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Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950109-01-502684.txt : 20010809
<SEC-HEADER>0000950109-01-502684.hdr.sgml : 20010809
ACCESSION NUMBER:		0000950109-01-502684
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		2
CONFORMED PERIOD OF REPORT:	20010630
FILED AS OF DATE:		20010808

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			UTSTARCOM INC
		CENTRAL INDEX KEY:			0001030471
		STANDARD INDUSTRIAL CLASSIFICATION:	COMMUNICATIONS EQUIPMENT, NEC [3669]
		IRS NUMBER:				521782500
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-29661
		FILM NUMBER:		1701187

	BUSINESS ADDRESS:	
		STREET 1:		1275 HARBOR BAY PARKWAY
		STREET 2:		STE 100
		CITY:			ALAMEDA
		STATE:			CA
		ZIP:			94502
		BUSINESS PHONE:		5108648800

	MAIL ADDRESS:	
		STREET 1:		1275 HARBOR BAY PARKWAY
		STREET 2:		STE 100
		CITY:			ALAMEDA
		STATE:			CA
		ZIP:			94502
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML><HEAD>
<TITLE>Form 10-Q</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF"> <P align="left">&nbsp;</P> <P align="center"><B><FONT face="serif">UNITED STATES SECURITIES AND EXCHANGE COMMISSION</FONT></B><br> <B><FONT face="serif">WASHINGTON, D.C. 20549<br> </FONT></B></P> <P
align="center"><B><FONT face="serif">------------<br> </FONT></B></P> <P align="center"><B><FONT face="serif">FORM 10-Q </FONT></B></P> <P> <FONT size=2 face="serif">(Mark One)</FONT></P> <p><font face="serif" size="2">[X] QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE</font> <FONT size=2 face="serif">ACT OF 1934</FONT> </p> <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the quarterly period ended June 30, 2001. </FONT></P> <blockquote>
<blockquote> <blockquote> <blockquote> <blockquote> <blockquote> <p> <FONT size=2 face="serif">OR </FONT></p> </blockquote> </blockquote> </blockquote> </blockquote> </blockquote> </blockquote> <P> <FONT size=2 face="serif">[_] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES </FONT><FONT size=2 face="serif">EXCHANGE ACT OF 1934 </FONT></P> <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the transition period from&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
to&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.</FONT></P> <P align="center">&nbsp; </P> <P align="center"> <B><FONT size=2 face="serif">COMMISSION FILE NUMBER 000-29661</FONT></B></P> <P align="center"> <FONT size=2 face="serif">_______________
</FONT></P> <P align="center"> <B><FONT size=2 face="serif">UTSTARCOM, INC. </FONT></B><br> <FONT size=2 face="serif">(Exact name of Registrant as specified in its charter)</FONT></P> <P align="center"> <FONT size=2 face="serif">_______________
</FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD> <center> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT size=2 face="serif">DELAWARE</FONT></B> </center> </TD>
<TD width="45%"> <center> <B><FONT size=2 face="serif">52-1782500</FONT></B> </center> </TD> </TR>
<TR>
<TD> <center> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">(State of Incorporation)</FONT> </center> </TD>
<TD width="45%"> <center> <FONT size=2 face="serif">(I.R.S. Employer Identification No.)</FONT> </center> </TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD> <center> <FONT size=2 face="serif">1275 HARBOR BAY PARKWAY, ALAMEDA, CALIFORNIA</FONT> </center> </TD>
<TD width="45%"> <center> <FONT size=2 face="serif">94502</FONT> </center> </TD> </TR>
<TR>
<TD> <center> &nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">(Address of principal executive offices)</FONT> </center> </TD>
<TD width="45%"> <center> <FONT size=2 face="serif">(zip code)</FONT> </center> </TD> </TR> </TABLE> <P align="center"> <FONT size=2 face="serif">REGISTRANT&#146;S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 864-8800 </FONT></P> <P align="center">
<FONT size=2 face="serif">_______________ </FONT></P> <P>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.</FONT></P> <P align="center"> <FONT
size=2 face="serif">Yes [X]&nbsp;&nbsp;&nbsp;No [_]&nbsp;&nbsp;&nbsp;</FONT></P> <P><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of August 1, 2001 there were 104,549,974 shares of the Registrant's Common Stock outstanding, par value
$0.00125.</FONT></P>

<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD>&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="86%"> <center> <FONT size=2 face="serif">TABLE OF CONTENTS</FONT> </center> </TD>
<TD width="4%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap><FONT size=2 face="serif">PART I.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">FINANCIAL INFORMATION</FONT></TD>
<TD width="4%"> <center> <FONT size=2 face="serif">PAGE</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Item 1.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">
<a href="#352tx1">Condensed Consolidated Financial Statements</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">3</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">&nbsp;</TD>
<TD width="4%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">
<a href="#352tx2"><FONT size=2 face="serif">Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and</FONT></a></TD>
<TD width="4%"> <div align="right"></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">
<a href="#352tx2"><FONT size=2 face="serif">December 31, 2000</FONT></a></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">3</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<tr>
<td nowrap>&nbsp;</td>
<td nowrap width="3%">&nbsp;</td>
<td width="86%">&nbsp;</td>
<td width="4%">&nbsp;</td>
<td width="2%">&nbsp;</td> </tr>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">
<a href="#352tx3"><FONT size=2 face="serif">Condensed Consolidated Statements of Operations for the three and six month periods</FONT></a></TD>
<TD width="4%"> <div align="right"></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">
<a href="#352tx3"><FONT size=2 face="serif">ended June 30, 2001 and June 30, 2000 (unaudited)</FONT></a></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">4</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<tr>
<td nowrap>&nbsp;</td>
<td nowrap width="3%">&nbsp;</td>
<td width="86%">&nbsp;</td>
<td width="4%">&nbsp;</td>
<td width="2%">&nbsp;</td> </tr>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">
<a href="#352tx4"><FONT size=2 face="serif">Condensed Consolidated Statements of Cash Flows for the six month periods</FONT></a></TD>
<TD width="4%"> <div align="right"></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">
<a href="#352tx4"><FONT size=2 face="serif">ended June 30, 2001 and June 30, 2000 (unaudited)</FONT></a></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">5</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<tr>
<td nowrap>&nbsp;</td>
<td nowrap width="3%">&nbsp;</td>
<td width="86%">&nbsp;</td>
<td width="4%">&nbsp;</td>
<td width="2%">&nbsp;</td> </tr>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%"><FONT size=2 face="serif">
<a href="#352tx5">Notes to Condensed Consolidated Financial Statements (unaudited)</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">6</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="right"></div> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Item 2.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom">
<a href="#352tx6"><FONT size=2 face="serif">Management's Discussion and Analysis of Financial Condition and Results of</FONT></a></TD>
<TD width="4%"> <div align="right"></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%">
<a href="#352tx6"><FONT size=2 face="serif">Operations</FONT></a></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">13</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="right"></div> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Item 3.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">
<a href="#352tx7">Quantitative and Qualitative Disclosure about Market Risk</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">33</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="right"></div> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap><FONT size=2 face="serif">PART II.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">OTHER INFORMATION</FONT></TD>
<TD width="4%"> <div align="right"></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<tr>
<td nowrap>&nbsp;</td>
<td nowrap width="3%">&nbsp;</td>
<td width="86%">&nbsp;</td>
<td width="4%">&nbsp;</td>
<td width="2%">&nbsp;</td> </tr>
<TR>
<TD valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Item 2.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">
<a href="#352tx9">Changes in Securities and Use of Proceeds</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">33</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="right"></div> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Item 4.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">
<a href="#352tx10">Submission of Matters to a Vote of Security Holders</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">34</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="right"></div> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Item 5.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">
<a href="#352tx11">Other Information</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">34</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="right"></div> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Item 6.</FONT></TD>
<TD valign="bottom" nowrap width="3%">&nbsp;</TD>
<TD width="86%" valign="bottom"><FONT size=2 face="serif">
<a href="#352tx12">Exhibits</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">35</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="right"></div> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD nowrap width="3%">&nbsp;</TD>
<TD width="86%"><FONT size=2 face="serif">
<a href="#352tx13">SIGNATURES</a></FONT></TD>
<TD width="4%"> <div align="right"><FONT size=2 face="serif">36</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR> </TABLE> <p>&nbsp;</p> <P align="center"> <FONT size=2 face="monospace">2</FONT></P>
 <P> <B><FONT size=2 face="serif">PART I &#150; FINANCIAL INFORMATION </FONT></B></P> <P> <B><FONT size=2 face="serif">
<a name="352tx1"></a>ITEM 1 &#150; CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</FONT></B></P>
<TABLE border=0 cellspacing=0 cellpadding=0 width="100%">
<TR>
<TD colspan="9"> <center> <B><FONT size=2 face="serif">
<a name="352tx2"></a>UTSTARCOM, INC.</FONT></B> </center> </TD> </TR>
<TR>
<TD colspan="9"> <center> <B><FONT size=2 face="serif">CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)</FONT></B> </center> </TD> </TR>
<TR>
<TD colspan="9"> <center> <B><FONT size=2 face="serif">(in thousands, except per share data)</FONT></B> </center> </TD> </TR>
<TR>
<TD rowspan="2" colspan="3">&nbsp;</TD>
<TD colspan=2 rowspan="2"> <center> <B><FONT size=2 face="serif">June 30,<br> </FONT></B><B><FONT size=2 face="serif">2001</FONT></B> </center> </TD>
<TD width="7%">&nbsp; </TD>
<TD colspan=2 nowrap rowspan="2"> <center> <B><FONT size=2 face="serif">December 31,<br> </FONT></B><B><FONT size=2 face="serif">2000</FONT></B> </center> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="7%">&nbsp; </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="7%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"> <center> <B><FONT size=2 face="serif">ASSETS</FONT></B> </center> </TD>
<TD width="3%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="4%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Current assets:</FONT></TD>
<TD width="3%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="4%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Cash and cash equivalents</FONT></TD>
<TD width="3%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">217,657</FONT></div> </TD>
<TD width="7%"> <div align="right"></div> </TD>
<TD width="4%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">149,112</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Short-term investments</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">27,969</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">83,858</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">Accounts receivable, net of allowances for doubtful accounts of $15,424 and $12,835 at June 30, 2001 and December 31, 2000, respectively</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><font size=2 face="serif">186,265</font> </div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><font size=2 face="serif">161,330</font> </div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">Receivable from related parties</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">1,745</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">406</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Inventories, net</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">181,192</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">118,995</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Other current assets</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">45,750</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">17,674</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="7%">&nbsp; </TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Total current assets</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">660,578</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">531,375</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan=3><FONT size=2 face="serif">Property, plant and equipment, net</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">31,813</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">21,999</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Long-term investments</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">17,026</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">12,397</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan=3><FONT size=2 face="serif">Goodwill and intangible assets, net</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">26,010</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">20,238</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Other long term assets</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">5,356</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">5,828</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="5%">&nbsp;</td>
<td colspan="2">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Total assets</FONT></TD>
<TD width="3%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">740,783</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">591,837</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="5%">&nbsp;</td>
<td colspan="2">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2">&nbsp;</TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan=3> <center> <B><FONT size=2 face="serif">LIABILITIES AND STOCKHOLDERS' EQUITY</FONT></B> </center> </TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Current liabilities:</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Accounts payable</FONT></TD>
<TD width="3%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">63,059</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">44,564</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Debt</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">57,834</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">43,381</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Income taxes payable</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right">-</div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">7,170</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Deferred revenue</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">89,642</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">31,678</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2"><FONT size=2 face="serif">Other current liabilities</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">49,400</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">34,721</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="5%">&nbsp;</td>
<td colspan="2">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Total current liabilities</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">259,935</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">161,514</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="4%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Long-term debt</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">12,048</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">12,048</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan=3><FONT size=2 face="serif">Minority interest in consolidated subsidiaries</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">6,678</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">5,956</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="5%">&nbsp;</td>
<td colspan="2">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan="2">&nbsp;</TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">278,661</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">179,518</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="5%">&nbsp;</td>
<td colspan="2">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Stockholders' equity:</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%">&nbsp; </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Common stock: $.00125 par value; authorized: 250,000,000 shares; issued&nbsp;<font size=2 face="serif">and outstanding:</font><font size=2 face="serif"> 98,148,629 at June 30, 2001 and 95,032,657 at December
31, 2000</font></FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><font size=2 face="serif">124</font> </div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><font size=2 face="serif">120</font> </div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Additional paid-in capital</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">452,206</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">426,665</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan=3><FONT size=2 face="serif">Deferred stock compensation</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">(3,950</FONT></div> </TD>
<TD width="7%"><font size=2 face="serif">)</font> </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">(6,491</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD colspan=3><FONT size=2 face="serif">Retained earnings (cumulative deficit)</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">13,814</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">(7,808</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD colspan=3><FONT size=2 face="serif">Notes receivable from shareholders</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">(201</FONT></div> </TD>
<TD width="7%"><font size=2 face="serif">)</font> </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">(314</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD colspan=3><FONT size=2 face="serif">Other comprehensive income</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">129</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">147</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td colspan="3">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD colspan="3"><FONT size=2 face="serif">Total stockholders' equity</FONT></TD>
<TD width="3%">&nbsp; </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">462,122</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%">&nbsp; </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">412,319</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="5%">&nbsp;</td>
<td colspan="2">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan=2>&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="4%">&nbsp;</TD>
<TD width="7%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="5%">&nbsp;</td>
<td colspan="2">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="5%">&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">Total liabilities and stockholders' equity</FONT></TD>
<TD width="3%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">740,783</FONT></div> </TD>
<TD width="7%">&nbsp; </TD>
<TD width="4%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">591,837</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td colspan="3">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="7%">&nbsp; </td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td> </tr> </TABLE> <P align="center"> <FONT size=2 face="serif">See accompanying notes to condensed consolidated financial statements.</FONT></P> <P align="center"> <FONT size=2 face="monospace">3</FONT></P> <P
align="center">&nbsp;</P> <hr noshade align="right" width="100%" size="1"> <P align="center">&nbsp;</P> <P align="center"></P>

<TABLE border=0 cellspacing=0 cellpadding=0 align="center" width="100%">
<TR valign="bottom">
<TD colspan="14"> <center> <B><FONT size=2 face="serif">
<a name="352tx3"></a>UTSTARCOM, INC.</FONT></B><B><FONT size=2 face="serif"><br> CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)<br> </FONT></B><B><FONT size=2 face="serif">(In thousands, except per share data)</FONT></B> </center> </TD>
</TR>
<TR valign="bottom">
<TD colspan=7>&nbsp;</TD>
<TD colspan=7>&nbsp;</TD> </TR>
<TR valign="bottom">
<TD nowrap width="2%">&nbsp;</TD>
<TD nowrap width="60%"><B></B></TD>
<TD align="center" colspan=5 nowrap><b><font size=2 face="serif">&nbsp;&nbsp;&nbsp;Three months ended June 30,&nbsp;&nbsp;&nbsp;</font></b></TD>
<TD colspan=6 align="center" nowrap> <center> <B><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B><b><font size=2 face="serif">&nbsp;Six months ended June 30,</font></b> </center> </TD>
<TD width="1%" align="center" nowrap>&nbsp;</TD> </TR>
<TR valign="middle">
<TD nowrap width="2%">&nbsp;</TD>
<TD nowrap width="60%">&nbsp;</TD>
<TD align="center" colspan=5 nowrap> <hr noshade align="center" width="100%" size="1"> </TD>
<TD align="center" nowrap>&nbsp; </TD>
<TD colspan=5 align="center" nowrap> <hr noshade align="center" width="100%" size="1"> </TD>
<TD width="1%" align="center" nowrap>&nbsp;</TD> </TR>
<TR valign="bottom">
<TD colspan=7 nowrap></TD>
<TD colspan=7 align="center" nowrap></TD> </TR>
<TR valign="bottom">
<TD nowrap width="2%">&nbsp;</TD>
<TD nowrap width="60%">&nbsp;</TD>
<TD colspan="2" align="center"><B><FONT size=2 face="serif">2001</FONT></B></TD>
<TD colspan="3" align="center"><B><FONT size=2 face="serif">2000</FONT></B></TD>
<TD colspan="3" align="center"><B><FONT size=2 face="serif">2001</FONT></B></TD>
<TD colspan="4" align="center"><B><FONT size=2 face="serif">2000</FONT></B></TD> </TR>
<TR valign="top">
<TD nowrap width="2%">&nbsp;</TD>
<TD nowrap width="60%">&nbsp;</TD>
<TD colspan="2" align="center" nowrap> <hr noshade align="center" width="100%" size="1"> </TD>
<TD align="center" nowrap>&nbsp; </TD>
<TD colspan="2" align="center" nowrap> <hr noshade align="center" width="100%" size="1"> </TD>
<TD align="center" nowrap>&nbsp; </TD>
<TD colspan="2" align="center" nowrap> <hr noshade align="center" width="100%" size="1"> </TD>
<TD align="center" nowrap>&nbsp; </TD>
<TD colspan="2" align="center" nowrap> <hr noshade align="center" width="100%" size="1"> </TD>
<TD width="1%" align="center" nowrap>&nbsp;</TD> </TR>
<TR valign="bottom">
<TD nowrap width="2%">&nbsp;</TD>
<TD nowrap width="60%">&nbsp;</TD>
<TD align="right" nowrap width="1%"></TD>
<TD align="right" nowrap width="8%"></TD>
<TD align="right" nowrap width="1%">&nbsp;</TD>
<TD align="right" nowrap width="1%"> <div align="right"></div> </TD>
<TD align="right" nowrap width="8%"></TD>
<TD align="right" nowrap width="1%">&nbsp;</TD>
<TD align="right" nowrap width="1%">&nbsp;</TD>
<TD align="right" nowrap width="8%"></TD>
<TD align="right" nowrap width="1%">&nbsp;</TD>
<TD align="right" nowrap width="1%">&nbsp;</TD>
<TD align="right" nowrap width="7%"></TD>
<TD align="right" nowrap width="1%"></TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Net sales </FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">140,047</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">75,676</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">259,228</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">134,263</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Cost of sales (includes stock compensation expense of <br> &nbsp;&nbsp;&nbsp;&nbsp; $11, $23, $24 and $56)</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">90,140</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">48,414</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">167,908</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">86,388</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Gross profit</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">49,907</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">27,262</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">91,320</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">47,875</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Operating expenses:</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" width="2%">&nbsp;&nbsp;&nbsp;&nbsp;</TD>
<TD align="left" width="60%"><FONT size=2 face="serif"><font size=2 face="serif">Selling, general and administrative expenses (includes </font>stock compensation expense of $557, $1,249, $1,238 and $3,051)</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">18,759</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">10,929</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">32,890</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">21,993</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" width="2%">&nbsp;</TD>
<TD align="left" width="60%"><FONT size=2 face="serif"><font size=2 face="serif">Research and development expenses (includes stock</font> compensation expense of $479, $660, $1,057 and $5,255)</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">13,286</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">8,886</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">25,698</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">19,795</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" width="2%">&nbsp;</TD>
<TD align="left" width="60%"><FONT size=2 face="serif">Amortization of intangible assets</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">1,965</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">1,224</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">3,436</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">2,447</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Total operating expenses</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">34,010</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">21,039</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">62,024</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">44,235</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Operating income</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">15,897</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">6,223</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">29,296</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">3,640</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="7%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Interest income</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">1,742</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">3,685</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">4,093</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">5,039</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Interest expenses</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(1,058</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(949</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(1,919</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">(1,706</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Other income (expenses)</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">1,002</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">303</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(36</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">478</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Equity in net loss of affiliated companies</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(457</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(181</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(701</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">(460</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right"> <div align="left"></div> </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right"> <div align="left"></div> </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Income before income taxes, minority interest and <br> &nbsp;&nbsp;&nbsp;&nbsp; cumulative effect of change in accounting principle</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">17,126</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">9,081</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">30,733</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">6,991</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Income tax expense</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">4,032</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">3,797</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">7,684</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">4,715</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right"> <div align="left"></div> </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right"> <div align="left"></div> </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Income before minority interest</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">13,094</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">5,284</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">23,049</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">2,276</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Minority interest in earnings of consolidated<br> &nbsp;&nbsp;&nbsp;&nbsp; subsidiaries</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(834</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(264</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">(1,427</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">(525</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right"> <div align="left"></div> </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right"> <div align="left"></div> </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Income before cumulative effect of change in accounting<br> &nbsp;&nbsp;&nbsp;&nbsp; principle</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">12,260</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">5,020</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">21,622</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">1,751</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Cumulative effect of change in accounting principle</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">(980</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right"> <div align="left"></div> </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Net income </FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">12,260</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">5,020</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">21,622</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">771</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Basic earnings (loss) per share:</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2" height="22"> <p><FONT size=2 face="serif">Income before cumulative effect of change in accounting</FONT><FONT size=2 face="serif"><br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;principle </FONT></p> </TD>
<TD align="right" width="1%" height="22"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD align="right" width="8%" height="22"><FONT size=2 face="serif">0.13</FONT></TD>
<TD align="right" width="1%" height="22">&nbsp;</TD>
<TD align="right" width="1%" height="22"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%" height="22"><FONT size=2 face="serif">0.05</FONT></TD>
<TD align="right" width="1%" height="22">&nbsp;</TD>
<TD align="right" width="1%" height="22"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%" height="22"><FONT size=2 face="serif">0.22</FONT></TD>
<TD align="right" width="1%" height="22">&nbsp;</TD>
<TD align="right" width="1%" height="22"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="7%" height="22"><FONT size=2 face="serif">0.03</FONT></TD>
<TD align="right" width="1%" height="22"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Cumulative effect of change in accounting principle</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">(0.02</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Net income per share </FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.13</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.05</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.22</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">0.01</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Diluted earnings (loss) per share:</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Income before cumulative effect of change in accounting<br> &nbsp;&nbsp;&nbsp;&nbsp; principle </FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.12</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.05</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.21</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">0.02</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Cumulative effect of change in accounting principle</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">-</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">(0.01</FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Net income per share </FONT></TD>
<TD align="right" width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.12</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.05</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">0.21</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">0.01</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="bottom">
<TD align="left" colspan="2"><FONT size=2 face="serif">Weighted average shares used in per-share calculation:</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%">&nbsp;</TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<TR valign="bottom">
<TD align="left" width="2%">&nbsp;</TD>
<TD align="left" width="60%"><FONT size=2 face="serif">- Basic</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">97,269</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">93,527</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">97,171</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">64,697</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<TR valign="top">
<TD align="left" width="2%">&nbsp;</TD>
<TD align="left" width="60%"><FONT size=2 face="serif">- Diluted</FONT></TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">105,264</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">104,506</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="left"></div> </TD>
<TD align="right" width="8%"><FONT size=2 face="serif">105,259</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD>
<TD align="right" width="1%"> <div align="right"></div> </TD>
<TD align="right" width="7%"><FONT size=2 face="serif">99,846</FONT></TD>
<TD align="right" width="1%">&nbsp;</TD> </TR>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td align="right">&nbsp; </td>
<td colspan="2" align="right"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%" align="right">&nbsp;</td> </tr>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right">&nbsp;</td>
<td colspan="3" align="right">&nbsp;</td>
<td colspan="3" align="right">&nbsp;</td>
<td colspan="4" align="right">&nbsp;</td> </tr>
<tr valign="top">
<td width="2%">&nbsp;</td>
<td width="60%">&nbsp;</td>
<td colspan="2" align="right">&nbsp;</td>
<td colspan="3" align="right">&nbsp;</td>
<td colspan="3" align="right">&nbsp;</td>
<td colspan="4" align="right">&nbsp;</td> </tr>
<tr valign="top">
<td colspan="14"> <center> <font face="serif" size="2">See accompanying notes to condensed consolidated financial statements. </font> </center> </td> </tr> </TABLE> <P align="center"> <FONT size=2 face="monospace">4</FONT></P> <hr noshade
align="right" width="100%" size="1"> <P align="center">&nbsp;</P>

<TABLE border=0 cellspacing=0 cellpadding=0 width="100%">
<TR>
<TD colspan=6>&nbsp;</TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="6"> <center>
<a name="352tx4"></a>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT size=2 face="serif">UTSTARCOM, INC.</FONT></B> </center> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="6"> <center> <B><FONT size=2 face="serif">CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)</FONT></B> </center> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD colspan="6"> <center> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT size=2 face="serif">(In thousands)</FONT></B> </center> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD colspan=4> <center> <B><FONT size=2 face="serif">Six months ended</FONT></B> </center> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;</TD>
<TD colspan="5"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;</TD>
<TD colspan=2> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD colspan=2> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">CASH FLOWS FROM OPERATING ACTIVITIES:</FONT></TD>
<TD width="3%">&nbsp;</TD>
<TD width="9%">&nbsp;</TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="10%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><font size=2 face="serif">Net income</font></TD>
<TD width="3%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="9%"> <div align="right"><font size=2 face="serif">21,622</font></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="10%"> <div align="right"><font size=2 face="serif">771</font></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Adjustments to reconcile net income to net cash used in</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">operating activities:</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Cumulative effect of change in accounting principle</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right">-</div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">980</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Depreciation and amortization</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">7,551</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">4,249</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Non-qualified stock option exercise tax benefits</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">7,660</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">7,737</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Net loss on sale of assets</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">274</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">128</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Impairment of long term investment in Softbank China</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">1,150</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right">-</div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Stock compensation expense</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">2,320</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">8,362</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Increase in allowance for doubtful accounts</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">2,589</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">3,338</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Increase in inventory reserve</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">2,906</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">3,102</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Equity in net loss of affiliated companies</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">701</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">327</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Minority interest in consolidated subsidiary</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">721</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">525</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Changes in operating assets and liabilities:</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Accounts receivable and receivable from related parties</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(28,864</FONT></div> </TD>
<TD width="5%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(29,590</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Inventories</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(65,102</FONT></div> </TD>
<TD width="5%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(37,423</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Other current and non-current assets</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(29,305</FONT></div> </TD>
<TD width="5%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(7,022</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Accounts payable and payable to related parties</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">26,138</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(7,874</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Income taxes payable</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(7,267</FONT></div> </TD>
<TD width="5%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(7,929</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Deferred revenue</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">57,963</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">13,505</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Other current liabilities</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">7,134</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(10,353</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD width="70%">&nbsp;</TD>
<TD colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Net cash provided by (used in) operating activities</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">8,191</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(57,167</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<tr>
<td width="70%">&nbsp;</td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="5%"> <div align="left"></div> </td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="70%"><FONT size=2 face="serif">CASH FLOWS FROM INVESTING ACTIVITIES:</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Additions to property, plant and equipment</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(11,162</FONT></div> </TD>
<TD width="5%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(4,335</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Investment in affiliates, net of cash acquired</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(6,479</FONT></div> </TD>
<TD width="5%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(4,790</FONT></div> </TD>
<TD width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Proceeds from disposal of property</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">151</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">103</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Sales (purchases) of short-term investments</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">55,897</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(45,456</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<tr>
<td width="70%">&nbsp;</td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="5%"> <div align="left"></div> </td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="70%"><FONT size=2 face="serif">Net cash provided by (used in) investing activities</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">38,407</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(54,478</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<tr>
<td width="70%">&nbsp;</td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="5%"> <div align="left"></div> </td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="70%"><FONT size=2 face="serif">CASH FLOWS FROM FINANCING ACTIVITIES:</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Issuance of stock, net of expenses</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">7,336</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">195,012</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Proceeds from borrowing, net</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">14,453</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">31,081</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Proceeds from shareholder notes</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">183</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(139</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<tr>
<td width="70%">&nbsp;</td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="5%"> <div align="left"></div> </td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="70%"><FONT size=2 face="serif">Net cash provided by financing activities</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">21,972</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">225,954</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Effects of exchange rates on cash</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(25</FONT></div> </TD>
<TD width="5%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(10</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<tr>
<td width="70%">&nbsp;</td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="5%"> <div align="left"></div> </td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<TR>
<TD width="70%"><FONT size=2 face="serif">Net increase in cash and cash equivalents</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">68,545</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">114,299</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="70%"><FONT size=2 face="serif">Cash and cash equivalents at beginning of period</FONT></TD>
<TD width="3%"> <div align="right"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">149,112</FONT></div> </TD>
<TD width="5%"> <div align="left"></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">87,364</FONT></div> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<tr>
<td width="70%">&nbsp;</td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="5%"> <div align="left"></div> </td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td> </tr>
<tr>
<td width="70%"><font size=2 face="serif">Cash and cash equivalents at end of period</font></td>
<td width="3%"> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="9%"> <div align="right"><font size=2 face="serif">217,657</font></div> </td>
<td width="5%"> <div align="left"></div> </td>
<td width="2%"> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="10%"> <div align="right"><font size=2 face="serif">201,663</font></div> </td>
<td width="1%">&nbsp;</td> </tr>
<tr>
<td width="70%">&nbsp;</td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="2"> </td>
<td width="5%"> <div align="left"></div> </td>
<td colspan="2"> <div align="right"></div> <hr noshade align="right" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td> </tr> </TABLE> <P align="center"> <FONT size=2 face="serif">See accompanying notes to condensed consolidated financial statements.</FONT></P> <P align="center"> <FONT size=2 face="monospace">5</FONT></P> <hr noshade
align="right" width="100%" size="1"> <P align="center">&nbsp;</P>
 <P align="center"> <B><FONT size=2 face="serif">
<a name="352tx5"></a>UTSTARCOM, INC. </FONT></B></P> <P align="center"> <B><FONT size=2 face="serif">NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) </FONT></B></P> <P> <B><FONT size=2 face="serif">SIGNIFICANT ACCOUNTING POLICIES
</FONT></B></P> <P> <B><FONT size=2 face="serif">1.</FONT></B>&nbsp;<B><FONT size=2 face="serif">BASIS OF PRESENTATION: </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying unaudited condensed
consolidated financial statements include the accounts of UTStarcom, Inc. (the &#147;Company&#148;) and its wholly and majority (over 50 percent) owned subsidiaries, except for the Guangdong manufacturing subsidiary (&#147;GUTS&#148;) which is
accounted for using the equity method as the Company does not have voting control over all significant matters. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements.
Minority interest in consolidated subsidiaries and equity in affiliated companies are shown separately in the consolidated financial statements. Investments in affiliated companies, of which none represent greater than 10 percent ownership, are
accounted for using the cost method.</FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying financial data as of June 30, 2001 and for the three and six months ended June 30, 2001 and June 30, 2000, have been
prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 2000 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally
accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company&#146;s audited December 31, 2000 financial statements including the notes thereto, and the other information set forth
therein included in the Company&#146;s Annual Report on Form 10K/A. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the opinion of management, the accompanying condensed consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company&#146;s financial condition, the results of its operations and its cash flows for the periods indicated. The results of
operations for the three and six months ended June 30, 2001 are not necessarily indicative of the operating results for the full year.</FONT></P> <p><B><FONT size=2 face="serif">2. REVENUE RECOGNITION:</FONT></B></p> <p><FONT size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue from sales of equipment is recognized on delivery when contractual obligations are substantially complete, remaining </FONT><FONT size=2 face="serif">obligations are inconsequential and
perfunctory, and collection of the resulting receivable is reasonably assured. Revenue from equipment sales with installations are recognized on final acceptance when contractual obligations are substantially complete, remaining obligations are
inconsequential and perfunctory, and collection of the resulting receivable is reasonably assured. Where multiple elements exist, revenue is allocated to the different elements based upon verifiable objective evidence and recognized on completion of
the element.</FONT><B><I><FONT size=2 face="serif"> </FONT></I></B></p> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Revenue from equipment sales incorporating software not considered incidental to the product as a whole ("software
sales") is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Revenue from software sales in multiple element contracts is recognized using
the residual method when there is vendor specific objective evidence of the fair value of all undelivered elements in an arrangement but vendor specific objective evidence of fair value does not exist for one or more of the delivered elements in an
arrangement. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered elements regardless of any separate prices stated within the contract for each element. If the fee due from the customer is not fixed or determinable due to extended payment
terms, revenue is recognized as payments become due from the customer. If collection is not considered probable, revenue is recognized when the fee is collected. </FONT></P> <p><B><FONT size=2 face="serif">3. ACCOUNTING CHANGE (in
thousands):</FONT></B></p> <p><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101 (&#147;SAB 101&#148;) issued by the Securities and</FONT> <FONT size=2
face="serif">Exchange Commission in December 1999. As a result of adopting SAB 101, the Company changed the way it recognizes revenue in certain contracts that had previously led to revenue being recognized as contract stages were completed and
accepted. The Company changed its method of revenue recognition to the point of contractual final acceptance for these contracts. In addition, certain contracts include service requirements for which revenue was previously recognized, and costs
accrued, on contractual acceptance. In </FONT></p> <P align="center"> <FONT size=2 face="monospace">6</FONT></P>
 <P> <FONT size=2 face="serif">consideration of SAB 101, revenues associated with these service requirements are being deferred until the service obligations are completed. The Company recorded a cumulative adjustment
of $980 for the effect of the change on prior years in first quarter fiscal 2000. No revenue was recognized in the three and six months ended June 30, 2001 that was included in the cumulative effect of change in accounting principle. The combined
impact of the cumulative adjustment and the retroactive adjustment resulted in a reduction in net income of $286 or $0.01 per share basic and diluted for the three months ended June 30, 2000. The combined impact of the cumulative adjustment and the
retroactive adjustment resulted in a reduction in net income of $1.2 million or $0.02 per share basic, $0.01 per share diluted for the six months ended June 30, 2000. </FONT></P> <p><B><FONT size=2 face="serif">4. EARNINGS PER SHARE (in thousands,
except per share data):</FONT></B></p> <p><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Basic earnings per share is computed by dividing net income applicable to common stockholders by the weighted average </FONT><FONT size=2
face="serif">number of shares of the Company&#146;s common stock outstanding during the period. Diluted earnings per share is determined in the same manner as basic earnings per share except that the numbers of shares is increased by potentially
dilutive common shares outstanding during the period. Potentially dilutive common shares consist of employee stock options, warrants and restricted stock. Dilutive potential shares are not included during periods when the Company experienced a net
loss, as the impact would be anti-dilutive.</FONT></p> <P> <FONT size=2 face="serif">The following table presents the calculation of basic and diluted earnings per share: </FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD width="49%">&nbsp;</TD>
<TD colspan="5"> <center> <B><FONT size=2 face="serif">Three Months Ended</FONT></B> </center> </TD>
<TD width="1%">&nbsp; </TD>
<TD colspan="5"> <center> <B><FONT size=2 face="serif">Six</FONT></B> <B><FONT size=2 face="serif">Months Ended</FONT></B> </center> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%">&nbsp;</TD>
<TD colspan="5"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="1%">&nbsp; </TD>
<TD colspan="5"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%">&nbsp;</TD>
<TD colspan=2 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="1%">&nbsp; </TD>
<TD colspan=2 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="1%">&nbsp; </TD>
<TD colspan=2 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="2%">&nbsp; </TD>
<TD colspan=2> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%">&nbsp;</TD>
<TD colspan=2> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD>
<TD colspan=2> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD>
<TD colspan=2> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Numerator:</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Income before cumulative effect of a change</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">in accounting principle</FONT></TD>
<TD width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="10%"> <div align="right"><font size=2 face="serif">12,260</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="10%"> <div align="right"><font size=2 face="serif">5,020</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="10%"> <div align="right"><font size=2 face="serif">21,622</font></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="10%"> <div align="right"><font size=2 face="serif">1,751</font></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Cumulative effect of a change in accounting principle</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right">-</div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right">- </div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right">-</div> </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">(980</FONT></div> </TD>
<TD width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%"> <div align="left"></div> </td> </tr>
<TR>
<TD width="49%"><FONT size=2 face="serif">Net income</FONT></TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">12,260</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">5,020</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">21,622</font></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">771</font></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%"> <div align="left"></div> </td> </tr>
<TR>
<TD width="49%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Denominator:</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Weighted average shares outstanding - basic</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">97,269</FONT></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">93,527</FONT></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">97,171</FONT></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">64,697</FONT></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%"> <div align="left"></div> </td> </tr>
<TR>
<TD width="49%"><FONT size=2 face="serif">Weighted average shares outstanding - diluted</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">105,264</FONT></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">104,506</FONT></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">105,259</FONT></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">99,846</FONT></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%"> <div align="left"></div> </td> </tr>
<TR>
<TD width="49%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Basic earnings per share:</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Income before cumulative effect of a change</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">in accounting principle</FONT></TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.13</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.05</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.22</font></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.03</font></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Cumulative effect of a change in accounting principle</FONT></TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right">-</div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right">-</div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right">-</div> </TD>
<TD width="2%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">(0.02</font></div> </TD>
<TD width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%"> <div align="left"></div> </td> </tr>
<TR>
<TD width="49%"><FONT size=2 face="serif">Net income per share</FONT></TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.13</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.05</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.22</font></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.01</font></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%"> <div align="left"></div> </td> </tr>
<TR>
<TD width="49%">&nbsp;</TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Diluted earnings per share:</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Income before cumulative effect of a change</FONT></TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.12</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.05</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.21</font></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.02</font></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">in accounting principle</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="2%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%">&nbsp; </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<TR>
<TD width="49%"><FONT size=2 face="serif">Cumulative effect of a change in accounting principle</FONT></TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right">-</div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right">-</div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right">-</div> </TD>
<TD width="2%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">(0.01</font></div> </TD>
<TD width="1%"> <div align="left"><font size=2 face="serif">)</font></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%"> <div align="left"></div> </td> </tr>
<TR>
<TD width="49%"><FONT size=2 face="serif">Net income per share</FONT></TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.12</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.05</font></div> </TD>
<TD width="1%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.21</font></div> </TD>
<TD width="2%">&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">0.01</font></div> </TD>
<TD width="1%"> <div align="left"></div> </TD> </TR>
<tr>
<td width="49%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="2"> </td>
<td width="1%"> <div align="left"></div> </td> </tr> </TABLE> <P> <FONT size=2 face="serif">Certain potential shares outstanding at June 30, 2001 and June 30, 2000 were not included in the computation, assuming dilution, since their exercise prices
were greater than the average market price of the common shares during the period and, accordingly, their effect is anti-dilutive. These shares totaled 1.2 million at a weighted- average exercise price of $24.65 per share at June 30, 2001 and 0.04
million with a weighted average exercise price of $41.63 per share at June 30, 2000. </FONT></P> <p><B><FONT size=2 face="serif">5. COMPREHENSIVE INCOME/(LOSS) (in thousands):</FONT></B></p> <p><FONT size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Statement of Financial Accounting Standards ("SFAS") No. 130 requires disclosure of total non-stockholder changes in </FONT><FONT size=2 face="serif">equity, which include unrealized gains and losses
on securities classified as available-for-sale under SFAS No. 115, foreign currency translation adjustments accounted for under SFAS No. 52, and minimum pension liability adjustments made pursuant to SFAS No. 87.</FONT></p> <P align="center"> <FONT
size=2 face="monospace">7</FONT></P>
 <P> <FONT size=2 face="serif">The reconciliation of net income to comprehensive income for the three and six months ended June 30, 2001 and 2000 is as follows (in thousands): </FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD> <center> </center> </TD>
<TD colspan="5" nowrap> <center> <B><FONT size=2 face="serif">Three Months Ended</FONT></B> </center> </TD>
<TD width="2%" nowrap> <center> </center> </TD>
<TD colspan="5" nowrap> <center> <B><FONT size=2 face="serif">Six Months Ended</FONT></B> </center> </TD>
<TD width="2%" nowrap> <center> </center> </TD> </TR>
<TR>
<TD> <center> </center> </TD>
<TD colspan="5" nowrap> <hr noshade align="right" width="100%" size="1"> </TD>
<TD nowrap> <center> </center> </TD>
<TD colspan="5" nowrap> <hr noshade align="right" width="100%" size="1"> </TD>
<TD nowrap> <center> </center> </TD> </TR>
<TR>
<TD> <center> </center> </TD>
<TD colspan=2 width="9%" nowrap> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="2%" nowrap> <center> </center> </TD>
<TD colspan=2 width="8%" nowrap> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="2%" nowrap> <center> </center> </TD>
<TD colspan=2 width="9%" nowrap> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="2%" nowrap> <center> </center> </TD>
<TD colspan=2 width="6%" nowrap> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="2%" nowrap> <center> </center> </TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Net income</FONT></TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">12,260</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">5,020</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">21,622</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="right"><FONT size=2 face="serif">771</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Unrealised gains (losses) on investments</FONT></TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">(148</FONT></div> </TD>
<TD width="2%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">(66</FONT></div> </TD>
<TD width="2%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">7</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="right">-</div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Change in cumulative translation adjustments</FONT></TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">(25</FONT></div> </TD>
<TD width="2%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">(439</FONT></div> </TD>
<TD width="2%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">(25</FONT></div> </TD>
<TD width="2%"> <div align="left"><font size=2 face="serif">)</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="5%"> <div align="right"><FONT size=2 face="serif">(10</FONT></div> </TD>
<TD width="2%"><font size=2 face="serif">)</font></TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<tr>
<td><font size=2 face="serif">Total comprehensive income</font></td>
<td width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="8%"> <div align="right"><font size=2 face="serif">12,087</font></div> </td>
<td width="2%"> <div align="right"></div> </td>
<td width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="7%"> <div align="right"><font size=2 face="serif">4,515</font></div> </td>
<td width="2%"> <div align="right"></div> </td>
<td width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="8%"> <div align="right"><font size=2 face="serif">21,604</font></div> </td>
<td width="2%"> <div align="right"></div> </td>
<td width="1%"> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="5%"> <div align="right"><font size=2 face="serif">761</font></div> </td>
<td width="2%"> <div align="right"></div> </td> </tr>
<tr>
<td>&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="2%">&nbsp;</td> </tr> </TABLE> <P> <B><FONT size=2 face="serif">6.</FONT></B>&nbsp;<B><FONT size=2 face="serif">SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (in thousands):</FONT></B></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD width="64%"> <center> </center> </TD>
<TD colspan="6" nowrap> <center> <B><FONT size=2 face="serif">Six</FONT></B> <B><FONT size=2 face="serif">Months Ended</FONT></B> </center> </TD>
<TD width="1%"> <center> </center> </TD> </TR>
<TR>
<TD width="64%"> <center> </center> </TD>
<TD colspan="6" nowrap> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%"> <center> </center> </TD> </TR>
<TR>
<TD width="64%"> <div align="left"><B><FONT size=2 face="serif">(In thousands)</FONT></B> </div> </TD>
<TD colspan=2 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="8%" nowrap> <center> </center> </TD>
<TD colspan=3 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="1%"> <center> </center> </TD> </TR>
<TR>
<TD width="64%">&nbsp;</TD>
<TD colspan=2 nowrap> <hr noshade align="right" width="100%" size="1"> </TD>
<TD nowrap width="8%"> </TD>
<TD colspan=3 nowrap> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="64%"><FONT size=2 face="serif">Cash paid during the period for:</FONT></TD>
<TD width="1%" nowrap> <div align="right"></div> </TD>
<TD width="10%" nowrap> <div align="right"></div> </TD>
<TD width="8%" nowrap> <div align="right"></div> </TD>
<TD colspan="2" nowrap> <div align="right"></div> </TD>
<TD nowrap width="10%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="64%"><font size=2 face="serif">Interest</font></TD>
<TD width="1%" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="10%" nowrap> <div align="right"><font size=2 face="serif">1,831</font></div> </TD>
<TD width="8%" nowrap> <div align="right"></div> </TD>
<TD colspan="2" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD nowrap width="10%"> <div align="right"><font size=2 face="serif">1,501</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="64%"><font size=2 face="serif">Income taxes</font></TD>
<TD width="1%" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD width="10%" nowrap> <div align="right"><font size=2 face="serif">4,624</font></div> </TD>
<TD width="8%" nowrap> <div align="right"></div> </TD>
<TD colspan="2" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </TD>
<TD nowrap width="10%"> <div align="right"><font size=2 face="serif">4,779</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="64%">&nbsp;</TD>
<TD colspan="2" nowrap> <div align="right"></div> </TD>
<TD nowrap width="8%"> <div align="right"></div> </TD>
<TD colspan="2" nowrap> <div align="left"></div> </TD>
<TD nowrap width="10%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD colspan=2><FONT size=2 face="serif">Non-cash investing and financing activities were as follows:</FONT></TD>
<TD width="10%" nowrap> <div align="right"></div> </TD>
<TD width="8%" nowrap> <div align="right"></div> </TD>
<TD colspan="2" nowrap> <div align="right"></div> </TD>
<TD nowrap width="10%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="64%">&nbsp;</TD>
<TD colspan="6" nowrap> <center> <B><FONT size=2 face="serif">Six</FONT></B> <B><FONT size=2 face="serif">Months Ended</FONT></B> </center> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="64%">&nbsp;</TD>
<TD colspan="6" nowrap> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="64%"><B><FONT size=2 face="serif">(In thousands)</FONT></B></TD>
<TD colspan=2 nowrap> <div align="right"><B><FONT size=2 face="serif">June 30, 2001</FONT></B> </div> </TD>
<TD width="8%" nowrap> <div align="right"></div> </TD>
<TD colspan=3 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<tr>
<td width="64%">&nbsp;</td>
<td colspan="2" nowrap> <hr noshade align="right" width="100%" size="1"> </td>
<td width="8%" nowrap> <div align="right"></div> </td>
<td colspan="3" nowrap> <hr noshade align="right" width="100%" size="1"> </td>
<td width="1%"> <div align="right"></div> </td> </tr>
<tr>
<td width="64%"><font size=2 face="serif">Receivable from shareholders</font></td>
<td width="1%" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="10%" nowrap> <div align="right">-</div> </td>
<td width="8%" nowrap> <div align="right"></div> </td>
<td colspan="2" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td nowrap width="10%"> <div align="right"><font size=2 face="serif">147</font></div> </td>
<td width="1%"> <div align="right"></div> </td> </tr>
<tr>
<td width="64%"><font size=2 face="serif">Stock issued in conjunction with an acquisition</font></td>
<td width="1%" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td width="10%" nowrap> <div align="right"><font size=2 face="serif">10,700</font></div> </td>
<td width="8%" nowrap> <div align="right"></div> </td>
<td colspan="2" nowrap> <div align="left"><font size=2 face="serif">$</font></div> </td>
<td nowrap width="10%"> <div align="right">-</div> </td>
<td width="1%"> <div align="right"></div> </td> </tr> </TABLE> <p><B><FONT size=2 face="serif">7. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (in thousands):</FONT></B></p> <p><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the
Company's cash equivalents and short-term investments are classified as available-for-sale. At June 30, 2001, </FONT><FONT size=2 face="serif">$106,961 of available-for-sale securities was included in cash equivalents and $27,969 of
available-for-sale securities was included in short-term investments. These available-for-sale securities consisted of government sponsored entities&#146; notes, commercial paper, floating rate corporate bonds and fixed income corporate
bonds.</FONT></p> <p><b><font size=2 face="serif">8.</font></b>&nbsp;<b><font size=2 face="serif">INVENTORIES (in thousands): </font></b></p> <p> <font size=2 face="serif">Inventories as of June 30, 2001 and December 31, 2000 consist of the
following:</font> </p>
<TABLE border=0 cellspacing=0 cellpadding=0 width="100%">
<TR>
<TD width="67%">&nbsp;</TD>
<TD colspan=2 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="8%" nowrap>&nbsp;</TD>
<TD colspan="4" nowrap> <center> <B><FONT size=2 face="serif">December 31, 2000</FONT></B> </center> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="67%">&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="8%">&nbsp; </TD>
<TD colspan=4> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="1%">&nbsp;</TD> </TR>
<TR>
<TD width="67%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Raw materials</FONT></TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><font size=2 face="serif">55,611</font></div> </TD>
<TD width="8%">&nbsp;</TD>
<TD width="1%"><font size=2 face="serif">$</font></TD>
<TD colspan="3"> <div align="left"></div> <div align="right"><font size=2 face="serif">41,876</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="67%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Work-in-process</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">33,513</FONT></div> </TD>
<TD width="8%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD colspan="3"> <div align="left"></div> <div align="right"><FONT size=2 face="serif">23,432</FONT></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="67%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Finished goods</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">104,175</FONT></div> </TD>
<TD width="8%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD colspan="3"> <div align="left"></div> <div align="right"><FONT size=2 face="serif">62,888</FONT></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="67%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="8%">&nbsp; </TD>
<TD colspan="4"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="67%">&nbsp;</TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><font size=2 face="serif">193,299</font></div> </TD>
<TD width="8%">&nbsp;</TD>
<TD width="1%"><font size=2 face="serif">$</font></TD>
<TD colspan="3"> <div align="left"></div> <div align="right"><font size=2 face="serif">128,196</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<TR>
<TD width="67%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Less allowance for obsolete inventory</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">(12,107</FONT></div> </TD>
<TD width="8%"><font size=2 face="serif">)</font></TD>
<TD width="1%">&nbsp;</TD>
<TD colspan="3"> <div align="left"></div> <div align="right"><FONT size=2 face="serif">(9,201</FONT></div> </TD>
<TD width="1%"><font size=2 face="serif">)</font></TD> </TR>
<tr>
<td width="67%">&nbsp;</td>
<td colspan="2"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="8%">&nbsp; </td>
<td colspan="4"> <hr noshade align="left" width="100%" size="1"> </td>
<td width="1%"> <div align="right"></div> </td> </tr>
<TR>
<TD width="67%">&nbsp;</TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><font size=2 face="serif">181,192</font></div> </TD>
<TD width="8%">&nbsp;</TD>
<TD width="1%"><font size=2 face="serif">$</font></TD>
<TD colspan="3"> <div align="left"></div> <div align="right"><font size=2 face="serif">118,995</font></div> </TD>
<TD width="1%"> <div align="right"></div> </TD> </TR>
<tr>
<td width="67%">&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="8%">&nbsp; </td>
<td colspan="4"> <hr noshade align="right" width="100%" size="2"> </td>
<td width="1%">&nbsp;</td> </tr> </table> <p align="center"><font face="monospace" size="2">8</font></p>
 <p>&nbsp;</p>
<table cellpadding="0" cellspacing="0" border="0" width="100%">
<TR>
<TD colspan="12"><B><FONT size=2 face="serif">9. DEBT (in thousands):</FONT></B></TD> </TR>
<TR>
<TD colspan="12"><FONT size=2 face="serif">The following represents the outstanding borrowings at June 30, 2001 and December 31, 2000:</FONT></TD> </TR>
<TR>
<TD nowrap> <div align="left">&nbsp;&nbsp;&nbsp;<B><FONT size=2 face="serif">Note</FONT></B> </div> </TD>
<TD colspan="3" nowrap> <center> <B><FONT size=2 face="serif">Rate</FONT></B> </center> </TD>
<TD colspan="2" nowrap> <center> <B><FONT size=2 face="serif">Maturity</FONT></B> </center> </TD>
<TD>&nbsp; </TD>
<TD colspan=2 nowrap> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD nowrap>&nbsp; </TD>
<TD colspan=2 nowrap> <center> <B><FONT size=2 face="serif">December 31, 2000</FONT></B> </center> </TD> </TR>
<TR>
<TD> <hr noshade align="left" width="90%" size="1"> </TD>
<TD colspan="2"> <hr noshade align="left" width="95%" size="1"> </TD>
<TD colspan="3"> <hr noshade align="center" width="98%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="center" width="98%" size="1"> </TD>
<TD>&nbsp;&nbsp;&nbsp;</TD>
<TD colspan=2> <hr noshade align="left" width="100%" size="1"> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Bank of China (1)</FONT></TD>
<TD colspan=2 nowrap><FONT size=2 face="serif">From 5.56% to 5.85%</FONT></TD>
<TD nowrap>&nbsp;&nbsp;&nbsp;</TD>
<TD colspan=2 nowrap><FONT size=2 face="serif">From 09/01 to 03/02</FONT></TD>
<TD>&nbsp;&nbsp;&nbsp;</TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">28,916</font></div> </TD>
<TD>&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">28,916</font></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">China Merchants Bank (2)</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">6.44%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">03/02</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">6,024</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">3,614</FONT></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Commercial Bank of Hangzhou (3)</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">6.21%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">06/10</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">12,048</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">12,048</FONT></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Industrial &amp; Commercial Bank of</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">China</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">5.85%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">05/01</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right">-</div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">6,024</FONT></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">China Construction Bank (4)</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">6.44%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">06/02</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">4,819</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">4,819</FONT></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">CITIC Industrial Bank (5)</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">6.14%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">05/02</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">6,024</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right">-</div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">CITIC Industrial Bank (6)</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">5.57%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">03/03</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right">-</div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right">-</div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">China Everbright Bank (7)</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">5.85%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">06/02</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">6,024</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right">-</div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Shanghai PuDong Development Bank (8)&nbsp;&nbsp;&nbsp;</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">5.56%</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">09/01</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">6,024</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right">-</div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Other</FONT></TD>
<TD colspan="2"><FONT size=2 face="serif">Various</FONT></TD>
<TD>&nbsp;</TD>
<TD colspan=2><FONT size=2 face="serif">Various</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">3</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">8</FONT></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="left" width="80%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="left" width="80%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp; </TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Total debt</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">69,882</font></div> </TD>
<TD>&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">55,429</font></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Long-term debt</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">12,048</FONT></div> </TD>
<TD>&nbsp; </TD>
<TD>&nbsp; </TD>
<TD> <div align="right"><FONT size=2 face="serif">12,048</FONT></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp; </TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD> </TR>
<TR>
<TD nowrap>&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Short-term debt</FONT></TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">57,834</font></div> </TD>
<TD>&nbsp; </TD>
<TD> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD> <div align="right"><font size=2 face="serif">43,381</font></div> </TD> </TR>
<TR>
<TD nowrap>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp; </TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD> </TR> </TABLE> <P> <FONT size=2 face="serif">______________ </FONT></P> <P> <FONT size=2 face="serif">(1) Guaranteed by the Company and the minority shareholder of HUTS. This
represents drawings on the Company's line of credit with the bank. This line allows for borrowings of up to $162,651. </FONT></P> <P> <FONT size=2 face="serif">(2) Guaranteed by HUTS. This line allows for borrowings of up to $6,024 and matures in
March 2002.</FONT></P> <P> <FONT size=2 face="serif">(3) Guaranteed by UTStarcom-China. This line allows for borrowings of up to $24,096 and matures in June 2010. </FONT></P> <P> <FONT size=2 face="serif">(4) Guaranteed by HUTS. This line allows for
borrowings of up to $4,819 and matures in June 2002. </FONT></P> <P> <FONT size=2 face="serif">(5) Guaranteed by HUTS. This line allows for borrowings of up to $6,024 and matures in May 2002. </FONT></P> <P> <FONT size=2 face="serif">(6) Guaranteed
by UTStarcom-China. This line allows for borrowings of up to $12,048 and matures in March 2003. </FONT></P> <P> <FONT size=2 face="serif">(7) Guaranteed by HUTS. This line allows for borrowings of up to $6,024 and matures in June 2002. </FONT></P>
<P> <FONT size=2 face="serif">(8) Guaranteed by UTStarcom-China. This line allows for borrowings of up to $19,277 and matures in September 2001. </FONT></P> <P> <FONT size=2 face="serif"><b>10. ACQUISITIONS (in thousands):</b></FONT></P> <P><FONT
size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On July 24, 2000, the Company entered into an agreement with Stable Gain International Ltd. (&#147;Stable Gain&#148;) to purchase intellectual property and certain related fixed assets, and to
transfer development employees to the Company for $10,700. The terms of the purchase agreement provide that the Company was to pay Stable Gain consideration of $10,700 in the form of common stock of the Company. The transfer of the common stock was
completed during the second quarter of fiscal 2001. On August 18, 2000, the Company entered into a separate agreement to purchase certain related fixed assets for a total consideration of $319. The total purchase consideration of $11,019 was
allocated to property and equipment, intangible assets and goodwill under the purchase method of accounting. Goodwill totaling $7,449 was recorded on acquisition.</FONT></P> <P align="center"> <FONT size=2 face="monospace">9</FONT></P>

<A name="page_10"></A> <P>&nbsp; </P> <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>The following represents the allocation of the purchase price for Stable Gain:</FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD width="88%"><FONT size=2 face="serif">Fair value of tangible net assets acquired</FONT></TD>
<TD width="3%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">2,430</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="88%"><FONT size=2 face="serif">Fair value of identified intangible assets</FONT></TD>
<TD width="3%"> <div align="left"></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">1,140</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="88%"><FONT size=2 face="serif">Excess of costs of acquiring Stable Gain</FONT></TD>
<TD colspan="2">&nbsp; </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="88%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">over fair value of identified net assets acquired (goodwill)</FONT></TD>
<TD width="3%"> <div align="left"></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">7,449</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="88%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="88%">&nbsp;</TD>
<TD width="3%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="7%"> <div align="right"><FONT size=2 face="serif">11,019</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="88%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD width="2%">&nbsp;</TD> </TR> </TABLE> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The Company, as part of its business operations in China, formed NST, a joint venture company with Zhejiang Nan Tian, and acquired a 65% ownership
interest. On February 5, 2001, the Company entered into an agreement to acquire the remaining 35% ownership in the joint venture company for a total consideration of $1,335 payable in cash. The purchase price was allocated to property and equipment
and goodwill under the purchase method of accounting. Goodwill totaling $619 was recorded on acquisition. The obligation in respect of the purchase consideration of $1,335 was paid during the second quarter of fiscal 2001. </FONT></P> <P> <FONT
size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>The following represents the allocation of the purchase price for NST: </FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD width="90%"><FONT size=2 face="serif">Fair value of tangible net assets acquired</FONT></TD>
<TD width="2%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="6%"> <div align="right"><FONT size=2 face="serif">716</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="90%"><FONT size=2 face="serif">Excess of costs of acquiring NST</FONT></TD>
<TD width="2%"> <div align="left"></div> </TD>
<TD width="6%"> <div align="right"></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="90%">&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">over fair value of identified net assets acquired (goodwill)</FONT></TD>
<TD width="2%"> <div align="left"></div> </TD>
<TD width="6%"> <div align="right"><FONT size=2 face="serif">619</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="90%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="90%">&nbsp;</TD>
<TD width="2%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="6%"> <div align="right"><FONT size=2 face="serif">1,335</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD width="90%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD width="2%">&nbsp;</TD> </TR> </TABLE> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Had the acquisitions of Stable Gain and NST occurred on January 1, 2001, proforma net income for the six months ended June 30, 2001 would have been
$21,065 or $0.22 per share basic, $0.20 per share fully diluted. There was no impact on proforma revenues or net income for the three months ended June 30, 2001. Proforma adjustments have been added to record the amortization of fixed assets,
goodwill and other intangible assets as if the transaction occurred on January 1, 2001.</FONT></P> <p><font face="serif" size="2"><b>11. </b></font><B><FONT size=2 face="serif">LONG TERM INVESTMENTS:</FONT></B></p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font><FONT size=2 face="serif">As of June 30, 2001, the Company had invested $10.0 million in Softbank China, the (&#147;fund&#148;), an investment fund established</FONT> <FONT size=2
face="serif">by SOFTBANK CORP. focused on investments in Internet companies in China. SOFTBANK CORP. and its related companies are significant stockholders of the Company. The Company&#146;s investment constitutes 10% of the funding for Softbank
China, with SOFTBANK CORP. contributing the remaining 90%. The Company is a passive investor and has no decision-making authority with respect to investments by the fund. The fund has a separate management team, and none of our employees is employed
by the fund. One of our directors serves as the Chief Executive Officer of the fund, and our Chief Executive Officer is the chairman of the board of the fund. The Company is not obligated to pay, nor receive, any fees in connection with services
provided to the fund. Many of the fund&#146;s investments are and will be in privately held companies, many of which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the
technologies or products the companies have under development are typically in these early stages and may never materialize. During the three months ended March 31, 2001, based upon a review of the carrying value of this investment, an impairment
charge of $1.0 million was recognized to provide for the decline in the fair value below the carrying value of this investment. During the three months ended June 30, 2001, the Company recognized an additional impairment charge of $0.2 million to
provide for the decline in the fair value below the carrying value of this investment. Due to the risky nature of these investments, the Company may experience further losses in connection with this investment in Softbank China. </FONT><b><font
size=2 face="serif"> </font></b></p> <p><b><font size=2 face="serif">12. SEGMENT REPORTING (in thousands):</font></b></p> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font> <font size=2 face="serif">The Company provides
communications equipment through an integrated suite of network access systems, optical transmission</font> <font size=2 face="serif">products and subscriber terminal products. The Company primarily operates in two geographic areas, China and Other
regions. Substantially all the Company's revenues are attributable from China. The chief operating decision makers evaluate performance, make operating decisions, and allocate resources based on consolidated financial data. Gross profit, operating
income, income from operations, and income taxes are not allocated to specific individual departments within the organization. In accordance with SFAS No. 131 &#147;Disclosures about Segments of an Enterprise and Related Information&#148;, the
Company is considered a single reportable segment. We are required to disclose certain information about our product revenues, information about geographic areas, information about our major customers, and information about long-lived assets.
Revenues from NingBo PTB accounted for 18.0% and revenues from Jiaxing PTB accounted for 12.0% of consolidated revenues during the three months ended June 30, 2001. Revenues from </font></p> <P align="center"> <FONT size=2
face="monospace">10</FONT></P>
 <P> <FONT size=2 face="serif">Hangzhou PTB accounted for 17.1% and revenues from Baoding PTB accounted for 11.5% of consolidated revenues during the three months ended June 30, 2000. No customer accounted for 10% or
more of consolidated revenues during the six months ended June 30, 2001. Revenues from Hangzhou PTB accounted for 26.6% of consolidated revenues during the six months ended June 30, 2000. Corporate assets consist of cash and cash equivalents, short-
and long-term investments and deferred tax assets. As of June 30, 2001, $398,676 or approximately 90.8% of non-corporate assets were located in China and $40,359 or 9.2% of non-corporate assets were located in the United States. Corporate assets at
June 30, 2001 were $301,661. As of December 31, 2000, $283,909 or approximately 90.4% of non-corporate assets were located in China and $29,951 or 9.5% of non-corporate assets were located in the United States. Corporate assets at December 31, 2000
were $277,931.</FONT></P> <P> <FONT size=2 face="serif">Geographical area data and product data are as follows (in thousands): </FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD>&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">Three Months Ended</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">Three Months Ended</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="8"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan="8"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan=2 width="13%"> <center> <FONT size=2 face="serif">Communications</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Subscriber</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%"> <center> <FONT size=2 face="serif">Total</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="13%"> <center> <FONT size=2 face="serif">Communications</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Subscriber</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%"> <center> <FONT size=2 face="serif">Total</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <center> <FONT size=2 face="serif">Equipment</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Handsets</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%"> <center> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%"> <center> </center> </TD>
<TD width="12%"> <center> <FONT size=2 face="serif">Equipment</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Handsets</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan=2> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Net Sales:</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD width="12%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="12%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">China</FONT></TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">88,534</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">50,695</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">139,229</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">50,940</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">23,796</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">74,736</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Other</FONT></TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">669</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">149</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">818</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">940</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="8%"> <div align="right">-</div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">940</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Total Net Sales</FONT></TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">89,203</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">50,844</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">140,047</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">51,880</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">23,796</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">75,676</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">Six Months Ended</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">Six Months Ended</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">June 30, 2001</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="8"> <center> <B><FONT size=2 face="serif">June 30, 2000</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="8"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD>
<TD colspan="8"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD>&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan=2 width="13%"> <center> <FONT size=2 face="serif">Communications</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Subscriber</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%"> <center> <FONT size=2 face="serif">Total</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="13%"> <center> <FONT size=2 face="serif">Communications</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Subscriber</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <center> <FONT size=2 face="serif">Total</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <center> <FONT size=2 face="serif">Equipment</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Handsets</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%"> <center> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <center> </center> <center> <FONT size=2 face="serif">Equipment</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan=2 width="9%"> <center> <FONT size=2 face="serif">Handsets</FONT> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2">&nbsp;</TD>
<TD width="2%">&nbsp;</TD> </TR>
<tr>
<td>&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td>&nbsp;</td>
<td colspan=2> <hr noshade align="right" width="100%" size="1"> </td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td> <hr noshade align="right" width="100%" size="1"> </td>
<td>&nbsp;</td>
<td colspan="2"> <hr noshade align="right" width="100%" size="1"> </td>
<td>&nbsp;</td>
<td colspan=2> <hr noshade align="right" width="100%" size="1"> </td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td> <hr noshade align="right" width="100%" size="1"> </td>
<td>&nbsp;</td> </tr>
<TR>
<TD><FONT size=2 face="serif">Net Sales:</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD width="12%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="12%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="8%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD width="9%">&nbsp;</TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">China</FONT></TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">172,577</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">84,119</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">256,696</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">93,880</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">39,031</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">132,911</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Other</FONT></TD>
<TD width="1%"> <div align="right"></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">2,383</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">149</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">2,532</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">1,352</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="8%"> <div align="right">-</div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">1,352</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD> <div align="right"></div> </TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Total Net Sales</FONT></TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">174,960</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">84,268</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">259,228</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="12%"> <div align="right"><FONT size=2 face="serif">95,232</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="8%"> <div align="right"><FONT size=2 face="serif">39,031</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="9%"> <div align="right"><FONT size=2 face="serif">134,263</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD>&nbsp;</TD> </TR> </TABLE> <P> <FONT size=2 face="serif">Revenue attributable to North America was insignificant during the three and six months ended June 30, 2001, and during the three and six months ended June 30, 2000.</FONT></P> <P> <FONT
size=2 face="serif"> Long-lived assets are as follows (in thousands):</FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD>&nbsp;</TD>
<TD colspan=2> <center> <B><FONT size=2 face="serif">June 30,</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <center> <B><FONT size=2 face="serif">December 31,</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <center> <B><FONT size=2 face="serif">2001</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <center> <B><FONT size=2 face="serif">2000</FONT></B> </center> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">China</FONT></TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">30,860</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">17,855</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">U.S.</FONT></TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">26,963</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">24,382</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD colspan="2"> <hr noshade align="left" width="100%" size="1"> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Total long-lived assets</FONT></TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">57,823</FONT></div> </TD>
<TD width="2%"> <div align="right"></div> </TD>
<TD width="1%"> <div align="left"><FONT size=2 face="serif">$</FONT></div> </TD>
<TD width="10%"> <div align="right"><FONT size=2 face="serif">42,237</FONT></div> </TD>
<TD width="2%">&nbsp;</TD> </TR>
<TR>
<TD>&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD width="2%">&nbsp;</TD>
<TD colspan="2"> <hr noshade align="right" width="100%" size="2"> </TD>
<TD width="2%">&nbsp;</TD> </TR> </TABLE> <p><B><FONT size=2 face="serif">13. RECENT ACCOUNTING PRONOUNCEMENTS:</FONT></B> </p> <p><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives and</FONT> <FONT size=2 face="serif">Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on January 1, 2001, and the adoption had no impact on our financial statements. </FONT></p> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P> <P align="center"> <FONT size=2 face="monospace">11</FONT></P>
 <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In September 2000, the FASB issued SFAS No. 140 &#147;Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,&#148;
which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires entities that have securitized financial assets to provide specific disclosures. SFAS 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption had no impact on our financial statements. </FONT></P> <p> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July 2001, the
FASB issued Statement of Financial Accounting Standard No. 141 (FAS 141) &#147;Business Combinations&#148;, and Statement of Financial Accounting Standard No. 142 (FAS 142), &#147;Goodwill and Other Intangible Assets&#148;. FAS 141 requires that the
purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. FAS 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and
reported apart from goodwill. FAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but </font><FONT size=2 face="serif">instead tested for impairment at least annually. FAS 142 also requires that
intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FAS 121, &#147;Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of&#148;.</FONT></p> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">FAS 141 is effective immediately, except with regard to business combinations that were
initiated prior to July 1, 2001, which the Company expects to account for using the purchase method of accounting. FAS 142 will be effective for fiscal years beginning after December 15, 2001, and will be adopted by the Company on January 1, 2002.
The Company expects the adoption of these accounting standards will have the impact of reducing amortization of goodwill and intangibles commencing January 1, 2002; however, impairment reviews may result in future periodic write-downs. FAS 142 will
also require the Company to perform an assessment within six months of the date of adoption, to determine whether there is an impairment of transitional goodwill. Any such transitional impairment loss will be recognized as a change in accounting
principle in the consolidated statement of operations. The Company has not yet made a final determination as to the impact of this assessment of transitional goodwill on the consolidated statement of operations or consolidated balance sheet.
</FONT></P> <p><B><FONT size=2 face="serif">14. SUBSEQUENT EVENT:</FONT></B></p> <p><font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On August 3, 2001, the Company completed a follow on public offering and sold an aggregate of 7,400,000
shares of </font><FONT size=2 face="serif">common stock, which included the underwriters&#146; over-allotment, at a price to the public of $20.00 per share. Selling stockholders sold an additional 2,950,000 shares of common stock in the offering.
The aggregate net proceeds that the Company received was approximately $139.7 million, after deducting underwriting discounts and commissions of approximately $7.3 million and expenses of the offering of approximately $1.0 million..</FONT></p>
<p><B><FONT size=2 face="serif">15. COUNTRY RISKS:</FONT></B></p> <p>&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Almost 99% of the Company&#146;s sales for the three and six months ended June 30, 2001 were made in China. Accordingly, the
</FONT><FONT size=2 face="serif">Company&#146;s business, financial condition and results of operations may be influenced by the political, economic and legal environment in China, and by the general state of China's economy. The Company&#146;s
operations in China are subject to special considerations and significant risks not typically associated with companies in the United States. These include risks associated with, among others, the political, economic and legal environments and
foreign currency exchange. The Company&#146;s results may be adversely affected by, among other things, changes in the political, economic and social conditions in China, and by changes in governmental policies with respect to laws and regulations,
changes in China's telecommunications industry and regulatory rules and policies, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation. </FONT></p> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2
face="serif">Beginning in January 1, 1999, China's government required that all manufacturers of telecommunications equipment connected to public or private telecommunications networks within China obtain a network access license for each of its
products. Sellers are prohibited from selling or advertising for sale equipment for which its manufacturer has not obtained a network access license and may be liable for penalties in an amount up to three times earnings from the sale of any
equipment sold beginning January </FONT><FONT size=2 face="serif">1, 1999 without a license. Failure to obtain the required licenses could permit the authorities to force the Company to remove previously installed equipment and could preclude the
Company from making further sales of the unlicensed products in China, which would substantially harm the Company's business.</FONT></P> <P><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>In June 2000, the
Ministry of Information Industry issued an internal notice concluding its review of PHS-based equipment. The Company&#146;s PAS system will continue to be allowed in China&#146;s county-level cities and counties, which are the Company&#146;s primary
markets for the Company&#146;s PAS system. In large and medium-sized cities, the Company&#146;s PAS system may be used on a limited basis where there is a high concentration of population, such as campuses, commercial buildings and special
development zones. New citywide PAS system deployments will not be allowed in large and medium-size cities. The evaluation group for access networks under the Ministry of </FONT></P> <P align="center"> <FONT size=2 face="monospace">12</FONT></P>
 <p><font size=2 face="serif">Information Industry has recommended that the Ministry of Information Industry issue a license for the Company&#146;s PAS system. However, the Company does not yet have this network access
license and the Company cannot provide any assurance that such a license will be issued for the Company&#146;s PAS system. In addition, there is no assurance that the Ministry of Information Industry will not conduct any further review/evaluation of
PHS-based equipment or change its order regarding PHS-based system in the future. Management has also applied for network access licenses for other products, which the Company is no longer manufacturing but had previously sold. However, the Company
has not yet received these access licenses and has no any assurance that a license will be issued. Management believes that no penalties or fines will be payable for non-compliance with the licensing requirements for both the PAS system and other
products and that there will be no adverse effect on the Company's business or financial condition. </font></p> <P> <B><FONT size=2 face="serif">
<a name="352tx6"></a>ITEM 2 &#150; MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF </FONT></B><B><FONT size=2 face="serif">OPERATIONS </FONT></B></P> <P> <B><FONT size=2 face="serif">FORWARD-LOOKING STATEMENTS
</FONT></B></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements are based
on information that is currently available to management. We intend such forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes
of complying with those provisions. The forward-looking statements include those concerning the following: our expectation regarding continued growth in our business and operations; our expectation that our PAS network access system will continue to
be allowed in China's county-level cities and counties; our expectation that there will be no penalties or fines for our non-compliance with the licensing requirements in China for our PAS system and other products; our expectation that there will
be fluctuations in our overall gross profit, gross margin, product mix and selling prices; our plans for expanding the direct sales organization and our selling and marketing campaigns and activities; our expectation that we may use part of the net
proceeds of the follow on public offering completed on August 3, 2001 to acquire or invest in complementary businesses, technologies or product offerings; our expectation that there will be increases in selling, marketing, research and development,
general and administrative expenses; our expectation that we will continue to invest significantly in research and development; our expectation that we will fill the majority of its current backlog orders; our expectation regarding our future
investments, particularly in Softbank China; and our expectation that existing cash and cash equivalents will be sufficient to finance our operations for at least the next 12 months. Additional forward-looking statements may be identified by the
words, "anticipate," "expect," "believe," "intend," "will" and similar expressions, as they relate to us or our management. Investors are cautioned that these forward-looking statements are inherently uncertain. These statements are subject to risks
and uncertainties that may cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the "Factors Affecting Future Operating Results" section of this Form 10-Q. We do not guarantee future
results and undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q. </FONT></P> <P> <B><FONT size=2 face="serif">OVERVIEW </FONT></B></P> <P> <FONT size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We design and market wireline and wireless broadband enabled access and switching equipment that supports migration to next generation IP-based networks. Our operations are conducted primarily by our
foreign subsidiaries that manufacture, distribute, and support our products, principally in China. Our systems and products allow service providers to offer efficient and expandable voice, data and Internet access services. Because our systems are
based on key international communications standards, service providers can easily integrate our systems into their existing networks and deploy our systems in new broadband, IP and wireless network rollouts. </FONT></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">On March 3, 2000, we sold 11,500,000 shares of common stock, which included the underwriters' over-allotment option, at $18.00 per share. The sale of the shares of common stock generated aggregate
gross proceeds of approximately $207.0 million. The aggregate net proceeds were approximately $189.4 million, after deducting underwriting discounts and commissions and related expenses. On August 3, 2001, we completed a follow on public offering
and sold an aggregate of 7,400,000 shares of common stock, which included the underwriters&#146; over-allotment, at a price to the public of $20.00 per share. Selling stockholders sold an additional 2,950,000 shares of common stock in the offering.
The aggregate net proceeds that we received was approximately $139.7 million, after deducting underwriting discounts and commissions of approximately $7.3 million and expenses of the offering of approximately $1.0 million. We intend to use these
proceeds for general corporate purposes, including research and development, expansion of our sales and marketing organization and working capital. A portion of the net proceeds may also be used to acquire or invest in complementary businesses,
technologies or product offerings; however, there are no current material agreements or commitments with respect to any such activities.</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We have only recently become profitable
and may not be able to remain profitable in future periods. As of June 30, 2001, we had retained earnings of $13.8 million. We anticipate continuing to incur significant sales and marketing, research and development and general and administrative
expenses, and, as a result, we will need to generate higher revenues to remain profitable. </FONT></P> <P> <FONT size=2 face="serif"> </FONT></P> <P align="center"> <FONT size=2 face="monospace">13</FONT></P>
 <p><font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have derived substantially all of our revenues from sales of communications equipment to service providers in China. Our customers often make a large
initial purchase of our equipment followed by supplemental purchases of enhancements and upgrades. As a result, our largest revenue-producing customers typically vary from period-to-period. The evaluation period for our products by potential
customers may span a year or more and our business generally depends on a relatively small number of deployments. We sell our products in China through a direct sales force.</font></p> <p> <font size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Approximately 99% of our sales for the three and six months ended June 30, 2001 were made in China. Accordingly, our business, financial condition and results of operations are likely to be influenced by the political,
economic and legal environment in China, by foreign currency exchange, and by the general state of China's economy. Our results may be adversely affected by, among other things,</font> <FONT size=2 face="serif">changes in the political, economic and
social conditions in China, and by changes in governmental policies with respect to laws and regulations, changes in China's telecommunications industry and regulatory rules and policies, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation.</FONT></p> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Remittances from China, which are of a capital nature such as the repayment of bank loans denominated in foreign
currencies, require approval from appropriate governmental authorities before Renminbi can be used to purchase foreign currency. Although the payment of cash dividends is permitted so long as our subsidiaries have sufficient reserves and adequate
amounts of Renminbi to purchase foreign currency, regulations restrict the ability of our subsidiaries to transfer funds to us through intercompany loans and advances.</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Additionally,
business activity in China declines considerably during the first quarter of each year in observance of the Lunar New Year. As a result, sales during the first quarter of our fiscal year have typically been lower than sales during the fourth quarter
of the preceding year, and we expect this trend to continue. We do not have the ability to forecast with any degree of certainty the impact of the decreased business activity during the Lunar New Year on our sales and operating results. </FONT></P>
<P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recognize revenue from equipment sales on delivery when contractual obligations are substantially complete, remaining obligations are inconsequential and perfunctory, and collection of
the resulting receivable is reasonably assured. We recognize revenue from equipment sales with installation requirements on final acceptance when contractual obligations are substantially complete, remaining obligations are inconsequential and
perfunctory, and collection of the resulting receivable is reasonably assured. Where multiple elements exist, revenue is allocated to the different elements based upon verifiable objective evidence and recognized on completion of the
element.</FONT></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">Revenue from equipment sales incorporating software not considered incidental to the product as a whole ("software sales") is recognized
when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Revenue from software sales in multiple element contracts is recognized using the residual method
when there is vendor specific objective evidence of the fair value of all undelivered elements in an arrangement but vendor specific objective evidence of fair value does not exist for one or more of the delivered elements in an arrangement. Under
the residual method, the total fair value of the undelivered elements, as indicated by vendor specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements regardless of any separate prices stated within the contract for each element. If the fee due from the customer is not fixed or determinable due to extended payment terms, revenue is recognized
as payments become due from the customer. If collection is not considered probable, revenue is recognized when the fee is collected. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of sales consists primarily of
material costs, third party commissions, costs associated with manufacturing, assembly and testing of products, costs associated with installation and customer training and overhead and warranty costs. Cost of sales also includes import taxes on
components and assemblies. In particular, China imposed an additional tariff in June 2001 on handsets and handset assemblies imported into China from Japan, which may lead to an increase in our cost of sales, at least in the short term. Some
components and materials used in our products are purchased from a single supplier or a limited group of suppliers and, in some cases, are subject to our obtaining Chinese import permits and approvals. We also rely on third party manufacturers in
China to manufacture and assemble most of our handsets. </FONT></P> <P> <FONT face="serif"> </FONT><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our gross profit has been affected by material costs, product mix and average selling prices.
Our gross profit, as a percentage of net sales, varies among our product families. The gross profit, as a percentage of net sales, on our mobile phone handsets is very low compared to our other products. We expect that our overall gross profit, as a
percentage of net sales, will fluctuate from period to period as a result of shifts in product mix, anticipated decreases in average selling prices and our ability to reduce cost of sales. As a result of a growth in sales of lower margin handsets
over the past few quarters, we have experienced a decline in overall gross profit, as a percentage of net sales. We are likely to continue to experience downward pressure on our gross profit, as a percentage of net sales.</FONT></P> <P> <FONT size=2
face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selling, general and administrative expenses include compensation and benefits, professional fees, sales commissions, provision for uncollectible accounts receivable and travel and entertainment costs. A
large percentage of our costs are fixed and are difficult to quickly reduce in periods of reduced sales. We intend to pursue aggressive selling and marketing campaigns and to expand our direct </FONT></P> <P align="center"> <FONT size=2
face="monospace">14</FONT></P>
 <p><font size=2 face="serif">sales organization and, as a result, our sales and marketing expenses will increase in future periods. We also expect that in support of our continued growth, general and administrative
expenses will continue to increase for the foreseeable future.</font></p> <p> <font size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and development expenses consist primarily of salaries and related costs of employees engaged in
research, design and development activities, the cost of parts for prototypes, equipment depreciation and third party development expenses. A large percentage of our costs are fixed and are difficult to quickly reduce in periods of reduced sales. We
believe that continued investment in research and development is critical to our long-term success. Accordingly, we expect that our research and development expenses will increase in future periods.</font></p> <p> <font size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net deferred stock compensation represents the difference between the fair value of common stock and the option exercise </font><FONT size=2 face="serif">price for the options at the date of grant. Deferred compensation
is presented as a reduction of stockholders' equity, with amortization recorded over the vesting period of the option, which is generally four years. In connection with the grant of stock options to our employees, we recorded no net deferred stock
compensation during the three and six months ended June 30, 2001. The Company recorded net deferred stock compensation of $0.0 million and $2.9 million during the three and six months ended June 30, 2000 respectively, representing the difference
between the fair value of common stock and the option exercise price for these options at the date of grant. We recorded stock compensation expense of approximately $1.0 million and $2.3 million during the three and six months ended June 30, 2001,
respectively, and $1.9 million and $8.3 million during the three and six months ended June 30, 2000, respectively. At June 30, 2001, approximately $4.0 million remained to be amortized.</FONT></p> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We employ a number of U.S. citizens who work on a full-time basis in China. These expatriate employees participate in our stock option plans and have exercised a number of options granted under the plans. The option
exercises generated income that may be subject to personal income taxes under China's income tax laws. We have withheld U.S. taxes in connection with these option exercises, but did not withhold China income taxes on the option exercises, and the
employees have not yet paid any taxes in China that may be due. Should the employees be liable for and fail to pay the China income taxes, we may be liable for such taxes in our capacity as withholding agent. In addition, our failure to collect and
remit China withholding tax may also subject us to penalties. In the event that it is determined that taxes are due in China, we will apply for a refund from the U.S. tax authorities corresponding to the amount over- withheld in the U.S. due to the
foreign tax credit.</FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortization of intangible assets consists primarily of the amortization of intangible assets associated with acquisitions in China, our acquisition of a
minority interest in Wacos, Inc. and our acquisition of Stable Gain International Ltd. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated equity in net income (loss) of affiliated companies comprises our share of
the earnings from our Guangdong manufacturing subsidiary, which is accounted for using the equity method, as we do not have voting control over all significant matters.</FONT></P> <P> <FONT face="serif"> </FONT><FONT size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under current regulations in China, foreign investment enterprises that have been accredited as technologically advanced enterprises are entitled to additional tax incentives. These tax incentives vary in
different locales and could include preferential national enterprise income tax treatment at 50% of the usual rates for different periods of time. All of our active subsidiaries in China were accredited as technologically advanced enterprises. The
tax holidays applicable to our two principal subsidiaries, UTStarcom China and Hangzhou UTStarcom, which together accounted for approximately 98.8% of our revenues in 2000, will expire at the end of 2002. At that time, the tax rates for these two
subsidiaries will increase from 7.5% to 15%, and from 10% to 15%, respectively, which will negatively impact our financial condition and results of operations by increasing our tax rate.</FONT></P> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Minority interest in (earnings) loss of consolidated subsidiaries represents the share of earnings in our Zhejiang manufacturing joint venture that is owned by our joint venture partner.</FONT></P> <P> <B><FONT size=2
face="serif">RECENT DEVELOPMENTS </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">On July 24, 2000, we entered into an agreement with Stable Gain to purchase intellectual property and related fixed assets, and to transfer
development employees to us for consideration of $10.7 million in the form of common stock, provided certain government approvals and other deliverables were obtained within 12 months. The final approvals were obtained in March 2001, and the
transfer of the common stock was completed in the second quarter of fiscal 2001. On August 18, 2000, we entered into a separate agreement to purchase additional related fixed assets from Stable Gain for a total consideration of $0.3 million. The
total purchase consideration of $11.0 million was allocated to property and equipment, intangible assets and goodwill under the purchase method of accounting. Goodwill totaling $7.4 million was recorded at the time of the acquisition of the assets.
</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">As part of our business operations in China, we formed a joint venture company named Hangzhou Nantian Starcom Telecommunication Equipment Ltd. with Zhejiang Nan Tian and acquired a
65% holding in the venture in February 1996. On February 5, 2001, we entered into an agreement to acquire the remaining 35% ownership in the joint venture company for a total </FONT></P> <P align="center"> <FONT size=2 face="monospace">15</FONT></P>
 <p><font size=2 face="serif">consideration of $1.3 million payable in cash. The purchase price was allocated to property and equipment and goodwill under the purchase method of accounting. Goodwill totaling $0.6
million was recorded at the time of acquisition. The total purchase consideration of $1.3 million was paid during the second quarter of fiscal 2001. </font></p> <p> <font size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On August 3, 2001, we
completed a follow on public offering and sold an aggregate of 7,400,000 shares of common stock, which included the underwriters&#146; over-allotment option of 1,350,000 shares, at a price to the public of $20.00 per share. Selling stockholders sold
an additional 2,950,000 shares of common stock in the offering. The aggregate net proceeds that we received was approximately $139.7 million, after deducting underwriting discounts and commissions of approximately $7.3 million and expenses of the
offering of approximately $1.0 million. </font></p> <p>&nbsp; </p> <P> <B><FONT size=2 face="serif">RESULTS OF OPERATIONS </FONT></B></P> <P> <B><FONT size=2 face="serif">THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 </FONT></B></P> <P> <FONT
size=2 face="serif">NET INCOME</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">For the three months ended June 30, 2001 we reported net income of $12.3 million as compared to net income of $5.0 million for the three months
ended June 30, 2000.</FONT></P> <P> <FONT size=2 face="serif">NET SALES</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our net sales increased 85% to $140.0 million for the three months ended June 30, 2001 from $75.7 million
for the corresponding period in 2000. Sales of communications equipment for the three months ended June 30, 2001 were $89.2 million, an increase of $37.3 million or 72%, as compared to the three months ended June 30, 2000. Sales of subscriber
handsets for the three months ended were $50.8 million, an increase of $27.0 million or 114%, as compared to the three months ended June 30, 2000. Sales of communications equipment and sales of subscriber handsets increased due to the continued
growth in spending on telecommunications infrastructure in China, as China continues to modernize its telecommunications infrastructure. For the three months ended June 30, 2001, sales to NingBo PTB accounted for 18% of our net sales and sales to
Jiaxing PTB accounted for 12% of our net sales. For the three months ended June 30, 2000, sales to Hangzhou PTB accounted for 17.1% and revenues from Baoding PTB accounted for 11.5% of our net sales.</FONT></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Effective January 1, 2000, we adopted Staff Accounting Bulletin 101 (&#147;SAB 101") issued by the Securities and Exchange Commission in December 1999. In light of the guidance issued in SAB
101, we changed our method of recognizing revenue in some contracts. We previously recognized revenue as contract stages were completed and accepted. We now recognize revenue upon final acceptance of the contract. In addition, some of our contracts
include service requirements for which revenue was previously recognized, and costs accrued, on contractual acceptance. In consideration of SAB 101, revenues associated with these service requirements are being deferred until the service obligations
are completed. We recorded a cumulative adjustment in the first quarter of fiscal 2000 of $1.0 million. No revenue was recognized in the three and six months ended June 30, 2001 that was included in the cumulative effect of change in accounting
principle. The combined impact of the cumulative adjustment and the retroactive adjustment resulted in a reduction in net income of $286 or $0.01 per share basic and diluted for the three months ended June 30, 2000. The combined impact of the
cumulative adjustment and the retroactive adjustment resulted in a reduction in net income of $1.2 million for the six months ended June 30, 2000, or $0.02 per share basic, $0.01 per share fully diluted.</FONT></P> <P> <FONT size=2 face="serif">
GROSS PROFIT </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Gross profit increased 83% to $49.9 million for the three months ended June 30, 2001 from $27.3 million for the corresponding period in 2000. Gross profit, as a
percentage of net sales, remained constant at 36% for the three months ended June 30, 2001 and for the three months ended June 30, 2000. Gross profit, as a percentage of net sales, remained constant primarily due to increasing margins on our lower
margin handset sales, which comprised 36.3% of sales for the three months ended June 30, 2001 compared to 31.4% for the corresponding period in 2000.</FONT></P> <P> <FONT size=2 face="serif">SELLING, GENERAL AND ADMINISTRATIVE </FONT></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Selling, general and administrative expenses increased 72% to $18.8 million for the three months ended June 30, 2001 from $10.9 million for the corresponding period in 2000. The increase in
selling, general and administrative expenses was primarily due to increased sales and administrative personnel and related expenses, including sales commissions, associated with the growth in net sales and the expansion of our overall level of
business activities. Selling, general and administrative expenses as a percentage of net sales decreased to 13% for the three months ended June 30, 2001 from 14% for the corresponding period in 2000. The decrease in selling, general and
administrative expenses as a percentage of net sales were primarily due to economies of scale associated with the significant increases in net sales. We expect our selling, general and administrative expenses to increase in absolute dollar amounts
in future periods as sales and marketing activities increase and we further invest in infrastructure and incur additional expenses related to anticipated growth of our business and operation as a publicly held company.</FONT></P> <P>&nbsp; </P> <P
align="center"> <FONT size=2 face="monospace">16</FONT></P>
 <p><font size=2 face="serif">RESEARCH AND DEVELOPMENT </font></p> <p> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Research and development expenses increased 50% to $13.3 million for the three months ended
June 30, 2001 from $8.9 million for the corresponding period in 2000. The increase in research and development expenses was primarily due to the hiring of additional technical personnel, increased prototype expenses and licensing fees to support our
research and development efforts. As a percentage of net sales, research and development expenses decreased to 9% for the three months ended June 30, 2001 from 12% for the corresponding period in 2000, primarily due to the significant increases in
net sales. We expect our research and development expenses to increase in absolute dollar amounts in future periods as we expand our research and development organization to support new product development. </font></p> <p> <font size=2
face="serif">STOCK COMPENSATION EXPENSE</font></p> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Stock compensation expense decreased to $1.0 million for the three months ended June 30, 2001 from $1.9 million for the corresponding
period in 2000. The expense is related to certain stock option grants to employees and non-employees, which we are amortizing over the vesting periods of the applicable options.</FONT></p> <P> <FONT size=2 face="serif">AMORTIZATION OF INTANGIBLE
ASSETS </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Amortization of intangible assets was $2.0 million for the three months ended June 30, 2001 and $1.2 million for the three months ended June 30, 2000. The increase in
amortization of intangible assets was primarily due to the amortization of additional goodwill that was recognized upon the acquisition of Stable Gain during the first quarter of fiscal 2001.</FONT><B><FONT size=2 face="serif"> </FONT></B></P> <P>
<FONT size=2 face="serif">INTEREST INCOME (EXPENSES), NET </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Net interest income was $0.7 million for the three months ended June 30, 2001 and $2.7 million for the corresponding
period in 2000. The decrease was primarily due to a decline in interest rates during the period and an increase in cash balances held in non-interest bearing accounts.</FONT></P> <P> <FONT size=2 face="serif">OTHER INCOME (EXPENSES), NET </FONT></P>
<P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Other income net was $1.0 million for the three months ended June 30, 2001 and $0.3 million for the corresponding period in 2000. The increase was primarily due to a $0.5 million gain on
the sale of one of our investments. </FONT><B><FONT size=2 face="serif"> </FONT></B></P> <P> <FONT size=2 face="serif">EQUITY IN INCOME (LOSS) OF AFFILIATED COMPANIES </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2
face="serif">Consolidated equity in the net loss of affiliated companies was $(0.5) million for the three months ended June 30, 2001 and $(0.2) million for the corresponding period in 2000. The change between the two periods was primarily due to the
decrease in net income at our Guangdong manufacturing subsidiary. </FONT></P> <P> <FONT size=2 face="serif"> INCOME TAX EXPENSE </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Income tax expense was $4.0 million for the three
months ended June 30, 2001 and $3.8 million for the corresponding period in 2000. The increase in the income tax expense was due to our increasing income. The effective tax rate was 24.7% and 39.0% for the three months ended June 30, 2001 and 2000,
respectively. The future rate may vary due to a variety of factors, including but not limited to, the relevant income contribution by domestic and foreign operations, changes in statutory tax rates, the amount of tax exempt interest income generated
during the year, the ability to utilize foreign tax credits and non-deductible items relating to acquisitions or other non recurring charges. The Company will continue to monitor the effective tax rates on a quarterly basis.</FONT></P> <P> <FONT
size=2 face="serif">MINORITY INTEREST IN (EARNINGS) OF CONSOLIDATED SUBSIDIARIES </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif"> Minority interest in (earnings) of consolidated subsidiaries was $(0.8) million for the three
months ended June 30, 2001 and $(0.3) million for the corresponding period in 2000. The change between the two periods was primarily due to decreased profitability at our Zhejiang subsidiary. </FONT></P> <P> <B><FONT size=2 face="serif">SIX MONTHS
ENDED JUNE 30, 2001 AND JUNE 30, 2000 </FONT></B></P> <P> <FONT size=2 face="serif"> NET SALES </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our net sales increased 93% to $259.2 million for the six months ended June 30,
2001 from $134.3 million for the corresponding period in 2000. Sales of communications equipment for the six months ended June 30, 2001 were $175.0 million, an increase of $79.7 million or 84%, as compared to the six months ended June 30, 2000.
Sales of subscriber handsets for the six months ended were $84.3 million, an increase of $45.2 million or 116%, as compared to the six months ended June 30, 2000. Sales of communications equipment and sales of subscriber handsets increased due to
the continued growth in spending on telecommunications infrastructure in China, as China continues to modernize its telecommunications infrastructure.</FONT><B><FONT size=2 face="serif"> </FONT></B><FONT size=2 face="serif">For the six months ended
June 30, 2001, there was no customer that accounted for 10% or more of our net sales. For the six months ended June 30, 2000, sales to Hangzhou PTB accounted for 26.6% of our net sales.</FONT></P> <P> <FONT size=2 face="serif">GROSS PROFIT
</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif"> Gross profit increased 91% to $91.3 million for the six months ended June 30, 2001 from $47.9 million for the corresponding </FONT></P> <P align="center"> <FONT size=2
face="monospace">17</FONT></P>
 <p><font size=2 face="serif">period in 2000. Gross profit, as a percentage of net sales, decreased to 35% for the six months ended June 30, 2001 from 36% for the six months ended June 30, 2000. The decrease in gross
profit, as a percentage of net sales, was primarily due to increases in sales of lower margin handsets, the impact of which was offset by increasing handset margins during the six months ended June 30, 2001. Handset sales comprised 32.5% of sales
for the six months ended June 30, 2001 compared to 29.1% for the corresponding period in 2000.</font></p> <p> <font size=2 face="serif">SELLING, GENERAL AND ADMINISTRATIVE </font></p> <p> <font size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selling, general and administrative expenses increased 50% to $32.9 million for the six months ended June 30, 2001 from $22.0 million for the corresponding period in 2000. The increase in selling, general and
administrative expenses was primarily due to increased</font> <FONT size=2 face="serif">sales and administrative personnel and related expenses, including sales commissions, associated with the growth in net sales and the expansion of our overall
level of business activities. Selling, general and administrative expenses as a percentage of net sales decreased to 13% for the six months ended June 30, 2001 from 16% for the corresponding period in 2000. The decrease in selling, general and
administrative expenses as a percentage of net sales were primarily due to economies of scale associated with the significant increases in net sales. We expect our selling, general and administrative expenses to increase in absolute dollar amounts
in future periods as sales and marketing activities increase and we further invest in infrastructure and incur additional expenses related to anticipated growth of our business and operation as a publicly held company.</FONT></p> <P> <FONT size=2
face="serif">RESEARCH AND DEVELOPMENT </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and development expenses increased 30% to $25.7 million for the six months ended June 30, 2001 from $19.8 million for the
corresponding period in 2000. The increase in research and development expenses was primarily due to the hiring of additional technical personnel, increased prototype expenses and licensing fees to support our research and development efforts. As a
percentage of net sales, research and development expenses decreased to 10% for the six months ended June 30, 2001 from 15% for the corresponding period in 2000, primarily due to the significant increases in net sales. We expect our research and
development expenses to increase in absolute dollar amounts in future periods as we expand our research and development organization to support new product development. </FONT></P> <P> <FONT size=2 face="serif"> STOCK COMPENSATION EXPENSE</FONT></P>
<P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Stock compensation expense decreased to $2.3 million for the six months ended June 30, 2001 from $8.4 million for the corresponding period in 2000. The expense is related to certain stock
option grants to employees and non-employees, which we are amortizing over the vesting periods of the applicable options.</FONT></P> <P> <FONT size=2 face="serif">AMORTIZATION OF INTANGIBLE ASSETS</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT
size=2 face="serif">Amortization of intangible assets increased to $3.4 million for the six months ended June 30, 2001 from $2.4 million for the corresponding period in 2000. The increase in amortization of intangible assets was due to the increase
in amortization associated with our December 1999 acquisition of the portion of our Wacos, Inc. subsidiary owned by the minority shareholders, and the amortization of additional goodwill that was recognized upon the acquisition of Stable Gain during
the first quarter of fiscal 2001. </FONT></P> <P> <FONT size=2 face="serif">INTEREST INCOME (EXPENSES), NET</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Net interest income was $2.2 million for the six months ended June 30,
2001 and net interest income was $3.3 million for the corresponding period in 2000. The decrease in interest income was primarily due to a decline in interest rates during the period and an increase in cash balances held in non-interest bearing
accounts.</FONT></P> <P> <FONT size=2 face="serif"> OTHER INCOME (EXPENSES) NET </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Other expense net was $(0.04) million for the six months ended June 30, 2001 and other income net
was $0.5 million for the corresponding period in 2000. The decrease in other income was primarily due to an impairment charge of $1.2 million relating to our investment in the Softbank China fund, based upon a review of the carrying value of this
long-term investment.</FONT></P> <P> <FONT size=2 face="serif">EQUITY IN INCOME (LOSS) OF AFFILIATED COMPANIES</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Consolidated equity in net loss of affiliated companies was $(0.7)
million for the six months ended June 30, 2001 and consolidated equity in net loss of affiliated companies was $(0.5) million for the corresponding period in 2000. The change between the two periods was primarily due to the decrease of net income at
our Guangdong manufacturing subsidiary. </FONT></P> <P> <FONT size=2 face="serif">INCOME TAX EXPENSE </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif"> Income tax expense was $7.7 million for the six months ended June 30, 2001
and income tax expense was $4.7 million for the corresponding period in 2000. The increase in the income tax expenses was due to our increasing income. The effective tax rate was 24.7% and 54.0% for the six months ended June 30, 2001 and 2000,
respectively. The future rate may vary due to a variety of factors, including but not limited to, the relevant income contribution by domestic and foreign operations, changes in statutory tax rates, the amount of tax exempt interest income generated
during the year, the ability to utilize foreign tax credits and non-deductible items relating to acquisitions or other non recurring charges. The Company will continue to monitor the effective tax rates on a quarterly basis.</FONT></P> <P>&nbsp;
</P> <P align="center"> <FONT size=2 face="monospace">18</FONT></P>
 <p><font size=2 face="serif">MINORITY INTEREST IN INCOME (LOSS) OF CONSOLIDATED SUBSIDIARIES </font></p> <p><font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>Minority interest in
net loss of consolidated subsidiaries was $(1.4) million for the six months ended June 30, 2001 and $(0.5) million for the corresponding period in 2000. The change between the two periods was primarily due to the decreased profitability at our
Zhejiang subsidiary.</font></p> <p> <b><font size=2 face="serif">LIQUIDITY AND CAPITAL RESOURCES </font></b></p> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Prior to our initial public offering we financed our operations through the
sales of preferred stock and, to a lesser extent, bank lines of credit. In November and December 1999, we secured private equity financing totaling $55.0 million. In March 2000, we raised $189.4 million in net proceeds from our initial public
offering. On August 3, 2001, we completed a follow on public offering and sold an aggregate of 7,400,000 shares of common stock, which included the underwriters&#146; over allotment, at a price to the public of $20.00 per share. Selling stockholders
sold an additional 2,950,000 shares of common stock in the offering. The aggregate net proceeds that we received was approximately $139.7 million, after deducting underwriting discounts and commissions of approximately $7.3 million and expenses of
the offering of approximately $1.0 million. </FONT></p> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We have available lines of credit totaling $241.0 million as of June 30, 2001. As of June 30, 2001, total borrowings were $69.8
million under these lines of credit, and of this amount, $12.0 million is included in long-term debt. As of June 30, 2001, we had working capital of $400.6 million, including $217.7 million in cash and cash equivalents, $28.0 million of short- term
investments and $57.8 million of Renminbi-denominated bank borrowings. </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">As of June 30, 2001, we had invested $10.0 million in Softbank China, the (&#147;fund&#148;), an
investment fund established by SOFTBANK CORP. focused on investments in Internet companies in China. SOFTBANK CORP. and its related companies are significant stockholders of the Company. Our investment constitutes 10% of the funding for Softbank
China, with SOFTBANK CORP. contributing the remaining 90%. We are a passive investor and have no decision-making authority with respect to investments by the fund. The fund has a separate management team, and none of our employees is employed by the
fund. One of our directors serves as the Chief Executive Officer of the fund, and our Chief Executive Officer is the chairman of the board of the fund. We are not obligated to pay, nor do we receive, any fees in connection with services provided to
the fund. Many of the fund&#146;s investments are and will be in privately held companies, many of which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or
products the companies have under development are typically in these early stages and may never materialize. During the three months ended March 31, 2001, based upon a review of the carrying value of this investment, an impairment charge of $1.0
million was recognized to provide for the decline in the fair value below the carrying value of this investment. During the three months ended June 30, 2001, we recognized an additional impairment charge of $0.2 million to provide for the decline in
the fair value below the carrying value of this investment. Due to the risky nature of these investments, we may experience further losses in connection with this investment in Softbank China. </FONT><B><FONT size=2 face="serif"> </FONT></B></P> <P>
<FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>Net cash provided by operations for the six months ended June 30, 2001 was $8.2 million, was primarily due to an increase in net income for the period, and by
increases in deferred revenue, accounts payable and other current liabilities of $58.0 million, $26.1 million and $7.1 million respectively. The net cash provided was partially offset by increases in inventories, accounts receivable, other current
and non-current assets and income taxes payable of $65.1 million, $28.9 million, $29.3 million and $7.3 million respectively. Net cash provided was also offset by depreciation and amortization expense of $7.6 million, non-qualified stock option
exercise tax benefits of $7.7 million, amortization of deferred stock compensation expense of $2.3 million and a long-term investment impairment charge of $1.2 million. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font
size=2 face="serif"></font>Net cash provided by investing activities for the six months ended June 30, 2001 of $38.4 million was primarily due to sales and maturities of short-term investments of $55.9 million, offset by the acquisition of property,
plant and equipment of $11.2 million and investment in affiliates of $6.5 million. Proceeds from sales and maturities of short-term investments were used to finance working capital requirements. </FONT></P> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>Net cash provided by financing activities for the six months ended June 30, 2001 of $22.0 million was primarily due to net proceeds of $14.5 million from borrowing under our lines of
credit and $7.3 million from the issuance of common stock through the exercise of stock options. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>Our sales in China are generally denominated
in Renminbi. Our sales outside China are generally denominated in U.S. dollars. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities in China. We cannot guarantee that fluctuations in
currency exchange rates, especially a devaluation in the Renminbi, which is currently fixed against the U.S. dollar, in the future will not have a material adverse effect on revenues from international sales and, correspondingly, on our business,
financial condition and results of operations. We also have contracts negotiated in Japanese Yen for purchasing portions of our inventories and supplies. We have a multi-currency bank account in Japanese Yen for purchasing portions of our
inventories and supplies. The balance of this Japanese Yen account as of June 30, 2001 is approximately $9.7 million. </FONT></P> <P> <FONT size=2 face="serif"> </FONT></P> <P align="center"> 19</P>
 <p><font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that our existing cash and cash equivalents, short-term investments and cash from operations will be sufficient to finance our operations through
at least the next 12 months. If additional financing is needed, there can be no assurance that such financing will be available to us on commercially reasonable terms, or at all. </font></p> <p> <b><font size=2 face="serif">FACTORS AFFECTING FUTURE
OPERATING RESULTS </font></b></p> <p><B><FONT size=2 face="serif">RISKS RELATING TO OUR COMPANY: </FONT></B></p> <P> <B><FONT size=2 face="serif">OUR FUTURE SALES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE FROM QUARTER TO
QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our quarterly and annual operating results
have fluctuated in the past and are likely to fluctuate in the future due to a variety of factors, some of which are outside of our control. As a result, period-to-period comparisons of our operating results are not necessarily meaningful or
indicative of future performance. Furthermore, it is likely that in some future quarters our operating results will fall below the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could decline.
</FONT></P> <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Factors that may affect our future operating results include: </FONT></P> <ul> <li> <FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">the timing, number and size
of orders for our products, as well as the relative mix of orders for each of our products, </FONT><FONT size=2 face="serif">particularly the volume of lower margin telephone handsets; </FONT></li> <li> <FONT size=2 face="sans-serif"> </FONT><FONT
size=2 face="serif">the evolving and unpredictable nature of the economic, regulatory and political environments in China and other </FONT><FONT size=2 face="serif">countries in which we market or plan to market our products; </FONT></li> <li> <FONT
size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">aggressive price reductions by our competitors; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">currency fluctuations;</FONT></li> <li><FONT size=2
face="sans-serif"> </FONT><FONT size=2 face="serif">market acceptance of our products and product enhancements; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">write-downs or write-offs of excess or obsolete
inventory;</FONT></li> <li><FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">the lengthy and unpredictable sales cycles associated with sales of our products combined with the impact of this </FONT><FONT size=2
face="serif">variability on our suppliers' ability to provide us with components on a timely basis; and </FONT></li> <li> <FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">longer collection periods of accounts receivable in China and
other countries. </FONT></li> </ul> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The limited performance history of some of our products, our limited forecasting experience and processes and the emerging nature of our target markets
make forecasting our future sales and operating results difficult. Our expense levels are based, in part, on our expectations regarding future sales, and these expenses are largely fixed, particularly in the short term. In addition, to enable us to
promptly fill orders, we maintain inventories of finished goods, components and raw materials. As a result, we commit to considerable costs in advance of anticipated sales. In the past, a substantial portion of our sales in each quarter resulted
from orders received and shipped in that quarter, and we have operated with a limited backlog of unfilled orders. Accordingly, we may not be able to reduce our costs in a timely manner to compensate for any unexpected shortfall between forecasted
and actual sales. Any significant shortfall of sales may require us to maintain higher levels of inventories of finished goods, components and raw materials than we require, thereby increasing our risk of inventory obsolescence and corresponding
inventory write-downs and write-offs.</FONT></P> <P> <B><FONT size=2 face="serif"> WE HAVE ONLY RECENTLY BECOME PROFITABLE AND MAY NOT BE ABLE TO SUSTAIN PROFITABILITY</FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We
have only recently become profitable and may not be able to remain profitable in future periods. As of June 30, 2001, we had retained earnings of approximately $13.8 million. We anticipate continuing to incur significant sales and marketing,
research and development and general and administrative expenses and, as a result, we will need to generate higher revenues to remain profitable. Numerous factors could negatively impact our results of operations, including a decrease in sales,
price pressures and significant fixed costs. Our past results should not be relied on as an indication of our future performance, and our results for the second quarter of 2001 should not be used as an indication of expected results for the full
year.</FONT></P> <P>&nbsp; </P> <P align="center"> <FONT size=2 face="monospace">20</FONT></P>
 <P> <b><font size=2 face="serif">COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED PRICES, REVENUES AND MARKET SHARE </font></b></P> <p> <font size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2
face="serif"></font>We face intense competition in our target markets and expect competition to increase. Our principal competitors in our various product lines include: </font></p> <ul> <li><FONT size=2 face="sans-serif"> </FONT><I><FONT size=2
face="serif">PAS</FONT></I><FONT size=2 face="serif">: Lucent Technologies, Inc. and Zhongxing Telecommunications Equipment. </FONT></li> <li> <FONT size=2 face="sans-serif"> </FONT><I><FONT size=2 face="serif">AN-2000</FONT></I><FONT size=2
face="serif">: Advanced Fibre Communications, Inc.; Alcatel Alsthom CGE, S.A.; Datong Telecom Technology Co. Ltd.; </FONT><FONT size=2 face="serif">Huawei Technology Co., Ltd.; Lucent Technologies, Inc.; and Zhongxing Telecommunications
Equipment.</FONT></li> <li> <FONT size=2 face="sans-serif"> </FONT><I><FONT size=2 face="serif">WACOS SYSTEM</FONT></I><FONT size=2 face="serif">: Alcatel; Cisco Systems, Inc.; Clarent Corporation; Ericsson LM Telephone Co.; Huawei; Lucent;
Motorola, </FONT><FONT size=2 face="serif">Inc.; Nokia Corporation; Nortel Networks Corporation; Nuera Communications, Inc.; Siemens AG; Sonus Networks, Inc.; and Zhongxing Telecommunications Equipment. </FONT></li> </ul> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We are increasingly facing competition from domestic companies in China. We believe that our strongest competition in the future may come from these companies, many of which operate under lower
cost structures and more favorable governmental policies and have much larger sales forces than we do. Furthermore, other companies not presently offering competing products may also enter our target markets. Many of our competitors have
significantly greater financial, technical, product development, sales, marketing and other resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in service provider
requirements. Our competitors may also be able to devote greater resources than we can to the development, promotion and sale of new products. These competitors may also be able to offer significant financing arrangements to service providers, in
some cases facilitated by government policies, which is a competitive advantage in selling systems to service providers with limited financial and currency resources. Increased competition is likely to result in price reductions, reduced gross
profit as a percentage of net sales and loss of market share, any one of which could materially harm our business, financial condition and results of operations.</FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2
face="serif"></font>Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties, including Telecommunications Administrations, Telecommunications Bureaus and other
local organizations, to increase the ability of their products to address the needs of prospective customers in our target markets. Accordingly, alliances among competitors or between competitors and third parties may emerge and rapidly acquire
significant market share. To remain competitive, we believe that we must continue to partner with Telecommunications Administrations and other local organizations, maintain a high level of investment in research and development and in sales and
marketing, and manufacture and deliver products to service providers on a timely basis and without significant defects. If we fail to meet any of these objectives, our business, financial condition and results of operations could be harmed.
</FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>The introduction of inexpensive wireless telephone service or other competitive services in China may also have an adverse impact on sales of
our PAS system in China. We may not be able to compete successfully against current or future competitors or that competitive pressures in the future will not materially adversely effect our business, financial condition and results of operations.
</FONT></P> <P> <B><FONT size=2 face="serif">THE SUCCESS OF OUR BUSINESS DEPENDS ON A RELATIVELY SMALL NUMBER OF LARGE SYSTEM DEPLOYMENTS, AND ANY CANCELLATION, REDUCTION OR DELAY IN THESE DEPLOYMENTS COULD HARM OUR BUSINESS </FONT></B></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our business is characterized by large system deployments for a relatively small number of service providers. In the three months ended June 30, 2001 sales to NingBo PTB accounted for 18% of
our net sales and sales to Jiaxing PTB accounted for 12% of our net sales. In the six months ended June 30, 2001 no customer accounted for 10% of our net sales. Our dependence on large system deployments makes our ability to provide systems in a
timely and cost-effective manner critically important to our business. We have in the past experienced delays and encountered other difficulties in the installation and implementation of our systems. Various factors could cause future delays,
including technical problems and the shortage of qualified technicians. Any delays or difficulties in deploying our systems, or the cancellation of any orders by service providers, could significantly harm our business and lead to fluctuations in
our operating results.</FONT></P> <P> <B><FONT size=2 face="serif">OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO COLLECT PAYMENTS FROM OUR CUSTOMERS ON A TIMELY BASIS </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our
customers often must make a significant commitment of capital to purchase our products. As a result, any downturn in a customer's business that affected the customer's ability to pay us could harm our financial condition. Moreover, accounts
receivable collection cycles historically tend to be much longer in China than in other markets. The failure of any of our customers to make timely payments could require us to write-off accounts receivable or increase our accounts receivable
reserves, either of which could adversely</FONT></P> <P align="center"> <FONT size=2 face="monospace">21</FONT></P>
 <p><font size=2 face="serif"> affect our financial condition. </font></p> <p> <b><font size=2 face="serif">A DECLINE IN BUSINESS ACTIVITY DURING CHINA'S LUNAR NEW YEAR MAY RESULT IN DECREASED SALES DURING OUR FIRST
QUARTER </font></b></p> <p><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Business activity in China declines considerably during the first quarter of each year in observance of the Lunar New Year. As a result, sales during the first
quarter of our fiscal year have in the past typically been lower than sales during the fourth quarter of the preceding year and we expect this trend to continue in the future. We will continue to face this seasonality in the future and do not have
the ability to forecast with any degree of certainty the impact of the decreased business activity during the Lunar New Year on our sales and operating results. </FONT></p> <P> <B><FONT size=2 face="serif">OUR MARKET IS SUBJECT TO RAPID
TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The emerging market for communications equipment
in developing countries is characterized by rapid technological developments, frequent new product introductions and evolving industry and regulatory standards. Our success will depend in large part on our ability to enhance our network access and
switching technologies and develop and introduce new products and product enhancements that anticipate changing service provider requirements and technological developments. We may need to make substantial capital expenditures and incur significant
research and development costs to develop and introduce new products and enhancements. If we fail to timely develop and introduce new products or enhancements to existing products that effectively respond to technological change, our business,
financial condition and results of operations could be materially adversely affected. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From time to time, our competitors or we may announce new products or product
enhancements, services or technologies that have the potential to replace or shorten the life cycles of our products and that may cause customers to defer purchasing our existing products, resulting in inventory obsolescence. Future technological
advances in the communications industry may diminish or inhibit market acceptance of our existing or future products or render our products obsolete. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Even if we are able to
develop and introduce new products, they may not gain market acceptance. Market acceptance of our products will depend on various factors including: </FONT></P> <ul> <li> <FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">our ability
to obtain necessary approvals from regulatory organizations; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">the perceived advantages of the new products over competing products; </FONT><FONT size=2
face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">our ability to attract customers who have existing relationships with our competitors; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">product cost
relative to performance; and </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">the level of customer service available to support new products. </FONT></li> </ul> <P> <FONT face="serif"> </FONT><FONT size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Specifically, sales of PAS, our wireless access system, will depend in part upon consumer acceptance of the mobility limitations of this service relative to other wireless service systems, such as GSM or
CDMA. If our existing or new products fail to achieve market acceptance for any reason, our business could be seriously harmed.</FONT></P> <P> <B><FONT size=2 face="serif">OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO DELIVER QUALITY PRODUCTS ON A
TIMELY AND COST EFFECTIVE BASIS </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our operating results depend on our ability to manufacture products on a timely and cost effective basis. In the past, we have experienced
reductions in yields as a result of various factors, including defects in component parts and human error in assembly. If we experience deterioration in manufacturing performance or a delay in production of any of our products, we could experience
delays in shipments and cancellations of orders. Moreover, networking products frequently contain undetected software or hardware defects when first introduced or as new versions are released. In addition, our products are often embedded in or
deployed in conjunction with service providers' products, which incorporate a variety of components produced by third parties. As a result, when a problem occurs, it may be difficult to identify the source of the problem. These problems may cause us
to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers, any one of which could harm our business.
</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We contract with third parties in China to undertake high volume manufacturing and assembly of our handsets. In addition, we sometimes use third parties for high volume assembly
of circuit boards. We do not have any long- term contracts with these third party manufacturers, and in the event that these manufacturers are unable or unwilling to continue to manufacture our products, we may be unable to secure alternative
manufacturers or could experience delays in qualifying new manufacturers. We currently manufacture internally only a very limited quantity of our handsets. However, if future demand for our handsets requires additional manufacturing capacity, we may
invest in and build additional manufacturing facilities, most likely in China. However, new </FONT></P> <P align="center"> <FONT size=2 face="monospace">22</FONT></P>
 <p><font size=2 face="serif">manufacturing facilities may not attain the same quality or level of efficiencies as those of our existing third party manufacturers.</font></p> <p> <b><font size=2 face="serif">WE DEPEND
ON SOME SOLE SOURCE AND OTHER KEY SUPPLIERS FOR HANDSETS, COMPONENTS AND</font></b> <B><FONT size=2 face="serif">MATERIALS USED IN OUR PRODUCTS, AND IF THESE SUPPLIERS FAIL TO PROVIDE US WITH ADEQUATE SUPPLIES OF HIGH QUALITY PRODUCTS AT COMPETITIVE
PRICES, OUR COMPETITIVE POSITION, REPUTATION AND BUSINESS COULD BE HARMED </FONT></B></p> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Some components and materials used in our products are purchased from a single supplier or a
limited group of suppliers. If any supplier is unwilling or unable to provide us with high quality components and materials in the quantities required and at the costs specified by us, we may not be able to find alternative sources on favorable
terms, in a timely manner, or at all. Our inability to obtain or to develop alternative sources if and as required could result in delays or reductions in manufacturing or product shipments. Moreover, these suppliers may delay product shipments or
supply us with inferior quality products. If any of these events occur, our competitive position, reputation and business could suffer. </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our ability to source a sufficient
quantity of high quality components used in our products may be limited by China's import restrictions and duties. We require a significant number of imported components to manufacture our products in China. Imported electronic components and other
imported goods used in the operation of our business are subject to a variety of permit requirements, approval procedures and import duties. Failure to obtain necessary permits or approvals, administrative actions by China's government to limit
imports of certain components, or non-payment of required import duties could subject us to penalties and fines and could adversely affect our ability to manufacture and sell our products in China. In addition, import duties increase the cost of our
products and may make them less competitive.</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">In particular, an integral component of our PAS system is the handset used by subscribers to make and receive mobile telephone calls.
Our inability to obtain a sufficient number of high quality components and assemblies for handsets could severely harm our business. A worldwide shortage of handsets existed in 2000, and there continues to be a shortage of low-priced handsets, which
we have found to be popular with many consumers in China. We have only used third parties to assemble and manufacture handsets in China for us for a limited period of time. These manufacturers may be unable to produce adequate quantities of
high-quality handsets to meet the demand of our customers. </FONT></P> <P> <B><FONT size=2 face="serif">CHINA'S GOVERNMENT RECENTLY IMPOSED TARIFFS ON CERTAIN IMPORTS FROM JAPAN, INCLUDING MOBILE HANDSETS AND HANDSET ASSEMBLIES SUCH AS THOSE USED IN
OUR PAS SYSTEM, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS IF WE ARE UNABLE TO SECURE A SUFFICIENT QUANTITY OF HANDSETS FROM SOURCES OUTSIDE OF JAPAN</FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">As a result of
a trade dispute with Japan, in June 2001 the Tariff Policy Commission of the State Council of China imposed a special tariff on certain Japanese imports, including mobile handsets and handset assemblies, such as those used in our PAS system. The
special tariff could result in additional charges of up to 100% of the cost of the affected products. We have relied on manufacturers in Japan to source a portion of our handsets and handset assemblies. Although we believe we will be able to
increase our handset manufacturing capacity in China and secure additional supply from sources outside Japan, we may not be able to do so in a cost-effective manner, or at all. If we are unable to cost-effectively manufacture or source sufficient
quantities of handsets and handset assemblies from suppliers outside of Japan, we believe that our handset revenue and gross profit from handset sales could be materially adversely impacted by the tariff.</FONT></P> <P> <B><FONT size=2
face="serif">IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION IN CHINA AND INDIRECT DISTRIBUTION CHANNELS ELSEWHERE OR SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION, OUR OPERATING RESULTS MAY SUFFER </FONT></B></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our distribution strategy focuses primarily on developing and expanding our direct sales organization in China and our indirect distribution channels outside of China. We may not be able to
successfully expand our direct sales organization in China and the cost of any expansion may exceed the revenue generated from these efforts. Even if we are successful in expanding our direct sales organization in China, we may not be able to
compete successfully against the significantly larger and better-funded sales and marketing operations of current or potential competitors. In addition, if we fail to develop relationships with significant international resellers or manufacturers'
representatives, or if these resellers or representatives are not successful in their sales or marketing efforts, we may be unsuccessful in our expansion efforts outside China. </FONT></P> <P> <B><FONT size=2 face="serif">WE EXPECT AVERAGE SELLING
PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE OUR REVENUES, AND, AS A RESULT, WE MUST INTRODUCE NEW PRODUCTS AND REDUCE OUR COSTS IN ORDER TO MAINTAIN PROFITABILITY </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2
face="serif">The average selling prices for communications access and switching systems and subscriber terminal products, such as handsets,</FONT></P> <P align="center"> <FONT size=2 face="monospace">23</FONT></P>
 <P> <font size=2 face="serif"> in China have been declining as a result of a number of factors, including: </font></P> <ul> <li> <font size=2 face="sans-serif"> </font><font size=2 face="serif">increased competition;
</font></li> <li><FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">aggressive price reductions by competitors; and </FONT><font size=2 face="sans-serif"> </font><font size=2 face="serif"></font></li> <li><FONT size=2 face="serif">
</FONT><FONT size=2 face="serif">rapid technological change. </FONT></li> </ul> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We anticipate that average selling prices of our products will decrease in the future in response to product
introductions by us or our competitors or other factors, including price pressures from customers. Therefore, we must continue to develop and introduce new products and enhancements to existing products that incorporate features that can be sold at
higher average selling prices. Failure to do so could cause our revenues and gross profit, as a percentage of net sales, to decline. </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our cost reduction efforts may not allow us
to keep pace with competitive pricing pressures or lead to improved gross profit, as a percentage of net sales. In order to be competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We
may not be successful in these efforts or delivering our products to market in a timely manner. Any redesign may not result in sufficient cost reductions to allow us to reduce the prices of our products to remain competitive or to improve or
maintain our gross profit, as a percentage of net sales.</FONT></P> <P> <B><FONT size=2 face="serif">SHIFTS IN OUR PRODUCT MIX MAY RESULT IN DECLINES IN GROSS PROFIT, AS A PERCENTAGE OF NET SALES</FONT></B><FONT size=2 face="serif"> </FONT></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Our gross profit, as a percentage of net sales, varies among our product groups. Our gross profit, as a percentage of net sales, is generally higher on our access network system products and is
significantly lower on our handsets. We also anticipate that the gross profit, as a percentage of net sales, may be lower for our newly developed products due to start-up costs and may improve as unit volumes increase and efficiencies can be
realized. Our overall gross profit, as a percentage of net sales, has fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and our ability to
reduce manufacturing costs. As a result of a growth in sales of lower margin handsets over the past few quarters, we have experienced a decline in overall gross profit, as a percentage of net sales. We are likely to continue to experience downward
pressure on our gross profit, as a percentage of net sales.</FONT></P> <P> <B><FONT size=2 face="serif">SERVICE PROVIDERS SOMETIMES EVALUATE OUR PRODUCTS FOR LONG AND UNPREDICTABLE PERIODS WHICH CAUSES THE TIMING OF PURCHASES AND OUR RESULTS OF
OPERATIONS TO BE UNPREDICTABLE</FONT></B><FONT size=2 face="serif"> </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The period of time between our initial contact with a service provider and the receipt of an actual purchase
order may span a year or more. During this time, service providers may subject our products to an extensive and lengthy evaluation process before making a purchase. The length of these qualification processes may vary substantially by product and
service provider, making our results of operations unpredictable. We may incur substantial sales and marketing expenses and expend significant management effort during this process, which ultimately may not result in a sale. These qualification
processes often make it difficult to obtain new customers, as service providers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources. </FONT></P> <P> <B><FONT size=2
face="serif">OUR INABILITY TO EXERCISE COMPLETE CONTROL OVER OUR SUBSIDIARIES MAY BE DETRIMENTAL TO OUR BUSINESS </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A considerable portion of our operations is and will
continue to be conducted through direct and indirect subsidiaries. For example, we own an 88% interest in a joint venture which operates the Zhejiang manufacturing facility and a 51% interest in a joint venture which operates the Guangdong
manufacturing facility. Even though we may own a majority interest in these joint ventures, we do not have sole power to control all of the policies and decisions of these jointly-owned subsidiaries. </FONT></P> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the law of China governing Sino-foreign joint ventures, equity holders exercise rights primarily through the board of directors, which constitutes the highest authority of the joint venture. Although we own a
majority of the Guangdong joint venture, we are only entitled to appoint a minority of the directors to the joint venture's board of directors, which prevents us from controlling the actions of the board. Moreover, even though we hold a majority of
the board seats in the Zhejiang joint venture, China law requires unanimous approval of the board of directors for some significant corporate actions, including: </FONT></P> <ul> <li> <FONT size=2 face="sans-serif"> </FONT><FONT size=2
face="serif">amendment of the Articles of Association of the joint venture; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">liquidation or dissolution of the joint venture; </FONT><FONT size=2 face="sans-serif">
</FONT></li> <li><FONT size=2 face="serif">any increase, decrease or transfer of equity interests of any party to the joint venture; and </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">a merger of the joint venture
with another economic entity. </FONT></li> </ul> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operating results and cash flow depend on the operating results and cash flow of our subsidiaries and the payment of funds by those
subsidiaries to us. These subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay </FONT></P> <P align="center"> <FONT size=2 face="monospace">24</FONT></P>
 <P> <FONT size=2 face="serif">dividends or otherwise provide financial benefits to us. Moreover, with respect to our Guangdong manufacturing joint venture, any payment of dividends to us must be agreed to by our joint
venture partner, whose interests in receiving dividend distributions may not coincide with ours. In addition, applicable law in some countries including China limits the ability of a subsidiary to pay dividends for various reasons including the
absence of sufficient distributable reserves. In the event of any insolvency, bankruptcy or similar proceedings, creditors of the subsidiaries would generally be entitled to priority over us with respect to assets of the affected subsidiary. In
addition, because our joint venture partners in both Zhejiang and Guangdong provinces are affiliated with the provincial Telecommunications Administrations that operate the telecommunication networks in these areas, if we fail to maintain these
joint ventures, sales to our customers located in these areas may decrease. </FONT></P> <P> <B><FONT size=2 face="serif">OUR MULTI-NATIONAL OPERATIONS SUBJECT US TO VARIOUS ECONOMIC, POLITICAL, REGULATORY AND LEGAL RISKS </FONT></B></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We market and sell our products in mainland China and other markets, including India and Taiwan. The expansion of our existing multi-national operations and entry into additional international
markets will require significant management attention and financial resources. Multi-national operations are subject to inherent risks, including:</FONT></P> <ul> <li> <FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">difficulties in
designing products that are compatible with varying international communications standards; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">longer accounts receivable collection periods and greater difficulty in
accounts receivable collection; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">unexpected changes in regulatory requirements; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2
face="serif">changes to import and export regulations, including quotas, tariffs and other trade barriers; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">delays or difficulties in obtaining export and import
licenses; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">potential foreign exchange controls and repatriation controls on foreign earnings; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2
face="serif">exchange rate fluctuations and currency conversion restrictions;</FONT></li> <li><FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">the burdens of complying with a variety of foreign laws and regulations; </FONT><FONT
size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">difficulties and costs of staffing and managing multi-national operations; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">reduced protection for
intellectual property rights in some countries; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">potentially adverse tax consequences; </FONT></li> <li><FONT size=2 face="serif">and </FONT><FONT size=2
face="sans-serif"> </FONT><FONT size=2 face="serif">political and economic instability. </FONT></li> </ul> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Multi-national companies are required to establish intercompany pricing for
transactions between their separate legal entities operating in different taxing jurisdictions. These intercompany transactions are subject to audit by taxing authorities in the jurisdictions in which multinational companies operate. An additional
tax liability may be incurred if it is determined that intercompany pricing was not done at arm's length. We believe we have adequately estimated and recorded our liability arising from intercompany pricing, but an additional tax liability may
result from audits of our intercompany pricing policies. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In markets outside of China, we rely on a number of original equipment manufacturers, or OEMs, and third-party
distributors and agents to market and sell our network access products. If these OEMs, distributors or agents fail to provide the support and effort necessary to service developing markets effectively, our ability to maintain or expand our
operations outside of China will be negatively impacted. We may not successfully compete in these markets, our products may not be accepted and we may not successfully overcome the risks associated with international operations. </FONT></P> <P>
<FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our international sales are generally denominated in local currencies. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities in
China. Fluctuations in currency exchange rates in the future may have a material adverse effect on our results of operations. Although the impact of currency fluctuations to date has been insignificant, fluctuations in currency exchange rates in the
future may have a material adverse effect on our results of operations. We have a multi-currency bank account in Japanese Yen for purchasing portions of our inventories and supplies. As of June 30, 2001, this Japanese Yen bank account is valued at
$9.7 million. </FONT></P> <P> <B><FONT size=2 face="serif">OUR FAILURE</FONT></B><FONT size=2 face="serif"> </FONT><B><FONT size=2 face="serif">TO MEET INTERNATIONAL AND GOVERNMENTAL PRODUCT STANDARDS COULD BE DETRIMENTAL TO OUR
BUSINESS</FONT></B><FONT size=2 face="serif"> </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many of our products are required to comply with numerous government regulations and standards, which vary by market. As standards
for products continue to evolve, we will need to modify our products or develop and support new versions of our products to meet emerging industry standards, comply with government regulations and satisfy the requirements necessary to obtain
approvals. Our inability to obtain regulatory approval and meet established standards could delay or prevent our entrance into or force our departure from markets. </FONT></P> <P> <B><FONT size=2 face="serif">OUR RECENT GROWTH HAS STRAINED OUR
RESOURCES, AND IF WE ARE UNABLE TO MANAGE AND SUSTAIN OUR GROWTH, OUR OPERATING RESULTS WILL BE NEGATIVELY AFFECTED </FONT></B></P> <P align="center"> <FONT size=2 face="monospace">25</FONT></P>
 <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have recently experienced a period of rapid growth and anticipate that we must continue to expand our operations to address potential market
opportunities. If we fail to implement or improve systems or controls or to manage any future growth and expansion effectively, our business could suffer. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our expansion has
placed and will continue to place a significant strain on our management, operational, financial and other resources. To manage our growth effectively, we will need to take various actions, including: </FONT></P> <ul> <li> <FONT size=2
face="sans-serif"> </FONT><FONT size=2 face="serif">enhancing management information systems and forecasting procedures; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">further developing our operating,
administrative, financial and accounting systems and controls; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">maintaining close coordination among our engineering, accounting, finance, marketing, sales and
operations organizations; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">expanding, training and managing our employee base; </FONT></li> <li><FONT size=2 face="serif">and </FONT><FONT size=2 face="sans-serif">
</FONT><FONT size=2 face="serif">expanding our finance, administrative and operations staff. </FONT></li> </ul> <P> <B><FONT size=2 face="serif">OUR SUCCESS IS DEPENDENT ON CONTINUING TO HIRE AND RETAIN QUALIFIED PERSONNEL, AND IF WE ARE NOT
SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL, OUR BUSINESS WOULD BE HARMED </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The success of our business depends in significant part upon the continued
contributions of key technical and senior management personnel, many of whom would be difficult to replace. In particular, our success depends in large part on the knowledge, expertise and services of Hong Liang Lu, our President and Chief Executive
Officer, and Ying Wu, our Executive Vice President and Chief Executive Officer of China Operations. The loss of any key employee, the failure of any key employee to perform satisfactorily in his or her current position or our failure to attract and
retain other key technical and senior management employees could have a significant negative impact on our operations. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To effectively manage our recent growth as well as any
future growth, we will need to recruit, train, assimilate, motivate and retain qualified employees. Competition for qualified employees is intense, and the process of recruiting personnel with the combination of skills and attributes required to
execute our business strategy can be difficult, time-consuming and expensive. We are actively searching for research and development engineers and sales and marketing personnel, who are in short supply. Additionally, we have a need for and have
experienced difficulty in finding qualified accounting personnel knowledgeable in U.S. and China accounting standards. If we fail to attract, hire, assimilate or retain qualified personnel, our business would be harmed. </FONT></P> <P> <FONT size=2
face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Competitors and others have in the past and may in the future attempt to recruit our employees. In addition, companies in the communications industry whose employees accept positions with competitors
frequently claim that the competitors have engaged in unfair hiring practices. We may be the subject of these types of claims in the future as we seek to hire qualified personnel. Some of these claims may result in material litigation and disruption
to our operations. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. </FONT></P> <P> <B><FONT size=2 face="serif">ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT</FONT></B><FONT size=2
face="serif"> </FONT><B><FONT size=2 face="serif">TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE OUR STOCKHOLDERS AND HARM OUR OPERATING RESULTS </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We may acquire complimentary
businesses, products and technologies. Any anticipated benefits of an acquisition may not be realized. We have in the past and will continue to evaluate acquisition prospects that would complement our existing product offerings, augment our market
coverage, enhance our technological capabilities, or that may otherwise offer growth opportunities. Acquisitions of other companies may result in dilutive issuances of equity securities, the incurrence of debt and the amortization of expenses
related to goodwill and other intangible assets. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of operations, technologies, products and personnel of the acquired company, diversion of management's
attention from other business concerns, risks of entering markets in which we have no direct or limited prior experience, and the potential loss of key employees of ours and the acquired company. </FONT></P> <P> <B><FONT size=2 face="serif">WE MAY
EXPERIENCE DIFFICULTY IN IDENTIFYING, FORMING AND MAINTAINING NEW BUSINESS VENTURES THAT ARE IMPORTANT TO THE DEVELOPMENT OF OUR BUSINESS, AND INVESTMENTS IN THESE VENTURES MAY NOT GENERATE RETURNS </FONT></B></P> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have invested, and expect to continue to invest, significant capital in new business ventures that are important to the development of our business. We may not be able to continue to identify suitable parties for new
ventures and investments in the future. The failure to form or maintain new ventures, or to identify suitable investment opportunities, could significantly limit our ability to expand our operations. Many of our investments have been in privately
held companies, many of which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may
never materialize. We have recognized an impairment charge in respect of our long-term</FONT></P> <P align="center"> <FONT size=2 face="monospace">26</FONT></P>
 <P> <FONT size=2 face="serif">investments, and we may incur future investment losses. Moreover, these new ventures or investments require significant management time and will present significant challenges. These
activities may not be successful and we may not realize returns on these activities. Additionally, if any venture or investment fails, our business could be negatively impacted. </FONT></P> <P> <B><FONT size=2 face="serif">WE MAY BE UNABLE TO
ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND MAY BE SUBJECT TO CLAIMS THAT WE INFRINGE THE INTELLECTUAL PROPERTY OF OTHERS, EITHER OF WHICH COULD SUBSTANTIALLY HARM OUR BUSINESS</FONT></B><FONT size=2 face="serif"> </FONT></P> <P> <font size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations to protect our technology. We have applied for 16 patents in the
United States, three of which have been issued. We have also filed patent applications in other countries. Additional patents may not be issued on our pending patent applications and our issued patents may not be upheld. Moreover, we have not yet
obtained, and may not be able to obtain patents in China on our products or the technology that we use to manufacture our products. Our subsidiaries and joint ventures in China rely upon our trademarks, technology and know-how to manufacture and
sell our products. We cannot guarantee that these and other intellectual property protection measures will be sufficient to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are
substantially equivalent or superior to ours. In addition, the legal systems of many foreign countries, including China, do not protect intellectual property rights to the same extent as the legal system of the United States. If we are unable to
adequately protect our proprietary information and technology, our business, financial condition and results of operations could be materially adversely affected.</FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The increasing
dependence of the communications industry on proprietary technology has resulted in frequent litigation based on allegations of the infringement of patents and other intellectual property. In the future we may be subject to litigation to defend
against claimed infringements of the rights of others or to determine the scope and validity of the proprietary rights of others. Future litigation also may be necessary to enforce and protect our trade secrets and other intellectual property
rights. Any intellectual property litigation could be costly and could cause diversion of management's attention from the operation of our business. Adverse determinations in any litigation could result in the loss of our proprietary rights, subject
us to significant liabilities or require us to seek licenses from third parties which may not be available on commercially reasonable terms, if at all. We could also be subject to court orders preventing us from manufacturing or selling our
products. </FONT></P> <P> <B><FONT size=2 face="serif">BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. Our headquarters facility in the State of California is currently subject to electrical blackouts as a
consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations at our headquarters. In addition, we do not carry sufficient business interruption insurance to
compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business. </FONT></P> <P> <B><FONT size=2 face="serif">RISKS RELATING TO THE STRUCTURE AND REGULATION OF CHINA'S
TELECOMMUNICATIONS INDUSTRY:</FONT></B></P> <P> <B><FONT size=2 face="serif">CHINA'S TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION</FONT></B></P> <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China's
telecommunications industry is heavily regulated by the Ministry of Information Industry. The Ministry of </FONT><FONT size=2 face="serif">Information Industry has broad discretion and authority to regulate all aspects of the telecommunications and
information technology industry in China, including managing spectrum bandwidths, setting network equipment specifications and standards and drafting laws and regulations related to the electronics and telecommunications industries. Additionally,
the Ministry of Information Industry can decide what types of equipment may be connected to the national telecommunications networks, the forms and types of services that may be offered to the public, the rates that are charged to subscribers for
those services and the content of material available in China over the Internet. If the Ministry of Information Industry sets standards with which we are unable to comply or which render our products noncompetitive, our ability to sell products in
China may be limited, resulting in substantial harm to our operations.</FONT></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">At the end of May 2000, we became aware of an internal notice, circulated
within the Ministry of Information Industry, announcing a review of PHS-based telecommunications equipment for future installation into China's telecommunications infrastructure. The Ministry of Information Industry requested service providers to
temporarily halt new deployments of PHS-based telecommunications equipment, including our PAS system, pending conclusion of a review by the Ministry of Information Industry. Subsequently, at the end of June 2000, the Ministry of Information Industry
issued a notice stating that it had concluded its review of PHS-based equipment and that the continued deployment of PHS-based systems, such as our PAS system, in China's county- level cities and towns and villages would be permitted. In addition,
the notice stated that deployments within large and medium-sized cities would only be allowed in very limited areas of dense population, such as campuses, commercial buildings and special development</FONT></P> <P align="center"> <FONT size=2
face="monospace">27</FONT></P>
 <P> <FONT size=2 face="serif"> zones. The notice confirmed, however, that new citywide deployments of our PAS system in large and medium cities would not be permitted. Failure of the Ministry of Information Industry
to permit the sale or deployment of our PAS system, or the sale or deployment of our other products, or the imposition of additional limitations on their sale in the future could have a material adverse effect on our business and financial
condition. The Ministry of Information Industry may conduct further reviews or evaluations of PHS-based telecommunications equipment or may change its position regarding PHS-based systems in the future. </FONT></P> <P> <B><FONT size=2
face="serif">CHINA'S TELECOMMUNICATIONS REGULATORY FRAMEWORK IS IN THE PROCESS OF BEING DEVELOPED, WHICH HAS LED TO UNCERTAINTIES REGARDING HOW TO CONDUCT OUR BUSINESS IN CHINA</FONT></B></P> <P> <font size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">China does not yet have a national telecommunications law. The Ministry of Information Industry, under the direction of the State Council, is currently preparing a draft of
the Telecommunications Law of the People's Republic of China for ultimate submission to the National People's Congress for review and adoption. It is unclear if and when the Telecommunications Law will be adopted. If the Telecommunications Law is
adopted, we expect it to become the basic telecommunications statute and the source of telecommunications regulations in China. We do not know the nature and scope of regulation that the Telecommunications Law would create. Accordingly, we cannot
predict whether it will have a positive or negative effect on us or on some or all aspects of our business.</FONT></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">China's telecommunications regulatory
framework is in the process of being developed. In September 2000, the State Council issued the Telecommunications Regulations of the People's Republic of China, known as the Telecom Regulations. The Telecom Regulations cover telecommunications
services and market regulations, pricing, interconnection and connection, as well as telecommunications construction and security issues. In May 2001, the Ministry of Information Industry issued the Administrative Measures of Network Access Licenses
to implement the Telecom Regulations. Regulations in this area often require subjective interpretation and, given the relative infancy of the Telecom Regulations and the implementing regulations, we do not know how the regulations will be
interpreted or enforced. As a result, our attempts to comply with these regulations may be deemed insufficient by the appropriate regulatory agencies, which could subject us to penalties that adversely affect our business.</FONT></P> <P> <B><FONT
size=2 face="serif">WE DO NOT HAVE SOME OF THE LICENSES WE ARE REQUIRED TO HAVE TO SELL OUR NETWORK ACCESS PRODUCTS IN CHINA</FONT></B></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">Under China's
current regulatory structure, the communications products that we offer in China must meet government and industry standards, and a network access license for the equipment must be obtained. Without the license, the equipment is not allowed to be
connected to public telecommunications networks or sold in China. Moreover, we must ensure that the quality of the telecommunications equipment for which we have obtained a network access license is stable and reliable, and may not lower the quality
or performance of other installed licensed products. The State Council's product quality supervision department, in concert with the Ministry of Information Industry, will perform spot checks to track and supervise the quality of licensed
telecommunications equipment and publish the results of such spot checks. </FONT></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">The regulations implementing these requirements are not very detailed,
have not been applied by a court and may be interpreted and enforced by regulatory authorities in a number of different ways. We have obtained the required network access licenses for our AN-2000 platform. We have applied for, but have not yet
received, a network access license for our PAS system. Based upon conversations with the Ministry of Information Industry, we understand that our PAS system is considered to still be in the trial period and that sales of our PAS system may continue
to be made by us during this trial period, but a license will ultimately be required. Network access licenses will also be required for most additional products that we are selling or may sell in China, including our WACOS platform. If we fail to
obtain the required licenses, we could be prohibited from making further sales of the unlicensed products, including our PAS system, in China, which would substantially harm our business, financial condition and results of operations. Our counsel in
China has advised us that China's governmental authorities may interpret or apply the regulations with respect to which licenses are required and the ability to sell a product while a product is in the trial period in a manner that is inconsistent
with the information received by our counsel in China, either of which could have a material adverse effect on our business and financial condition.</FONT></P> <P> <B><FONT size=2 face="serif">SOFTWARE INCORPORATED IN OUR PRODUCTS HAS NOT BEEN
REGISTERED IN ACCORDANCE WITH RELEVANT CHINESE REGULATIONS, AND OUR ABILITY TO SELL THE PRODUCTS INCORPORATING THE SOFTWARE MAY BE AFFECTED</FONT></B></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2
face="serif">In October 2000, the Ministry of Information Industry issued regulations which prohibit the production and sale of software products, or products incorporating software, in China unless the software is registered with the government. We
are in the process of applying for registration of our software. Based upon verbal advice received from the Ministry of Information Industry, we believe that since these regulations only recently came into effect, we will be able to continue to sell
products incorporating our software during the period in which the regulations are being implemented and our applications are pending. However, this implementation period may not last long enough for us to complete the registration of our software.
Moreover, the Chinese government may interpret or apply the</FONT></P> <P align="center"> <FONT size=2 face="monospace">28</FONT></P>
 <P> <FONT size=2 face="serif"> regulations in such a way as to prohibit sales of products incorporating our unregistered software prior to registration. If the government prohibits sales pending registration, or if we
fail in our efforts to register our software, we could be prohibited from making further sales of products incorporating our unregistered software in China, which could substantially harm our business and financial condition.</FONT></P> <P> <B><FONT
size=2 face="serif">MOST OF OUR CUSTOMERS IN CHINA ARE PART OF THE CHINA TELECOM SYSTEM AND ARE SUBJECT TO ITS ULTIMATE CONTROL</FONT></B></P> <P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">Our main
customers in China are the local Telecommunications Bureaus, which operate under China Telecom, China's state-owned fixed line operator, and are subject to its ultimate control. Accordingly, China Telecom may issue policy statements or make other
decisions, which govern the equipment purchasing decisions of most of our customers in China. For example, in late 1999 China Telecom prohibited all Telecommunications Bureaus from purchasing PHS systems, such as our PAS systems, for implementation
in large cities, even before these sales were prohibited by the Ministry of Information Industry. As virtually all of our sales are generated from our operations in China, other decisions by China Telecom restricting or prohibiting the sales or
deployment of our products could cause substantial harm to our business.</FONT></P> <P> <B><FONT size=2 face="serif">OUR BUSINESS MAY SUFFER IF THE CHINA TELECOM SYSTEM UNDERGOES FURTHER RESTRUCTURING</FONT></B></P> <P> <font size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">In February 1999, the State Council approved a restructuring plan for the China Telecom system, under which the telecommunications operations of the China Telecom system
were separated along four business lines: fixed line, mobile, paging and satellite communications services. Following the announcement, we observed a reduction in orders from Telecommunications Bureaus, which we attributed to the uncertainties
surrounding the restructuring and the ultimate impact the restructuring would have on the Telecommunication Bureaus. In May 2001, China media sources reported that China Telecom would undergo further restructuring in an effort to stimulate
additional competition in the telecommunications market. As the details and timing of the proposed restructuring are not yet publicly known, we cannot be certain what impact the restructuring will have on our business operations. However, we may
experience another decline in orders and related revenues similar to that which we experienced following the 1999 restructuring, resulting from uncertainty among our Telecommunications Bureau customers associated with any new restructuring.
Moreover, following any restructuring, China Telecom or any other entity that may replace it as a result of a restructuring may restrict or prohibit the sales of our products, which could cause substantial harm to our business.</FONT></P> <P>
<B><FONT size=2 face="serif">OUR ABILITY TO SELL OUR PAS WIRELESS SYSTEM COULD BE SIGNIFICANTLY IMPAIRED IF CHINA TELECOM IS GRANTED OR OTHERWISE ACQUIRES A MOBILE LICENSE, WHICH WILL ALLOW CHINA TELECOM TO DELIVER CELLULAR SERVICES</FONT></B></P>
<P> <font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">Under the current regulatory structure, China Telecom holds and operates the fixed line telephone and data communications assets in China and is prohibited
from offering cellular services. To offer wireless services to end users, the Telecommunications Bureaus must offer services that can be delivered over wireline networks, such as those delivered over our PAS wireless system. China Telecom has
applied for a mobile license with the Ministry of Information Industry. If the Ministry of Information Industry grants a mobile license to China Telecom or if China Telecom otherwise acquires a mobile license, local Telecommunications Bureaus will
be free to offer cellular services, such as GSM or CDMA, to their customers and they may therefore elect not to deploy our PAS system. If this were to occur, we could lose current and potential customers for our PAS system, and our financial
condition and results of operations could be harmed.</FONT></P> <P> <B><FONT size=2 face="serif">CHANGES IN TELECOMMUNICATIONS RATES OR PRICING POLICIES MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS </FONT></B></P> <P> <font size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">In November 2000, the Ministry of Information Industry announced significant changes in rates for telecommunications services in China. While long distance, international,
leased line and Internet connection fees were cut by up to 70%, the rates for local telephone services, which include certain types of wireless access services such as those offered over our PAS system, were increased, from approximately $0.01 per
minute to approximately $0.02 per minute. The increase in rates may result in a reduced demand by end users for wireless services delivered over our PAS system and a corresponding decline in demand for our products. Additionally, the Ministry of
Information Industry may implement future rate changes for wireline or wireless services in China or change telecommunications pricing policies, any of which may lead to reduced demand for our systems and products and result in a material adverse
effect on our business or results of operations.</FONT></P> <P> <B><FONT size=2 face="serif">RISKS RELATING TO CONDUCTING OPERATIONS IN CHINA: </FONT></B></P> <P><B><FONT size=2 face="serif">SALES IN CHINA HAVE ACCOUNTED FOR SUBSTANTIALLY ALL OF OUR
SALES, AND THEREFORE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE TO A SIGNIFICANT DEGREE SUBJECT TO ECONOMIC, POLITICAL AND SOCIAL EVENTS IN CHINA </FONT></B></P> <P align="center"> <font face="monospace" size="2">29</font></P>
 <P> <B></B><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>Approximately $256.7 million, or 99%, of our sales for the six months ended June 30, 2001, $364.0 million, or 98.8%,
of our sales in fiscal 2000, and $186.1 million, or 99.3%, of our sales in fiscal 1999, occurred in China. Additionally, a substantial portion of our fixed assets are located in China. Of our total fixed assets, approximately 67% as of June 30,
2001, 75.0% as of December 31, 2000, and 53.7% as of December 31, 1999 were in China. We expect to make further investments in China in the future. Therefore, our business, financial condition and results of operations are to a significant degree
subject to economic, political and social events in China. </FONT></P> <P> <B><FONT size=2 face="serif">DEVALUATION IN THE VALUE OF THE RENMINBI AND FLUCTUATIONS IN EXCHANGE RATES COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS </FONT></B></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Exchange rate fluctuations could have a substantial negative impact on our financial condition and results of operations. We purchase substantially all of our materials in the United States and
Japan and a significant portion of our cost of goods sold is incurred in U.S. dollars and Japanese yen. A significant portion of our operating expenses are incurred in U.S. dollars. At the same time, most of our sales are denominated in Renminbi.
The value of the Renminbi is fixed by China's national government and is subject to changes in China's governmental policies and to international economic and political developments. China may choose to devalue the Renminbi against the U.S. dollar.
Additionally, China's national government has considered from time to time whether to partially or fully abandon the official exchange rate for Renminbi to the U.S. dollar. The abandonment of this official exchange rate policy may lead to sharp
depreciation of the Renminbi against the U.S. dollar and other foreign currencies and to significantly more volatility in the Renminbi exchange rate in the future, both of which would adversely affect our financial results and make our future
results more subject to fluctuation.</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">In the past, financial markets in many Asian countries have experienced severe volatility and, as a result, some Asian currencies have
experienced significant devaluation from time to time. The devaluation of some Asian currencies may have the effect of rendering exports from China more expensive and less competitive and therefore place pressure on China's government to devalue the
Renminbi. Any devaluation of the Renminbi could result in an increase in volatility of Asian currency and capital markets. Future volatility of Asian financial markets could have an adverse impact on our ability to expand our product sales into
Asian markets outside of China. Moreover, due to the limitations on the convertibility of Renminbi, we are limited in our ability to engage in currency hedging activities in China and do not currently engage in currency hedging activities with
respect to international sales outside of China. </FONT></P> <P> <B><FONT size=2 face="serif">CURRENCY RESTRICTIONS IN CHINA MAY LIMIT THE ABILITY OF OUR SUBSIDIARIES AND JOINT VENTURES IN CHINA TO OBTAIN AND REMIT FOREIGN CURRENCY NECESSARY FOR THE
PURCHASE OF IMPORTED COMPONENTS AND MAY LIMIT OUR ABILITY TO OBTAIN AND REMIT FOREIGN CURRENCY IN EXCHANGE FOR RENMINBI EARNINGS </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>China's
government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Under the current foreign exchange control system, sufficient foreign currency may not be available
to satisfy our currency needs. Shortages in the availability of foreign currency may restrict the ability of our Chinese subsidiaries to obtain and remit sufficient foreign currency to pay dividends to us, or otherwise satisfy their foreign currency
denominated obligations such as payments to us for components which we export to them and for technology licensing fees. We may also experience difficulties in completing the administrative procedures necessary to obtain and remit needed foreign
currency.</FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>Our business could be substantially harmed if we are unable to convert and remit our sales received in Renminbi into U.S. dollars.
Under existing foreign exchange laws, Renminbi held by our China subsidiaries can be converted into foreign currencies and remitted out of China to pay current account items such as payments to suppliers for imports, labor services, payment of
interest on foreign exchange loans and distributions of dividends so long as the subsidiaries have adequate amounts of Renminbi to purchase the foreign currency. Expenses of a capital nature such as the repayment of bank loans denominated in foreign
currencies, however, require approval from appropriate governmental authorities before Renminbi can be used to purchase foreign currency and then remitted out of China. This system could be changed at any time by executive decision of the State
Council to impose limits on current account convertibility of the Renminbi or other similar restrictions. Moreover, even though the Renminbi is intended to be freely convertible under the current account, the State Administration of Foreign
Exchange, which is responsible for administering China's foreign currency market, has a significant degree of administrative discretion in implementing the laws. From time to time, the State Administration of Foreign Exchange has used this
discretion in ways which effectively limit the convertibility of current account payments and restrict remittances out of China. Furthermore, in many circumstances the State Administration of Foreign Exchange must approve foreign currency
conversions and remittances. Under the current foreign exchange control system, sufficient foreign currency may not be available at a given exchange rate to satisfy our currency demands. </FONT></P> <p> <b><font size=2 face="serif">CHINA CLOSELY
RESTRICTS ACTIVITIES OF FOREIGN INVESTORS IN THE TELECOMMUNICATIONS INDUSTRY</font></b><font size=2 face="serif"> </font></p> <P align="center"> <FONT size=2 face="monospace">30</FONT></P>
 <P><font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">China's government and its agencies, including the Ministry of Information Industry and the State Council, regulate foreign
investment in the telecommunications industry through the promulgation of various laws and regulations and the issuance of various administrative orders and decisions. Foreign investment enterprises, companies and individuals are prohibited from
investing and participating in the operation and management of telecommunications networks without special approval by the State Council. China may promulgate new laws or regulations, or issue administrative or judicial decisions or interpretations,
which would further restrict or bar foreigners from engaging in telecommunications-related activities. The promulgation of laws or regulations or the issuance of administrative orders or judicial decisions or interpretations restricting or
prohibiting telecommunications activities by foreigners could have a substantial impact on our ongoing operations. </FONT></P> <P> <B><FONT size=2 face="serif">GOVERNMENTAL POLICIES IN CHINA COULD IMPACT OUR BUSINESS </FONT></B></P> <P> <FONT size=2
face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since 1978, China's government has been and is expected to continue reforming its economic and political systems. These reforms have resulted in and are expected to continue to result in significant
economic and social development in China. Many of the reforms are unprecedented or experimental and may be subject to change or readjustment due to a number of political, economic and social factors. We believe that the basic principles underlying
the political and economic reforms will continue to be implemented and provide the framework for China's political and economic system. New reforms or the readjustment of previously implemented reforms could have a significant negative effect on our
operations. Changes in China's political, economic and social conditions and governmental policies which could have a substantial impact on our business include: </FONT></P> <ul> <li> <FONT size=2 face="sans-serif"> </FONT><FONT size=2
face="serif">new laws and regulations or the interpretation of those laws and regulations; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">the introduction of measures to control inflation or stimulate growth;
</FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">changes in the rate or method of taxation; </FONT><FONT size=2 face="sans-serif"> </FONT></li> <li><FONT size=2 face="serif">the imposition of additional restrictions
on currency conversion and remittances abroad; </FONT></li> <li><FONT size=2 face="serif">and </FONT><FONT size=2 face="sans-serif"> </FONT><FONT size=2 face="serif">any actions which limit our ability to develop, manufacture, import or sell our
products in China, or to finance and operate </FONT><FONT size=2 face="serif">our business in China. </FONT></li> </ul> <P> <B><FONT size=2 face="serif">ECONOMIC POLICIES IN CHINA COULD IMPACT OUR BUSINESS </FONT></B></P> <P> <font size=2
face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><FONT size=2 face="serif">The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development in various respects such as
structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of payments position. In the past, the economy of China has been primarily a planned
economy subject to one- and five-year state plans adopted by central government authorities and largely implemented by provincial and local authorities which set production and development targets. </FONT></P> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since 1978, increasing emphasis had been placed on decentralization and the utilization of market forces in the development of China's economy. Economic reform measures adopted by China's government may be inconsistent
or ineffectual, and we may not in all cases be able to capitalize on any reforms. Further, these measures may be adjusted or modified in ways which could result in economic liberalization measures that are inconsistent from time to time or from
industry to industry or across different regions of the country. China's economy has experienced significant growth in the past decade. This growth, however, has been accompanied by imbalances in China's economy and has resulted in significant
fluctuations in general price levels, including periods of inflation. China's government has implemented policies from time to time to increase or restrain the rate of economic growth, control periods of inflation or otherwise regulate economic
expansion. While we may be able to benefit from the effects of some of these policies, these policies and other measures taken by China's government to regulate the economy could also have a significant negative impact on economic conditions in
China with a resulting negative impact on our business. </FONT></P> <P> <B><FONT size=2 face="serif">CHINA'S EXPECTED ENTRY INTO THE WTO CREATES UNCERTAINTY AS TO THE FUTURE ECONOMIC AND BUSINESS ENVIRONMENTS IN CHINA </FONT></B></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">China is expected to enter the World Trade Organization some time late in 2001 or in 2002. Entry into the WTO will require China to further reduce tariffs and eliminate other trade restrictions.
While China's entry into the WTO and the related relaxation of trade restrictions may lead to increased foreign investment, it may also lead to increased competition in China's markets from international companies. Whether or not China enters the
WTO, the impact on China's economy and our business is uncertain.</FONT></P> <P> <B><FONT size=2 face="serif">IF TAX BENEFITS AVAILABLE TO OUR SUBSIDIARIES LOCATED IN CHINA ARE REDUCED OR REPEALED, OUR BUSINESS COULD SUFFER </FONT></B></P> <p>
&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Our subsidiaries and joint ventures located in China enjoy tax benefits in China which are generally available to foreign investment enterprises, including full exemption from national enterprise
income tax for two years starting from the first profit-making year and/or a 50% reduction in national income tax rate for the following three years. In addition, local enterprise income tax is often</font></p> <P align="center"> <FONT size=2
face="monospace">31</FONT></P>
 <P> <FONT size=2 face="serif"> waived or reduced during this tax holiday/incentive period. Under current regulations in China, foreign investment enterprises that have been accredited as technologically advanced
enterprises are entitled to additional tax incentives. These tax incentives vary in different locales and could include preferential national enterprise income tax treatment at 50% of the usual rates for different periods of time. All of our active
subsidiaries in China were accredited as technologically advanced enterprises. The tax holidays applicable to our two principal subsidiaries, UTStarcom China and Hangzhou UTStarcom, which together accounted for approximately 98.8% of our revenues in
2000, will expire at the end of 2002. At that time, the tax rates for these two subsidiaries will increase from 7.5% to 15%, and from 10% to 15%, respectively, which will negatively impact our financial condition and results of
operations.</FONT></P> <P> <B><FONT size=2 face="serif">WE MAY BE EXPOSED TO CONTINGENT TAX LIABILITIES IN CHINA RESULTING FROM OUR FAILURE TO WITHHOLD SUFFICIENT AMOUNTS FOR CHINA'S INCOME TAX PURPOSES</FONT></B></P> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We employ a number of U.S. citizens who work on a full time basis in China. These expatriate employees participate in our stock option plans and have exercised a number of options granted under the plans. The option
exercises generated income which may be subject to personal income taxes under China's income tax laws. We withheld U.S. taxes in connection with these option exercises, but did not withhold China income taxes on the option exercises, and the
employees have not yet paid any taxes in China which may be due. Should the employees fail to pay the income taxes, we may be liable for such taxes in our capacity as withholding agent. In the event that it is determined that taxes are due in China,
we will apply for a refund from the U.S. tax authorities corresponding to the amount over-withheld in the U.S. due to the foreign tax credit which would then be applicable. In addition, our failure to collect and remit China withholding tax may also
subject us to penalties. </FONT></P> <P> <B><FONT size=2 face="serif">CHINA'S LEGAL SYSTEM EMBODIES UNCERTAINTIES THAT COULD NEGATIVELY IMPACT OUR BUSINESS </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China has a
civil law legal system. Decided court cases do not have binding legal effect on future decisions. Since 1979, many new laws and regulations covering general economic matters have been promulgated in China. Despite this activity to develop the legal
system, China's system of laws is not yet complete. Even where adequate law exists in China, enforcement of existing laws or contracts based on existing law may be uncertain and sporadic and it may be difficult to obtain swift and equitable
enforcement, or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China's judiciary in many cases creates additional uncertainty as to the outcome of any litigation. Further, interpretation of
statutes and regulations may be subject to government policies reflecting domestic political changes. </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China has adopted a broad range of related laws, administrative rules and
regulations that govern the conduct and operations of foreign investment enterprises and restrict the ability of foreign companies to conduct business in China. These laws, rules and regulations provide some incentives to encourage the flow of
investment into China, but also subject foreign companies, and foreign investment enterprises, including our subsidiaries in China, to a set of restrictions which may not always apply to domestic companies in China. Although China is increasingly
according foreign companies and foreign investment enterprises established in China the same rights and privileges as Chinese domestic companies in anticipation of China's entry into the WTO, these special laws, administrative rules and regulations
governing foreign companies and foreign investment enterprises may still place us and our subsidiaries at a disadvantage in relation to Chinese domestic companies and may adversely affect our competitive position. Moreover, as China's legal system
develops, the promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors and companies. </FONT></P> <P> <FONT size=2 face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many of our activities and products in China are subject to administrative review and approval by various national and local agencies of China's government. Because of the changes occurring in China's legal and
regulatory structure, we may not be able to secure the requisite governmental approval for our activities and products. Failure to obtain the requisite government approval for any of our activities or products could substantially harm our business.
</FONT></P> <P> <B><FONT size=2 face="serif">RISK RELATING TO OUR STOCK PERFORMANCE: </FONT></B></P> <P> <B><FONT size=2 face="serif">OUR STOCK PRICE IS HIGHLY VOLATILE </FONT></B></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
trading price of our common stock has fluctuated significantly since our initial public offering in March 2000. Our stock price could be subject to wide fluctuations in the future in response to many events or factors, including those discussed in
the preceding risk factors relating to our operations, as well as: </FONT></P> <ul> <li><font size=2 face="sans-serif"> </font><font size=2 face="serif">actual or anticipated fluctuations in operating results; </font></li> <li><font size=2
face="serif">changes in expectations as to future financial performance or changes in financial estimates or buy/sell recommendations </font><font size=2 face="serif">of securities analysts; </font></li> <li><font size=2 face="serif">changes in
governmental regulations or policies in China, such as the temporary suspension of sales of our PAS system </font><font size=2 face="serif">that occurred in May and June of 2000, which caused our stock price to drop; </font></li> <li><font size=2
face="serif">our, or a competitor&#146;s, announcement of new products, services or technological innovations; and </font><font size=2 face="sans-serif"></font> </li> </ul> <P align="center"> <FONT size=2 face="monospace">32</FONT></P>
 <ul> <li><FONT size=2 face="serif">the operating and stock price performance of other comparable companies. </FONT></li> </ul> <P><FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<i><font size=2
face="serif"></font></i>General market conditions and domestic or international macroeconomic factors unrelated to our performance may also affect our stock price. For these reasons, investors should not rely on recent trends to predict future stock
prices or financial results. In addition, following periods of volatility in a company&#146;s securities, securities class action litigation against a company is sometimes instituted. This type of litigation could result in substantial costs and the
diversion of management time and resources. </FONT></P> <P> <B><FONT size=2 face="serif">
<a name="352tx7"></a>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS </FONT></B></P> <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<i><font size=2 face="serif"></font></i>We are exposed to the impact of interest
rate changes and changes in foreign currency exchange rates. </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT size=2 face="serif">Interest Rate Risk</FONT></I><FONT size=2 face="serif">. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. The fair value of our investment portfolio would not be significantly affected by either a 10% increase or decrease in interest rates due mainly to the short term nature of our investment
portfolio. However, our interest income can be sensitive to changes in the general level of U.S. interest rates since the majority of our funds are invested in instruments with maturities less than one year. Our policy is to limit the risk of
principal loss and ensure the safety of invested funds by limiting market risk. Funds in excess of current operating requirements are invested in government-sponsored entities&#146; notes, commercial paper, floating rate corporate bonds and fixed
income corporate bonds. </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The table below represents carrying amounts and related weighted-average interest rates of maturity of our investment portfolio at June 30, 2001:
</FONT></P>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD width="12%">&nbsp;</TD>
<td width="60%" align="left"><font size=2 face="serif">(In thousands, except interest rates)</font></td>
<TD width="1%">&nbsp;</TD>
<TD width="5%" align="right">&nbsp;</TD>
<TD width="22%">&nbsp;</TD> </TR>
<TR>
<TD width="12%">&nbsp;</TD>
<td width="60%" align="left">&nbsp;</td>
<TD width="1%">&nbsp;</TD>
<TD width="5%" align="right">&nbsp;</TD>
<TD width="22%">&nbsp;</TD> </TR>
<TR>
<TD width="12%">&nbsp;</TD>
<td width="60%" align="left"><font size=2 face="serif">Cash and cash equivalents</font></td>
<TD width="1%">&nbsp;</TD>
<TD width="5%" align="right"><FONT size=2 face="serif">$217,657</FONT></TD>
<TD width="22%">&nbsp;</TD> </TR>
<TR>
<TD width="12%">&nbsp;</TD>
<td width="60%" align="left"><font size=2 face="serif">Average interest rate</font></td>
<TD width="1%">&nbsp;</TD>
<TD width="5%" align="right"><FONT size=2 face="serif">2.8%</FONT></TD>
<TD width="22%">&nbsp;</TD> </TR>
<TR>
<TD width="12%">&nbsp;</TD>
<td width="60%" align="left"><font size=2 face="serif">Short-term investments</font></td>
<TD width="1%">&nbsp;</TD>
<TD width="5%" align="right"><FONT size=2 face="serif">27,969</FONT></TD>
<TD width="22%">&nbsp;</TD> </TR>
<TR>
<TD width="12%">&nbsp;&nbsp;&nbsp;</TD>
<td width="60%" align="left"><font size=2 face="serif">Average interest rate</font></td>
<TD width="1%">&nbsp;</TD>
<TD width="5%" align="right"><FONT size=2 face="serif">4.8%</FONT></TD>
<TD width="22%">&nbsp;</TD> </TR>
<TR>
<TD width="12%">&nbsp;</TD>
<td width="60%" align="left"><font size=2 face="serif">Total investment securities</font></td>
<TD width="1%">&nbsp;</TD>
<TD align="right" width="5%"><font size=2 face="serif">245,626</font></TD>
<TD width="22%">&nbsp;</TD> </TR>
<TR>
<TD width="12%">&nbsp;</TD>
<td width="60%" align="left"><font size=2 face="serif">Average interest rate</font></td>
<TD width="1%">&nbsp;</TD>
<TD width="5%" align="right"><FONT size=2 face="serif">3.0%</FONT></TD>
<TD width="22%">&nbsp;</TD> </TR> </TABLE> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT size=2 face="serif">Foreign Exchange Rate Risk</FONT></I><FONT size=2 face="serif">. We are exposed to foreign exchange rate risk because our sales in China are
denominated in Renminbi and portions of our accounts payable are denominated in Japanese Yen. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities in China. Although the impact of
currency fluctuations of Renminbi to date has been insignificant, fluctuations in currency exchange rates in the future may have a material adverse effect on our results of operations. We have a multi-currency bank account in Japanese Yen for
purchasing portions of our inventories and supplies. The balance of this Japanese Yen account as of June 30, 2001 is approximately $9.7 million. </FONT></P> <P> <B><FONT size=2 face="serif">PART II &#150; OTHER INFORMATION </FONT></B></P> <P>
<B><FONT size=2 face="serif">
<a name="352tx9"></a>ITEM 2 &#150; CHANGES IN SECURITIES AND USE OF PROCEEDS </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We completed our initial public offering (&#147;IPO&#148;) on March 3, 2000 pursuant to a
Registration Statement on Form S-1 (File No. 333-93069). In the IPO, we sold an aggregate of 11,500,000 shares of common stock (including an over-allotment option of 1,500,000 shares) at $18.00 per share. </FONT></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The managing underwriters of our initial public offering were Merrill Lynch &amp; Co., Banc of America Securities LLC, U.S. Bancorp Piper Jaffray, Merrill Lynch Japan Inc., and E-TRADE
Securities Co., Ltd. The sale of the shares of common stock generated aggregate gross proceeds of approximately $207.0 million. The aggregate net proceeds were approximately $189.4 million, after deducting underwriting discounts and commissions of
approximately $14.5 million and expenses of the offering of approximately $3.1 million. None of such amounts were direct or indirect payments to our directors or officers or their associates, to persons owning 10 percent or more of any class of our
equity securities or to our affiliates.</FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">We completed a follow on public offering on August 3, 2001 pursuant to a Registration Statement on Form S-3 (File No. 333-63356). A total
of 10,350,000 shares of common stock (including the underwriters&#146; over-allotment) were registered. We sold an aggregate of 7,400,000 shares of common stock, which included the underwriters&#146; over-allotment, at a price to the public of
$20.00 per share. Selling stockholders sold an additional 2,950,000 shares of common stock in the offering. </FONT></P> <p align="center"><font size=2 face="monospace">33</font></p>
 <P>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The managing underwriter of our follow on public offering was Merrill Lynch &amp; Co. Salomon Smith Barney, Banc of America Securities LLC, HSBC Securities
(USA) Inc., and U.S. Bancorp Piper Jaffray served as co-managers of our offering. The sale of the shares of common stock generated aggregate gross proceeds of approximately $148.0 million. The aggregate net proceeds that we received was
approximately $139.7 million, after deducting underwriting discounts and commissions of approximately $7.3 million and expenses of the offering of approximately $1.0 million. None of such amounts were direct or indirect payments to our directors or
officers or their associates, to persons owning 10 percent or more of any class of our equity securities or to our affiliates. The aggregate gross proceeds for the selling stockholders were approximately $59.0 million. </FONT></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The net proceeds are expected to be used for general corporate purposes, including research and development, expansion of our sales and marketing organization and working capital and capital
expenditures. The amounts actually expended for such purposes may vary significantly and will depend on a number of factors, including our future revenues and cash generated by operations and the other factors described under "Factors Affecting
Future Operating Results". Accordingly, we retain broad discretion in the allocation of the net proceeds of the offering. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies or product
offerings. As of August 6, 2001 we have not used any of the net proceeds and the entire amounts of net proceeds of our initial public offering remains in our cash and cash equivalents and short-term investments accounts. In addition, as of June 30,
2001, there are no material agreements or commitments with respect to any acquisition or investment activities. </FONT></P> <P> <B><FONT size=2 face="serif">
<a name="352tx10"></a>ITEM 4 </FONT></B><FONT size=2 face="monospace">&#150;</FONT><B><FONT size=2 face="serif"> SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS </FONT></B></P> <P> <FONT size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font
size=2 face="serif"></font>On May 11, 2001, the Annual Meeting of Stockholders of the Company was held in Oakland, California. </FONT></P> <P> <FONT size=2 face="serif">An election of Class I directors was held with the following individuals being
elected to the Board of Directors of the Company as Class I directors: </FONT></P>
<TABLE width="60%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD><u><B><FONT size=2 face="serif">NAME</FONT></B></u></TD>
<TD colspan="2"> <center> <u><B><FONT size=2 face="serif">VOTED FOR</FONT></B> </u> </center> </TD>
<TD colspan="2"> <center> <u><B><FONT size=2 face="serif">VOTES WITHHELD</FONT></B> </u> </center> </TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Thomas J. Toy</FONT></TD>
<TD colspan="2"> <center> <FONT size=2 face="serif">86,620,300</FONT> </center> </TD>
<TD colspan="2"> <center> <FONT size=2 face="serif">172,290</FONT> </center> </TD> </TR>
<TR>
<TD><FONT size=2 face="serif">Ying Wu</FONT></TD>
<TD colspan="2"> <center> <FONT size=2 face="serif">83,319,322</FONT> </center> </TD>
<TD colspan="2"> <center> <FONT size=2 face="serif">3,473,268</FONT> </center> </TD> </TR> </TABLE> <P> <FONT size=2 face="serif">The current Class II and Class III directors with unexpired terms are as follows: </FONT></P> <P> <B><I><FONT size=2
face="serif">Continuing Class II Directors:<br> </FONT></I></B><FONT size=2 face="serif">Larry D. Horner<br> Chauncey Shey </FONT></P> <P> <B><I><FONT size=2 face="serif">Continuing Class III Directors:<br> </FONT></I></B><FONT size=2
face="serif">Hong Liang Lu<br> Masayoshi Son </FONT></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The stockholders approved the Company&#146;s 2001 Director Option Plan (the &#147;2001 Director Plan&#148;) and the reservation of
1,200,000 shares of the Company&#146;s common stock for issuance thereunder. There were 78,182,651 votes cast for the 2001 Director Plan, 8,402,040 votes cast against the 2001 Director Plan and 207,899 abstentions. </FONT></P> <P>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">The stockholders ratified the appointment of PricewaterhouseCoopers LLP as the Company&#146;s independent public accountants to audit the financial statements of the Company for the fiscal year
ending December 31, 2001. There were 86,728,893 votes cast for the appointment, 54,472 votes cast against the appointment and 9,225 abstentions. </FONT></P> <P> <B><FONT size=2 face="serif">
<a name="352tx11"></a>ITEM 5 </FONT></B><FONT size=2 face="monospace">&#150;</FONT><B><FONT size=2 face="serif"> OTHER INFORMATION</FONT></B><FONT size=2 face="serif"> </FONT></P> <P> <FONT size=2 face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font
size=2 face="serif"></font>Our directors, officers, or employees have entered, and may from time to time enter, into good faith trading plans pursuant to SEC Rule 10b5-1(c).</FONT></P> <P align="center"> <FONT size=2 face="monospace">34</FONT></P>
 <P> <B><FONT size=2 face="serif">
<a name="352tx12"></a>ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</FONT></B></P> <p><FONT size=2 face="serif">(a) Exhibits:</FONT></p>
<TABLE width="100%" border=0 cellspacing=0 cellpadding=0>
<TR>
<TD width="6%"><u><font size=2 face="serif">NUMBER </font></u></TD>
<TD width="5%"><u></u></TD>
<TD width="94%"><u><font size=2 face="serif">EXHIBIT DESCRIPTION</font></u></TD> </TR>
<TR>
<TD width="6%"><FONT size=2 face="serif">10.64*</FONT></TD>
<TD width="5%">&nbsp;</TD>
<TD width="94%"><FONT size=2 face="serif">2001 Director Option Plan.</FONT></TD> </TR>
<TR>
<TD width="6%" valign="top"><FONT size=2 face="serif">10.65*+</FONT></TD>
<TD width="5%">&nbsp;</TD>
<TD width="94%"><FONT size=2 face="serif">Strategic Alliance, Purchase and License Agreement between UTStarcom, Inc. and Telecommunications D&#146;Haiti S.A.M. dated as of April 12, 2001.</FONT></TD> </TR>
<TR>
<TD width="6%"><FONT size=2 face="serif">10.66</FONT></TD>
<TD width="5%">&nbsp;</TD>
<TD width="94%"><FONT size=2 face="serif">2001 Director Option Plan, as amended on July 10, 2001.</FONT></TD> </TR> </TABLE> <P> <FONT size=2 face="serif">(*) Incorporated by reference to the Registrant&#146;s Registration Statement on Form S-3 (No.
333-63356), as amended, which became effective on July 18, 2001.</FONT></P> <P> <FONT size=2 face="serif">(+) Certain information in this Exhibit has been omitted and filed separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions. </FONT></P> <p><font size=2 face="serif">(b) Reports on Form 8-K:</font></p> <p><font size=2 face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif"></font>1. A Current Report on Form 8-K was filed
on July 12, 2001 to report our earnings release for the second quarter of fiscal 2001.</font> </p> <hr noshade align="left" width="10%" size="1"> <P>&nbsp; </P> <P align="center"> <FONT size=2 face="monospace">35</FONT></P>
 <P align="center"> <B><FONT size=2 face="serif">
<a name="352tx13"></a>UTSTARCOM, INC. </FONT></B></P> <P align="center"> <B><FONT size=2 face="serif">SIGNATURES </FONT></B></P> <P> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2 face="serif">Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. </FONT></P> <P> <FONT size=2 face="serif">Date: August 6, 2001 </FONT></P>
<table width="100%" border="0" cellspacing="0" cellpadding="2">
<tr>
<td width="50%">&nbsp;</td>
<td> <p><font size=2 face="serif">UTSTARCOM, INC.<br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </font><font size=2 face="serif">(Registrant) </font></p> </td> </tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr>
<td>&nbsp;</td>
<td><font size=2 face="serif">BY: </font></td> </tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr>
<td>&nbsp;</td>
<td><font size=2 face="serif">/s/ Hong Liang Lu </font></td> </tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr>
<td>&nbsp;</td>
<td> <hr noshade align="left" width="80%" size="1"> </td> </tr>
<tr>
<td>&nbsp;</td>
<td><font size=2 face="serif">Hong Liang Lu <br> President, Chief Executive Officer and Director </font></td> </tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr>
<td>&nbsp;</td>
<td><font size=2 face="serif">/s/ Michael J. Sophie </font></td> </tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr>
<td>&nbsp;</td>
<td> <hr noshade align="left" width="80%" size="1"> </td> </tr>
<tr>
<td>&nbsp;</td>
<td><font size=2 face="serif">Michael J. Sophie <br> Chief Financial Officer and Assistant Secretary </font></td> </tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr> </table> <P>&nbsp;</P> <P align="center"> <FONT size=2 face="monospace">36</FONT></P>
</BODY></HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.66
<SEQUENCE>3
<FILENAME>dex1066.htm
<DESCRIPTION>2001 DIRECTOR OPTION PLAN
<TEXT>
<HTML><HEAD>
<TITLE>2001 Director Option Plan</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF"> <p align="right"><b><font size=2 face="Times New Roman">Exhibit 10.66</font></b></p> <p><font size=3 face="Times New Roman"> </font></p> <p align="center"><b><font size=2 face="Times New Roman">UTSTARCOM, INC.<br>
</font></b><b><font size=2 face="Times New Roman">2001 DIRECTOR OPTION PLAN<br> </font></b><b><font size=2 face="Times New Roman">(Amended July 10, 2001)</font></b><font size=3 face="Times New Roman"> </font></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.</font></b> <b><font size=2><u>Purposes of the Plan</u>. The purposes of this 2001 Director Option Plan are to attract and retain the best available personnel for service as Outside Directors
(as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board.</font><font size=2 face="Times New Roman"> </font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All options granted hereunder shall be nonstatutory stock options.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. <u>Definitions</u>. As used herein, the following definitions shall apply:</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) &quot;<u>Board</u>&quot; means the Board of Directors of the Company.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) &quot;<u>Code</u>&quot; means the Internal Revenue Code of 1986, as amended.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) &quot;<u>Common Stock</u>&quot; means the common stock of the Company.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) &quot;<u>Company</u>&quot; means UTStarcom, Inc., a Delaware corporation.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) &quot;<u>Director</u>&quot; means a member of the Board.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f) &quot;<u>Disability</u>&quot; means total and permanent disability as defined in section 22(e)(3) of the Code.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g) &quot;<u>Employee</u>&quot; means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of
a Director&#146;s fee by the Company shall not be sufficient in and of itself to constitute employment by the Company.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)
&quot;<u>Exchange Act</u>&quot; means the Securities Exchange Act of 1934, as amended.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) &quot;<u>Fair Market Value</u>&quot;
means, as of any date, the value of Common Stock determined as follows:</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) If the Common Stock is
listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination as reported in The Wall Street Journal or such other source as the Board deems
reliable;</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling
prices are not reported, the Fair Market Value of a Share of Common Stock shall be </font></b></p>
 <p><b><font size=2 face="Times New Roman">the mean between the high bid and low asked prices for the Common Stock for the last market trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable; or</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) In the absence of an established
market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j) &quot;<u>Inside
Director</u>&quot; means a Director who is an Employee.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k) &quot;<u>Option</u>&quot; means a stock option granted pursuant to the
Plan.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l) &quot;<u>Optioned Stock</u>&quot; means the Common Stock subject to an Option.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(m) &quot;<u>Optionee</u>&quot; means a Director who holds an Option.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(n) &quot;<u>Outside Director</u>&quot; means a Director who is not an Employee.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(o) &quot;<u>Parent</u>&quot; means a parent corporation,&quot; whether now or hereafter existing, as defined in Section 424(e) of the Code.</font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(p) &quot;<u>Plan</u>&quot; means this 2001 Director Option Plan.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(q) &quot;<u>Share</u>&quot; means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(r) &quot;<u>Subsidiary</u>&quot; means a subsidiary corporation,&quot; whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code
of 1986.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. <u>Stock Subject to the Plan</u>. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned
and sold under the Plan is 1,200,000 Shares (the Pool&quot;). The Shares may be authorized, but unissued, or reacquired Common Stock.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for
future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan.</font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4. Administration and Grants of Options under the Plan.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)
<u>Procedure for Grants</u>. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions:</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options.</font></b></p> <p align="center"><b><font size=2 face="Times New Roman">-2-</font></b></p>
 <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) Each Outside Director shall be automatically granted an Option to purchase
eighty thousand (80,000) Shares (the &quot;First Option&quot;) on the date on which the later of the following events occurs: (A) the effective date of this Plan, as determined in accordance with Section 6 hereof, or (B) the date on which such
person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy (the &quot;Anniversary Date&quot;); provided, however, that an Inside Director who ceases to be an
Inside Director but who remains a Director shall not receive a First Option.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) At such time as
each Outside Director&#146;s First Option is fully vested, each Outside Director shall be automatically granted an Option to purchase twenty thousand (20,000) Shares (a &quot;Subsequent Option&quot;) on the Anniversary Date of each year provided he
or she is then an Outside Director. In the event an Outside Director does not receive a First Option due to previously being an Inside Director, such Outside Director shall receive a Subsequent Option at the Company&#146;s first annual meeting of
the stockholders following such conversion from an Inside Director to an Outside Director and at each subsequent annual stockholder meeting thereafter, provided such Outside Director is serving as an Outside Director on each such
date.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an
Option granted before the Company has obtained stockholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 16 hereof.</font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) The terms of a First Option granted hereunder shall be as follows:</font></b><font size=3 face="Times New Roman">
</font></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A) the term of the First Option shall be ten (10) years.</font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B) the First Option shall be exercisable only while the Outside Director remains a
Director of the Company, except as set forth in Sections 8 and 10 hereof.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(C) the exercise price per Share shall be one hundred percent (100%) of the Fair Market Value per Share on
the date of grant of the First Option.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(D) subject to Section 10 hereof,
the First Option shall become exercisable as to twenty-five percent (25%) of the Shares subject to the First Option on each anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such
dates.</font></b><b><font size=2 face="Times New Roman"> </font></b></p> <p><b><font size=2 face="Times New Roman"><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></b>(vi) The terms of a Subsequent Option granted hereunder shall be as follows:</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(A) the term of the Subsequent Option shall be ten (10) years.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(B) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the
Company, except as set forth in Sections 8 and 10 hereof.</font></b></p> <p align="center"><b><font size=2 face="Times New Roman">-3-</font></b></p>
 <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(C) the exercise price per Share shall be one hundred
percent (100%) of the Fair Market Value per Share on the date of grant of the Subsequent Option.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(D) subject to Section 10 hereof, the Subsequent Option shall become exercisable as to one hundred percent
(100%) of the Shares subject to the Subsequent Option on the anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such date.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the
number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such
time, if any, as additional Shares become available for grant under the Plan through action of the Board or the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.</font></b> <b><font size=2><u>Eligibility</u>. Options may be granted only to Outside Directors. All Options shall be
automatically granted in accordance with the terms set forth in Section 4 hereof.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Plan shall not confer upon any Optionee any
right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director&#146;s relationship with the
Company at any time.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.</font></b> <b><font size=2><u>Term of Plan</u>. The Plan shall become effective upon the later to occur of its adoption by the Board or
its approval by the stockholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.</font></b> <b><font size=2><u>Form of Consideration</u>. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of
(i) cash, (ii) check, (iii) other Shares, provided Shares acquired from the Company, (x) have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the
foregoing methods of payment.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8. <u>Exercise of Option</u>. </font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) <u>Procedure for Exercise; Rights as a Stockholder</u>. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof;
provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An Option may not be exercised for a fraction of a Share.</font></b></p> <p align="center"><b><font size=2 face="Times New Roman">-4-</font></b></p>
 <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An Option shall be deemed to be exercised when written notice of such exercise has
been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may
consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares
so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as
provided in Section 10 of the Plan.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. </font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) <u>Termination of Continuous Status as a Director</u>. Subject to Section 10 hereof, in the event an Optionee&#146;s status as a Director terminates (other than
upon the Optionee&#146;s death or Disability), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of
such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not vested as to his or her entire Option on the date of such termination, the shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. </font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) <u>Disability of Optionee</u>. In the event Optionee&#146;s status as a Director terminates as a result of Disability, the Optionee may
exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not vested as to his or her entire Option on the date of termination, the shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d) <u>Death of Optionee</u>. In the event of an Optionee&#146;s death, the Optionee&#146;s estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not vested as to his or her entire an Option on the date of death, the shares covered by the unvested portion of the Option shall revert to the Plan. To the extent that the Optionee&#146;s
estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.</font></b></p> <p align="center"><b><font size=2 face="Times New Roman">-5-</font></b></p>
 <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.</font></b> <b><font size=2><u>Non-Transferability of Options</u>. The Option may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10. <u>Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale</u>.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) <u>Changes in Capitalization</u>. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, the
number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by
each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to have been effected without receipt of consideration. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) <u>Dissolution or Liquidation</u>. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously
exercised, it shall terminate immediately prior to the consummation of such proposed action. </font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c) <u>Merger or Asset Sale</u>. In
the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent
or Subsidiary thereof (the Successor Corporation). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a
director of the Successor Corporation. Following such assumption or substitution, if the Optionee&#146;s status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(b) through (d)
above.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the Successor Corporation does not assume an outstanding Option or substitute for it an
equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option
confers the right to purchase or receive, for each Share of</font></b></p> <p align="center"><b><font size=2 face="Times New Roman">-6-</font></b></p>
 <p><b><font size=2 face="Times New Roman">Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by olders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the
outstanding Shares). If such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Board may, with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders
of Common Stock in the merger or sale of assets.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11. <u>Amendment and Termination of the Plan</u>.</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a) <u>Amendment and Termination</u>. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or
discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock
exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. In addition, no such amendment shall be made without the approval of the Company&#146;s stockholders to the extent
such approval is required by law or agreement or if such amendment would:</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i) expand the classes of
persons to whom grants may be made under Section 4 or 5 of the Plan;</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii) increase the number of
Shares authorized for grant under Section 3 of the Plan;</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii) increase the number of Shares which may
be granted to any one participant under Section 4 of the Plan, except as provided in Section 10(a) of the Plan;</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv) allow the creation of additional types of awards;</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v) permit decreasing the exercise price on any outstanding Option;</font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi) permit acceleration of the exercisability of any Option, except as provided in Section 10 of the Plan; or</font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vii) change any of the provisions of this Section 11. </font></b></p> <p><b><font size=2
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) <u>Effect of Amendment or Termination</u>. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in
full force and effect as if the Plan had not been amended or terminated.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12. <u>Time of Granting Options</u>. The date of grant of an Option shall, for all
purposes, be the date determined in accordance with Section 4 hereof.</font></b></p> <p align="center"><b><font size=2 face="Times New Roman">-7-</font></b></p>
 <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13. <u>Conditions Upon Issuance of Shares</u>. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such
Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.</font></b></p>
<p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned
relevant provisions of law.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inability of the Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company&#146;s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained. </font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14. <u>Reservation of Shares</u>. The Company, during the term of this Plan, will at all times reserve and keep available
such number of Shares as shall be sufficient to satisfy the requirements of the Plan.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;15. <u>Option Agreement</u>. Options shall be evidenced by written option
agreements in such form as the Board shall approve.</font></b></p> <p><b><font size=2 face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;16. <u>Stockholder Approval</u>. The Plan shall be subject to approval by the stockholders of the Company
within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules.</font></b></p> <p
align="center"><b><font size=2 face="Times New Roman">-8-</font></b></p> <p><font size=3 face="Times New Roman"> </font></p>
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