing research development administrative office facility hangzhou china hangzhou facility third party proceeds approximately 1388 million leaseback approximately onethird property 2016 march 15 2010 company received proceeds approximately 139 million transaction march 8 2010 company obtained irrevocable bank guarantee letter buyer remaining amount cash proceeds sale leaseback agreement may 31 2010 company buyer agreed conditions precedent closing met notes consolidated financial statements continued note 6longlived assets continued leaseback commenced june 1 2010 may 31 2010 company received sales proceeds met criteria consummation sale hangzhou facility management concluded transaction qualified saleleaseback accounting risks rewards ownership transferred buyer upon closing transaction leaseback arrangement include form continuing involvement normal leaseback second quarter 2010 company recorded sale hangzhou facility recorded deferred gain 77 million time sale deferred gain represented excess gross sales proceeds 1388 million 75 million transaction related taxes fees net book value hangzhou facility 1236 million gain sale deferred accordance accounting guidance saleleaseback transactions company retained minor portion use property sixyear leaseback deferred gain saleleaseback amortized proportion related gross rental charged expense leaseback term 2010 amortization deferred gain 08 million recorded reduction operating expenses connection sale leaseback agreement february 1 2010 company entered lease contract lease respect leaseback portion hangzhou facility terms lease company lease back 71027 square meters gross floor area gfa aboveground 12000 sqm gfa underground building period 6 years rate approximately 037 044 047 respectively per sqm per day years 12 34 56 respectively lease period aboveground space approximately 366 per sqm per month underground space full lease period company also required pay security deposit amount approximately 18 million prepay part rent fees last six months lease term amount approximately 34 million upon lease inception june 1 2010 company may terminate part lease giving six months advance notice however company would required pay penalties additional compensation event early termination company concluded lease qualifies operating lease company decided terminate lease hangzhou facility june 2011 notified landlord december 8 2010 six months advance according termination clause lease agreement termination clause requires company pay total penalties 95 million termination penalty charge 13 million recorded december 2010 result full termination penalty set release deferred gain deferred rental liabilities portion would normally amortized next six month period june 8 2011 early termination december 31 2010 company net balance 40 million related early termination penalty recorded liabilities consists 95 million total penalty less prepaid rent security deposit paid second quarter 2010 december 31 2010 06 million deferred gain included current liabilities consolidated balance sheet see note 14 future minimum lease payments noncancelable operating leases prior sale leaseback hangzhou facility 2010 discussed company announced consideration sell facility june 2009 view intentions third quarter 2009 company contracted commercial real estate agent assist evaluating potential sale facility furthermore october 2009 company initiated actions notes consolidated financial statements continued note 6longlived assets continued consolidate companys use facility reduce operating costs revised projected occupancy needs light developments company performed recoverability assessment facility september 30 2009 impairment testing performed company third quarter 2009 utilizing income approach indicated fair value approximated carrying value hangzhou facility september 30 2009 1605 million impairment recorded respect property income approach used result lack preliminary offers available comparable market transaction activity place reliance market valuation approach however fourth quarter 2009 binding offer received buyer gave company better indication propertys fair value revealed value property interested third party lower fair value company previously estimated using income approach building approximately 27 million square feet unique design based uniqueness building fact single offer building received market several months management determined third party offer better indication fair value methods offer specific property representing direct evidence fair value based offer company determined property net book value excess fair value due apparent decline value company conducted recoverability test entitywide asset determined carrying value net assets company exceeded undiscounted cash flows expected result use eventual disposition asset group companys assessment fair value management placed primary reliance market approach third party offer result analysis reduced companys overall assessment fair value property 333 million accordingly company recorded noncash impairment charge 333 million fourth quarter 2009 adjusted carrying value 1257 million property lower pending sales price valuation performed factored abovemarket rental rates paid company stipulated leaseback agreement accompanying sale companys overall assessment fair value property based level 2 inputs defined inputs quoted market prices active markets observable either directly indirectly december 31 2009 longlived asset sold classified held use company expects retain minor portion use property sixyear leaseback third quarter 2008 company divested intangible assets net carrying amount approximately 158 million connection sale pcd see note 3 fourth quarter 2008 company decided exit csbu market recorded charge approximately 49 million writeoff remaining unamortized balance customer relationships intangible asset arising companys previous acquisition commworks result companys consolidated balance sheet december 31 2008 contains balances finitelived intangible assets subject amortization fourth quarter 2008 companys internal forecasts revised downwards take account rapidly deteriorating business environment addition combined effect recurring operating losses sustained decline companys stock price determined aggregate significant adverse change business climate triggering event longlived assets impairment analysis notes consolidated financial statements continued note 6longlived assets continued company determined longlived asset groups company considers held used operations based upon certain factors including assessing lowest level identifiable cash flows largely independent cash flows groups assets liabilities asset groups consist companys operating segments entitywide assets companys china headquarters building estimates future cash flows developed 2009 budgeting process indicated companys business segments inability fully recover carrying value segments assets entitywide level inability fully recover carrying value asset group accordingly company tested carrying values december 31 2008 property plant equipment impairment asset groups except companys china headquarters building testing involved estimating fair value exchange transaction asset group comparing fair value carrying value asset grouping recording impairment charges reduce carrying value estimated fair value cases preimpairment carrying value asset group estimated fair value company made various estimates discussed management believes reasonable appropriate determining estimated fair values companys asset groups december 31 2008 concluding fair values management also considered part results appraisals made december 31 2008 valuation firms fair value companys facility hangzhou china certain companys equipment furniture software automobiles leasehold improvements company obtained confirm reasonableness estimates companys manufacturing research development administrative offices facility hangzhou china carrying value approximately 1674 million december 31 2008 largest single asset subject impairment testing management initially considered whether using comparable market transaction activity market comparison approach estimate current fair value hangzhou facility would feasible sufficiently objective circumstances discovered secondary market similar industrial properties derive sales data sufficiently robust place primary reliance valuation approach therefore management primarily used income capitalization approach estimate fair value valuation approach involves estimating current market rental facility analysis rents similar facilities either locality comparable districts using applicable capitalization rate estimate fair value resulted determining estimated fair value hangzhou facility approximately 1832 million december 31 2008 approximately 158 million greater carrying value december 31 2008 impairment charge recorded 2008 estimated fair value hangzhou facility exceeded carrying value company also tested individually significant equipment furniture software automobiles leasehold improvements located china india japan korea united states impairment primarily using cost approach estimate related fair values determine tested assets estimated fair value december 31 2008 adjustment factors applied assets original cost first estimate current replacement cost estimate deductions estimated current replacement costs recognize effects deterioration obsolescence causes well deinstallation costs effort resulted impairment charge approximately 223 million consisted 119 million companys enterprise resource planning erp system 67 million equipment furniture 37 million primarily capitalized software notes consolidated financial statements continued note 7debt december 31 2010 2009 company bank loans outstanding company guaranteed debt included consolidated balance sheet second quarter 2010 company entered two credit facilities totaling 294 million credit facilities used issuance certain letters credit guarantees facilities expire second quarter 2011 2009 approximately 3221 million credit facilities china expired renewed december 31 2009 company available credit facilities march 21 2008 company entered credit agreement providing 750 million secured revolving credit facility subject accounts receivable inventory borrowing base formula used second quarter 2008 fund companys general working capital requirements second quarter 2008 company repaid outstanding borrowings credit agreement june 30 2008 connection entry agreement sale pcd see note 3 company terminated commitments credit agreement upon termination credit agreement 2008 company expensed remaining unamortized debt issuance costs approximately 11 million march 3 2008 company repaid remaining outstanding convertible subordinated notes 2895 million included principal payment 2746 million accrued interest 149 million note 8warranty obligations guarantees company provides standard warranty equipment handset sales period generally ranging one two years time final acceptance times company entered arrangements provide limited warranty services periods longer two years company provides expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate company assesses adequacy recorded warranty liability every quarter makes adjustments liabilities necessary specific warranty accruals reversed upon expiration warranty period recorded reduction cost net sales time company may subject additional costs related nonstandard warranty claims customers occurs company estimates additional accruals based historical experience communication customers various assumptions company believes reasonable circumstances additional warranty accruals recorded period additional costs identified expirations recorded reduction cost net sales approximated 35 million 43 million years ended december 31 2010 2009 respectively included table benefit expirations following table summarizes activity related warranty obligations years ended december 31 2010 2009 2008 notes consolidated financial statements continued note 8warranty obligations guarantees continued companys warranty obligations included current liabilities related activity years ended december 31 2010 2009 2008 follows thousands second quarter 2009 company recorded special warranty charge related certain handsets sold pcd llc settlement agreement pcd llc see note 3 company agreed pay pcd llc 84 million settle certain pcd llc customers warranty claims arising handsets sold pcd llc 84 million claim settlement paid third quarter 2009 included accruals warranties issued settlements made 2009 table certain companys sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees historically company incurred material costs result obligations agreements possible determine aggregate maximum potential loss indemnification agreements due limited history prior indemnification claims unique facts circumstances involved particular agreement note 9income taxes united states foreign income loss income taxes minority interest follows notes consolidated financial statements continued note 9income taxes continued components provision benefit income taxes follows december 31 2010 company gross unrecognized tax benefits approximately 565 million certain deferred tax assets federal tax benefit state income tax items totaling 421 million total 565 million gross unrecognized tax benefits 144 million related tax benefits recognized would impact annual effective tax rate company reduced total unrecognized tax benefits approximately 326 million fourth quarter 2010 total 326 million reduction gross unrecognized tax benefits 14 million mainly due statute limitations expirations settlements income tax audits remaining 312 million primarily due settlement timing differences approximately 04 million 326 million reduction gross unrecognized tax benefits impacted effective tax rate 2010 companys policy recognize interest expense penalties related unrecognized tax benefits component income tax expense 2010 total amount interest penalties recognized statement income 05 million company accrued interest penalties approximately 34 million december 31 2010 approximately 31 million december 31 2009 company subject taxation us federal jurisdiction various us state foreign jurisdictions company also audit taxing authorities china recurring basis material jurisdictions company subject examination united states china companys tax years 2000 2010 still open examination china companys tax years 2003 2010 still open examination united states fasb asc 74010 establishes criteria recognizing continuing recognize morelikelythannot tax positions may result income tax expense volatility future periods company believes adequately provided tax positions amounts asserted taxing authorities could greater companys accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved notes consolidated financial statements continued note 9income taxes continued summary companys unrecognized tax benefits follows establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change companys expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks notes consolidated financial statements continued note 9income taxes continued summary components net deferred tax assets follows company provides deferred income taxes unremitted earnings foreign subsidiaries unless earnings deemed permanently reinvested outside united states 2010 company gross us deferred income tax liability 02 million foreign earnings 877 million considers permanently reinvested outside united states december 31 2010 company still undistributed earnings approximately 182 million investments foreign subsidiaries considered permanently reinvested determination amount deferred taxes earnings practicable since computation would depend number factors cannot known decision repatriate earnings made december 31 2010 companys us federal net operating loss carryforwards 3569 million expire varying amounts 2026 2031 december 31 2010 state net operating loss carryforwards 2470 million expire varying amounts 2011 2031 company concluded federal state net operating losses meet likely standard contained fasb asc 74010 therefore placed 1373 million valuation allowance related deferred tax assets event tax benefits related valuation allowance realized immaterial amount would credited paidin capital december 31 2010 company also net operating loss carryforwards nols china notes consolidated financial statements continued note 9income taxes continued approximately 4830 million china net operating loss carryforwards expire varying amounts 2012 2016 company also concluded china net operating losses meet likely standard therefore placed 742 million valuation allowance related deferred tax assets december 31 2010 company nols countries us china nols approximately 965 million majority nols expire carried forward indefinitely however company concluded losses meet likely standard therefore placed valuation allowance 151 million related deferred tax assets december 31 2010 company us alternative minimum tax credit carryforwards 10 million indefinite life company also us research development credit carryforwards 131 million 25 million credits indefinite life 106 million credits expire varying amounts 2012 2029 company us foreign tax credits 902 million expire varying amounts 2012 2021 company concluded us tax credit carryforwards meet likely standard contained fasb asc 74010 therefore placed 1043 million valuation allowance related deferred tax assets december 31 2010 company foreign research development credit carryforwards 12 million expire varying amounts 2015 2029 company also concluded foreign research development credit carryforwards meet likely standard therefore placed 12 million valuation allowance related deferred tax assets difference companys effective income tax rate federal statutory rate reconciled china corporate income tax law cit law became effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises notes consolidated financial statements continued note 9income taxes continued prior change tax law certain subsidiaries joint ventures located china enjoyed tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc companys active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law provides reduced 15 enterprise income tax rate qualified high new technology enterprises two companys china subsidiaries huts utsc majority business china conducted obtained high new technology enterprise certificates hightech certificates relevant approval authorities september 19 2008 december 30 2008 respectively thereafter approved pay cit reduced tax rate 15 approval reduced 15 tax rate valid three years applies retroactively january 1 2008 subject possible reassessment approval authorities reassessment tax authority may suspend implementation reduced 15 rate hutss hightech certificate expire september 19 2011 utscs hightech certificate expire december 30 2011 huts utsc may apply extension respective hightech certificates prior expiration date respective certificates approved extended term three years huts utsc fails pass reassessment approval authorities fails renew hightech certificate preferential tax rate 15 cease apply huts utsc would subject tax rate 25 however since entities currently significant loss positions change tax rate material adverse impact business liquidity two china subsidiaries begin generate profit deplete net operating loss carry forwards 2010 04 million tax benefit effect tax rate changes attributable revaluation companys deferred tax assets china related decrease tax rates due huts qualifying reduced 15 tax rate 2008 utscs likely disqualification reduced 15 2010 2009 190 million tax benefit effect tax rate changes attributable revaluation companys deferred tax assets china related decrease tax rates due huts utsc qualifying reduced 15 tax rate 2008 discussed 2008 138 million tax expense effect tax rate changes attributable revaluation companys deferred tax assets china related decrease tax rates due passage huts utsc qualifying reduced 15 tax rate 2008 discussed establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts september 30 2005 company believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets china united states result review undertaken september 30 2005 company concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment 2010 change deferred tax valuation allowance 209 million primarily attributable tax expense related continuing provide full valuation allowance companys deferred tax assets december 31 2010 united states china 2009 change deferred tax notes consolidated financial statements continued note 9income taxes continued valuation allowance 1122 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets december 31 2009 united states china 2008 change deferred tax valuation allowance 126 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets united states china december 31 2008 2010 income tax benefit 10 million related tax credits primarily attributable increase amount foreign tax credits generated united states due foreign taxes paid 2009 income tax benefit 187 million related tax credits primarily attributable increase amount foreign tax credits generated united states due foreign withholding taxes repatriations dividends companys foreign operations 2008 income tax benefit 249 million related tax credits primarily attributable increase amount foreign tax credits generated united states due foreign withholding taxes paid repatriations dividends companys foreign operations note 10common stock purchase option purchase additional shares february 1 2010 company entered stock purchase agreements beijing etown international investment development co ltd beiid two unrelated investment funds elite noble limited shah capital opportunity fund lp included proposed investment 485 million companys common stock purchase agreements subsequently amended may 4 2010 june 4 2010 july 7 2010 respectively september 7 2010 company investors entered fourth amendment stock purchase agreements fourth amendments reduce per share purchase price make certain adjustment number shares sold agreements terms fourth amendments company investors agreed reduce purchase price 220 per share 2027 per share adjust number shares sold investors fourth amendments also provided option elite noble limited purchase additional 3972251 shares november 8 2010 approximately 81 million based stated exercise price 2027 per share purchase takes place prior october 7 2010 2047 per share purchase takes place october 8 2010 november 8 2010 september 7 2010 company completed transaction issued aggregate 18073202 shares common stock option purchase additional 3972251 shares cash proceeds net issuance costs 346 million net cash proceeds allocated common stock issued option purchase additional shares based relative fair value date issuance resulting 341 million net cash proceeds allocated common stock issued 05 million net cash proceeds allocated option purchase additional shares fair value option purchase additional 3972251 shares estimated 05 million date issuance based blackscholes option pricing model using riskfree interest rate 016 volatility approximately 55 contractual life 02 years zero dividend rate net cash proceeds allocated option purchase additional shares recorded additional paid capital option expired unexercised december 31 2010 note 11acquisition goodwill intangible assets october 16 2010 company entered ordinary shares purchase agreement stage smart limited stage smart frontier holdings limited smart frontier notes consolidated financial statements continued note 11acquisition goodwill intangible assets continued sole shareholder stage smart enable company launch internet tv platform generate revenue subscription advertising valueadded service coming years pursuant ordinary shares purchase agreement company agreed purchase smart frontier 5100000 ordinary shares stage smart held smart frontier purchase shares aggregate purchase price 100 million purchased shares constitute 51 total shares stage smart currently held smart frontier purchase price purchased shares paid form number shares companys common stock calculated dividing 100 million average closing price per share companys common stock quoted nasdaq stock market thirty day period immediately preceding date closing transaction closely approximates market value day issuance subject customary closing conditions pursuant ordinary shares purchase agreement company right repurchase companys shares issued part consideration stage smart shareholders one year anniversary closing date regulatory approvals obtained outlined postclosing covenants concurrent entering ordinary shares purchase agreement company also entered series preference shares purchase agreement stage smart affiliated entity wholly owned subsidiaries smart frontier pursuant series preference shares purchase agreement company agreed purchase stage smart 9600000 series preference shares stage smart price 208333 per share aggregate cash consideration 200 million certain conditions shares series preference shares convertible ordinary shares 11 basis series preference shares equal voting rights ordinary shares entitled cumulative dividends rate 8 original issue price also participate dividends declared stage smart purchase shares series preference shares together constitute 75 total shares stage smart gives company control stage smart company recorded transaction acquisition business transactions closed november 8 2010 company issued 4473272 shares common stock smart frontier fair value 98 million based market price companys common stock november 8 2010 purchase price 100 million made cash payments 200 million stage smart purchase series preference shares date acquisition november 8 2010 results operations stage smart limited wholly owned subsidiary included companys consolidated financial statements reported multimedia communications segment material pro forma results operations presented material companys consolidated results operations either individually aggregate goodwill represents excess purchase price net tangible intangible assets acquired deductible tax purposes following table presents aggregate purchase price allocation reflects notes consolidated financial statements continued note 11acquisition goodwill intangible assets continued preliminary fair value estimates analyses including preliminary work performed thirdparty valuation specialists purchase price allocation amounts subject change within measurement period valuations finalized relate fair values certain tangible assets liabilities acquired valuation intangible assets acquired residual goodwill measurement period adjustments determined material applied retrospectively period acquisition companys consolidated financial statements depending nature adjustments periods subsequent period acquisition could also affected goodwill mainly consisted extensive knowledge expertise management team internet tv industry complemented execution ability operation team amortizable intangible assets acquired consisted estimated fair values stage smarts technology platform 47 million noncompete agreements signed key executives upon closing transaction 03 million company amortizing intangible assets straightline basis estimated weightedaverage life 4 years transaction costs incurred stage smart acquisition amounted 09 million expensed included selling general administrative expense consolidated statements operations year ended december 31 2010 note 12common stock incentive plans stock incentive plans december 31 2010 company stock incentive plans described substantially outstanding awards subject potential accelerated vesting event change control company repurchases cancels shares common stock forfeited respect tax liability associated certain vesting restricted stock restricted stock unit grants plans 2006 equity incentive plan 2006 equity incentive plan 2006 plan implemented july 21 2006 adopted board directors june 6 2006 approved companys stockholders july 21 2006 plan replaces 1997 plan 2001 plan 2003 plan collectively notes consolidated financial statements continued note 12common stock incentive plans continued prior plans awards granted pursuant prior plans 2006 plan provides grant following types incentive awards stock options ii stock appreciation rights iii restricted stock iv restricted stock units v performance shares performance units vi stock cash awards award collectively awards eligible awards 2006 plan include employees directors consultants provide services company affiliates maximum aggregate number shares may awarded sold 2006 plan 4500000 shares plus shares reserved remain unissued prior plans july 21 2006 ii shares subject stock options similar awards granted prior plans expire become exercisable without exercised full shares issued pursuant awards granted prior plans forfeited repurchased company december 31 2010 number shares transferred prior plans 2006 plan totaled 24584584 december 31 2010 4877512 options restricted stock units outstanding 2006 plan board directors compensation committee board compensation committee administers 2006 plan administrator subject terms 2006 plan administrator sole discretion select employees consultants directors receive awards determine terms conditions awards interpret provisions 2006 plan outstanding awards options granted 2006 plan generally vest become exercisable four years awards granted 2006 plan generally transferable rights respect award granted participant generally may exercised participants lifetime participant provided however administrators approval participant may transfer award participants spouse former spouse pursuant courtapproved domestic relations order relates provision child support alimony payments marital property rights ii transfer award gift benefit participants immediate family exercise price stock options stock appreciation rights granted 2006 plan must least equal 100 fair market value common stock date grant least 110 fair market value incentive stock option iso granted stockholder greater 10 voting power companys stock maximum term stock option granted participant must exceed seven years date grant five years iso granted stockholder greater 10 voting power common stock administrator determine terms conditions awards granted plan prior plansthe 1997 stock plan 2001 director option plan 2003 nonstatutory stock option plan 1997 stock plan prior implementation 2006 plan july 21 2006 officers employees consultants company affiliates eligible receive options purchase shares common stock purchase rights 1997 stock plan 1997 plan 1997 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2010 options purchase 597901 shares common stock outstanding 1997 plan options granted 1997 plan prior july 21 2006 either isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue notes consolidated financial statements continued note 12common stock incentive plans continued code 1986 amended nonqualified stock options nsos qualify compensation committee oversaw selection eligible persons option grants determined grant date amounts exercise prices vesting periods relevant terms options including whether options would isos nsos exercise price isos granted 1997 plan could less 100 fair market value common stock grant date least 110 fair market value iso granted stockholder greater 10 voting power companys stock exercise price nsos could determined compensation committee discretion options granted 1997 plan generally transferable life optionee 1997 plan options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date five years isos granted stockholder greater 10 voting power common stock options generally terminate 12 months death permanent disability optionee ii three months termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos prior implementation 2006 plan company could also grant stock purchase rights eligible participants 1997 plan 1997 plan shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determined otherwise agreement granted company right repurchase restricted stock upon voluntary involuntary termination employee reason including death disability prior vesting purchase price repurchased shares original price paid could paid cancellation indebtedness owed company companys repurchase right lapsed rate determined compensation committee 2001 director option plan prior implementation 2006 plan july 21 2006 directors employees company outside directors eligible receive options purchase shares common stock 2001 director option plan 2001 plan 2001 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2010 options purchase 260000 shares common stock outstanding 2001 plan compensation committee administrator 2001 plan terms 2001 plan exercise price option granted equaled market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subject outside director continuing serve director dates subsequent option grants vest 100 shares subject subsequent option first anniversary date grant 2003 nonstatutory stock option plan prior implementation 2006 plan july 21 2006 directors officers employees consultants company affiliates eligible receive options purchase shares notes consolidated financial statements continued note 12common stock incentive plans continued companys common stock 2003 nonstatutory stock option plan 2003 plan nonstatutory stock options would qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended could granted 2003 plan 2003 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2010 options purchase 26250 shares common stock outstanding 2003 plan 2003 plan administered compensation committee compensation committee oversaw selection eligible persons options would granted determined number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii three months termination option holders service reason disability due option holders death option however may exercised ten years grant date stock award stock option activity past years company granted equity awards consisting primarily stock options fiscal 2010 company granted equity awards primarily consisting restricted stock restricted stock units rsus much lesser extent option awards december 31 2010 2009 2008 number shares common stock available issuance pursuant future grants 2006 plan including remaining unissued shares prior plans transferred 2006 plan 12679755 12201930 10710921 respectively october 1 2008 company completed tender offer exchange certain outstanding employee stock options purchase shares companys common stock eligible exchange outstanding options vested unvested held current employees excluding directors executive officers granted companys 1997 stock plan exercise price greater equal 600 per share included options exercise price less fair market value companys common stock date grant subject terms conditions tender offer company accepted exchange cancelled options purchase aggregate 6072818 shares weighted average exercise price 1415 per share issued new options purchase aggregate 1983920 shares exercise price 324 per share closing stock price companys common stock october 1 2008 new options granted companys 2006 equity incentive plan generally vest two years exchange ratio number options canceled pursuant offer exceeded number options granted connection offer incremental compensation expense resulting completion tender offer notes consolidated financial statements continued note 12common stock incentive plans continued following summarizes companys stock options activity february 2008 compensation committee also granted 1073333 performancebased awards certain senior executive officers third quarter 2008 233333 contingently issuable shares forfeited result employee terminations october 6 2008 performance requirements respect 60000 contingently issuable shares eliminated restricted stock units fair value 269 per share equals closing price companys common stock nasdaq global select market measurement date october 6 2008 february 18 2009 committee determined based companys executive officers level performance companys 2008 fiscal year additional 367500 shares underlying previously granted performance based restricted stock units earned performancebased restricted stock units fair value 127 per share equals closing price companys common stock nasdaq global select market measurement date february 18 2009 restricted stock units vested 50 february 27 2009 vested 50 february 26 2010 february 2009 compensation committee also granted senior executive officers 313293 restricted stock units fouryear vesting additional 626586 performancebased awards subject attainment goals determined compensation committee company may subject variable levels expense related primarily varying levels performance well fluctuations companys stock price awards marked market periodically earlier date compensation committees determination performance ii date deemed fully vested result involuntary termination 626586 performancebased awards granted february 2009 401859 awards deemed fully vested fiscal 2009 rest awards deemed fully vested fiscal 2010 result involuntary terminations prior annual compensation committees evaluation performance notes consolidated financial statements continued note 12common stock incentive plans continued february 2010 compensation committee decided new stockbased awards would granted senior executives 2010 year light companys previously announced planned changes management 2006 1997 plans company granted restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units awards generally vest period one four years date grant restricted stock voting rights common stock shares underlying restricted stock considered currently issued outstanding restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding expense awards based fair market value shares date grant recognized straightline basis requisite service period weighted average fair value restricted stock awards granted equity incentive plans years ended december 31 2010 2009 2008 225 135 291 respectively grant restricted stock awards deducted shares available one basis grant companys stock plan nonvested restricted awards december 31 2010 changes year ended december 31 2010 summarized year ended december 31 2010 33 million shares restricted stock awards vested total fair value restricted stock awards vested measured date vesting year ended december 31 2010 724 million company also granted 15 million restricted stock awards year ended december 31 2009 35 million shares restricted stock awards vested total fair value restricted stock awards vested measured date vesting year ended december 31 2009 48 million company also granted 20 million restricted stock awards year ended december 31 2008 26 million shares restricted stock awards vested total fair value restricted stock awards vested measured date vesting year ended december 31 2008 84 million company also granted 60 million restricted stock awards notes consolidated financial statements continued note 12common stock incentive plans continued following table summarizes significant ranges outstanding exercisable stock options december 31 2010 thousands except years share prices intrinsic value represents total pretax intrinsic value calculated difference market value reported nasdaq december 31 2010 206 exercise price inthemoney shares years ended december 31 2010 2009 2008 total pretax intrinsic value options exercised negligible weighted average remaining contractual life options exercisable 272 years weighted average remaining contractual life options expected vest 329 years december 31 2010 weighted average fair value options granted stock plans years ended december 31 2010 2009 2008 130 099 146 per share respectively 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan espp purchase plan intended qualify employee stock purchase plan section 423 internal revenue code stock purchase plan administered board committee appointed board reduce companys long term cost structure manage shareholder dilution company elected terminate espp program february 2009 effective date may 15 2009 cancellation accounted settlement shares consideration resulted immediate expense recognition 12 million first quarter 2009 associated unrecognized compensation canceled purchase periods 24month offering espp expired march 2010 employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permitted eligible employees purchase companys common stock payroll deductions exceed 15 employees total compensation stock could purchased notes consolidated financial statements continued note 12common stock incentive plans continued plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower stockbased compensation stockbased compensation expense stock options estimated grant date based options fair value calculated blackscholes option pricing model blackscholes model blackscholes model developed use estimating fair value shortlived exchange traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility term awards actual projected employee stock option exercise behaviors riskfree interest rate expected dividends company uses historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options companys common stock available determine implied volatility company estimates expected term options granted based upon companys historical exercise cancellation data vested options addition separate groups employees similar exercise behavior considered separately expected term employee stock purchase plan shares average remaining purchase periods offering period company bases risk free interest rate used option valuation model us treasury zerocoupon issues remaining terms similar expected term options company anticipate paying cash dividends foreseeable future therefore uses expected dividend yield zero option valuation model company required estimate forfeitures time grant revise estimates subsequent periods actual forfeitures differ estimates company uses historical data estimate prevesting option forfeitures record stock based compensation expense awards expected vest fair values stockbased payment awards estimated using black scholes option pricing model following assumptions december 31 2010 approximately 28 million total unrecognized compensation cost measured related nonvested stock options restricted stock restricted stock units expected recognized weightedaverage period 225 years notes consolidated financial statements continued note 12common stock incentive plans continued second quarter 2009 adjustment made increase estimated forfeiture rate equity awards employees included 2009 restructuring plan awards expected ultimately vest resulting net effect forfeiture rate adjustment decrease companys stockbased compensation expense year ended december 31 2009 approximately 04 million certain executives company employment contracts provide acceleration unvested equity awards event employee terminated without cause 2010 eight executives involuntarily terminated part 2008 2009 restructuring plans year ended december 31 2010 approximately 21 million previously unrecognized compensation costs related vesting acceleration recognized within restructuring year ended december 31 2009 approximately 28 million compensation costs related vesting acceleration recognized within restructuring following table summarizes stockbased compensation expense recognized companys consolidated statement operations december 31 2010 2009 stockbased compensation capitalized within inventory stockbased compensation 2008 includes 25 million charges relating prior periods resulting correction forfeiture rate application impact recording prior period charges 2008 prior periods material note 13401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees attained age 21 companys matching contributions suspended effective march 1 2009 prior suspension company contributed 050 dollar contributed qualified employees 401k plan maximum 5500 per employee 2009 2008 2007 plan years plan reinstituted 2010 company contributed maximum 3252 per employee 2010 plan year companys matching contributions subject fiveyear vesting schedule based upon longevity employee service company matching contributions 03 million 05 million 19 million 2010 2009 2008 respectively note 14commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2015 connection sale leaseback agreement company entered notes consolidated financial statements continued note 14commitments contingencies continued lease respect leaseback portion hangzhou facility see note 6 leaseback commenced june 1 2010 early terminated june 2011 contractual obligations related hangzhou facility lease june 2011 included table future minimum lease payments noncancelable operating leases initial term excess one year december 31 2010 follows rent expense years ended december 31 2010 2009 2008 159 million 153 million 173 million respectively third party commissions company records accruals commissions payable third parties normal course business commissions recorded based terms contracts company third parties paid pursuant contracts consistent companys accounting policies commissions recorded cost net sales period liability incurred december 31 2010 company approximately 04 million accrued commissions management performed continues perform followup procedures respect accrued commissions upon completion followup procedures accrued commissions claimed statute limitations expired company reverses accruals reversals recorded statement operations period management determines accruals longer necessary assistance china counsel company concluded certain accrued commissions statute limitations expired august 2010 november 2010 two years formal communication sent agents year ended december 31 2010 approximately 60 million released cost net sales result expiration statute limitations year ended december 31 2009 approximately 08 million released cost net sales result expiration statute limitations india department telecommunication security supply chain standards recent changes india require equipment manufacturers satisfy certain security supply chain standards satisfaction indian authorities company entered agreements several customers india establish detailed security supply chain standards covering products supplied telecommunication customers agreements contain significant penalty clauses event security breach detected related product supplied company management unable estimate likelihood financial impact potential security breach companys financial position results operations cash flows regulation still review dot new interpretation expected later 2011 december 31 notes consolidated financial statements continued note 14commitments contingencies continued 2010 company subject penalty liability related agreements 2010 impact revenue recognized however contracts signed effective date agreements may affected company continues assess potential impact agreements may timing revenue recognition contractual obligations commercial commitments letters credit company issues standby letters credit primarily support international sales activities outside china support purchase commitments december 31 2010 company approximately 174 million outstanding letters credit 97 million due less year 51 million due one three years 26 million due three five years company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire without drawn beneficiary thereof finally company may issue commercial letters credit support purchase commitments purchase commitments company obligated purchase raw materials workinprocess inventory various orders various suppliers fulfilled without adverse consequences material companys operations financial condition december 31 2010 company outstanding purchase commitments including agreements noncancelable cancelable without penalty approximating 459million intellectual property certain sales contracts include provisions customers would indemnified company event among things third party claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products uncertain tax positions december 31 2010 company 565 million gross unrecognized tax benefits 144 million related tax benefits recognized would impact annual effective tax rate impact annual effective tax rate reflects gross unrecognized tax benefits net certain deferred tax assets federal tax benefit state income tax items totaling 421 million litigation securities class action litigation beginning october 2004 several shareholder class action lawsuits alleging federal securities violations filed company various officers directors company notes consolidated financial statements continued note 14commitments contingencies continued actions consolidated united states district court northern district california caption utstarcom inc securities litigation master file c044908jw pvt lead plaintiffs case filed first amended consolidated complaint july 26 2005 first amended complaint alleged violations securities exchange act 1934 brought behalf putative class shareholders purchased companys stock april 16 2003 september 20 2004 april 13 2006 lead plaintiffs filed second amended complaint adding new allegations extending end class period october 6 2005 addition company defendants plaintiffs also suing softbank plaintiffs complaint seeks recovery damages unspecified amount june 2 2006 company individual defendants filed motion dismiss second amended complaint march 21 2007 court granted defendants motion dismissed plaintiffs second amended complaint court granted plaintiffs leave file third amended complaint plaintiffs filed may 25 2007 july 13 2007 company individual defendants filed motion dismiss motion strike third amended complaint march 14 2008 court granted defendants motion dismissed plaintiffs third amended complaint court granted plaintiffs leave file fourth amended complaint plaintiffs filed may 14 2008 june 13 2008 consistent courts march 14 2008 dismissal order company individual defendants filed objections form content fourth amended complaint july 24 2008 court overruled objections september 8 2008 company individual defendants filed motion dismiss motion strike certain allegations fourth amended complaint march 27 2009 court denied defendants motion dismiss granted defendants motion strike plaintiffs company individual defendants signed filed stipulation settlement providing settlement case defendant softbank party settlement terms settlement companys individual defendants insurers would pay full amount settlement may 13 2010 court granted preliminary approval settlement august 31 2010 court granted final approval settlement october 8 2010 plaintiffs defendant softbank filed motion preliminary approval separate settlement plaintiffs defendant softbank november 17 2010 court granted preliminary approval settlement february 9 2011 court granted final approval settlement courts decision subject appeal appealed may continue incur costs regard discovery connection litigation plaintiffs defendant softbank accordingly company unable time estimate effects lawsuit companys financial position results operations cash flows governmental investigations december 2005 us embassy mongolia informed company forwarded department justice doj allegations agent companys mongolia joint venture offered payments mongolian government official possible violation foreign corrupt practices act fcpa company audit committee authorized independent investigation possible violations fcpa contact doj us securities exchange commission sec regarding investigation identified possible fcpa violations mongolia southeast asia india china well possible violations us immigration laws doj requested company voluntarily produce documents related investigation sec subpoenaed company documents notes consolidated financial statements continued note 14commitments contingencies continued company received grand jury subpoena requiring production documents related one aspect doj investigation travel company sponsored company resolved investigations doj sec december 21 2009 part resolution investigations company executed consent pursuant without admitting denying secs allegations agreed judgment favor sec 15 million agreed certain reporting obligations four years sec approved resolution april 14 2010 united states district court northern district california entered judgment incorporating terms consent december 31 2009 company entered nonprosecution agreement doj pursuant company paid additional 15 million agreed undertake threeyear reporting obligation review appropriate strengthen companys compliance bookkeeping internal controls standards procedures nonprosecution agreement subject compliance terms doj agreed criminally prosecute company crimes criminal tax violations relating certain travel arrangements provided customers china company submitted first reports doj sec may 1 2010 shareholder derivative litigation november 17 2006 shareholder derivative complaint captioned ernesto espinoza v ying wu et al case rg06298775 filed certain companys former officers current former directors superior court county alameda california complaint alleges individual defendants among things breached duties unjustly enriched violated california corporations code connection timing stock option grants complaint names company nominal defendant seeks unspecified monetary damages individual defendants various forms injunctive relief february 2 2007 company individual defendants filed demurrers complaint april 11 2007 court sustained individual defendants demurrer overruled companys demurrer ordered plaintiff file amended complaint ordered company answer original complaint plaintiff filed amended complaint company filed answer amended complaint august 21 2007 individual defendants filed demurrers amended complaint court sustained individual defendants demurrers ordered plaintiff file second amended complaint september 26 2008 plaintiff filed second amended complaint november 21 2008 company individual defendants filed demurrers second amended complaint february 27 2009 court sustained companys demurrer ordered plaintiff file third amended complaint march 20 2009 plaintiff filed third amended complaint may 5 2009 company individual defendants filed demurrers third amended complaint august 11 2009 court sustained companys demurrer without leave amend october 13 2009 plaintiffs filed notice appeal parties signed final stipulation settlement providing settlement case settlement contingent approval court terms settlement individual defendants insurer would pay full amount monetary portion settlement april 15 2010 plaintiff filed request dismissal without prejudice court appeals january 12 2011 court appeals dismissed appeal pursuant request appeal may reinstated superior court grant preliminary final approval settlement assurance settlement receive court approval accordingly company notes consolidated financial statements continued note 14commitments contingencies continued unable time estimate effects lawsuit companys financial position results operations cash flows ipo allocation october 31 2001 complaint filed united states district court southern district new york company companys directors officers various underwriters companys initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offerings securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers companys common stock march 2 2000 december 6 2000 february 19 2003 court granted part denied part motion dismiss claims brought defendants including company order dismissed claims company except claim brought section 11 securities act 1933 alleges registration statement filed accordance ipo misleading parties reached global settlement litigation settlement insurers pay full amount settlement share allocated company bear financial liability company defendants receive complete dismissals case october 5 2009 court entered opinion order granting final approval settlement certain objectors filed appeals plaintiffs filed motions dismiss appeals reason settlement become effective company believes meritorious defenses claims intends defend action vigorously accordingly company unable time estimate effects lawsuit financial position results operations cash flow litigation company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty management company believes final outcome matters material adverse impact companys financial position results operations cash flows note 15credit risk concentration financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts notes receivable company places temporary cash shortterm investments several financial institutions approximately 2876 million 1976 million companys cash equivalents shortterm investments deposit foreign accounts december 31 2010 2009 respectively notes consolidated financial statements continued note 15credit risk concentration continued companys exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however companys interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature certain investments declining interest rates negatively impact companys investment income company maintains investment portfolio various holdings types maturities company use derivative financial instruments company places cash investments instruments meet high credit quality standards specified investment policy guidelines companys policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested money market funds rated aaa concentration credit risk major customers chinese telecommunication carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier company groups china customers together province treats province one customer since level purchasing decisions made december 31 2010 companys accounts receivable balance included amounts due affiliates softbank representing approximately 32 companys total accounts receivables net allowances doubtful accounts december 31 2009 companys accounts receivable balance included amounts due china telecom jiangsu branch representing approximately 11 companys total accounts receivable net allowances doubtful accounts following customers accounted 10 companys net revenues sales verizon tmobile sprint spectrum lp primarily pcd segment sold july 2008 see note 3 approximately 53 30 19 companys net sales 2010 2009 2008 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 382 million 457 million respectively december 31 2010 2009 company extends credit customers china generally without requiring collateral global sales outside china company may require letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts notes consolidated financial statements continued note 15credit risk concentration continued country risks approximately 57 46 27 companys sales year ended december 31 2010 2009 2008 respectively made china accordingly political economic legal environment well general state chinas economy may influence companys business financial condition results operations companys operations china subject special considerations significant risks typically associated companies united states include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation note 16segment reporting align business units corporate strategy focus core businesses july 1 2008 company sold personal communications division pcd llc see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k prior july 1 2008 pcd sold supported handsets pas handsets mainly united states included segment mobile solutions business unit msbu custom solutions business unit csbu july 31 2008 company sold msbu responsible development sales service wireless ipcdmaipgsm product line first quarter 2009 company completed winddown csbu consolidation voice messaging technology multimedia communications segment csbu historically responsible development sales service noncore products consolidation voice messaging technology multimedia communications segment significant impact segment net sales gross profit order optimize resources improve efficiency beginning january 1 2010 company integrated services segment multimedia communications broadband infrastructure segments based products services performed substantially completed winddown handsets business fourth quarter 2009 except sales relating inventory clearing significant revenue handset segment 2010 expect 2011 beyond effective january 1 2010 new reporting segments follows •multimedia communicationsfocused development market opportunities iptv solutions wireless infrastructure technologies including related services revenue •broadband infrastructurefocused world class portfolio broadband products including related services revenue •handsetsfocused mobile phone business including pas cdma handset market well data cards markets handset sales pcd llc commenced july 1 2008 sale pcd included segment companys chief operating decision makers make financial decisions based information receive internal management system currently evaluate operating performance allocate resources reporting segments based segment revenue gross profit cost sales direct expenses relation production assigned reporting segments accounting policies used measuring segment assets operating performance used consolidated level notes consolidated financial statements continued note 16segment reporting continued summarized companys segment net sales gross loss profit segment margin years ended december 31 2010 2009 2008 based current reporting segment structure company reclassified previously reported segment information year ended december 31 2009 2008 conform current segment presentation segment margin includes direct expenses related operations segment direct product management research development expenses general corporate expenses include unallocated expenses sales marketing general administration common notes consolidated financial statements continued note 16segment reporting continued research development expenses equity award related charges amortization intangibles restructuring impairment charges company excludes items consistent manner internally evaluates performance segments sales attributed geographical area based upon location customer sales data geographical areas follows longlived assets consisting property plant equipment geographical area follows note 17related party transactions softbank affiliates company recognizes revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb company supports softbanks fibertothehome service sales carrier class gepon product well netring™ product addition company supports softbanks new internet protocol television iptv sales rollingstream™ product notes consolidated financial statements continued note 17related party transactions continued 2010 2009 2008 company recognized revenue cost net sales telecommunications equipment services affiliates softbank follows fluctuations gross profit percentage net sales expected generally result changes product mix year ended december 31 2010 gross profit percentage net sales also benefited approximately 24 million release previously deferred revenue carveout potential penalty cancellation penalties result completing obligations included accounts receivable december 31 2010 2009 97 million 55 million respectively related transactions amounts due softbank included accounts payable 13 million december 31 2010 none december 31 2009 sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period december 31 2010 2009 companys customer advance balance related softbank agreements 02 million 02 million respectively current deferred revenue balance related softbank 23 million 14 million december 31 2010 2009 respectively companys noncurrent deferred revenue balance related softbank 66 million december 31 2010 compared 88 million december 31 2009 discussed note 4 company 12 million investment sbi affiliates softbank controlling interest sbi december 31 2010 2009 softbank beneficially owned approximately 94 11 respectively companys outstanding stock yellowstone subsequent completion beiid investment september 7 2010 one companys new directors also served director yellowstone investment advisory ltd yellowstone 2010 company paid approximately 02 million consulting services provided yellowstone company also incurred approximately 09 million expenses success fee acquisition support services provided yellowstone audiovox prior sale pcd july 1 2008 one companys former officers served director audiovox corporation audiovox 2008 company paid approximately 08 million services provided audiovox notes consolidated financial statements continued note 18restructuring restructuring costs 2009 restructuring plan june 9 2009 board directors company approved restructuring plan 2009 restructuring plan designed reduce companys operating costs 2009 restructuring plan includes worldwide reduction force approximately 50 companys headcount approximately 2300 employees located primarily china united states lesser degree international locations year ended december 31 2010 company recorded restructuring costs approximately 157 million related 2009 restructuring plan net approximately 21 million reversal charges recorded prior periods restructuring costs year ended december 31 2010 consist primarily 146 million severance benefits related approximately 200 employees included 2009 restructuring plan adjusted changes estimate termination date employees approximately 11 million lease exit costs primarily related lease expiring 2013 year ended december 31 2009 company recorded restructuring costs approximately 400 million related 2009 restructuring plan restructuring costs year ended december 31 2009 included 380 million severance benefits related approximately 2100 employees 19 million related primarily estimated loss lease obligation expires 2013 total restructuring costs recorded december 31 2010 related 2009 restructuring plan approximated 557 million 2008 restructuring plan fiscal 2008 company implemented restructuring plan 2008 restructuring plan recorded 131 million restructuring charges primarily related global reduction force across functions employee terminations certain noncore operations company process winding total number employees affected totaled approximately 750 including 350 china 200 korea 200 locations including united states year ended december 31 2010 company recorded additional restructuring costs related 2008 restructuring plan approximately 03 million severance benefit costs recognized remaining service period employees included 2008 restructuring plan year ended december 31 2009 company recorded restructuring costs approximately 63 million related 2008 restructuring plan net approximately 05 million reversal charges recorded fiscal year 2008 costs year ended december 31 2009 63 million consist primarily severance benefits related transition certain key functions china divestiture companys korea operations lease costs related lease obligation expires fiscal year 2010 total restructuring costs recorded december 31 2010 related 2008 restructuring plan approximated 197 million 2007 restructuring plan june 30 2010 2007 restructuring plan complete notes consolidated financial statements continued note 18restructuring continued activity accrued restructuring balances related plans described follows year ended december 31 2010 activity accrued restructuring balances related plans described follows years ended december 31 2007 2008 2009 notes consolidated financial statements continued note 18restructuring continued following table shows total amount costs incurred segment connection restructuring programs remaining cash expenditures related 2009 2008 restructuring plans expected paid 2011 remaining liabilities related lease obligations expected settled remaining lease term company expect incur additional significant restructuring charges 2011 related 2009 2008 restructuring plans note 19other income net income net consists following 1previously company held 8 ownership interest fiberxon acquired mrv communications mrv 2007 connection acquisition fiberxon shareholders received cash stock well right potential deferred consideration december 2009 mrv entered settlement agreement dismissal legal proceedings mrv former shareholders fiberxon regarding amount contingent consideration owed related acquisition proceeds received first quarter 2010 represented companys proportionate share settlement amounts notes consolidated financial statements continued note 20variable interest entities tet october 2008 company made investment turnstone environment technologies llc tet delaware limited liability company formed purpose licensing developing energy efficient renewable cooling solutions cell towers telecommunications industry exchange 5180788 series preferred units representing approximately 22 voting interest tet 500000 series preferred warrants exercise price 09265 per unit expiration term 5 years company contributed 48 million cash company currently representation tets board directors ability control management operation decisions tet operations tet development stage entity actively seeking additional investors company intend obligation fund future losses make additional contributions initial investment december 31 2009 2008 tet effect entirely funded companys initial investment capital contributions current investors substantive company determined venture variable interest entity company primary beneficiary exposed majority variable interest entitys expected losses therefore company required consolidate tets financial statements asc 8101015 variable interest entities subsections beginning january 1 2009 assets liabilities operating results tet consolidated companys balance sheet statement operations assets liabilities operating results tet determined immaterial company december 31 2008 companys results operations cash flows full year fourth quarter 2008 therefore consolidated tet revenues 39 million expenses year ended december 31 2009 31 million relates amortization acquired exclusive license utilize solar cooling technology company initially determined appropriate amortization period exclusive license match estimated revenue generation period sale products utilizing licensed technology third quarter 2009 result delay revenue generation company changed estimate systematic rational allocation straightline amortization expense based term technology license tets operations considered integral companys major operating activities income expenses tets operations includable companys income statement result application asc 8101015 variable interest entities subsections classified within operating expense fourth quarter 2009 company evaluated several fourth quarter events including continued unsuccessful efforts tet secure additional funding continued unsuccessful efforts tet locate suitable local manufacturing partner tets continued need amend extend payment due dates acquired exclusive license utilize solar cooling technology departure key employee tet company determined combined effect events well others triggering event impairment analysis tets longlived assets company furthered determined estimated cash flows tet sufficient recover carrying value tets net assets result company recorded 09 million impairment charge included within operating expense equal initial cost investment 48 million less cumulative absorbed losses date december 31 2009 effect consolidating tet resulted immaterial impact consolidated balance sheet june 2009 fasb issued authoritative guidance revised approach identifying primary beneficiaries quantitativebased risksand rewards calculation qualitative approach assessing whether entity controlling financial interest variable interest entity notes consolidated financial statements continued note 20variable interest entities continued analysis identifies primary beneficiary variable interest entity one power direct activities variable interest entity significantly impact entitys economic performance obligation absorb losses entity could potentially significant variable interest company adopted new guidance first quarter fiscal year 2010 new guidance company concluded power direct activities tet significantly impact entitys economic performance therefore tets primary beneficiary would require consolidation company concluded new guidance would accounted initial investment cost method new guidance also requires enterprise upon initial adoption determine carrying amount investment entity longer consolidated always applied provisions new guidance either consolidation model cost method balances assetsliabilities investment would zero financial statements company december 31 2009 january 1 2010 respectively adoption new guidance 2010 financial statement impact company fourth quarter 2005 company provided interest free 124 million loan party china seed capital venture organized participate providing technical service networking technology equipment emerging market iptv products china loan partially secured indirect ownership interest venture payable 10 years could called early without penalty result foregoing fact ventures continuing viability heavily dependent provision network terminal equipment company determined venture vie company primary beneficiary venture therefore company required consolidate vies financial statements consolidation vie prior years significant impact companys consolidated financial statements march 2008 company received repayment full loans principal balance eliminating interest vie resulting reconsideration companys position primary beneficiary based reconsideration event management concluded company longer primary beneficiary fin 46r longer required consolidate vies financial statements companys consolidated statement operations year ended december 31 2008 includes operating results vie february 2008 point vie deconsolidated companys financial statements first quarter 2008 company recorded 82 million gain upon repayment loan deconsolidation included income expense net management expects continuing involvement ongoing entitys business supplier iptv equipment company determined conditions presentation discontinued operation met note 21subsequent events march 2011 company entered lease agreement lease research development administrative office hangzhou china terms lease company lease 32983 square meters gross floor area gfa aboveground buildings including common areas july 15 2016 lease payment approximately 23 million annually 9 increase starting fourth year lease another 9 increase fourth years increased rent year five company priority third parties desires renew lease company also required pay security deposit amount approximately 05 million company may terminate part lease giving six months advance notice however company would required pay penalties additional compensation subject maximum six months lease payments event early termination quarterly financial data unaudited quarterly financial data unaudited continued item 9item 8 financial statements supplementary data index consolidated financial statements financial statement schedules omitted applicable required information shown consolidated financial statements notes thereto report independent registered public accounting firm board directors stockholders utstarcom inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position utstarcom inc subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index present fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintain material respects effective internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso material weaknesses internal control financial reporting related 1 lack effective controls estimating recording reserves losses customer contracts 2 lack effective controls appropriate timely analysis monitoring underlying information related period end financial reporting process preparation consolidated financial statements 3 lack effective controls recording review revenue deferred revenue accounts associated cost sales existed date material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement annual interim financial statements prevented detected timely basis material weaknesses referred described managements annual report internal control financial reporting appearing item 9a considered material weaknesses determining nature timing extent audit tests applied audit latest year consolidated financial statements opinion regarding effectiveness companys internal control financial reporting affect opinion consolidated financial statements companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report referred responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts noncontrolling interests 2009 companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers zhong tian cpas limited company shanghai peoples republic china march 16 2010 utstarcom inc consolidated balance sheets see accompanying notes consolidated financial statements utstarcom inc consolidated statements operations see accompanying notes consolidated financial statements utstarcom inc consolidated statements stockholders equity see accompanying notes consolidated financial statements utstarcom inc consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1basis presentation liquidity utstarcom inc company delaware corporation incorporated 1991 headquarters currently alameda california designs sells internet protocol ipbased telecommunications infrastructure products telecommunications service providers operators throughout world also provides telecommunications infrastructure installation operations maintenance services company enables customers rapidly deploy revenuegenerating access services using existing infrastructure providing migration path costefficient endtoend ip networks accompanying consolidated financial statements include accounts company whollyand majorityowned subsidiaries significant intercompany accounts transactions eliminated preparation consolidated financial statements noncontrolling interests consolidated subsidiaries shown separately consolidated financial statements certain reclassifications made prior period amounts conform current period presentation reclassifications effect net income previously reported accompanying consolidated balance sheets december 31 2009 2008 consolidated statements operations three years period ended december 31 2009 prepared company pursuant rules regulations securities exchange commission sec conformity generally accepted accounting principles united states america gaap accompanying consolidated financial statements presented basis company going concern going concern assumption contemplates realization assets satisfaction liabilities normal course business company incurred net losses attributable utstarcom inc 2257 million 1503 million 1956 million years ended december 31 2009 2008 2007 respectively company recorded operating losses 19 20 consecutive quarters period ended december 31 2009 december 31 2009 company accumulated deficit 10672 million company incurred net cash outflows operations 674 million 552 million 2251 million 2009 2008 2007 respectively operating results expected improve 2010 compared prior years management expects company continue incur losses 2010 december 31 2009 company cash equivalents 2658 million 1312 million held subsidiaries china imposes currency exchange controls certain transfers funds fromto china amount cash available transfer china subsidiaries use companys nonchina subsidiaries limited liquidity needs subsidiaries china restriction currency exchange chinesegovernment mandated limitations including currency exchange controls certain transfers funds outside china 2009 approximately 3221 million credit facilities china expired renewed december 31 2009 company available credit facilities management certain new credit facilities available commercially reasonable terms even new facilities entered total available credit may lower previously available amounts global economies experienced significant downturn driven financial credit crisis continue challenge economies period time current macroeconomic environment significant risks uncertainties inherent managements notes consolidated financial statements continued note 1basis presentation liquidity continued ability forecast future results operating environment confronting company internally externally raises significant uncertainties 2009 2008 company took number actions improve liquidity march 2008 company paid 2895 million retire companys convertible subordinated notes related accrued interest july 1 2008 company completed sale pcd see note 3 addition company divested mobile solutions business unit july 2008 fourth quarter 2008 management initiated actions disband customs solutions business unit wind companys korea based handset operations announced initiatives including efforts eliminate functional duplications consolidation number functions companys china operations june 2009 management expanded initiatives include worldwide reduction workforce outsourcing manufacturing operations optimizing research development spending focus selected products companys yeartoyear quarterly selling general administrative research development operating expenses decreased significantly 2009 compared 2008 management believes continuing efforts streamline operations enable companys fixed cost base better aligned operations market demand projected sales levels projected sales materialize company need take actions reduce costs expenses explore cost reduction options december 2009 company entered property transfer leaseback agreement sale leaseback agreement intended sale manufacturing research development administrative offices facility hangzhou china another third party approximately 140 million leaseback portion facility date company received proceeds approximately 139 million transaction march 8 2010 company obtained irrevocable bank guarantee letter buyer remaining amount cash proceeds sale leaseback agreement february 1 2010 company entered agreements strategic relationship beijing etown international investment development co ltd beiid includes investment 485 million companys common stock beiid two unrelated investment funds elite noble limited shah capital opportunity fund lp agreements expected close end march april 2010 provide additional cash working capital general purposes management believes companys china nonchina operations sufficient liquidity finance working capital expenditure needs next 12 months company able execute plan successfully company may need obtain funds equity debt financings assurance additional financing required available terms satisfactory company funds raised future issuance preferred stock debt securities could rights privileges preference senior companys common stock newly issued debt could contain debt covenants impose restrictions companys operations sale newly issued debt equity securities could result additional dilution companys current shareholders notes consolidated financial statements continued note 2summary significant accounting policies use estimates preparation consolidated financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period estimates used revenue recognition allowance doubtful accounts sales returns tax valuation allowances reserves inventory deferred costs accrued product warranty costs provisions contract losses recoverability goodwill intangible assets longlived asset impairments stockbased compensation expense loss contingencies restructuring expenses among others actual results could differ materially estimates cash equivalents cash equivalents consist highly liquid instruments original maturities three months less approximately 26 cash equivalents held us december 31 2009 remainder held utstarcom entities throughout world december 31 2009 1312 million companys cash equivalents held subsidiaries china imposes currency exchange controls transfers funds outside china cash equivalents invested institutional money market funds shortterm bank deposits similar short duration instruments fixed maturities overnight three months restricted cash december 31 2009 company shortterm restricted cash 264 million longterm restricted cash 106 million included longterm assets december 31 2008 company shortterm restricted cash 168 million longterm restricted cash 182 million included longterm assets amounts primarily collateralize companys issuances standby commercial letters credit investments companys investments consist principally bank notes equity securities publicly traded privately held companies companys investments publicly traded equity securities accounted asc 320 investment debt equity securities classified availableforsale investments recorded fair value unrealized gains losses included separate component accumulated comprehensive income net tax 2009 company sold remaining investment publicly traded equity securities investments equity securities privately held companies company holds less 20 voting interest company ability exercise significant influence accounted asc 325 investmentsother using cost method cost method investments carried lower cost fair market value company recognizes impairment charge decline fair value investments cost basis judged otherthantemporary making determination company reviews several factors determine whether losses otherthantemporary including limited length time investment unrealized loss position ii extent fair value less cost iii financial condition near term prospects issuer notes consolidated financial statements continued note 2summary significant accounting policies continued iv companys intent ability hold investment period time sufficient allow anticipated recovery fair value revenue recognition revenues sales telecommunications equipment handsets recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectability probable payment due customer fixed determinable due extended payment terms revenue recognized payments become due payable customer assuming criteria revenue recognition met payments received prior revenue recognition recorded customer advances normal payment terms differ various reasons amongst different customer regions depending upon common business practices customers within region billing customers shipping handling recorded revenues associated costs recorded costs revenues expected losses contracts recognized identified individual basis accordance prevailing accounting guidance respective contract sales may generated complex contractual arrangements require significant revenue recognition judgments particularly area contracts multiple deliverable elements multiple element arrangements multiple elements exist arrangement contract price allocated different elements based upon proportion verifiable objective evidence fair value various elements multiple element arrangements primarily involve sale equipment installation training postcontract support revenue recognized element earned namely upon installation acceptance equipment delivery handsets provided fair value undelivered elements determined delivered elements standalone value right return delivered elements company control undelivered elements arrangements include service elements including promotional support installation verifiable objective evidence fair value exist revenue deferred services deemed complete time company establish verifiable objective evidence fair value final acceptance required revenue recognition installation services considered perfunctory final acceptance indicates customer fully accepted delivery installation equipment company entitled full payment company recognize revenue final acceptance granted customer acceptance considered substantive transaction multiple elements exist arrangement includes software considered incidental equipment services arrangement software related elements recognized accordance specific guidance recognizing software revenue company allocates revenues element software arrangements based vendor specific objective evidence vsoe fair value vsoe fair value element based price charged element sold separately company uses residual method recognize revenue arrangement includes one elements delivered future date vsoe fair value undelivered elements exists residual method fair value undelivered elements deferred remaining portion contract price recognized revenue recognition criteria met vsoe fair value one undelivered elements exist revenue delivered undelivered elements notes consolidated financial statements continued note 2summary significant accounting policies continued deferred delivery elements occurs vsoe fair value undelivered elements established cases company agreed give software upgrade rights made available basis equipment sold additional consideration unspecified period could extend term contract additional contract obligation element postcontract support company established vsoe contract element accordingly revenues contracts recognized ratably period postcontract support expected provided expected period support generally term contract cases stated contractual term revenue recognized ratably estimated period support company reviews assumptions regarding estimated post contract support periods regular basis company determines necessary revise companys estimates support periods amount revenue recognized life contract would affected however extent new assumptions regarding postcontract support periods different original assumptions contract revenues would recognized remaining expected period support due china telecommunication industry restructuring launch 3g services china ministry industry information technology china announced pas services china phased january 1 2012 second third quarter 2009 company streamlined sales service research development operations pas handsets infrastructure equipment company perform new research development pas products maintains small support team assist customers warranty matters later part third quarter 2009 early part fourth quarter 2009 company contacted pas infrastructure customers held discussions pas products future october 2009 company notified pas infrastructure customers china longer provide upgrades support pas products beyond december 31 2011 consequently company determined remaining expected period support 2 years hence deferred revenue associated pas infrastructure recognized ratably beginning fourth quarter 2009 fourth quarter 2011 december 31 2009 approximately 1864 million deferred revenue associated pas infrastructure sales accelerated amortization period support revenue fixed priced contracts include requirement significant software modification customization recognized using completed contract method accounting whereby revenue recognized prior completion project contracts involving unique requirements company unable make reasonably dependable estimates progress towards meeting contractual requirements event estimated total project costs exceed estimated total project revenues entire estimated loss charged operations period loss becomes probable reasonably estimated complexity estimation process judgments internal external factors including labor utilization changes specifications testing requirements time required performance resulting incurrence contract penalties performance subcontractors affect estimation process years ended december 31 2009 2008 2007 company recorded approximately 49 million 184 million 62 million contract loss fixed price contract respectively contract loss recorded 2008 includes 34 million relating costs recorded prior periods impact recording priorperiod costs prior current periods material notes consolidated financial statements continued note 2summary significant accounting policies continued company recognizes revenue system integration installation training upon completion performance revenue recognition criteria met service revenue principally related maintenance support contracts recognized ratably maintenance term company also sells products resellers revenue generally recognized standard price protection period ranges 30 90 days lapsed collectability cannot reasonably assured reseller arrangement revenue recognized upon sellthrough end customer receipt cash may additional obligations reseller arrangements inventory rotation stock exchange rights product cases company developed reasonable estimates stock exchanges based historical experience similar types sales similar products company sales agreements certain wireless customers provide rebate selling price customers particular product subsequently sold lower price customers different customer rebate period extends relatively short period time historically amounts rebates paid customers material company estimates amount rebate based upon terms individual arrangement historical experience future expectations price reductions records estimate rebate amount time sale company also enters sales incentive programs comarketing arrangements certain wireless handset customers company records incurred incentive reduction revenue sales revenue recognized assessment collectability also factor determining whether revenue recognized company assesses collectability based number factors including payment history creditworthiness customer company request collateral customers international sales company may require letters credit customers drawn demand customer defaults payment company determines collection payment reasonably assured company defers revenue recognition collection becomes reasonably assured generally upon receipt cash occasionally company enters revenue sharing arrangements company collects payment customer telecommunications service provider collects service revenues company enters revenue sharing arrangement company recognize revenue collection reasonably assured nature business china emerging markets companys billings andor customer payments may correlate contractual payment terms company generally enforce contractual payment terms prior final acceptance accordingly accounts receivable recorded company recognizes related customer revenue advances customers recognized company collected cash customer prior recognizing revenue deferred revenue recorded undelivered elements final acceptance obtained company current deferred revenue 1708 million 1176 million longterm deferred revenue 1609 million 2101 million december 31 2009 2008 respectively costs related deferred revenue also deferred revenue recognized see deferred costs notes consolidated financial statements continued note 2summary significant accounting policies continued product warranty company provides warranty equipment handset sales period generally ranging one two years time final acceptance times company entered arrangements provide limited warranty services periods longer two years company provides expected cost product warranties time revenue recognized based assessment past warranty experience specific circumstances dictate company assesses adequacy recorded warranty liability every quarter makes adjustments liabilities necessary time company may subject additional costs related nonstandard warranty claims customers occurs company estimates additional accruals based historical experience communication customers various assumptions company believes reasonable circumstances additional warranty accruals recorded period additional costs identified receivables although company evaluates customer credit worthiness prior sale company provides allowance doubtful accounts estimated loss trade notes receivable collection may longer reasonably assured company assesses collectability receivables based number factors including analysis creditworthiness companys historical collection history current economic conditions ability collect payment length time individual receivable balance outstanding companys policy determining allowance doubtful accounts includes specific allowances balances known uncollectible formulabased portfolio approach based aging accounts receivable precursor management review overall allowance doubtful accounts formulabased approach involves aging companys accounts receivable applying percentage based companys historical experience approach results allowance computed based aging receivables company evaluates percentages applied category aged accounts receivable periodically based actual history writeoffs collections refines formulabased approach accordingly use future periods company certain accounts receivable china outstanding significant period time company provides allowances receivables based criteria discussed company believes sufficient experience knowledge china market customer payment patterns reasonably estimate allowances actual payment patterns customer behavior could differ expectations company uses actual collection experience periodically adjust percentages used applying formulabased portfolio approach discussed inventories consist product held companys manufacturing facility warehouses well finished goods customer sites customer taken possession based specific contractual terms title yet passed customer company may ship inventory existing customers require additional equipment expand existing networks prior signing expansion contract inventories stated lower cost market value based fifo method accounting writedowns based assumptions future market conditions customer demand including projected changes average selling prices resulting notes consolidated financial statements continued note 2summary significant accounting policies continued competitive pricing pressures company continually monitors inventory valuation potential losses obsolete inventory manufacturing facilities well customer sites actual market conditions less favorable projected management additional writedowns may required actual market conditions favorable anticipated inventory previously written may sold customers resulting lower cost sales higher income operations expected period deferred costs deferred costs consist product shipped customer rights obligations ownership passed customer revenue yet recognized deferred costs stated cost management periodically assesses recoverability deferred costs provides reserves deferred cost balances recovery deferred costs probable recoverability evaluated based various factors including length time product held customer site viability payment including assessment product demand revenue sharing arrangement exists andor evaluation related transaction result gross margin loss situation transaction deferred cost balance adjusted impairment equal value excess cost amount revenue eventually recognized transaction revenue cost sales recorded final acceptance received customer greater concentration product customer sites contract specific individual customers financial conditions specific individual customers may result increased concentration risk exposure companys inventory post contract support services revenue deferred entire related deferred direct costs classified noncurrent asset consistent definition current asset research development capitalized software development costs research development costs charged expense incurred company capitalizes software development costs incurred development software ultimately sold time technological feasibility attained related product ready general release management judgment required assessing technological feasibility expected future revenues estimated product lives changes product technologies ultimate recoverability companys capitalized software development costs 2009 2008 2007 company capitalized immaterial software development costs amortization capitalized software development costs 02 million 06 million 10 million 2009 2008 2007 respectively direct costs software developed internal use expensed preliminary project stage capitalized application development stage property plant equipment property plant equipment recorded cost stated net accumulated depreciation provided straightline basis estimated useful lives related assets land use rights related property leased company china amortized life lease leasehold improvements amortized straightline basis shorter useful life improvements term lease assets disposed cost related accumulated depreciation removed accounts resulting gains losses included results operations company capitalizes interest incurred related construction notes consolidated financial statements continued note 2summary significant accounting policies continued property plant equipment ready use capitalized interest recorded years ended december 31 2009 2008 2007 capitalized interest primarily arose construction companys manufacturing research development administrative offices facility hangzhou china amortized straightline basis life building company generally depreciates assets following periods depreciation expense 128 million 304 million 392 million years ended december 31 2009 2008 2007 respectively longlived assets including finitelived purchased intangible assets company amortizes purchased intangible assets finite lives estimated economic lives assets purchased intangible assets carried cost less accumulated amortization longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable undiscounted expected future cash flows less carrying value assets impairment loss recognized based excess carrying amount fair value assets see note 6 longlived assets disposed sale measured lower book value fair value less cost sell result amortization asset sales impairment charges approximately 49 million 157 million 2008 2007 respectively companys consolidated balance sheet december 31 2009 2008 contained balances finitelived purchased intangible assets advertising costs company expenses advertising costs incurred payment customers marketing development costs accounted reduction revenue associated customers incurred years ended december 31 2009 2008 2007 advertising costs totaled 08 million 43 million 74 million respectively restructuring liabilities litigation contingencies company accounts restructuring plans using guidance provided asc 420 exit disposal cost obligations asc 712 compensationnonretirement postemployment benefits company accounts litigation contingencies accordance asc 450 contingencies requires company record estimated loss contingency information available prior issuance companys financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated notes consolidated financial statements continued note 2summary significant accounting policies continued third party commissions company records accruals commissions payable third parties operating expense period liability incurred management performs followup procedures respect accrued commission upon completion followup procedures accrued commissions claimed statute limitations expired reasonable period time elapsed reduces accruals reductions recorded consolidated statement operations period management determines certain accruals longer necessary december 31 2009 approximately 64 million accrued commissions claimed third parties three years ended december 31 2009 2008 respectively reduced approximately 08 million 45 million accrued commissions payable reduction recorded cost net sales year ended december 31 2007 significant accruals related third party commissions reversed stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value stockbased compensation expense restricted stock awards measured based closing fair market value companys common stock date grant stockbased compensation expense stock options estimated grant date based options fair value calculated blackscholes option pricing model blackscholes model stockbased compensation expensed ratably straightline basis requisite service period generally vesting term sharebased payment awards accumulated comprehensive income comprehensive income includes changes equity net assets period nonowner sources comprehensive income loss 2009 2008 2007 shown consolidated statement stockholders equity december 31 years indicated components accumulated comprehensive income reported consolidated balance sheets follows accumulated comprehensive income includes material amounts related noncontrolling interests income taxes company subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating companys tax positions determining provision income taxes ordinary course business many transactions calculations ultimate tax determination uncertain company notes consolidated financial statements continued note 2summary significant accounting policies continued recognizes tax benefit expense uncertain tax position likely tax position sustained examination taxing authorities based technical merits position company recognizes interest expense penalties related income tax matters part provision income taxes company recognizes deferred income taxes difference tax bases assets liabilities financial statement amounts based enacted tax rates management judgment required assessment recoverability companys deferred tax assets based assessment projected taxable income numerous factors could affect companys results operations future significant decline companys future operating results assessment recoverability deferred tax assets would need revised adjustment deferred tax assets would charged income period necessary company records valuation allowance reduce deferred tax assets amount management believes likely realized company provides us taxes foreign undistributed earnings considered permanently reinvested outside united states financial instruments derivatives financial instruments consist cash equivalents short longterm investments notes receivable accounts receivable payable accrued liabilities first quarter 2008 company adopted new accounting guidance related fair value measurements new accounting guidance material impact financial statements company new disclosures required accounting guidance included note 4 carrying amounts cash equivalents bank notes accounts receivable payable notes receivable accrued liabilities approximate fair values shortterm nature instruments fair value long term investments equity securities determined based quoted market prices available information investees company may use derivative financial instruments manage exposures foreign currency exchange rate changes objectives holding derivatives include reducing eliminating efficiently managing economic impact exposures effectively possible derivative instruments recognized either assets liabilities balance sheet company measures instruments fair value recognizes changes fair value derivatives earnings period change unless derivative qualifies effective hedge offsets certain exposures contracts designated inception related foreign currency exposures hedged company hedged transactions 2009 2008 2007 foreign currency translation companys operations conducted international subsidiaries local currency functional currency financial statements subsidiaries translated respective functional currencies us dollars foreign currency assets liabilities translated periodend exchange rate revenues expenses translated average exchange rate period effects translating financial statements foreign subsidiaries us dollars reported cumulative translation adjustment separate component comprehensive income stockholders equity foreign currency translation gainloss transactions denominated functional currency included income net notes consolidated financial statements continued note 2summary significant accounting policies continued companys consolidated statements operations connection remeasurement process company recorded gain 63 million 2009 loss 99 million 2008 gain 46 million 2007 earnings per share basic earnings per share eps computed dividing net income loss available common stockholders weighted average number shares companys common stock outstanding period excludes nonvested restricted stock diluted eps presents amount net income loss available share common stock outstanding period plus share common stock would outstanding assuming company issued shares common stock dilutive potential common shares outstanding period companys potentially dilutive common shares include outstanding stock options nonvested restricted stock restricted stock units convertible subordinated notes prior maturity march 1 2008 employee stock purchase plan espp shares prior termination espp effective may 15 2009 years ended december 31 2009 2008 2007 potential common shares dilutive net loss years therefore basic dilutive eps following table summarizes total potential shares common stock excluded diluted per share calculation include would antidilutive period variable interest entities accounting guidance requires entity primary beneficiary variable interest entity vie assets liabilities results operations vie included consolidated financial statements entity company evaluates investments periodically triggering events occur recent accounting pronouncements june 2009 financial accounting standards board fasb issued fasb accounting standards codification financial statements issued interim annual periods ending september 15 2009 codification became single authoritative source gaap accordingly previous references gaap accounting standards longer used companys disclosures including notes consolidated financial statements adoption codification third quarter 2009 substantive impact companys consolidated financial statements june 2009 fasb issued authoritative guidance requiring enterprise perform analysis determine whether enterprises variable interest interests give controlling financial interest variable interest entity analysis identifies primary beneficiary variable interest notes consolidated financial statements continued note 2summary significant accounting policies continued entity one power direct activities variable interest entity significantly impact entitys economic performance obligation absorb losses entity could potentially significant variable interest guidance effective beginning annual reporting period commencing november 15 2009 adopted company first quarter fiscal year 2010 company assessing potential impact adoption guidance consolidated financial statements september 2009 fasb issued new standards revenue recognition multiple deliverables new standards impact determination individual deliverables included multipleelement arrangement may treated separate units accounting additionally new standards modify manner transaction consideration allocated across separately identified deliverables longer permitting residual method allocating arrangement consideration new standards effective company beginning first quarter fiscal year 2011 however early adoption permitted company currently assessing potential impact guidance consolidated financial statements september 2009 fasb issued new standards accounting certain revenue arrangements include software elements new standards amend scope preexisting software revenue guidance removing guidance nonsoftware components tangible products certain software components tangible products new standards effective company beginning first quarter fiscal year 2011 however early adoption permitted company currently assessing potential impact guidance consolidated financial statements note 3divestitures beginning fourth quarter 2007 company launched number initiatives including potential divestitures noncore assets focus core growth technologies including iptv ipbased softswitch broadband devices third quarter 2009 company completed sale korea operations third quarter 2008 company completed divestitures utstarcom personal communications llc mobile solutions business unit korea operations july 31 2009 company completed sale korea operations entity founded former employee received total consideration approximately 20 million connection transaction company recorded net loss 13 million 2009 included amount 22 million foreign currency losses previously carried accumulated comprehensive income realized upon completion sale liquidation subsidiary company determined divestiture korea operations meet criteria presentation discontinued operation korea operations meet definition component entity utstarcom personal communications llc pcd july 1 2008 company completed sale utstarcom personal communications llc whollyowned subsidiary company pcd personal communications devices llc notes consolidated financial statements continued note 3divestitures continued pcd llc entity controlled aig global investment group certain investors total sale consideration company based primarily working capital pcd closing transaction subject certain adjustments upon final settlement working capital adjustments fourth quarter 2008 total sale consideration company 2377 million 2008 company recorded net cash proceeds 2191 million sale pcd represented total sale consideration 2377 million less 86 million transaction costs 100 million held escrow december 31 2008 company recorded additional 13 million transaction costs incurred yet paid company also invested 16 million equity securities pcd llc representing approximately 26 interest pcd llc company recorded 38 million gain sale pcd net assets 2008 following table summarizes components gain sale thousands second quarter 2009 company recorded additional 14 million gain resulting adjustment reflect actual transactionrelated costs total gain sale pcd net assets includes proceeds 100 million held escrow disbursed company july 2009 pursuant original terms divestiture agreement company potentially entitled receive 500 million earnout payment 2011 based achievement cumulative earnings levels pcd llc december 31 2010 prior june 30 2008 pcd reportable segment company concurrent closing divestiture transaction company entered threeyear supply agreement pcd llc whereby company indicated intent supply handset products pcd llc connection winddown korea operations december 2008 furnished pcd llc 180days notice termination supply agreement due continuing direct cash flows pursuant supply agreement beyond oneyear assessment period starting date sale pcd assets meet criteria presentation discontinued operation june 30 2009 company entered settlement agreement release settlement agreement pcd llc resolve certain product quality issues settlement agreement company waived right earnout payments granted call option pcd llc companys 16 million investment equity securities pcd llc company also agreed pay pcd llc total 111 million recorded warranty costs approximately 84 million see note 8 reduction revenue approximately 27 million third quarter 2009 pcd llc elected exercise call option repurchase 2199214 class units owned company received cash 16 million notes consolidated financial statements continued note 3divestitures continued september 2009 transferred equity holdings class units pcd llc gain loss recorded transfer carrying value equity holdings equal proceeds received 2009 gross profit reduced approximately 246 million result certain transactions pcd llc consisting 111 million claim settlement approximately 260 million costs inventory writedowns net realizable value writedowns excess inventory warranty reserves related transactions pcd llc offset partially 125 million benefit related sales handsets pcd llc 2009 previously written zero carrying value fourth quarter 2008 mobile solutions business unit msbu july 31 2008 company completed divestiture mobile solutions business unit msbu global private equity firm third quarter 2008 company recorded net gain divestiture 39 million gain resulted transferring net liabilities approximately 90 million netted cash payments made company approximately 51 million including transaction related costs 03 million net liability primarily consisted deferred revenue liabilities totaling 278 million offset deferred costs assets approximately 188 million previously msbu reported part companys segment concurrent closing transaction company entered manufacturing agreement whereby company continue develop manufacture wireless ipbased products sale divested entity due ongoing direct cash flows pursuant manufacturing agreement sale msbu assets meet criteria presentation discontinued operation sale assets marvell technology group ltd february 2006 company sold substantially assets selected liabilities semiconductor design business division marvell technology group ltd marvell assets sold included assets related prior acquisition advanced communications devices corporation 2001 systemonchip semiconductors company recognized gain sale assets 123 million 2006 gain determined based upon total net proceeds less net book value assets sold 29 million value supply agreement 202 million included cash received 160 million earned company result achieving certain defined milestones company received payment 160 million october 2006 upon satisfaction certain escrow conditions company received additional 43 million cash august 2007 recorded consolidated statement operations gain divestiture 2007 connection sale assets company entered supply agreement marvell purchase chipsets companys handset products next five years value allocated supply agreement 202 million amortized proportion quantities chipsets purchased supply agreement first quarter 2009 company revised estimates customer demand certain handset products determined future chipset purchases marvell would negligible result company fully amortized remaining value supply agreement 85 million first quarter 2009 years ended december 31 2009 2008 2007 approximately 85 million 88 million 13 million respectively amortized cost sales notes consolidated financial statements continued note 4cash cash equivalents investments cash equivalents consisting primarily bank deposits money market funds recorded cost approximates fair value shortterm nature instruments availableforsale securities included cash equivalents december 31 2009 december 31 2008 shortterm investments consist bank notes 10 million 43 million december 31 2009 december 31 2008 respectively company accepts bank notes receivable maturity dates three six months customers china normal course business company may discount bank notes banking institutions china sale notes reflected reduction shortterm investments proceeds settlement notes included cash flows operating activities consolidated statement cash flows company sold 99 million 305 million bank notes recorded costs less 01 million 04 million result discounting notes 2009 2008 respectively bank notes sold 2007 december 31 2008 mrv communications mrv availableforsale security investment recorded fair value unrealized holding gains losses reported component comprehensive income net related income tax effects realized gains losses reported earnings accumulated comprehensive income included approximately 33 million unrealized holding loss december 31 2008 related companys investment mrv fourth quarter 2009 company disposed holdings mrv see additional discussion result availableforsale securities subject fair value accounting december 31 2009 longterm investments december 31 2009 privatelyheld companies accounted cost method following table shows breakdown companys total investments december 31 2009 december 31 2008 tet october 2008 company invested 48 million turnstone environment technologies llc tet exchange approximately 22 voting interest company obligated make capital contributions tets mission secure exclusive licensing rights technologicallyproven environmentally friendly renewable energy technologies distribution various emerging markets initial focus india tet considered variable interest entity company primary beneficiary hold majority voting interest assets liabilities operating results tet determined immaterial december 31 2008 notes consolidated financial statements continued note 4cash cash equivalents investments continued therefore consolidated beginning january 1 2009 financial statements tet included consolidated financial statement company see note 18 cortina september 2004 company invested 20 million series preferred stock immenstar inc immenstar development stage company designed chip used companys product investment accounted cost method february 2007 immenstar acquired cortina systems inc cortina exchange companys investment immenstar company received 36 million shares series preferred stock cortina 0837 per share 18 million cash march 2007 received additional 04 million shares series preferred stock 0837 per share 02 million cash escrow 2008 result acquisition company recorded gain investment 28 million income net 2007 05 million 2008 company owns approximately 1 interest cortina december 31 2009 2008 accounts investment cortina using cost method mrv july 1 2007 fiberxon investment company 7 ownership interest completed merger mrv publiclytraded company active market exchange companys interest fiberxon company entitled receive 15 million cash 1519365 shares mrv common stock valued approximately 45 million deferred consideration approximately 27 million deferred consideration becomes payable upon completion certain milestones may reduced legitimate claims mrv certain matters related merger third quarter 2007 company paid cash consideration 15 million received 1519365 shares mrv common stock recognized gain investment 29 million second quarter 2009 trading mrv common stock nasdaq global market suspended result mrvs failure file delinquent periodic reports sec numerous extensions granted staff nasdaq stock market inc result delisting nasdaq global market management reevaluated carrying value investment including reviewing mrvs cash position recent financing activities financing needs earningsrevenue outlook operational performance competition based review consideration duration extent decline mrv fair value company determined decline mrv fair value otherthantemporary recorded 38 million impairment charge investment income net second quarter 2009 38 million impairment charge included recognition previously unrealized loss approximately 33 million december 31 2008 fourth quarter 2009 company sold entire equity position 1519365 mrv shares approximately 10 million cash proceeds recognized gain 04 million income net december 2009 company together fiberxon shareholders agreed settlement mrv related deferred consideration companys proportionate share settlement proceeds expected less 05 million paid several installments fiscal 2010 company record contingent gain upon receipt settlement proceeds notes consolidated financial statements continued note 4cash cash equivalents investments continued gct semiconductor october 2004 company invested 30 million gct semiconductor inc investment represents approximately 2 interest gct semiconductor inc designs develops markets integrated circuit products wireless communications industry investment accounted cost method xalted networks may 2005 august 2005 company invested 20 million 10 million respectively xalted networks xalted march 2006 company invested additional 03 million xalted development stage company providing telecommunication operator customers comprehensive set network systems software solutions service offerings company less 10 ownership interest december 31 2009 2008 fully diluted basis xalted accounts investment using cost method third quarter 2009 management reevaluated carrying value investment including reviewing xalteds cash position recent financing activities financing needs earningsrevenue outlook operational performance competition based review company determined decline xalteds fair value otherthantemporary recorded 17 million impairment charge investment income expense third quarter 2009 pcd llc connection divestiture pcd company invested 16 million equity units representing approximately 26 ownership interest pcd llc settlement agreement dated june 30 2009 company granted pcd llc option repurchase companys current equity position pcd llc within 90 days date settlement agreement original investment cost 16 million third quarter 2009 pcd llc elected exercise call option repurchase 2199214 class units owned company received cash 16 million september 2009 transferred equity holdings class units pcd llc gain loss recorded transfer carrying value equity holdings equal proceeds received fair value measurements fasb asc 820 fair value measurements disclosures clarifies fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions fasb asc 8201035 establishes threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires company use observable market data available minimize use unobservable inputs determining fair value recurring basis company measures certain financial assets fair value including marketable securities notes consolidated financial statements continued note 4cash cash equivalents investments continued december 31 2009 companys money market funds recorded cost approximates fair value classified within level 1 fair value hierarchy december 31 2008 investment mrv listed overthecounter exchange recorded fair value classified within level 1 fair value hierarchy money market funds recorded cost approximates fair value classified within level 1 fair value hierarchy company financial assets liabilities measured fair value december 31 2009 2008 note 5balance sheet details following tables provide details selected balance sheet items 1includes finished goods customer sites approximately 338 million 1380 million december 31 2009 2008 respectively customer taken possession based specific contractual terms title yet passed customer property plant equipment net notes consolidated financial statements continued note 5balance sheet details continued current liabilities note 6longlived assets june 2009 company announced intention consider potential sale manufacturing research development administrative offices facility hangzhou china december 2009 company entered property transfer leaseback agreement sale leaseback agreement intended sale property another party approximately 140 million leaseback portion property 2016 transaction expected end march april 2010 subject customary closing conditions including completion required regulatory approvals third quarter 2009 company contracted commercial real estate agent assist evaluating potential sale facility furthermore october 2009 company initiated actions consolidate companys use facility reduce operating costs revised projected occupancy needs light developments company performed recoverability assessment facility september 30 2009 impairment testing performed company third quarter 2009 utilizing income approach indicated fair value approximated carrying value hangzhou facility september 30 2009 1605 million impairment recorded respect property income approach used result lack preliminary offers available comparable market transaction activity place reliance market valuation approach however fourth quarter 2009 binding offer received buyer gave company better indication propertys fair value revealed value property interested third party lower fair value company previously estimated using income approach building approximately 27 million square feet unique design based uniqueness building fact single offer building received market several months management determined third party offer better indication fair value methods offer specific property representing direct evidence fair value based offer company determined property net book value excess fair value due apparent decline value company conducted recoverability test entitywide asset determined carrying value net assets company exceeded undiscounted cash flows expected result use eventual disposition asset group companys assessment fair value management placed primary reliance market approach third notes consolidated financial statements continued note 6longlived assets continued party offer result analysis reduced companys overall assessment fair value property 333 million accordingly company recorded noncash impairment charge 333 million fourth quarter 2009 adjusted carrying value 1257 million property lower pending sales price valuation performed factored abovemarket rental rates paid company stipulated leaseback agreement accompanying sale companys overall assessment fair value property based level 2 inputs defined inputs quoted market prices active markets observable either directly indirectly december 31 2009 longlived asset sold classified held use company expects retain minor portion use property sixyear leaseback company expects transaction qualify saleleaseback accounting upon closing potential gain realized sale leaseback expected deferred amortized leaseback term connection sale leaseback agreement february 1 2010 company entered lease contract lease respect leaseback portion hangzhou facility terms lease company lease back 71027 sqm gross floor area gfa aboveground 12000 sqm gfa underground building period 6 years rate approximately 037 044 047 respectively per sqm per day years 12 34 56 respectively lease period aboveground space approximately 366 per sqm per month underground space full lease period company also required pay security deposit amount approximately 18 million prepay part rent fees last six months lease term amount approximately 34 million day first rent payment due company may terminate part lease giving six months advance notice however company would required pay penalties additional compensation event early termination date company received proceeds approximately 139 million transaction march 8 2010 company obtained irrevocable bank guarantee letter buyer remaining amount cash proceeds sale leaseback agreement third quarter 2008 company divested intangible assets net carrying amount approximately 158 million connection sale pcd see note 3 fourth quarter 2008 company decided exit csbu market recorded charge approximately 49 million writeoff remaining unamortized balance customer relationships intangible asset arising companys previous acquisition commworks result companys consolidated balance sheet december 31 2008 contains balances finitelived intangible assets subject amortization fourth quarter 2008 companys internal forecasts revised downwards take account rapidly deteriorating business environment addition combined effect recurring operating losses sustained decline companys stock price determined aggregate significant adverse change business climate triggering event longlived assets impairment analysis notes consolidated financial statements continued note 6longlived assets continued company determined longlived asset groups company considers held used operations based upon certain factors including assessing lowest level identifiable cash flows largely independent cash flows groups assets liabilities asset groups consist companys operating segments entitywide assets companys china headquarters building estimates future cash flows developed 2009 budgeting process indicated companys business segments inability fully recover carrying value segments assets entitywide level inability fully recover carrying value asset group accordingly company tested carrying values december 31 2008 property plant equipment impairment asset groups except companys china headquarters building testing involved estimating fair value exchange transaction asset group comparing fair value carrying value asset grouping recording impairment charges reduce carrying value estimated fair value cases preimpairment carrying value asset group estimated fair value company made various estimates discussed management believes reasonable appropriate determining estimated fair values companys asset groups december 31 2008 concluding fair values management also considered part results appraisals made december 31 2008 valuation firms fair value companys facility hangzhou china certain companys equipment furniture software automobiles leasehold improvements company obtained confirm reasonableness estimates companys manufacturing research development administrative offices facility hangzhou china carrying value approximately 1674 million december 31 2008 largest single asset subject impairment testing management initially considered whether using comparable market transaction activity market comparison approach estimate current fair value hangzhou facility would feasible sufficiently objective circumstances discovered secondary market similar industrial properties derive sales data sufficiently robust place primary reliance valuation approach therefore management primarily used income capitalization approach estimate fair value valuation approach involves estimating current market rental facility analysis rents similar facilities either locality comparable districts using applicable capitalization rate estimate fair value resulted determining estimated fair value hangzhou facility approximately 1832 million december 31 2008 approximately 158 million greater carrying value december 31 2008 impairment charge recorded 2008 estimated fair value hangzhou facility exceeded carrying value company also tested individually significant equipment furniture software automobiles leasehold improvements located china india japan korea united states impairment primarily using cost approach estimate related fair values determine tested assets estimated fair value december 31 2008 adjustment factors applied assets original cost first estimate current replacement cost estimate deductions estimated current replacement costs recognize effects deterioration obsolescence causes well deinstallation costs effort resulted impairment charge approximately 223 million consisted 119 million companys enterprise resource planning erp system 67 million equipment furniture 37 million primarily capitalized software notes consolidated financial statements continued note 6longlived assets continued 2007 light current market conditions management conducted indepth strategic analysis completed fourth quarter 2007 define new corporate strategy review management challenged key assumptions companys overall strategic business manufacturing capacity plans light continued declines companys revenues excluding pcd segment appeared persistent result company revised near medium term revenue expectations downward significantly take account persistent weak global industry economic conditions new strategic direction well declines revenues company experienced material changes companys outlook plans company first able quantify fourth quarter 2007 result strategic review 2008 budgeting process triggered impairment review longlived assets based upon 2007 goodwill impairment assessment company recorded goodwill impairment charges approximately 31 million year ended december 31 2007 impairment charges represented excess carrying amount goodwill segment implied fair value consolidated balance sheets december 31 2008 2007 contained goodwill balances company also determined estimated undiscounted cash flows within segment sufficient recover carrying value certain longlived assets company calculated estimated fair values intangible assets subject amortization segment using expected discounted future cash flows recorded asset impairment charge approximately 105 million customer relationships 52 million existing technology intangible assets approximate 11 million impairment charge recorded recognize impairment carrying value certain equipment segment well note 7debt december 31 2009 2008 company bank loans outstanding company guaranteed debt included consolidated balance sheet 2009 approximately 3221 million credit facilities china expired renewed december 31 2009 company available credit facilities march 21 2008 company entered credit agreement providing 750 million secured revolving credit facility subject accounts receivable inventory borrowing base formula used second quarter 2008 fund companys general working capital requirements second quarter 2008 company repaid outstanding borrowings credit agreement june 30 2008 connection entry agreement sale pcd see note 3 company terminated commitments credit agreement upon termination credit agreement 2008 company expensed remaining unamortized debt issuance costs approximately 11 million march 12 2003 company completed offering 4025 million 78 convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 expenses associated convertible subordinated notes issuance 117 million recorded longterm assets amortized life notes effective january 9 2007 company holders remaining 2746 million convertible subordinated notes entered first supplemental indenture providing failure notes consolidated financial statements continued note 7debt continued company comply certain provisions original agreement result default event default may 31 2007 convertible subordinated notes accrued additional 675 per annum special interest january 9 2007 march 1 2008 maturity date notes payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest result first supplemental indenture convertible subordinated notes bore stated interest rate 7625 subsequently company solicited obtained requisite consents holders notes waiver effective july 26 2007 default may occurred prior date due delay filing noncompliance certain covenants company entered second supplemental indenture trustee dated july 26 2007 receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection companys consent solicitation announced july 19 2007 second supplemental indenture provided convertible subordinated notes accrue additional interest rate 675 per annum special interest january 9 2007 including july 25 2007 b 10 per annum special interest july 26 2007 date notes paid prepaid redeemed converted otherwise cease outstanding special interest rate provided second supplemental indenture represented increase 325 per annum special interest rate 675 provided first supplemental indenture result second supplemental indenture convertible subordinated notes stated interest rate 10875 payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest march 3 2008 company repaid convertible subordinated notes 2895 million included principal payment 2746 million accrued interest 149 million note 8warranty obligations guarantees warranty obligations included current liabilities follows thousands second quarter 2009 company recorded special warranty charge related certain handsets sold pcd llc settlement agreement pcd llc see note 3 company agreed pay pcd llc 84 million settle certain pcd llc customers warranty claims notes consolidated financial statements continued note 8warranty obligations guarantees continued arising handsets sold pcd llc 84 million claim settlement paid third quarter 2009 included accruals warranties issued settlements made 2009 table certain companys sales contracts include provisions customers would indemnified company event among things thirdparty claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amount relation provisions claims made company believes valid enforceable rights intellectual property embedded products note 9income taxes united states foreign income loss income taxes minority interest follows components provision benefit income taxes follows december 31 2009 company gross unrecognized tax benefits approximately 906 million certain deferred tax assets federal tax benefit state income tax items totaling 778 million recognized portion gross unrecognized tax benefits would decrease provision income taxes decrease companys net loss approximately 128 million company reduced total unrecognized tax benefits approximately 265 million first quarter 2009 due statute limitations expirations settlements income tax audits portion 265 million reduction gross unrecognized tax benefits decreased provision notes consolidated financial statements continued note 9income taxes continued income taxes decreased companys net loss quarter approximately 14 million unrecognized tax benefits relate primarily allocations revenue costs among companys global operations company recognizes interest expense penalties related unrecognized tax benefits within income tax expense company accrued interest penalties approximately 39 million december 31 2008 approximately 31 million december 31 2009 company reduced interest expense penalties recorded within income tax expense approximately 14 million first quarter 2009 due statute limitations expirations settlements income tax audits company subject taxation us federal jurisdiction various us state foreign jurisdictions company also audit taxing authorities china recurring basis material jurisdictions company subject examination united states china companys tax years 1998 2009 still open examination china companys tax years 2006 2009 still open examination united states company believes reasonably possible amount gross unrecognized tax benefits related resolution income tax matters could reduced approximately 10 million next 12 months income tax audits settled statute limitations expire portion 10 million gross unrecognized tax benefits would decrease provision income taxes increase companys net income approximately 07 million fasb asc 74010 establishes criteria recognizing continuing recognize morelikelythannot tax positions may result income tax expense volatility future periods company believes adequately provided tax positions amounts asserted taxing authorities could greater companys accrued position accordingly additional provisions income tax related matters could recorded future revised estimates made underlying matters settled otherwise resolved notes consolidated financial statements continued note 9income taxes continued summary companys unrecognized tax benefits follows establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change companys expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks notes consolidated financial statements continued note 9income taxes continued summary components net deferred tax assets follows accordance specific accounting guidance deferred income taxes must provided unremitted earnings foreign subsidiaries unless earnings deemed permanently reinvested outside united states 2009 company gross us deferred income tax liability 101 million foreign earnings 929 million considers permanently reinvested outside united states december 31 2009 company still undistributed earnings approximately 187 million investments foreign subsidiaries considered permanently reinvested determination amount deferred taxes earnings practicable since computation would depend number factors cannot known decision repatriate earnings made december 31 2009 companys us federal net operating loss carryforwards 2624 million expire varying amounts 2026 2029 december 31 2009 state net operating loss carryforwards 389 million expire varying amounts 2011 2029 company concluded federal state net operating losses meet likely standard contained fasb asc 74010 therefore placed 1017 million valuation allowance related deferred tax assets event tax benefits related valuation allowance realized immaterial amount would credited paidin capital december 31 2009 company also net operating loss carryforwards nols china notes consolidated financial statements continued note 9income taxes continued approximately 4068 million china net operating loss carryforwards expire varying amounts 2011 2014 company also concluded china net operating losses meet likely standard therefore placed 1022 million valuation allowance related deferred tax assets december 31 2009 company nols countries us china nols approximately 964 million majority nols expire carried forward indefinitely however company concluded losses meet likely standard therefore placed valuation allowance 146 million related deferred tax assets december 31 2009 company us alternative minimum tax credit carryforwards 10 million indefinite life company also us research development credit carryforwards 147 million 25 million credits indefinite life 122 million credits expire varying amounts 2010 2028 company us foreign tax credits 783 million expire varying amounts 2012 2019 company concluded us tax credit carryforwards meet likely standard contained fasb asc 74010 therefore placed 940 million valuation allowance related deferred tax assets december 31 2009 company foreign research development credit carryforwards 04 million expire 2018 company also concluded foreign research development credit carryforwards meet likely standard therefore placed 04 million valuation allowance related deferred tax assets difference companys effective income tax rate federal statutory rate reconciled china corporate income tax law cit law became effective january 1 2008 cit law chinas dual tax system domestic enterprises foreign investment enterprises fies effectively replaced unified system new law establishes tax rate 25 enterprises reduced tax rate 15 certain qualified high technology enterprises notes consolidated financial statements continued note 9income taxes continued prior change tax law certain subsidiaries joint ventures located china enjoyed tax benefits china generally available fies tax holidaysincentives fies applicable potentially applicable utstarcom chongqing telecom co ltd cuts utstarcom telecom co ltd huts utstarcom china co ltd utsc companys active subsidiaries china entities may qualify accredited technologically advanced enterprises cit law targets certain industries reduced 15 tax rate certain qualified high technology enterprises fies established promulgation new law previously enjoyed lower tax rates increase tax rates would gradually phased five years fourth quarter 2008 two companys china subsidiaries huts utsc approved reduced 15 tax rate approval lasts three years retroactive january 1 2008 2009 190 million tax benefit effect tax rate changes attributable revaluation companys deferred tax assets china related decrease tax rates due huts utsc qualifying reduced 15 tax rate 2008 discussed 2008 138 million tax expense effect tax rate changes attributable revaluation companys deferred tax assets china related decrease tax rates due huts utsc qualifying reduced 15 tax rate 2008 discussed 2007 271 million tax benefit effect tax rate changes attributable revaluation companys deferred tax assets china related increase tax rates due passage new law discussed based cit law december 31 2007 companys subsidiaries qualified reduced 15 tax rate establishing deferred income tax assets liabilities company makes judgments interpretations based enacted tax laws published tax guidance applicable operations well amount jurisdiction future taxable income company records deferred tax assets liabilities evaluates need valuation allowances reduce deferred tax assets realizable amounts september 30 2005 company believe likely would generate sufficient level proper mix taxable income within appropriate period utilize deferred tax assets china united states result review undertaken september 30 2005 company concluded appropriate establish full valuation allowance net deferred tax assets china united states wherein cumulative losses weigh heavily overall assessment 2009 change deferred tax valuation allowance 1122 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets december 31 2009 united states china 2008 change deferred tax valuation allowance 126 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets december 31 2008 united states china 2007 change deferred tax valuation allowance 1055 million primarily attributable tax expense related continuing provide full valuation allowance companys net deferred tax assets december 31 2007 united states china 2009 income tax benefit 187 million related tax credits primarily attributable increase amount foreign tax credits generated united states due foreign withholding taxes repatriation dividends companys foreign operations 2008 income tax benefit 249 million related tax credits primarily attributable increase amount notes consolidated financial statements continued note 9income taxes continued foreign tax credits generated united states due foreign withholding taxes paid repatriations dividends companys foreign operations note 10common stock incentive plans stock incentive plans december 31 2009 company stock incentive plans described substantially outstanding awards subject potential accelerated vesting event change control company repurchases cancels shares common stock forfeited respect tax liability associated certain vesting restricted stock restricted stock unit grants plans 2006 equity incentive plan 2006 equity incentive plan 2006 plan implemented july 21 2006 adopted board directors june 6 2006 approved companys stockholders july 21 2006 plan replaces 1997 plan 2001 plan 2003 plan collectively prior plans awards granted pursuant prior plans 2006 plan provides grant following types incentive awards stock options ii stock appreciation rights iii restricted stock iv restricted stock units v performance shares performance units vi stock cash awards award collectively awards eligible awards 2006 plan include employees directors consultants provide services company affiliates maximum aggregate number shares may awarded sold 2006 plan 4500000 shares plus shares reserved remain unissued prior plans july 21 2006 ii shares subject stock options similar awards granted prior plans expire become exercisable without exercised full shares issued pursuant awards granted prior plans forfeited repurchased company december 31 2009 number shares transferred prior plans 2006 plan totaled 23056752 december 31 2009 6174000 options restricted stock units outstanding 2006 plan board directors compensation committee board compensation committee administers 2006 plan administrator subject terms 2006 plan administrator sole discretion select employees consultants directors receive awards determine terms conditions awards interpret provisions 2006 plan outstanding awards options granted 2006 plan generally vest become exercisable four years awards granted 2006 plan generally transferable rights respect award granted participant generally may exercised participants lifetime participant provided however administrators approval participant may transfer award participants spouse former spouse pursuant courtapproved domestic relations order relates provision child support alimony payments marital property rights ii transfer award gift benefit participants immediate family exercise price stock options stock appreciation rights granted 2006 plan must least equal 100 fair market value common stock date grant notes consolidated financial statements continued note 10common stock incentive plans continued least 110 fair market value incentive stock option iso granted stockholder greater 10 voting power companys stock maximum term stock option granted participant must exceed seven years date grant five years iso granted stockholder greater 10 voting power common stock administrator determine terms conditions awards granted plan prior plansthe 1997 stock plan 2001 director option plan 2003 nonstatutory stock option plan 1997 stock plan prior implementation 2006 plan july 21 2006 officers employees consultants company affiliates eligible receive options purchase shares common stock purchase rights 1997 stock plan 1997 plan 1997 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2009 options purchase 1937703 shares common stock outstanding 1997 plan options granted 1997 plan prior july 21 2006 either isos intended qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended nonqualified stock options nsos qualify compensation committee oversaw selection eligible persons option grants determined grant date amounts exercise prices vesting periods relevant terms options including whether options would isos nsos exercise price isos granted 1997 plan could less 100 fair market value common stock grant date least 110 fair market value iso granted stockholder greater 10 voting power companys stock exercise price nsos could determined compensation committee discretion options granted 1997 plan generally transferable life optionee 1997 plan options vest become exercisable determined compensation committee generally four years options may generally exercised time vest expiration date determined compensation committee however option may exercised ten years grant date five years isos granted stockholder greater 10 voting power common stock options generally terminate 12 months death permanent disability optionee ii three months termination employment reason aggregate fair market value shares common stock represented isos become exercisable calendar year one option holder may exceed 100000 options excess limit treated nsos prior implementation 2006 plan company could also grant stock purchase rights eligible participants 1997 plan 1997 plan shares purchased pursuant stock purchase rights subject restricted stock purchase agreement unless compensation committee determined otherwise agreement granted company right repurchase restricted stock upon voluntary involuntary termination employee reason including death disability prior vesting purchase price repurchased shares original price paid could paid cancellation indebtedness owed company companys repurchase right lapsed rate determined compensation committee notes consolidated financial statements continued note 10common stock incentive plans continued 2001 director option plan prior implementation 2006 plan july 21 2006 directors employees company outside directors eligible receive options purchase shares common stock 2001 director option plan 2001 plan 2001 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2009 options purchase 260000 shares common stock outstanding 2001 plan compensation committee administrator 2001 plan terms 2001 plan exercise price option granted equaled market value common stock date grant options terms ten years terminate earlier individual ceases serve director first option grants vest 25 shares subject first option first four anniversaries date grant subject outside director continuing serve director dates subsequent option grants vest 100 shares subject subsequent option first anniversary date grant 2003 nonstatutory stock option plan prior implementation 2006 plan july 21 2006 directors officers employees consultants company affiliates eligible receive options purchase shares companys common stock 2003 nonstatutory stock option plan 2003 plan nonstatutory stock options would qualify favorable federal income tax treatment provisions section 422 internal revenue code 1986 amended could granted 2003 plan 2003 plan terminated july 2006 effective upon stockholder approval 2006 plan december 31 2009 options purchase 214280 shares common stock outstanding 2003 plan 2003 plan administered compensation committee compensation committee oversaw selection eligible persons options would granted determined number shares subject option exercise prices vesting periods terms applicable option options granted 2003 plan generally vest become exercisable four years may exercised time vest expiration date options generally terminate 12 months death employment termination due disability option holder ii three months termination option holders service reason disability due option holders death option however may exercised ten years grant date stock award stock option activity past years company granted equity awards consisting primarily stock options fiscal 2009 company granted equity awards using mixture restricted stock units restricted stock options december 31 2009 2008 2007 number shares common stock available issuance pursuant future grants equity compensation plans 12201930 10710921 5973324 respectively october 1 2008 company completed tender offer exchange certain outstanding employee stock options purchase shares companys common stock eligible exchange outstanding options vested unvested held current employees excluding directors executive notes consolidated financial statements continued note 10common stock incentive plans continued officers granted companys 1997 stock plan exercise price greater equal 600 per share included options exercise price less fair market value companys common stock date grant subject terms conditions tender offer company accepted exchange cancelled options purchase aggregate 6072818 shares weighted average exercise price 1415 per share issued new options purchase aggregate 1983920 shares exercise price 324 per share closing stock price companys common stock october 1 2008 new options granted companys 2006 equity incentive plan generally vest two years exchange ratio number options canceled pursuant offer exceeded number options granted connection offer incremental compensation expense resulting completion tender offer following summarizes companys stock options activity november 2007 compensation committee granted 962249 shares performancebased restricted stock units certain senior executive officers february 26 2008 committee determined based companys executive officers level performance companys 2007 fiscal year 783324 shares underlying previously granted performancebased restricted stock units earned 50 vesting immediately 50 vesting february 28 2009 performancebased restricted stock unit fair value 299 per share equals closing price companys common stock nasdaq global select market measurement date february 26 2008 february 2008 compensation committee also granted 1073333 performancebased awards certain senior executive officers third quarter 2008 233333 contingently issuable shares forfeited result employee terminations october 6 2008 performance requirements respect 60000 contingently issuable shares eliminated restricted stock units fair value 269 per share equals closing price companys common stock nasdaq global select market measurement date notes consolidated financial statements continued note 10common stock incentive plans continued october 6 2008 february 18 2009 committee determined based companys executive officers level performance companys 2008 fiscal year additional 367500 shares underlying previously granted performancebased restricted stock units earned performancebased restricted stock units fair value 127 per share equals closing price companys common stock nasdaq global select market measurement date february 18 2009 restricted stock units vested 50 february 27 2009 vested 50 february 26 2010 february 2009 compensation committee also granted senior executive officers 313293 restricted stock units fouryear vesting additional 626586 performancebased awards subject attainment goals determined compensation committee company may subject variable levels expense related primarily varying levels performance well fluctuations companys stock price awards marked market periodically earlier date compensation committees determination performance ii date deemed fully vested result involuntary termination 626586 performancebased awards granted february 2009 401859 awards deemed fully vested fiscal 2009 result involuntary terminations prior annual compensation committees evaluation performance february 2010 compensation committee decided new stockbased awards would granted senior executives 2010 year light companys previously announced planned changes management 2006 1997 plans company granted restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units awards generally vest period one four years date grant restricted stock voting rights common stock shares underlying restricted stock considered currently issued outstanding restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding expense awards based fair market value shares date grant recognized straightline basis requisite service period weighted average fair value restricted stock awards granted equity incentive plans years ended december 31 2009 2008 2007 135 291 296 respectively grant restricted stock awards deducted shares available grant companys stock plan nonvested restricted awards december 31 2009 changes year ended december 31 2009 summarized notes consolidated financial statements continued note 10common stock incentive plans continued year ended december 31 2009 35 million shares restricted stock awards vested total fair value restricted stock awards vested measured date vesting year ended december 31 2009 48 million company also granted 20 million restricted stock awards year ended december 31 2008 26 million shares restricted stock awards vested total fair value restricted stock awards vested measured date vesting year ended december 31 2008 84 million company also granted 60 million restricted stock awards year ended december 31 2007 14 million shares restricted stock awards vested total fair value restricted stock vested year ended december 31 2007 48 million company also granted 73 million shares restricted stock awards following table summarizes significant ranges outstanding exercisable stock options december 31 2009 thousands except years share prices intrinsic value represents total pretax intrinsic value calculated difference market value reported nasdaq december 31 2009 219 exercise price inthemoney shares years ended december 31 2009 2008 2007 total pretax intrinsic value options exercised negligible weighted average remaining contractual life options exercisable 354 years weighted average remaining contractual life options expected vest 395 years december 31 2009 2000 employee stock purchase plan february 2000 companys stockholders approved 2000 employee stock purchase plan espp purchase plan intended qualify employee stock purchase plan notes consolidated financial statements continued note 10common stock incentive plans continued section 423 internal revenue code stock purchase plan administered board committee appointed board company elected terminate espp program february 2009 effective date may 15 2009 cancellation accounted settlement shares consideration resulted immediate expense recognition 12 million first quarter 2009 associated unrecognized compensation canceled purchase periods 24month offering espp expires march 2010 employees eligible participate stock purchase plan employed company 20 hours per week five months calendar year stock purchase plan permitted eligible employees purchase companys common stock payroll deductions exceed 15 employees total compensation stock could purchased plan price equal 85 fair market value companys stock either date purchase first day offering period whichever lower stockbased compensation stockbased compensation expense stock options estimated grant date based options fair value calculated blackscholes option pricing model blackscholes model blackscholes model developed use estimating fair value shortlived exchange traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility term awards actual projected employee stock option exercise behaviors riskfree interest rate expected dividends company uses historical volatility management believes representative future stock price trends implied volatility due relatively small number actively traded options companys common stock available determine implied volatility company estimates expected term options granted based upon companys historical exercise cancellation data vested options addition separate groups employees similar exercise behavior considered separately expected term employee stock purchase plan shares average remaining purchase periods offering period company bases risk free interest rate used option valuation model us treasury zerocoupon issues remaining terms similar expected term options company anticipate paying cash dividends foreseeable future therefore uses expected dividend yield zero option valuation model company required estimate forfeitures time grant revise estimates subsequent periods actual forfeitures differ estimates company uses historical data estimate prevesting option forfeitures record stockbased compensation expense awards expected vest notes consolidated financial statements continued note 10common stock incentive plans continued fair value stockbased payment awards estimated using blackscholes option pricing model following assumptions december 31 2009 approximately 85 million total unrecognized compensation cost measured related nonvested stock options restricted stock restricted stock units expected recognized weightedaverage period 17 years weighted average fair value options granted stock plans years ended december 31 2009 2008 2007 099 146 164 per share respectively second quarter 2009 adjustment made increase estimated forfeiture rate equity awards employees included 2009 restructuring plan awards expected ultimately vest resulting net effect forfeiture rate adjustment decrease companys stockbased compensation expense year ended december 31 2009 approximately 04 million certain executives company employment contracts provide acceleration unvested equity awards event employee terminated without cause 2009 eight executives involuntarily terminated part 2008 2009 restructuring plans year ended december 31 2009 approximately 28 million unrecognized compensation costs related acceleration recognized within restructuring 2008 stockbased compensation expense includes approximately 15 million resulting award modifications related retirement one companys executives notes consolidated financial statements continued note 10common stock incentive plans continued following table summarizes stockbased compensation expense recognized companys consolidated statement operations december 31 2009 stockbased compensation capitalized within inventory stockbased compensation 2008 includes 25 million charges relating prior periods resulting correction forfeiture rate application impact recording priorperiod charges 2008 prior periods material note 11401k plan january 1 2000 company adopted utstarcom inc 401k savings plan 401k plan cashordeferred arrangement covers companys eligible employees attained age 21 companys matching contributions suspended effective march 1 2009 prior suspension company contributed 050 dollar contributed qualified employees 401k plan maximum 5500 per employee 2009 2008 2007 plan years companys matching contributions subject fiveyear vesting schedule based upon longevity employee service company matching contributions 05 million 19 million 25 million 2009 2008 2007 respectively note 12commitments contingencies leases company leases certain facilities noncancelable operating leases expire various dates 2013 minimum future lease payments leases december 31 2009 follows notes consolidated financial statements continued note 12commitments contingencies continued connection sale leaseback agreement february 1 2010 company entered lease contract lease respect leaseback portion hangzhou facility lease becomes effective upon closing sale transaction lease terms require total cash payments approximately 115 million years 1 2 134 million years 3 4 142 million years 5 6 rent expense years ended december 31 2009 2008 2007 153 million 173 million 199 million respectively contractual obligations commercial commitments letters credit company issues standby letters credit primarily support international sales activities outside china support purchase commitments december 31 2009 company approximately 281 million outstanding letters credit 176 million due less year 105 million due one three years company submits bid sale often potential customer require company issue bid bond standby letter credit demonstrate commitment bid process addition company may required issue standby letters credit guarantees advance customer payments upon contract signing performance guarantees standby letters credit usually expire without drawn beneficiary thereof finally company may issue commercial letters credit support purchase commitments purchase commitments company obligated purchase raw materials workinprocess inventory various orders various suppliers fulfilled without adverse consequences material companys operations financial condition december 31 2009 company outstanding purchase commitments including agreements cancelable without penalty approximating 431 million intellectual property certain sales contracts include provisions customers would indemnified company event among things third party claim customer intellectual property rights infringement related companys products limitations maximum potential future payments guarantees company accrued amounts relation provisions claims made company believes valid enforceable rights intellectual property embedded products uncertain tax positions december 31 2009 company 906 million gross unrecognized tax benefits recognized portion gross unrecognized tax benefits would decrease provision income taxes decrease companys net loss 128 million impact net loss reflects gross unrecognized tax benefits net certain deferred tax assets federal tax benefit state income tax items totaling 778 million notes consolidated financial statements continued note 12commitments contingencies continued litigation securities class action litigation beginning october 2004 several shareholder class action lawsuits alleging federal securities violations filed company various officers directors company actions consolidated united states district court northern district california caption utstarcom inc securities litigation master file c044908jw pvt lead plaintiffs case filed first amended consolidated complaint july 26 2005 first amended complaint alleged violations securities exchange act 1934 brought behalf putative class shareholders purchased companys stock april 16 2003 september 20 2004 april 13 2006 lead plaintiffs filed second amended complaint adding new allegations extending end class period october 6 2005 addition company defendants plaintiffs also suing softbank plaintiffs complaint seeks recovery damages unspecified amount june 2 2006 company individual defendants filed motion dismiss second amended complaint march 21 2007 court granted defendants motion dismissed plaintiffs second amended complaint court granted plaintiffs leave file third amended complaint plaintiffs filed may 25 2007 july 13 2007 company individual defendants filed motion dismiss motion strike third amended complaint march 14 2008 court granted defendants motion dismissed plaintiffs third amended complaint court granted plaintiffs leave file fourth amended complaint plaintiffs filed may 14 2008 june 13 2008 consistent courts march 14 2008 dismissal order company individual defendants filed objections form content fourth amended complaint july 24 2008 court overruled objections september 8 2008 company individual defendants filed motion dismiss motion strike certain allegations fourth amended complaint march 27 2009 court denied defendants motion dismiss granted defendants motion strike discovery motion practice ongoing litigation trial date set plaintiffs company individual defendants signed stipulation settlement providing settlement case defendant softbank party settlement contingent approval court terms settlement companys individual defendants insurers would pay full amount settlement court scheduled preliminary approval hearing may 10 2010 assurance settlement receive court approval accordingly company unable time estimate effects lawsuit companys financial position results operations cash flows governmental investigations december 2005 us embassy mongolia informed company forwarded department justice doj allegations agent companys mongolia joint venture offered payments mongolian government official possible violation foreign corrupt practices act fcpa company audit committee authorized independent investigation possible violations fcpa contact doj us securities exchange commission sec regarding investigation identified possible fcpa violations mongolia southeast asia india china well possible violations us immigration laws doj requested company voluntarily notes consolidated financial statements continued note 12commitments contingencies continued produce documents related investigation sec subpoenaed company documents company received grand jury subpoena requiring production documents related one aspect doj investigation travel company sponsored company resolved investigations doj sec december 21 2009 part resolution investigations company executed consent pursuant without admitting denying secs allegations agreed judgment favor sec 15 million agreed certain reporting obligations four years sec approved resolution december 31 2009 company entered nonprosecution agreement doj pursuant company paid additional 15 million agreed undertake threeyear reporting obligation review appropriate strengthen companys compliance bookkeeping internal controls standards procedures nonprosecution agreement subject compliance terms doj agreed criminally prosecute company crimes criminal tax violations relating certain travel arrangements provided customers china shareholder derivative litigation november 17 2006 shareholder derivative complaint captioned ernesto espinoza v ying wu et al case rg06298775 filed certain companys current former officers directors superior court county alameda california complaint alleges individual defendants among things breached duties unjustly enriched violated california corporations code connection timing stock option grants complaint names company nominal defendant seeks unspecified monetary damages individual defendants various forms injunctive relief february 2 2007 company individual defendants filed demurrers complaint april 11 2007 court sustained individual defendants demurrer overruled companys demurrer ordered plaintiff file amended complaint ordered company answer original complaint plaintiff filed amended complaint company filed answer amended complaint august 21 2007 individual defendants filed demurrers amended complaint court sustained individual defendants demurrers ordered plaintiff file second amended complaint september 26 2008 plaintiff filed second amended complaint november 21 2008 company individual defendants filed demurrers second amended complaint february 27 2009 court sustained companys demurrer ordered plaintiff file third amended complaint march 20 2009 plaintiff filed third amended complaint may 5 2009 company individual defendants filed demurrers third amended complaint august 11 2009 court sustained companys demurrer without leave amend october 13 2009 plaintiffs filed notice appeal parties signed binding memorandum understanding providing settlement case settlement requires completion final settlement documentation settlement contingent approval court terms settlement individual defendants insurer would pay full amount monetary portion settlement assurance settlement receive court approval accordingly company unable time estimate effects lawsuit companys financial position results operations cash flows notes consolidated financial statements continued note 12commitments contingencies continued ipo allocation october 31 2001 complaint filed united states district court southern district new york company companys directors officers various underwriters companys initial public offering substantially similar actions filed concerning initial public offerings 300 different issuers cases coordinated initial public offerings securities litigation civil action 01cv9604 plaintiffs allege violations securities act 1933 securities exchange act 1934 undisclosed improper underwriting practices concerning allocation ipo shares exchange excessive brokerage commissions agreements purchase shares higher prices aftermarket misleading analyst reports plaintiffs seek unspecified damages behalf purported class purchasers companys common stock march 2 2000 december 6 2000 companys directors officers dismissed without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss claims brought defendants including company order dismissed claims company except claim brought section 11 securities act 1933 alleges registration statement filed accordance ipo misleading 2007 settlement pending court since 2004 terminated stipulation parties settlement ruling second circuit court appeals six test cases coordinated proceeding action involving company one test cases made unlikely settlement would receive final court approval plaintiffs filed amended master allegations amended complaints six test cases defendants cases moved dismiss 2008 court largely denied defendants motion dismiss amended complaints parties reached global settlement litigation october 5 2009 court entered opinion order granting final approval settlement insurers pay full amount settlement share allocated company bear financial liability company well officer director defendants previously dismissed action pursuant tolling agreements receive complete dismissals case certain objectors appealed courts october 5 2009 order reason settlement become effective company believes meritorious defenses claims intends defend action vigorously utstarcom inc v starent patent infringement litigations february 16 2005 company filed suit starent patent infringement us district court northern district california complaint company asserts starent infringes utstarcom patent us reg 6829473 starents development testing software upgrade customers installed st16 intelligent mobile gateways company seeks inter alia declaratory injunctive relief starent filed answer counterclaims may 31 2005 denying companys allegations seeking declaration patentinsuit infringed invalid unenforceable june 16 2005 company filed motion strike starents affirmative defense dismiss starents counterclaim alleging inequitable conduct july 19 2005 parties stipulated starent would file amended answer counterclaim july 27 2005 company would withdraw motion strike company withdrew motion strike july 27 2005 starent filed amended answer counterclaim august 10 2005 company responded starents amended counterclaim early december 2006 notes consolidated financial statements continued note 12commitments contingencies continued company filed reissue application 473 patent united states patent trademark office starent also filed reexamination 473 patent reexamination reissue consolidated utstarcom starent responded first office action mailed december 22 2008 patent trademark office consolidated proceedings may 8 2007 company filed additional suit starent sixteen individual defendants former employees 3coms commworks division company acquired certain assets may 2003 northern district illinois causes action include claims patent infringement misappropriation trade secrets intentional interference business relations prospective economic advantage declarations ownership certain patent rights company seeks compensatory damages punitive damages injunctive relief court denied defendants motion dismiss misappropriation trade secrets claims august 30 2007 defendants answered companys complaint denying companys allegations asserting number affirmative defenses counterclaims company filed amended complaint allege additional related causes action starent moved dismiss certain causes action amended complaint may 30 2008 company amended complaint remove suit us patent 6978128 add additional factual allegations relating defendants case july 23 2008 court dismissed companys trade secret contractbased counts company asked court clarify ruling filed motion leave file fourth amended complaint containing trade secret contractbased counts initially granting defendants motion strike complaint court reconsidered order granted company leave file fourth amended complaint filed october 14 2008 defendants moved dismiss various counts complaint including seeking trade secret claims dismissed march 24 2009 court ruled defendants motion court denied defendants motion dismiss companys trade secret claims however extent companys claims defendants intentional interference business relations based misappropriation companys trade secrets court partially dismissed claims based upon doctrine preemption court also dismissed yet ripe adjudication one patent claims brought company finally court also dismissed contractbased claims related claims individual defendants previously employed 3coms commworks division march 25 2009 court denied motion starent cofounder anthony schoener dismiss individually based upon lack personal jurisdiction april 21 2009 defendants answered remaining claims august 27 2008 company moved dismiss starents counterclaims december 5 2008 court partially granted motion january 9 2009 starent filed amended counterclaims noninfringement invalidity unenforceability asserted patents tortuous interference prospective economic advantage trade secret misappropriation january 26 2009 company filed answer counterclaims asserted various affirmative defenses april 21 2009 connection defendants answers companys claims remained courts march 24 2009 ruling defendants motion dismiss fourth amended complaint starent four individual defendants asserted counterclaims noninfringement invalidity unenforceability asserted patents tortuous interference prospective economic advantage trade secret misappropriation may 14 2009 company filed answer counterclaims asserted various affirmative defenses june 10 2009 parties entered stipulation whereby company agreed dismiss claims misappropriation trade secrets fifteen eighteen individual defendants notes consolidated financial statements continued note 12commitments contingencies continued starent three individual defendants intentional interference business relations defendants four patentrelated claims four individual defendants named claims stipulation also includes agreement whereby patentrelated counterclaims asserted company four individual defendants dismissed fifteen individual defendants also agreed file future claims counterclaims company successors assignees relating action unless company files claims july 10 2009 parties entered stipulation whereby company agreed dismiss claim copyright infringement starent filed motions summary judgment noninfringement us patent 7173905 us patent 6684256 us patent 6765900 starent also filed motion partial summary judgment concerning companys trade secret claim starent filed motion summary judgment invalidity claim 6 us patent 6963582 september 16 2009 special master recommended district court starents motion summary judgment noninfringement us patent 7173905 granted september 30 2009 court adopted special masters recommendations granted starents motion summary judgment noninfringement us patent 7173905 october 14 2009 parties executed settlement agreement pursuant starent paid company one time sum 35 million exchange perpetual royalty free license companys patents company starent dismiss prejudice claims counterclaims defenses asserted actions company recorded 35 million settlement reduction selling general administrative expense fourth quarter 2009 litigation company party litigation matters claims normal course operations results litigation matters claims cannot predicted certainty management company believes final outcome matters material adverse impact companys financial position results operations cash flows note 13credit risk concentration financial risks financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments accounts notes receivable company places temporary cash shortterm investments several financial institutions approximately 1976 million 2469 million companys cash equivalents shortterm investments deposit foreign accounts december 31 2009 2008 respectively companys exposure market risk changes interest rates relates primarily investment portfolio fair value investment portfolio would significantly affected either 10 increase decrease interest rates due mainly short term nature investment portfolio however companys interest income sensitive changes general level us china interest rates since majority funds invested instruments maturities less one year declining interest rate environment short term investments mature reinvestment occurs less favorable market rates given short term nature notes consolidated financial statements continued note 13credit risk concentration continued certain investments anticipated declining interest rates negatively impact companys investment income company maintains investment portfolio various holdings types maturities company use derivative financial instruments company places cash investments instruments meet high credit quality standards specified investment policy guidelines companys policy limit risk principal loss ensure safety invested funds generally attempting limit market risk funds excess current operating requirements mostly invested money market funds rated aaa concentration credit risk major customers chinese telecommunication carriers three levels operations central headquarters level provincial level local citycounty level central provincial levels independent legal entities corporate mandate purchasing decision making process may take various forms different projects may also differ significantly carrier company groups china customers together province treats province one customer since level purchasing decisions made december 31 2009 companys accounts receivable balance included amounts due china telecom jiangsu branch representing approximately 11 total accounts receivable company december 31 2008 companys accounts receivable balance included amounts due pcd llc representing approximately 39 total accounts receivable company following customers accounted 10 companys net revenues sales verizon tmobile sprint spectrum lp primarily pcd segment sold july 2008 see note 3 approximately 18 16 17 companys net sales 2009 2008 2007 respectively entities affiliated government china accounts receivable balances china government affiliated entities state owned enterprises 457 million 862 million respectively december 31 2009 2008 company extends credit customers china generally without requiring collateral global sales outside china company may require letters credit customers company monitors exposure credit losses maintains allowances doubtful accounts country risks approximately 46 27 23 companys sales year ended december 31 2009 2008 2007 respectively made china accordingly political economic legal environment well general state chinas economy may influence companys business financial condition results operations companys operations china subject special considerations significant risks typically associated companies united states notes consolidated financial statements continued note 13credit risk concentration continued include risks associated among others political economic legal environments foreign currency exchange companys results may adversely affected among things changes political economic social conditions china changes governmental policies respect laws regulations changes chinas telecommunications industry regulatory rules policies antiinflationary measures currency conversion remittance abroad rates methods taxation note 14segment reporting align business units corporate strategy focus core businesses july 1 2008 company sold personal communications division pcd llc see note 3 notes consolidated financial statements included part ii item 8 annual report form 10k prior july 1 2008 pcd sold supported handsets pas handsets mainly united states included segment mobile solutions business unit msbu custom solutions business unit csbu july 31 2008 company sold msbu responsible development sales service wireless ipcdmaipgsm product line first quarter 2009 company completed winddown csbu consolidation voice messaging technology multimedia communications segment csbu historically responsible development sales service noncore products consolidation voice messaging technology multimedia communications segment significant impact segment net sales gross profit result changes company revised internal reporting structure operating segments reporting segments effective january 1 2009 new reporting segments follows •multimedia communicationsfocused development market opportunities iptv solutions wireless infrastructure technologies •broadband infrastructurefocused companys portfolio broadband products •handsetsfocused mobile phone business continued focus pas cdma handset market well data cards markets handset sales pcd llc commenced july 1 2008 sale pcd included segment •servicesfocused providing services support companys broadband infrastructure multimedia communications product lines companys chief operating decision makers make financial decisions based information receive internal management system currently evaluate operating performance allocate resources reporting segments based segment revenue gross profit cost sales direct expenses relation production assigned reporting segments accounting policies used measuring segment assets operating performance used consolidated level notes consolidated financial statements continued note 14segment reporting continued summarized companys segment net sales gross loss profit segment margin years ended december 31 2009 2008 2007 based current reporting segment structure notes consolidated financial statements continued note 14segment reporting continued segment margin includes direct expenses related operations segment direct product management research development expenses general corporate expenses include unallocated expenses sales marketing general administration common research development expenses equity award related charges amortization intangibles restructuring impairment charges company excludes items consistent manner internally evaluates performance segments sales attributed geographical area based upon location customer sales data geographical areas follows longlived assets consisting property plant equipment geographical area follows note 15related party transactions softbank affiliates company recognizes revenue respect sales telecommunications equipment affiliates softbank significant stockholder company softbank offers adsl coverage throughout japan marketed name yahoo bb company supports softbanks fibertothehome service sales carrier class gepon product well netring™ product addition company supports softbanks new internet protocol television iptv sales rollingstream™ product notes consolidated financial statements continued note 15related party transactions continued 2009 2008 2007 company recognized revenue cost net sales telecommunications equipment services affiliates softbank follows included accounts receivable december 31 2009 2008 55 million 92 million respectively related transactions sales softbank include three year service period penalty clause product failure rates exceed certain level seven year period december 31 2009 2008 companys customer advance balance related softbank agreements 02 million 07 million respectively current deferred revenue balance related softbank 14 million 40 million december 31 2009 december 31 2008 respectively december 31 2009 companys noncurrent deferred revenue balance related softbank 88 million compared 92 million december 31 2008 december 31 2009 softbank beneficially owned approximately 11 companys outstanding stock audiovox prior sale pcd july 1 2008 one companys former officers served director audiovox corporation audiovox 2008 2007 company paid approximately 08 million 21 million respectively services provided audiovox note 16restructuring restructuring costs 2009 restructuring plan june 9 2009 board directors company approved restructuring plan 2009 restructuring plan designed reduce companys operating costs 2009 restructuring plan includes worldwide reduction force approximately 50 companys headcount approximately 2300 employees located primarily china united states lesser degree international locations year ended december 31 2009 company recorded restructuring costs approximately 400 million related 2009 restructuring plan restructuring costs year ended december 31 2009 included 380 million severance benefits related approximately 2100 employees 19 million related primarily estimated loss lease obligation expires 2013 2008 restructuring plan fiscal 2008 company implemented restructuring plan 2008 restructuring plan recorded 131 million restructuring charges primarily related global reduction force notes consolidated financial statements continued note 16restructuring continued across functions employee terminations certain noncore operations company process winding total number employees affected totaled approximately 750 including 350 china 200 korea 200 locations including united states year ended december 31 2009 company recorded restructuring costs approximately 63 million related 2008 restructuring plan net approximately 05 million reversal charges recorded fiscal year 2008 costs year ended december 31 2009 63 million consist primarily severance benefits related transition certain key functions china divestiture companys korea operations lease costs related lease obligation expires fiscal year 2010 2007 restructuring plan december 31 2009 restructuring accrual 2007 plan included within liabilities approximately 03 million related lease obligation expires fiscal year 2010 activity accrued restructuring balances related plans described follows year ended december 31 2009 notes consolidated financial statements continued note 16restructuring continued activity accrued restructuring balances related plans described follows years ended december 31 2007 2008 following table shows total amount costs incurred segment connection restructuring programs majority remaining cash expenditures related 2009 2008 restructuring plans expected paid 2010 remaining liabilities related lease obligations expected settled remaining lease term company expects incur additional restructuring charges 2010 continues execute 2009 2008 restructuring plans company continues review business opportunities reduce operating expenses focus executing strategy based core competencies cost efficiencies notes consolidated financial statements continued note 17other income net income net consists following note 18variable interest entities tet october 2008 company made investment turnstone environment technologies llc tet delaware limited liability company formed purpose licensing developing energy efficient renewable cooling solutions cell towers telecommunications industry exchange 5180788 series preferred units representing approximately 22 voting interest tet 500000 series preferred warrants exercise price 09265 per unit expiration term 5 years company contributed 48 million cash company currently representation tets board directors ability control management operation decisions tet operations tet development stage entity actively seeking additional investors company intend obligation fund future losses make additional contributions initial investment december 31 2009 2008 tet effect entirely funded companys initial investment capital contributions current investors substantive company determined venture variable interest entity company primary beneficiary exposed majority variable interest entitys expected losses therefore company required consolidate tets financial statements asc 8101015 variable interest entities subsections beginning january 1 2009 assets liabilities operating results tet consolidated companys balance sheet statement operations assets liabilities operating results tet determined immaterial company december 31 2008 companys results operations cash flows full year fourth quarter 2008 therefore consolidated tet revenues 39 million expenses year ended december 31 2009 31 million relates amortization acquired exclusive license utilize solar cooling technology company initially determined appropriate amortization period exclusive license match estimated revenue generation period sale products utilizing licensed technology third quarter 2009 result delay revenue generation company changed estimate systematic rational allocation straightline amortization expense based term technology license tets operations considered integral companys major operating activities income expenses tets operations includable companys income statement result notes consolidated financial statements continued note 18variable interest entities continued application asc 8101015 variable interest entities subsections classified within operating expense fourth quarter 2009 company evaluated several fourth quarter events including continued unsuccessful efforts tet secure additional funding continued unsuccessful efforts tet locate suitable local manufacturing partner tets continued need amend extend payment due dates acquired exclusive license utilize solar cooling technology departure key employee tet company determined combined effect events well others triggering event impairment analysis tets longlived assets company furthered determined estimated cash flows tet sufficient recover carrying value tets net assets result company recorded 09 million impairment charge included within operating expense equal initial cost investment 48 million less cumulative absorbed losses date december 31 2009 effect consolidating tet resulted immaterial impact consolidated balance sheet fourth quarter 2005 company provided interest free 124 million loan party china seed capital venture organized participate providing technical service networking technology equipment emerging market iptv products china loan partially secured indirect ownership interest venture payable 10 years could called early without penalty result foregoing fact ventures continuing viability heavily dependent provision network terminal equipment company determined venture vie company primary beneficiary venture therefore company required consolidate vies financial statements consolidation vie prior years significant impact companys consolidated financial statements march 2008 company received repayment full loans principal balance eliminating interest vie resulting reconsideration companys position primary beneficiary based reconsideration event management concluded company longer primary beneficiary fin 46r longer required consolidate vies financial statements companys consolidated statement operations year ended december 31 2008 includes operating results vie february 2008 point vie deconsolidated companys financial statements first quarter 2008 company recorded 82 million gain upon repayment loan deconsolidation included income expense net management expects continuing involvement ongoing entitys business supplier iptv equipment company determined conditions presentation discontinued operation met note 19subsequent events strategic investment changes management board directors february 1 2010 company entered agreements strategic relationship beijing etown international investment development co ltd beiid investment company established beijing municipality includes investment 485 million beiid two unrelated investment funds elite noble limited shah capital opportunity fund lp part investment company issue approximately 22 million shares common stock price notes consolidated financial statements continued note 19subsequent events continued 220 per share private placement transaction company intends use proceeds working capital general corporation purposes lease agreement february 1 2010 company entered lease contract lease respect leaseback portion hangzhou facility see note 6 quarterly financial data unaudited quarterly financial data unaudited continued first fourth quarter 2008 company identified recorded additional contract loss reserves 18 million 16 million respectively relating 2006 2007 priorperiod charges related loss contracts resulted understatement cost sales related understatement net loss 2006 2007 company also identified recorded additional 25 million charge fourth quarter 2008 relating correction forfeiture rate application stock compensation expense associated prior periods priorperiod charge resulted understatement operating expenses related understatement net loss 2006 2007 impact priorperiod charges material prior annual interim period impact recording charges 2008 material consolidated financial statements year ended december 31 2008 item 9 nannanitem 15 exhibits financial statement schedules reports form 8k 1 financial statementssee index consolidated financial statements financial statement schedules page 69 form 10k 2 financial statement schedulesee index consolidated financial statements financial statement schedules page 69 form 10k 3 exhibits exhibit number description 311 thirteenth amended restated certificate incorporation utstarcom inc 321 amended restated bylaws utstarcom inc 41 see exhibits 31 32 provisions certificate incorporation bylaws defining rights holders common stock 421 specimen common stock certificate 431 third amended restated registration rights agreement dated december 14 1999 1011 form indemnification agreement 1021 1992 omnibus equity incentive plan form related agreement 1031 1995 stock plan forms related agreements 1041 1997 stock plan amended forms related agreements 1051 2000 employee stock purchase plan forms related agreements 1061 common stock purchase warrant dated february 5 1998 utstarcom inc lintech limited 1071 common stock purchase warrant dated september 20 1999 utstarcom inc talent group international ltd 1081 employment noncompetition agreement dated october 6 1995 utstarcom inc hong lu 1091 employment noncompetition agreement dated october 6 1995 utstarcom inc ying wu 10101 product manufacture license agreement dated may 13 1997 utstarcom inc tollgrade communications inc 10111 sales agreement dated february 12 1999 utstarcom china ltd baoding telecommunication bureau hebei province 10121 sales contract dated august 23 1999 utstarcom china ltd xian telecommunication bureau 10131 technical license assistance agreement dated november 2 1999 utstarcom inc mitsubishi electric corporation 1013a1 amendment 1 technical license assistance agreement dated february 21 2000 utstarcom inc mitsubishi electric corporation 10141 technical assistance agreement dated october 1 1999 matsushita communication industrial co ltd utstarcom inc 1014a1 addendum dated february 18 2000 technical assistance agreement dated october 1 1999 matsushita communication industrial co ltd utstarcom inc 10151 joint product development marketing memorandum understanding dated september 2 1999 utstarcom inc matsushita communication industrial co ltd 10161 joint patent filing agreement dated december 1 1998 utstarcom inc matsushita communication industrial co ltd 10171 loan agreement dated june 15 1998 utstarcom inc softbank corp 1018a1 loan agreement dated march 9 1999 bank china utstarcom hangzhou telecommunications co ltd 1018b1 loan agreement dated june 7 1999 bank china utstarcom hangzhou telecommunications co ltd 1018c1 loan agreement dated june 29 1999 bank china utstarcom hangzhou telecommunications co ltd 1018d1 loan agreement dated july 7 1999 bank china utstarcom hangzhou telecommunications co ltd 1018e1 loan agreement dated july 14 1999 bank china utstarcom hangzhou telecommunications co ltd 1018f1 loan agreement dated july 21 1999 bank china utstarcom hangzhou telecommunications co ltd 1018g1 loan agreement dated august 5 1999 bank china utstarcom hangzhou telecommunications co ltd 1018h1 loan agreement dated august 17 1999 bank china utstarcom hangzhou telecommunications co ltd 1018i1 loan agreement dated september 2 1999 bank china utstarcom hangzhou telecommunications co ltd 1018j1 loan agreement dated september 17 1999 bank china utstarcom hangzhou telecommunications co ltd 10191 joint venture agreement dated july 31 1997 utstarcom inc zhejiang telecommunication equipment factory 10201 joint venture agreement dated december 8 1995 utstarcom inc chinese guangdong nanfeng telecommunication group co ltd 1020a1 amendment agreement contract articles association guangdong utstarcom communications co ltd dated december 11 1997 10211 joint venture agreement dated september 12 1997 utstarcom inc zhejiang nantian post telecommunication development group co ltd 10221 lease dated december 23 1997 utstarcom inc tech center partners 10231 lease agreement dated april 1995 amended utstarcom inc metro park associates 10241 lease agreements dated december 31 1997 may 14 1998 guangdong utstarcom telecom co ltd guangdong southern telecom group huizhou company 10251 lease contract dated december 15 1996 utstarcom hangzhou telecommunications co ltd yile village gudang township 10261 purchase agreement pr china market dated april 1 1999 utstarcom inc matsushita electric industrial co ltd matsushita communication industrial co ltd 10271 information service project contract dated june 1 1998 utstarcom china ltd china jitong communication co ltd 10281 payment agent contract dated june 11 1998 among utstarcom china ltd softbank corporation jitong communication co ltd 10291 agreement termination contract dated august 30 1999 among utstarcom inc utstarcom china ltd softbank corporation jitong communication co ltd 10301 exchange agreement dated october 15 1997 utstarcom inc certain investors 10311 exchange agreement dated october 15 1997 utstarcom inc certain investors 10321 employment noncompetition agreement dated october 6 1995 utstarcom inc bill huang 10331 lease contract housing vacant land yunshan post telecommunication industrial village dated january 3 2000 guangdong utstarcom telecom co ltd guangdong nanfang communication group huizhou co 10341 loan agreement dated october 8 1996 utstarcom china co inc bill x huang 10351 promissory note secured deed trust dated february 13 1999 issued utstarcom inc bill x huang minnie huang 10361 supply agreement dated february 18 2000 utstarcom inc matsushita electric industrial co ltd 10372 manufacturing license agreement himachal futuristic communications ltd utstarcom inc undated 10382 sales agreement japan radio company utstarcom inc dated march 16 2000 10392 technical collaboration agreement sharp corporation utstarcom inc dated march 31 2000 10402 parts supply agreement sharp corporation utstarcom inc undated 10413 joint venture agreement softbank corporation utstarcom inc dated may 29 2000 10423 land use right assignment agreement administration committee hangzhou hitech industry development zone zhejiang province peoples republic china utstarcom inc dated may 18 2000 10433 supply agreement matsushita electric industrial co ltd matsushita communications industrial co ltd utstarcom inc dated april 1 2000 10444 oem agreement utstarcom inc zaffire inc dated august 10 2000 10454 development agreement utstarcom inc matsushita communication industrial co ltd dated september 26 2000 10464 oem agreement utstarcom inc interwave communications international ltd dated july 14 2000 10474 oem agreement utstarcom inc foundry networks inc dated august 24 2000 10484 loan contract utsc co ltd bank china beijing branch dated august 29 2000 10499 sales contract utstarcom china ltd zhejiang telecom company shaoxing branch dated november 18 2000 10509 sales contract utstarcom china ltd nan telecom company dated october 28 2000 10519 sales contract utstarcom china ltd xian equipment importexport company ltd shaanxi china telecom group ltd dated september 29 2000 received utstarcom inc october 9 2000 10529 technical assistance agreement utstarcom inc matsushita communication industrial co ltd dated december 1 2000 10539 definitive agreement collaboration utstarcom inc mitsubishi electric corporation dated october 22 2000 10549 software license agreement utstarcom inc ddi corporation inc dated october 4 2000 10559 strategic alliance purchase license agreement utstarcom inc telecommunication dhaiti sam dated december 5 2000 10565 assignment agreement utstarcom inc stable gain international limited dated july 24 2000 10575 amendment no1 july 24 2000 assignment agreement utstarcom inc stable gain international limited dated march 2 2001 10585 loan agreement china merchant bank utstarcom china co ltd dated march 14 2001 10595 technical service agreement utstarcom china co ltd hainan xinhuangpu investment co ltd dated august 18 2000 10605 assets transfer agreement hainan xinhuangpu investment co ltd utstarcom china co ltd dated august 18 2000 10615 equity transferring agreement zhe jiang nantian telecommunication development group share company utstarcom dated february 5 2001 10625 sales contract zhejiang telecom co utstarcom china co ltd dated march 23 2001 10635 manufacturing license agreement himachal futuristic communications ltd utstarcom inc dated march 6 2001 10647 2001 director option plan 10657 strategic alliance purchase license agreement utstarcom inc telecommunications dhaiti sam dated april 12 2001 10666 2001 director option plan amended july 10 2001 10678 purchase contract utstarcom inc bb technologies corporation dated october 9 2001 106810 comprehensive creditextension agreement utstarcom china ltd china everbright bank chaoyang branch beijing dated november 30 2001 106910 equity transfer agreement utstarcom inc guangdong nanfang communications group co ltd dated december 18 2001 107010 equity transfer agreement utstarcom inc zhejiang provincial telecom instruments factory utstarcom hangzhou communications co ltd dated january 21 2002 107110 lease agreement utstarcom inc legend tech dated september 12 2001 107211 comprehensive creditextension agreement utstarcom china ltd beijing city commercial bank yuhaiyuan road branch dated february 20 2002 maximum amount guaranty contract utstarcom hangzhou telecommunication co ltd beijing city commercial bank yuhaiyuan road branch dated february 20 2002 107311 change control severance agreement gerald soloway utstarcom inc dated april 12 2002 107411 change control severance agreement howard kwock utstarcom inc dated april 12 2002 107511 change control severance agreement michael j sophie utstarcom inc dated april 12 2002 107612 comprehensive creditextension agreement utstarcom china ltd shenzhen development bank hangzhou dated june 26 2002 107712 merger agreement utstarcom telecom co ltd guangdong utstarcom teleco 107813 professional services agreement utstarcom inc n lohr bangle jr dated september 10 2002 107913 teaming agreement utstarcom inc stellar holdings llc dated september 10 2002 108013 joint venture contract utstarcom telecom co ltd matsushita electric industrial co ltd matsushita communication industrial co ltd dated july 5 2002 108113 amendment oem agreement utstarcom inc interwave communications dated september 27 2002 1082 joint development agreement datang mobile communications equipment co ltd utstarcom china co ltd dated november 22 2002 1083 broadband access network general terms conditions reliance infocomm limited utstarcom inc dated october 1 2002 1084 broadband access equipment contract reliance infocomm limited utstarcom inc dated october 1 2002 1085 broadband access services contract reliance infocomm limited utstarcom inc dated october 1 2002 1086 broadband access software contract reliance infocomm limited utstarcom inc dated october 1 2002 211 subsidiaries utstarcom 231 consent pricewaterhousecoopers llp 23210 consent willamette management associates 241 power attorney included signature page 991 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 portions exhibit omitted pursuant order granted securities exchange commission confidential treatment 1incorporated reference registrants registration statement form s1 33393069 became effective march 2 2000 2incorporated reference registrants quarterly report form 10q quarter ended march 31 2000 3incorporated reference registrants quarterly report form 10q quarter ended june 30 2000 4incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 5incorporated reference registrants quarterly report form 10q quarter ended march 31 2001 6incorporated reference registrants quarterly report form 10q quarter ended june 30 2001 7incorporated reference registrants registration statement form s3 became effective july 18 2001 8incorporated reference registrants quarterly report form 10q quarter ended september 30 2001 9incorporated reference registrants annual report form 10k year ended december 31 2000 10incorporated reference registrants annual report form 10k year ended december 31 2001 11incorporated reference registrants quarterly report form 10q quarter ended march 31 2002 12incorporated reference registrants quarterly report form 10q quarter ended june 30 2002 13incorporated reference registrants quarterly report form 10q quarter ended september 30 2002 breports form 8k 1utstarcom filed report form 8k securities exchange commission august 29 2002 connection repurchase 6000000 shares common stock softbank corp cexhibits see item 15a3 signatures pursuant requirements section 13 15d securities act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 21st day february 2003 utstarcom inc michael j sophie michael j sophie vice president finance chief financial officer assistant secretary power attorney know persons present person whose signature appears constitutes appoints hong liang lu michael j sophie jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities act 1934 report signed following persons capacities dates indicated signature title date hong liang lu hong lu president chief executive officer principal executive officer director february 21 2003 michael j sophie michael j sophie vice president finance chief financial officer assistant secretary principal financial accounting officer february 21 2003 betsy atkins betsy atkins director february 21 2003 larry horner larry horner director february 21 2003 masayoshi son masayoshi son chairman board directors february 21 2003 thomas j toy thomas j toy director february 21 2003 ying wu ying wu executive vice president chief executive officer china operations director february 21 2003 certifications hong liang lu certify 1i reviewed annual report form 10k utstarcom inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 21 2003 hong liang lu hong liang lu president chief executive officer certifications michael j sophie certify 1i reviewed annual report form 10k utstarcom inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 21 2003 michael j sophie michael j sophie vice president finance chief financial officer assistant secretary independent accountants report financial statement schedules board directors stockholders utstarcom inc audits consolidated financial statements referred report dated january 23 2003 also included audit financial statement schedules annual report form 10k opinion financial statement schedules present fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp san francisco california january 23 2003 schedule utstarcom inc unconsolidated registrant balance sheets thousands except share per share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidated condensed information results operations registrant thousands except share per share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidated condensed information cash flows registrant thousands accompanying notes integral part financial statements schedule utstarcom inc notes condensed financial statements note 1 basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated cash dividends paid utstarcom inc subsidiaries three years ended december 31 2002 accounting policies information see notes consolidated financial statements included elsewhere herein schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2002 2001 2000 utstarcom inc table contents part forwardlooking statements additional information item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders executive officers utstarcom part ii item 5 market utstarcom incs common equity related stockholder matters item 6 selected consolidated financial data item 7 managements discussion analysis financial condition results operation factors affecting future operating results risks relating company risks relating structure regulation chinas telecommunications industry risks relating conducting operations china risks relating stock performance item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent accountants utstarcom inc consolidated balance sheets thousands except share per share data utstarcom inc consolidated statements operations thousands except per share data utstarcom inc subsidiaries consolidated statements stockholders equity thousands except share data utstarcom inc consolidated statements cash flows thousands notes consolidated financial statements part iii item 10 directors executive officers utstarcom inc item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions part iv item 14 controls procedures item 15 exhibits financial statement schedules reports form 8k signatures power attorney certifications independent accountants report financial statement schedules schedule utstarcom inc unconsolidated registrant balance sheets thousands except share per share data schedule utstarcom inc unconsolidated condensed information results operations registrant thousands except share per share data schedule utstarcom inc unconsolidated condensed information cash flows registrant thousands schedule utstarcom inc notes condensed financial statements schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2002 2001 2000item 15 exhibits financial statement schedules reports form 8k a1 financial statementssee index consolidated financial statements financial statement schedules page 61 form 10k 2 financial statement schedulesee index consolidated financial statements financial statement schedules page 61 form 10k exhibit number description 3116 thirteenth amended restated certificate incorporation utstarcom inc amended 3217 first amended restated bylaws utstarcom inc amended 41 see exhibits 31 32 provisions certificate incorporation bylaws defining rights holders common stock 421 specimen common stock certificate 431 third amended restated registration rights agreement dated december 14 1999 4412 convertible subordinated notes indenture dated march 12 2003 utstarcom inc us bank national association including form 78 convertible subordinated notes due 2008 4512 registration rights agreement utstarcom inc initial purchasers named therein dated march 12 2003 4616 registration rights agreement dated june 30 2003 among utstarcom inc shareholders rollingstreams systems ltd 1011 form indemnification agreement 1021 1992 omnibus equity incentive plan form related agreement 1031 1995 stock plan forms related agreements 1041 1997 stock plan amended forms related agreements 1051 2000 employee stock purchase plan forms related agreements 1061 common stock purchase warrant dated february 5 1998 utstarcom inc lintech limited 1071 common stock purchase warrant dated september 20 1999 utstarcom inc talent group international ltd 10171 loan agreement dated june 15 1998 utstarcom inc softbank corp 1018a1 loan agreement dated march 9 1999 bank china utstarcom hangzhou telecommunications co ltd 1018b1 loan agreement dated june 7 1999 bank china utstarcom hangzhou telecommunications co ltd 1018c1 loan agreement dated june 29 1999 bank china utstarcom hangzhou telecommunications co ltd 1018d1 loan agreement dated july 7 1999 bank china utstarcom hangzhou telecommunications co ltd 1018e1 loan agreement dated july 14 1999 bank china utstarcom hangzhou telecommunications co ltd 1018f1 loan agreement dated july 21 1999 bank china utstarcom hangzhou telecommunications co ltd 1018g1 loan agreement dated august 5 1999 bank china utstarcom hangzhou telecommunications co ltd 1018h1 loan agreement dated august 17 1999 bank china utstarcom hangzhou telecommunications co ltd 1018i1 loan agreement dated september 2 1999 bank china utstarcom hangzhou telecommunications co ltd 1018j1 loan agreement dated september 17 1999 bank china utstarcom hangzhou telecommunications co ltd 10221 lease dated december 23 1997 utstarcom inc tech center partners 10231 lease agreement dated april 1995 amended utstarcom inc metro park associates 10241 lease agreements dated december 31 1997 may 14 1998 guangdong utstarcom telecom co ltd guangdong southern telecom group huizhou company 10251 lease contract dated december 15 1996 utstarcom hangzhou telecommunications co ltd yile village gudang township 10281 payment agent contract dated june 11 1998 among utstarcom china ltd softbank corporation jitong communication co ltd 10291 agreement termination contract dated august 30 1999 among utstarcom inc utstarcom china ltd softbank corporation jitong communication co ltd 10301 exchange agreement dated october 15 1997 utstarcom inc certain investors 10311 exchange agreement dated october 15 1997 utstarcom inc certain investors 10392 technical collaboration agreement sharp corporation utstarcom inc dated march 31 2000 10402 parts supply agreement sharp corporation utstarcom inc undated 10413 joint venture agreement softbank corporation utstarcom inc dated may 29 2000 10423 land use right assignment agreement administration committee hangzhou hitech industry development zone zhejiang province peoples republic china utstarcom inc dated may 18 2000 10433 supply agreement matsushita electric industrial co ltd matsushita communications industrial co ltd utstarcom inc dated april 1 2000 10548 software license agreement utstarcom inc ddi corporation inc dated october 4 2000 10558 strategic alliance purchase license agreement utstarcom inc telecommunication dhaiti sam dated december 5 2000 10564 assignment agreement utstarcom inc stable gain international limited dated july 24 2000 10574 amendment no1 july 24 2000 assignment agreement utstarcom inc stable gain international limited dated march 2 2001 10584 loan agreement china merchant bank utstarcom china co ltd dated march 14 2001 10594 technical service agreement utstarcom china co ltd hainan xinhuangpu investment co ltd dated august 18 2000 10604 assets transfer agreement hainan xinhuangpu investment co ltd utstarcom china co ltd dated august 18 2000 10614 equity transferring agreement zhe jiang nantian telecommunication development group share company utstarcom dated february 5 2001 10656 strategic alliance purchase license agreement utstarcom inc telecommunications dhaiti sam dated april 12 2001 10665 amended 2001 director option plan 10677 purchase contract utstarcom inc softbank bb corporation dated october 9 2001 10689 comprehensive creditextension agreement utstarcom china ltd china everbright bank chaoyang branch beijing dated november 30 2001 10719 lease agreement utstarcom inc legend tech dated september 12 2001 107310 change control severance agreement gerald soloway utstarcom inc dated april 12 2002 107410 change control severance agreement howard kwock utstarcom inc dated april 12 2002 107510 change control severance agreement michael j sophie utstarcom inc dated april 12 2002 107811 professional services agreement utstarcom inc n lohr bangle jr dated september 10 2002 108011 joint venture contract utstarcom telecom co ltd matsushita electric industrial co ltd matsushita communication industrial co ltd dated july 5 2002 108214 joint development agreement datang mobile communications equipment co ltd utstarcom china co ltd dated november 22 2002 108314 broadband access network general terms conditions reliance infocomm limited utstarcom inc dated october 1 2002 108414 broadband access equipment contract reliance infocomm limited utstarcom inc dated october 1 2002 108514 broadband access services contract reliance infocomm limited utstarcom inc dated october 1 2002 108614 broadband access software contract reliance infocomm limited utstarcom inc dated october 1 2002 108713 equipment purchase agreement dated february 4 2003 tata teleservices limited utstarcom inc 108815 utstarcom inc 2003 nonstatutory stock option plan 1089 change control severance agreement dated january 17 2003 hong liang lu utstarcom inc 1090 change control severance agreement dated january 31 2003 ying wu utstarcom inc 1091 change control severance agreement dated january 31 2003 shaoning chou utstarcom inc 1092 change control severance agreement dated january 31 2003 william x huang utstarcom inc 1093 distributor agreement dated october 21 2003 utstarcom inc multidata 1094 amendment 1 distributor agreement dated december 17 2003 utstarcom inc multidata 1095 revenue sharing purchase agreement dated october 21 2003 utstarcom inc multidata 1096 amendment 1 revenue sharing purchase agreement dated december 17 2003 utstarcom inc multidata 211 subsidiaries utstarcom 231 consent pricewaterhousecoopers llp 241 power attorney included signature page 311 certification pursuant section 302 sarbanesoxley act 2002 312 certification pursuant section 302 sarbanesoxley act 2002 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed sec concurrently filing annual report form 10k 1incorporated reference registrants registration statement form s1 33393069 became effective march 2 2000 2incorporated reference registrants quarterly report form 10q quarter ended march 31 2000 3incorporated reference registrants quarterly report form 10q quarter ended june 30 2000 4incorporated reference registrants quarterly report form 10q quarter ended march 31 2001 5incorporated reference registrants quarterly report form 10q quarter ended june 30 2001 6incorporated reference registrants registration statement form s3 became effective july 18 2001 7incorporated reference registrants quarterly report form 10q quarter ended september 30 2001 8incorporated reference registrants annual report form 10k year ended december 31 2000 9incorporated reference registrants annual report form 10k year ended december 31 2001 10incorporated reference registrants quarterly report form 10q quarter ended march 31 2002 11incorporated reference registrants quarterly report form 10q quarter ended september 30 2002 12incorporated reference registrants quarterly report form 10q quarter ended march 31 2003 13incorporated reference registrants quarterly report form 10qa amendment 1 quarter ended march 31 2003 14incorporated reference registrants annual report form 10ka amendment 1 year ended december 31 2002 15incorporated reference registrants registration statement form s8 filed september 15 2003 16incorporated reference registrants current report form 8k filed december 12 2003 17incorporated reference registrants current report form 8k filed january 13 2004 breports form 8k 1on december 12 2003 utstarcom filed sec current report form 8k dated december 12 2003 items 5 7 connection revised risk factors cexhibits see item 15a3 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned hereunto duly authorized utstarcom inc date march 8 2004 michael j sophie name michael j sophie title senior vice president finance chief financial officer power attorney know persons present person whose signature appears constitutes appoints hong liang lu michael j sophie jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated signature title date hong liang lu hong liang lu president chief executive officer principal executive officer chairman board directors march 8 2004 michael j sophie michael j sophie senior vice president finance chief financial officer principal financial accounting officer march 8 2004 betsy atkins betsy atkins director march 8 2004 larry horner larry horner director march 8 2004 masayoshi son masayoshi son director march 8 2004 thomas j toy thomas j toy director march 8 2004 ying wu ying wu executive vice president chief executive officer china operations director march 8 2004 report independent auditors financial statement schedules board directors stockholders utstarcom inc audits consolidated financial statements referred report dated february 27 2004 also included audit financial statement schedules annual report form 10k opinion financial statement schedules present fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp san francisco california february 27 2004 schedule utstarcom inc unconsolidated registrant balance sheets thousands except share per share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidated condensed information results operations registrant thousands accompanying notes integral part financial statements schedule utstarcom inc unconsolidated condensed information cash flows registrant thousands accompanying notes integral part financial statements schedule utstarcom inc notes condensed financial statements note 1 basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated cash dividends paid utstarcom inc subsidiaries three years ended december 31 2003 accounting policies information see notes consolidated financial statements included elsewhere herein schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2003 2002 2001 utstarcom inc table contents part additional information item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market utstarcom incs common equity related stockholder matters item 6 selected consolidated financial data item 7 managements discussion analysis financial condition results operation factors affecting future operating results risks related company risks related conducting business china risks related stock performance convertible debt securities item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent auditors utstarcom inc consolidated balance sheets thousands utstarcom inc consolidated statements operations thousands except per share amounts utstarcom inc consolidated statements cash flows thousands notes consolidated financial statements item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures part iii item 10 directors executive officers utstarcom inc item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules reports form 8k signatures power attorney report independent auditors financial statement schedules schedule utstarcom inc unconsolidated registrant balance sheets thousands except share per share data schedule utstarcom inc unconsolidated condensed information results operations registrant thousands schedule utstarcom inc unconsolidated condensed information cash flows registrant thousands schedule utstarcom inc notes condensed financial statements schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2003 2002 2001item 15 exhibits financial statement schedules 1 financial statementssee index consolidated financial statements financial statement schedules page 78 form 10k 2 financial statement schedulesee index consolidated financial statements financial statement schedules page 78 form 10k 3 exhibit number description 3114 thirteenth amended restated certificate incorporation utstarcom inc amended 3218 first amended restated bylaws utstarcom inc amended 41 see exhibits 31 32 provisions certificate incorporation bylaws defining rights holders common stock 421 specimen common stock certificate 431 third amended restated registration rights agreement dated december 14 1999 449 convertible subordinated notes indenture dated march 12 2003 utstarcom inc us bank national association including form 7¤8 convertible subordinated notes due 2008 4616 registration rights agreement dated june 30 2003 among utstarcom inc shareholders rollingstreams systems ltd 47 underwriting agreement dated january 8 2004 company bank america securities llc amended january 14 2004 1011 form indemnification agreement 1031 1995 stock plan forms related agreements 1041 1997 stock plan amended forms related agreements 1051 2000 employee stock purchase plan forms related agreements 10221 lease dated december 23 1997 utstarcom inc tech center partners 10231 lease agreement dated april 1995 amended utstarcom inc metro park associates 10241 lease agreements dated december 31 1997 may 14 1998 guangdong utstarcom telecom co ltd guangdong southern telecom group huizhou company 10251 lease contract dated december 15 1996 utstarcom hangzhou telecommunications co ltd yile village gudang township 10281 payment agent contract dated june 11 1998 among utstarcom china ltd softbank corporation jitong communication co ltd 10291 agreement termination contract dated august 30 1999 among utstarcom inc utstarcom china ltd softbank corporation jitong communication co ltd 10301 exchange agreement dated october 15 1997 utstarcom inc certain investors 10311 exchange agreement dated october 15 1997 utstarcom inc certain investors 10412 joint venture agreement softbank corporation utstarcom inc dated may 29 2000 10422 land use right assignment agreement administration committee hangzhou hitech industry development zone zhejiang province people’s republic china utstarcom inc dated may 18 2000 10545 software license agreement utstarcom inc ddi corporation inc dated october 4 2000 10663 amended 2001 director option plan 10674 purchase contract utstarcom inc softbank bb corporation dated october 9 2001 10716 lease agreement utstarcom inc legend tech dated september 12 2001 10757 change control severance agreement michael j sophie utstarcom inc dated april 12 2002 10808 joint venture contract utstarcom telecom co ltd matsushita electric industrial co ltd matsushita communication industrial co ltd dated july 5 2002 108311 broadband access network general terms conditions reliance infocomm limited utstarcom inc dated october 1 2002 108411 broadband access equipment contract reliance infocomm limited utstarcom inc dated october 1 2002 108511 broadband access services contract reliance infocomm limited utstarcom inc dated october 1 2002 108611 broadband access software contract reliance infocomm limited utstarcom inc dated october 1 2002 108710 equipment purchase agreement dated february 4 2003 tata teleservices limited utstarcom inc 108812 utstarcom inc 2003 nonstatutory stock option plan 108913 change control severance agreement dated january 17 2003 hong liang lu utstarcom inc 109013 change control severance agreement dated january 31 2003 ying wu utstarcom inc 109113 change control severance agreement dated january 31 2003 shaoning chou utstarcom inc 109213 change control severance agreement dated january 31 2003 william x huang utstarcom inc 109313 distributor agreement dated october 21 2003 utstarcom inc multidata 109413 amendment 1 distributor agreement dated december 17 2003 utstarcom inc multidata 109513 revenue sharing purchase agreement dated october 21 2003 utstarcom inc multidata 109613 amendment 1 revenue sharing purchase agreement dated december 17 2003 utstarcom inc multidata 109715 infrastructure equipment license agreement qualcomm inc utstarcom inc dated january 30 2004 109815 subscriber unit license agreement qualcomm inc utstarcom inc dated january 30 2004 109915 asset purchase agreement among hyundai syscomm inc 3r inc dr seong ik jang utstarcom inc dated february 26 2004 1010016 asset purchase agreement among utstarcom inc telos technology inc telos technology canada inc telos technology bermuda ltd telos engineering limited dated april 21 2004 1010116 asset purchase agreement among audiovox communications corp quintex mobile communications corporation audiovox communications canada co utstarcom inc utstarcom canada company audiovox corporation dated june 11 2004 1010217 continuous basic sale purchase agreement japan telecom co ltd telecom sales marketing kk dated august 20 2004 1010317 sale purchase agreement japan telecom co ltd telecom sales marketing kk dated august 20 2004 10104 distributor agreement dated december 20 2004 curitel communications inc utstarcom personal communications llc 10105 asset purchase agreement utstarcom cdma technologies korea limited giga telecom inc dated october 29 2004 211 subsidiaries utstarcom 231 consent independent registered public accounting firm 241 power attorney included signature page 311 certification pursuant section 302 sarbanesoxley act 2002 312 certification pursuant section 302 sarbanesoxley act 2002 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed sec concurrently filing annual report form 10k 1 incorporated reference registrant’s registration statement form s1 33393069 became effective march 2 2000 2 incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2000 3 incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2001 4 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2001 5 incorporated reference registrant’s annual report form 10k year ended december 31 2000 6 incorporated reference registrant’s annual report form 10k year ended december 31 2001 7 incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2002 8 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2002 9 incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2003 10 incorporated reference registrant’s quarterly report form 10qa amendment 1 quarter ended march 31 2003 11 incorporated reference registrant’s annual report form 10ka amendment 1 year ended december 31 2002 12 incorporated reference registrant’s registration statement form s8 filed september 15 2003 13 incorporated reference registrant’s annual report form 10k year ended december 31 2003 14 incorporated reference registrant’s current report form 8k filed december 12 2003 15 incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2004 16 incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2004 17 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2004 18 incorporated reference registrant’s current report form 8k filed march 16 2005 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized utstarcom inc date april 15 michael j sophie name michael j sophie title senior vice president finance chief financial officer power attorney know persons present person whose signature appears constitutes appoints hong liang lu michael j sophie jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except share per share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands accompanying notes integral part financial statements schedule utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands accompanying notes integral part financial statements schedule utstarcom inc notes condensed financial statements note 1basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated inventory balances december 31 2004 2003 include intercompany profit 99 million 23 million respectively cash dividends paid utstarcom inc subsidiaries three years ended december 31 2004 accounting policies information see notes consolidated financial statements included elsewhere herein company filed amendment annual report form 10k year ended december 31 2003 reflect restatement consolidated financial statements year ended december 31 2003 see note 2 consolidated financial statements note 2long term obligations march 12 2003 utstarcom inc completed offering 4025 million convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes bear interest rate 7¤8 per annum convertible common stock utstarcom inc conversion price 2379 per share subordinated present future senior debt utstarcom inc see note 11 consolidated financial statements schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2004 2003 2002item 15 exhibits financial statement schedules a1 financial statementssee index consolidated financial statements financial statement schedules page 108 form 10k 2financial statement schedulesee index consolidated financial statements financial statement schedules page 108 form 10k 3 exhibit number description 319 thirteenth amended restated certificate incorporation utstarcom inc amended 3213 first amended restated bylaws utstarcom inc amended 41 see exhibits 31 32 provisions certificate incorporation bylaws defining rights holders common stock 423 specimen common stock certificate 431 third amended restated registration rights agreement dated december 14 1999 444 convertible subordinated notes indenture dated march 12 2003 utstarcom inc us bank national association including form 78 convertible subordinated notes due 2008 4611 registration rights agreement dated june 30 2003 among utstarcom inc shareholders rollingstreams systems ltd 4714 underwriting agreement dated january 8 2004 company bank america securities llc amended january 14 2004 1011 form indemnification agreement 104 1997 stock plan amended forms related agreements 1051 2000 employee stock purchase plan forms related agreements 10422 land use right assignment agreement administration committee hangzhou hitech industry development zone zhejiang province peoples republic china utstarcom inc dated may 18 2000 1066 amended 2001 director option plan forms related agreements 10836 broadband access network general terms conditions reliance infocomm limited utstarcom inc dated october 1 2002 10846 broadband access equipment contract reliance infocomm limited utstarcom inc dated october 1 2002 10856 broadband access services contract reliance infocomm limited utstarcom inc dated october 1 2002 10866 broadband access software contract reliance infocomm limited utstarcom inc dated october 1 2002 10875 equipment purchase agreement dated february 4 2003 tata teleservices limited utstarcom inc 10887 utstarcom inc 2003 nonstatutory stock option plan 10898 change control severance agreement dated january 17 2003 hong liang lu utstarcom inc 10908 change control severance agreement dated january 31 2003 ying wu utstarcom inc 10928 change control severance agreement dated january 31 2003 william x huang utstarcom inc 109710 infrastructure equipment license agreement qualcomm inc utstarcom inc dated january 30 2004 109810 subscriber unit license agreement qualcomm inc utstarcom inc dated january 30 2004 109910 asset purchase agreement among hyundai syscomm inc 3r inc dr seong ik jang utstarcom inc dated february 26 2004 1010111 asset purchase agreement among audiovox communications corp quintex mobile communications corporation audiovox communications canada co utstarcom inc utstarcom canada company audiovox corporation dated june 11 2004 1010212 continuous basic sale purchase agreement japan telecom co ltd telecom sales marketing kk dated august 20 2004 1010312 sale purchase agreement japan telecom co ltd telecom sales marketing kk dated august 20 2004 1010414 distributor agreement dated december 20 2004 curitel communications inc utstarcom personal communications llc 1010615 committed receivables purchase agreement dated august 1 2005 utstarcom personal communications llc citibank na 1010716 agreement francis p barton utstarcom inc dated july 29 2005 1010816 change controlinvoluntary termination severance agreement francis p barton utstarcom inc dated september 6 2005 1010916 form restricted stock agreement use companys 1997 stock plan 1011017 form director officer stock option agreement use stock option grants directors executive officers company companys 1997 stock plan 211 subsidiaries utstarcom 231 consent independent registered public accounting firm 241 power attorney included signature page 311 certification pursuant section 302 sarbanesoxley act 2002 312 certification pursuant section 302 sarbanesoxley act 2002 321 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed sec 1incorporated reference registrants registration statement form s1 33393069 became effective march 2 2000 2incorporated reference registrants quarterly report form 10q quarter ended june 30 2000 3incorporated reference registrants amendment 4 registration statement form s1 33393069 filed february 7 2000 4incorporated reference registrants quarterly report form 10q quarter ended march 31 2003 5incorporated reference registrants quarterly report form 10qa amendment 1 quarter ended march 31 2003 6incorporated reference registrants annual report form 10ka amendment 1 year ended december 31 2002 7incorporated reference registrants registration statement form s8 filed september 15 2003 8incorporated reference registrants annual report form 10k year ended december 31 2003 9incorporated reference registrants current report form 8k filed december 12 2003 10incorporated reference registrants quarterly report form 10q quarter ended march 31 2004 11incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 12incorporated reference registrants quarterly report form 10q quarter ended september 30 2004 13incorporated reference registrants current report form 8k filed march 16 2005 14incorporated reference registrants annual report form 10k year ended december 31 2004 15incorporated reference registrants quarterly report form 10q quarter ended june 30 2005 16incorporated reference registrants current report form 8k filed september 12 2005 17incorporated reference registrants current report form 8k filed december 6 2005 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons present person whose signature appears constitutes appoints hong liang lu francis p barton jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date hong liang lu hong liang lu president chief executive officer principal executive officer chairman board directors june 1 2006 francis p barton francis p barton executive vice president chief financial officer principal financial accounting officer june 1 2006 jeff clarke jeff clarke director june 1 2006 larry horner larry horner director june 1 2006 allen lenzmeier allen lenzmeier director june 1 2006 thomas j toy thomas j toy director june 1 2006 ying wu ying wu director june 1 2006 schedule utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except share per share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands accompanying notes integral part financial statements schedule utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands accompanying notes integral part financial statements schedule utstarcom inc notes condensed financial statements note 1basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated inventory balances december 31 2005 2004 include intercompany profit 19 million 99 million respectively cash dividends paid utstarcom inc subsidiaries three years ended december 31 2005 accounting policies information see notes consolidated financial statements included elsewhere herein note 2restatement financial statements company restated previously issued condensed financial statements years ended december 31 2004 2003 registrant balance sheet december 31 2004 condensed information results operations cash flows registrant years ended december 31 2004 2003 restated amounts previously reported reasons restatement see note 2 consolidated financial statements following tables summarize impact restatement adjustments previously issued condensed information results operations registrant years ended december 31 2004 2003 following table presents impact restatement adjustments previously issued registrant balance sheet december 31 2004 note 3long term obligations march 12 2003 utstarcom inc completed offering 4025 million convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes bear interest rate 78 per annum convertible common stock utstarcom inc conversion price 2379 per share subordinated present future senior debt utstarcom inc see note 11 consolidated financial statements 2005 utstarcom inc entered agreements exchange total 4988100 common shares utstarcom inc fair value approximately 376 million approximately 571 million cash 1279 million aggregate principal amount outstanding convertible notes five note holders exchanges considered early extinguishment debt aggregate fair value common stock cash less carrying value convertible notes accordingly utstarcom inc recorded gain net writeoff unamortized issuance expenses 314 million year ended december 31 2005 extinguishment accordance provisions accounting principles board opinion 26 early extinguishment debt schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2005 2004 2003 1charged cumulative translation adjustment 2obligations assumed upon acquisition utstarcom inc table contents additional information explanatory note part factors affecting future operating results risks related company part ii forwardlooking statements report independent registered public accounting firm utstarcom inc consolidated balance sheets thousands except share data utstarcom inc consolidated statements operations thousands except per share amounts notes consolidated financial statements consolidated balance sheets consolidated balance sheets consolidated balance sheets part iii summary compensation table option grants last fiscal year aggregate option exercises last fiscal year fiscal year end option values part iv signatures power attorney utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except share per share data utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands utstarcom inc notes condensed financial statements utstarcom inc valuation qualifying accounts reserves years ended december 31 2005 2004 2003item 15 exhibits financial statement schedules 1 financial statementssee index consolidated financial statements financial statement schedules page 127 form 10k 2 financial statement schedulesee index consolidated financial statements financial statement schedules page 108 form 10k exhibit number description form incorporated reference exhibit number date filed 31 thirteenth amended restated certificate incorporation utstarcom inc amended 8k 31 121203 32 first amended restated bylaws utstarcom inc amended july 13 2007 filed herewith 41 see exhibits 31 32 provisions certificate incorporation bylaws defining rights holders common stock 42 specimen common stock certificate s1a 41 2700 43 third amended restated registration rights agreement dated december 14 1999 s1 42 122099 44 convertible subordinated notes indenture dated march 12 2003 utstarcom inc us bank national association including form 7¤8 convertible subordinated notes due 2008 10q 44 51203 45 first supplemental indenture dated january 9 2007 company us bank national association 8k 992 11007 46 underwriting agreement dated january 8 2004 company bank america securities llc amended january 14 2004 10k 47 41505 47 consent solicitation statement dated december 22 2006 related company’s 7¤8 convertible subordinated notes due 2008 8k 992 122206 48 amended letter consent related company’s 7¤8 convertible subordinated notes due 2008 8k 993 1807 49 supplemental consent solicitation statement dated january 8 2007 related company’s 7¤8 convertible subordinated notes due 2008 8k 992 1807 410 second consent solicitation statement dated july 19 2007 relating company’s convertible subordinated notes due 2008 8k 992 71907 411 letter consent relating company’s convertible subordinated notes due 2008 8k 993 71907 412 second supplemental indenture dated july 26 2007 company us bank national association 8k 991 73007 101 form indemnification agreement s1 101 122099 102 1997 stock plan amended forms related agreements 10k 104 6106 103 2000 employee stock purchase plan forms related agreements s1 105 122099 104 land use right assignment agreement administration committee hangzhou hitech industry development zone zhejiang province people’s republic china utstarcom inc dated may 18 2000 10q 102 81400 105 amended 2001 director option plan forms related agreements 10k 1066 6106 1011 utstarcom inc 2003 nonstatutory stock option plan s8 44 91503 1012 change control severance agreement dated january 17 2003 hong liang lu utstarcom inc 10k 1089 3904 1013 infrastructure equipment license agreement qualcomm inc utstarcom inc dated january 30 2004 10q 1097 51004 1014 subscriber unit license agreement qualcomm inc utstarcom inc dated january 30 2004 10q 1098 51004 1015 asset purchase agreement among audiovox communications corp quintex mobile communications corporation audiovox communications canada co utstarcom inc utstarcom canada company audiovox corporation dated june 11 2004 10q 10101 81604 1017 agreement francis p barton utstarcom inc dated july 29 2005 8k 103 91205 1018 form restricted stock agreement use company’s 1997 stock plan 8k 101 91205 1019 form director officer stock option agreement use company’s 1997 stock plan 8k 101 12605 1020 utstarcom inc 2006 equity incentive plan 2006 eip 8k 101 72706 1021 form stock option award agreement 2006 eip 8k 102 72706 1022 form stock option award agreement directors officers 2006 eip 8k 103 72706 1023 form restricted stock agreement 2006 eip 8k 104 72706 1024 form restricted stock unit agreement 2006 eip 8k 105 72706 1025 severance agreement release michael j sophie utstarcom inc dated april 13 2006 10q 1010 101007 1026 amended restated change controlinvoluntary termination severance agreement william x huang utstarcom inc dated august 21 2006 10q 1015 101007 1027 amended restated change controlinvoluntary termination severance agreement francis p barton utstarcom inc dated august 23 2006 10q 1014 101007 1028 amended restated change controlinvoluntary termination severance agreement ying wu utstarcom inc dated november 14 2006 filed herewith 1029 form stock option amendment election form executed key executive officers directors 8k 101 1407 1030 stock option amendment election form executed hong liang lu december 29 2006 8k 102 1407 1031 stock option amendment election form executed ying wu december 29 2006 8k 103 1407 1032 stock option amendment election form executed william x huang december 29 2006 8k 104 1407 1033 offer letter viraj patel dated november 2 2005 10q 106 101007 1034 offer letter mark green dated december 19 2005 10q 107 101007 1035 offer letter david king dated april 3 2006 10q 108 101007 1036 employment agreement philip christopher utstarcom inc dated june 11 2004 10q 109 101007 1037 strategic alliance agreement pantech curitel communications utstarcom personal communications llc dated september 25 2006 10q 1011 101007 1038 utstarcom inc vice president change control involuntary termination severance pay plan 10q 1012 101007 1039 utstarcom inc executive involuntary termination severance pay plan 10q 1013 101007 211 subsidiaries utstarcom filed herewith 241 power attorney included signature page filed herewith 311 certification ceo pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification cfo pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certifications pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 991 restated condensed consolidated statements operations periods ended june 30 3006 march 31 2006 december 31 2005 september 30 2005 june 30 2005 march 31 2005 restated condensed consolidated balance sheets june 30 2006 march 31 2006 september 30 2005 june 30 2005 march 31 2005 december 31 2004 restated condensed consolidated statements cash flows six months ended june 30 2006 three months ended march 31 2006 filed herewith management contract plan arrangement portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed securities exchange commission signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k year ended december 31 2006 signed behalf undersigned thereunto duly authorized utstarcom inc date october 10 2007 francis p barton name francis p barton title executive vice president chief financial officer power attorney know persons present person whose signature appears constitutes appoints hong liang lu francis p barton jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands accompanying notes integral part financial statements schedule utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands accompanying notes integral part financial statements utstarcom inc notes condensed financial statements note 1basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate parent company basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated inventory balances december 31 2006 2005 include intercompany profit 26 million 19 million respectively cash dividends paid utstarcom inc subsidiaries three years ended december 31 2006 accounting policies information see notes consolidated financial statements included elsewhere herein note 2restatement financial statements company restated previously issued consolidated financial statements years ended december 31 2005 2004 accordingly registrant’s balance sheet december 31 2005 condensed information registrant’s results operations years ended december 31 2005 2004 restated amounts previously reported see note 2 consolidated financial statements information concerning restatement including impact restatements adjustments reflected consolidated financial statements similarly reflected restated condensed financial statements additionally parent company basis financial statements company corrected income tax expense 2005 2004 include impact company’s branch operations foreign jurisdictions consistent 2006 methodology correction reduced tax expense equity net income affiliated companies 364 million 06 million years ended december 31 2005 2004 respectively impact net income registrant’s balance sheet december 31 2005 adjusted result correction tax provision reducing investment affiliates 666 million increasing income taxes payable 10 million reducing current liabilities 676 million utstarcom inc notes condensed financial statements continued following tables summarize impact restatement adjustments previously issued condensed information results operations registrant years ended december 31 2005 2004 utstarcom inc notes condensed financial statements continued utstarcom inc notes condensed financial statements continued following table presents impact restatement adjustments previously issued registrant balance sheet december 31 2005 utstarcom inc notes condensed financial statements continued note 3long term obligations march 12 2003 utstarcom inc completed offering 4025 million 7¤8 convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes convertible common stock utstarcom inc conversion price 2379 per share subordinated present future senior debt utstarcom inc effective january 9 2007 utstarcom inc holders remaining 2746 million convertible subordinated notes entered first supplemental indenture providing failure utstarcom inc comply certain provisions original agreement result default event default may 31 2007 convertible subordinated notes accrue additional 675 per annum special interest january 9 2007 march 1 2008 maturity date notes unless notes earlier repurchased converted payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest result first supplemental indenture convertible subordinated notes bear stated interest rate 7625 january 9 2007 see note 11 consolidated financial statements information regarding notice default may 31 2007 second supplemental indenture utstarcom inc see note 23 consolidated financial statements 2005 utstarcom inc entered agreements exchange total 4988100 common shares utstarcom inc fair value approximately 376 million approximately 571 million cash 1279 million aggregate principal amount outstanding convertible notes five note holders exchanges considered early extinguishment debt aggregate fair value common stock cash less carrying value convertible notes accordingly utstarcom inc recorded gain net writeoff unamortized issuance expenses 314 million year ended december 31 2005 extinguishment accordance provisions accounting principles board opinion 26 “early extinguishment debt” schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2006 2005 2004 1 charged comprehensive incomeitem 15 exhibits financial statement schedules 1 financial statementssee index consolidated financial statements financial statement schedules page 127 form 10k 2 financial statement schedulesee index consolidated financial statements financial statement schedules page 108 form 10k exhibit number description form incorporated reference exhibit number date filed 31 thirteenth amended restated certificate incorporation utstarcom inc amended 8k 31 121203 32 first amended restated bylaws utstarcom inc amended august 22 2007 10q 32 11907 41 see exhibits 31 32 provisions certificate incorporation bylaws defining rights holders common stock 42 specimen common stock certificate s1a 41 2700 43 third amended restated registration rights agreement dated december 14 1999 s1 42 122099 44 convertible subordinated notes indenture dated march 12 2003 utstarcom inc us bank national association including form 78 convertible subordinated notes due 2008 10q 44 51203 45 first supplemental indenture dated january 9 2007 company us bank national association 8k 992 11007 46 underwriting agreement dated january 8 2004 company bank america securities llc amended january 14 2004 10k 47 41505 47 consent solicitation statement dated december 22 2006 related companys 78 convertible subordinated notes due 2008 8k 992 122206 48 amended letter consent related companys 78 convertible subordinated notes due 2008 8k 993 1807 49 supplemental consent solicitation statement dated january 8 2007 related companys 78 convertible subordinated notes due 2008 8k 992 1807 410 second consent solicitation statement dated july 19 2007 relating companys convertible subordinated notes due 2008 8k 992 71907 411 letter consent relating companys convertible subordinated notes due 2008 8k 993 71907 412 second supplemental indenture dated july 26 2007 company us bank national association 8k 991 73007 101 form indemnification agreement s1 101 122099 102 1997 stock plan amended forms related agreements 10k 104 6106 103 2000 employee stock purchase plan forms related agreements s1 105 122099 104 land use right assignment agreement administration committee hangzhou hitech industry development zone zhejiang province peoples republic china utstarcom inc dated may 18 2000 10q 102 81400 105 amended 2001 director option plan forms related agreements 10k 1066 6106 106 utstarcom inc 2003 nonstatutory stock option plan s8 44 91503 107 amended restated change controlinvoluntary termination severance agreement dated january 30 2008 hong liang lu utstarcom inc 8k 101 2508 108 infrastructure equipment license agreement qualcomm inc utstarcom inc dated january 30 2004 10q 1097 51004 109 subscriber unit license agreement qualcomm inc utstarcom inc dated january 30 2004 10q 1098 51004 1010 asset purchase agreement among audiovox communications corp quintex mobile communications corporation audiovox communications canada co utstarcom inc utstarcom canada company audiovox corporation dated june 11 2004 10q 10101 81604 1011 agreement francis p barton utstarcom inc dated july 29 2005 8k 103 91205 1012 form restricted stock agreement use companys 1997 stock plan 8k 101 91205 1013 form director officer stock option agreement use companys 1997 stock plan 8k 101 12605 1014 utstarcom inc 2006 equity incentive plan 2006 eip 8k 101 72706 1015 form stock option award agreement use 2006 eip 8k 102 72706 1016 form stock option award agreement directors officers use 2006 eip 8k 103 72706 1017 form restricted stock agreement use 2006 eip 8k 104 72706 1018 form restricted stock unit agreement use 2006 eip 8k 105 72706 1019 amended restated change controlinvoluntary termination severance agreement francis p barton utstarcom inc dated january 30 2008 8k 103 2508 1020 amended restated change controlinvoluntary termination severance agreement ying wu utstarcom inc dated november 14 2006 10k 1028 101007 1021 form stock option amendment election form executed key executive officers directors 8k 101 1407 1022 stock option amendment election form executed hong liang lu december 29 2006 8k 102 1407 1023 stock option amendment election form executed ying wu december 29 2006 8k 103 1407 1024 offer letter viraj patel dated november 2 2005 10q 106 101007 1025 offer letter mark green dated december 19 2005 10q 107 101007 1026 offer letter david king dated april 3 2006 10q 108 101007 1027 employment agreement philip christopher utstarcom inc dated june 11 2004 10q 109 101007 1028 strategic alliance agreement pantech curitel communications utstarcom personal communications llc dated september 25 2006 10q 1011 101007 1029 utstarcom inc vice president change control involuntary termination severance pay plan 10q 1012 101007 1030 utstarcom inc executive involuntary termination severance pay plan amended restated january 30 2008 8k 104 2508 1031 amended restated change control involuntary termination severance agreement utstarcom inc peter blackmore effective january 30 2008 8k 102 2508 1032 peter blackmore offer letter amended october 25 2007 8k 991 103107 1033 amended restated committed receivables purchase agreement dated march 30 2007 utstarcom personal communications llc citibank na 10q 101 101707 1034 form performance share agreement use 2006 eip 8k 103 113007 1035 form performance unit agreement use 2006 eip 8k 104 113007 1036 retention agreement company francis p barton dated november 30 2007 8k 102 113007 211 subsidiaries utstarcom inc filed herewith 231 consent independent registered public accounting firm filed herewith 241 power attorney included signature page filed herewith 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certifications pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith management contract plan arrangement portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed securities exchange commission signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k year ended december 31 2007 signed behalf undersigned thereunto duly authorized utstarcom inc date march 3 2008 francis p barton name francis p barton title executive vice president chief financial officer power attorney know persons present person whose signature appears constitutes appoints hong liang lu francis p barton jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date hong liang lu hong liang lu chief executive officer director principal executive officer march 3 2008 francis p barton francis p barton executive vice president chief financial officer principal financial officer director march 3 2008 viraj j patel viraj j patel vice president corporate controller chief accounting officer principal accounting officer march 3 2008 thomas j toy thomas j toy chairman board directors march 3 2008 jeff clarke jeff clarke director march 3 2008 larry horner larry horner director march 3 2008 allen lenzmeier allen lenzmeier director march 3 2008 schedule utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except share data accompanying notes integral part financial statements schedule utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands accompanying notes integral part financial statements utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands accompanying notes integral part financial statements utstarcom inc notes condensed financial statements note 1basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate parent company basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated inventory balances december 31 2007 2006 include intercompany profit 24 million 26 million respectively 150 million cash dividends paid subsidiaries china year ended december 31 2007 accounting policies information see notes consolidated financial statements included elsewhere herein note 2inventory majority companys inventory december 31 2007 2006 finished goods note 3long term obligations march 12 2003 company completed offering 4025 million 78 convertible subordinated notes due march 1 2008 qualified buyers pursuant rule 144a securities act 1933 notes convertible companys common stock conversion price 2379 per share subordinated present future senior debt company holders notes may convert notes price companys common stock issuable upon conversion note reaches specified threshold ii specified corporate transactions occur iii trading price notes falls certain thresholds initial conversion price 1000 principal amount notes convertible 420345 shares common stock expenses associated convertible subordinated notes issuance 117 million recorded longterm assets amortized life notes concurrent issuance convertible notes company entered convertible bond hedge call option transaction convertible bond hedge amended allows company purchase 115 million shares common stock 2379 per share party agreement written call option amended allows holder purchase 115 million shares companys common stock company 32025 per share bond hedge call option transactions may settled companys option either cash net shares expire march 1 2008 company recorded instruments cost carrying value december 31 2007 equaled original cost adjusted amendments related early extinguishment debt convertible bond hedge call option transactions expected reduce potential dilution conversion notes options included stockholders equity accordance guidance eitf 0019 accounting derivative financial instruments indexed potentially settled companys stock effective january 9 2007 company holders remaining 2746 million convertible subordinated notes entered first supplemental indenture providing failure company comply certain provisions original agreement result default event default may 31 2007 convertible subordinated notes accrued additional 675 per annum special interest january 9 2007 march 1 2008 maturity date notes payments special interest made addition time utstarcom inc notes condensed financial statements continued note 3long term obligations continued manner regularly scheduled payments interest holders entitled regularly scheduled payments interest result first supplemental indenture convertible subordinated notes bore stated interest rate 7625 subsequently company solicited obtained requisite consents holders notes waiver effective july 26 2007 default may occurred prior date due delay filing noncompliance certain covenants company entered second supplemental indenture trustee dated july 26 2007 receiving consent holders 50 outstanding aggregate principal amount convertible subordinated notes connection companys consent solicitation announced july 19 2007 second supplemental indenture provided convertible subordinated notes accrue additional interest rate 675 per annum special interest january 9 2007 including july 25 2007 b 10 per annum special interest july 26 2007 date notes paid prepaid redeemed converted otherwise cease outstanding special interest rate provided second supplemental indenture represented increase 325 per annum special interest rate 675 provided first supplemental indenture result second supplemental indenture convertible subordinated notes bear stated interest rate 10875 payments special interest made addition time manner regularly scheduled payments interest holders entitled regularly scheduled payments interest february 28 2008 company transferred 2895 million trustee notes trustee order assure repayment notes mature march 1 2008 amount includes principal payment 2746 million 149 million accrued interest trustee instructed pay amounts note holders due schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2007 2006 2005 1charged comprehensive income utstarcom inc table contents additional information part item 1 business item 1a risk factors item 1b unresolved staff comments item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market utstarcom incs common equity related stockholder matters issuer purchases equity securities companys stock performance issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations forwardlooking statements item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent registered public accounting firm utstarcom inc consolidated balance sheets thousands except share data utstarcom inc consolidated statements operations thousands except per share amounts utstarcom inc consolidated statements stockholders equity thousands except per share amounts utstarcom inc consolidated statement cashflows thousands item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures item 9b information part iii item 10 directors executive officers corporate governance item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions director independence item 14 principal accounting fees services part iv item 15 exhibits financial statement schedules signatures power attorney schedule utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands utstarcom inc notes condensed financial statements schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2007 2006 2005item 15 exhibits financial statement schedules 1 financial statementssee index consolidated financial statements financial statement schedules page 94 form 10k 2 financial statement schedulessee index consolidated financial statements financial statement schedules page 94 form 10k management contract plan arrangement portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed securities exchange commission reviewing agreements included exhibits annual report form 10k please remember included provide information regarding terms intended provide factual disclosure information company parties agreements contain representations warranties parties applicable agreement representations warranties made solely benefit parties applicable agreement •should instances treated categorical statements fact rather way allocating risk one parties statements prove inaccurate •have qualified disclosures made party connection negotiation applicable agreement disclosures necessarily reflected agreement •may apply standards materiality way different may viewed material investors •were made date applicable agreement date dates may specified agreement subject recent developments accordingly representations warranties may describe actual state affairs date made time additional information company may found elsewhere annual report form 10k companys public filings available without charge website wwwutstarcom information contained website incorporated herein signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k year ended december 31 2008 signed behalf undersigned thereunto duly authorized power attorney know persons present person whose signature appears constitutes appoints peter blackmore viraj j patel jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except share data accompanying notes integral part financial statements utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands accompanying notes integral part financial statements utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands accompanying notes integral part financial statements utstarcom inc notes condensed financial statements note 1basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate parent company basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated inventory balances december 31 2008 2007 include intercompany profit 18 million 24 million respectively 100 million 150 million cash dividends paid subsidiaries china years ended december 31 2008 2007 respectively february 2009 additional 50 million cash dividends paid subsidiaries china accounting policies information see notes consolidated financial statements included elsewhere herein note 2inventory majority companys inventory december 31 2008 2007 finished goods schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2008 2007 2006 1charged credited comprehensive incomeitem 15 exhibits financial statement schedules 1 financial statementssee index consolidated financial statements financial statement schedules page 88 form 10k 2 financial statement schedulessee index consolidated financial statements financial statement schedules page 88 form 10k management contract plan arrangement portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed securities exchange commission reviewing agreements included exhibits annual report form 10k please remember included provide information regarding terms intended provide factual disclosure information company parties agreements contain representations warranties parties applicable agreement representations warranties made solely benefit parties applicable agreement •should instances treated categorical statements fact rather way allocating risk one parties statements prove inaccurate •have qualified disclosures made party connection negotiation applicable agreement disclosures necessarily reflected agreement •may apply standards materiality way different may viewed material investors •were made date applicable agreement date dates may specified agreement subject recent developments accordingly representations warranties may describe actual state affairs date made time additional information company may found elsewhere annual report form 10k companys public filings available without charge website wwwutstarcom information contained website incorporated herein signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k year ended december 31 2010 signed behalf undersigned thereunto duly authorized power attorney know persons present person whose signature appears constitutes appoints jack lu edmond cheng jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except par value accompanying notes integral part financial statements utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands accompanying notes integral part financial statements utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands accompanying notes integral part financial statements utstarcom inc notes condensed financial statements note 1basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate parent company basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated inventory balances december 31 2010 2009 include intercompany profit 16 million 13 million respectively 100 million 150 million cash dividends paid subsidiaries china years ended december 31 2008 2007 respectively february 2009 additional 50 million cash dividends paid subsidiaries china accounting policies information see notes consolidated financial statements included elsewhere herein note 2inventory majority companys inventories december 31 2010 2009 finished goods schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2010 2009 2008 1charged credited comprehensive incomeitem 15 exhibits financial statement schedules 1 financial statementssee index consolidated financial statements financial statement schedules page 87 form 10k 2 financial statement schedulessee index consolidated financial statements financial statement schedules page 87 form 10k management contract plan arrangement portions exhibit omitted pursuant order granted securities exchange commission confidential treatment portions exhibit omitted pursuant request confidential treatment filed securities exchange commission reviewing agreements included exhibits annual report form 10k please remember included provide information regarding terms intended provide factual disclosure information company parties agreements contain representations warranties parties applicable agreement representations warranties made solely benefit parties applicable agreement •should instances treated categorical statements fact rather way allocating risk one parties statements prove inaccurate •have qualified disclosures made party connection negotiation applicable agreement disclosures necessarily reflected agreement •may apply standards materiality way different may viewed material investors •were made date applicable agreement date dates may specified agreement subject recent developments accordingly representations warranties may describe actual state affairs date made time additional information company may found elsewhere annual report form 10k companys public filings available without charge website wwwutstarcom information contained website incorporated herein signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k year ended december 31 2009 signed behalf undersigned thereunto duly authorized power attorney know persons present person whose signature appears constitutes appoints peter blackmore kenneth luk jointly severally attorneysinfact power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule utstarcom inc unconsolidatedparent company basis registrant balance sheets thousands except par value accompanying notes integral part financial statements utstarcom inc unconsolidatedparent company basis condensed information results operations registrant thousands accompanying notes integral part financial statements utstarcom inc unconsolidatedparent company basis condensed information cash flows registrant thousands accompanying notes integral part financial statements utstarcom inc notes condensed financial statements note 1basis presentation utstarcom inc delaware corporation parent company utstarcom inc subsidiaries accompanying condensed financial statements reflect financial position results operations cash flows utstarcom inc separate parent company basis subsidiaries utstarcom inc reflected investments accounted using equity method accordingly intercompany transactions eliminated inventory balances december 31 2009 2008 include intercompany profit 13 million 18 million respectively 100 million 150 million cash dividends paid subsidiaries china years ended december 31 2008 2007 respectively february 2009 additional 50 million cash dividends paid subsidiaries china accounting policies information see notes consolidated financial statements included elsewhere herein note 2inventory majority companys inventory december 31 2009 2008 finished goods schedule ii utstarcom inc valuation qualifying accounts reserves years ended december 31 2009 2008 2007 1charged credited comprehensive income