FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are based on current expectations, estimates, forecasts and projections about us, our future performance and the industries in which we operate as well as on our management's assumptions and beliefs. Statements that contain words like "expects," "anticipates," "may," "will," "targets," "projects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are forward-looking statements. In addition, any statements that refer to trends in our businesses, future financial results, and our liquidity and business plans are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks and uncertainties, including those discussed in "Part II, Item 1A-Risk Factors" of this Form 10-Q. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We do not guarantee future results, and actual results, developments and business decisions may differ from those contemplated by the forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.

EXECUTIVE SUMMARY

We design, manufacture and sell telecommunications infrastructure, handsets and customer premise equipment, and provide services associated with their installation, operation, and maintenance. Our products are sold primarily to telecommunications service providers or operators. We sell an extensive range of products that are designed to enable voice, data and video services for our operator customers and consumers around the world. Over the past few years, we have expanded our focus to build a global presence and currently sell our products in several established and emerging growth markets, including North America, China, Japan, India, Central and Latin America, Europe, the Middle East, Africa and Southeast and North Asia.

We differentiate ourselves with products designed to reduce network complexity, integrate high performance capabilities and allow a simple transition to next generation networks. We design our products to facilitate cost-effective and efficient deployment, maintenance and upgrades.

Because our products are IP-based, our customers can more easily integrate our products with other industry standard hardware and software. Additionally, we believe we can introduce new features and enhancements that can be cost-effectively added

to our customers' existing networks. IP-based devices can be changed or upgraded in modules, saving our customers the expense of replacing their entire system installation. Our strategy is built upon the following key concepts:

†          identify key technology shifts and trends before our competitors;



†          develop differentiated products, which are designed to offer new and
innovative revenue-generating features and enhanced functionality for our
customers;

† reduce overall operational and deployment costs of our customers' networks, enabling them to meet the demands of a greater number of consumers by expanding their addressable markets; and

† develop tailored products and services to suit customers' current needs and to anticipate future needs.

Our current strategy is to focus on the key segments of the IP technology market which we have identified as having the greatest potential for profitable growth. Specifically, our strategy is to:

† Invest our R&D resources in select IP-based technologies where we believe we can create unique end-to-end solutions that will deliver strong market share and create value for our customers;

† Drive revenue from this technology in select core geographic markets where there is high acceptance of the disruptive shift to IP technologies and where we have established credibility with customers; and

† Supplement revenue outside of core markets by using regional technology and sales partners in areas where we can leverage their strong customer relationships.

Management Changes

Effective July 1, 2008, Peter Blackmore, President of the Company, was appointed Chief Executive Officer and a member of the Board of Directors. Hong Liang Lu, who was serving as Chief Executive Officer and as a member of the Board, was appointed Executive Chairman of the Board. Thomas Toy, who was serving as Chairman of the Board, was appointed as Lead Director of the Board. On August 28, 2008, Francis Barton, our previous Chief Financial Officer and Executive Vice President, announced his retirement. Viraj Patel, our Corporate Controller, Vice President and Chief Accounting Officer, was also named interim Chief Financial Officer.

Sale of Investments

During the first quarter of 2008, we sold our remaining investment in Gemdale for approximately $32.9 million and recognized a gain of $32.4 million in other income (expense), net. We also sold our investment in Infinera for approximately $9.2 million and recognized a gain of $7.3 million in other income (expense), net.

Sale of Non-core Assets and Restructuring Programs

On July 1, 2008, we sold UTStarcom Personal Communications LLC, a wholly-owned subsidiary of the Company ("PCD") to an entity controlled by AIG Global Investment Group and certain other investors for a total sale consideration of approximately $233.4 million. Pursuant to the terms of the divestiture agreement, we may be entitled to receive up to an additional $50 million earnout payment in 2011 based on the achievement of certain earnings levels of the divested business ("New PCD") through December 31, 2010. We recorded a net loss of $0.5 million from the divestiture included as a component of continuing operations in the third quarter of 2008. As a result of the divestiture of PCD, we will lose a substantial part of our revenue; however, management expects improvement in gross margin as a percent of total sales as the gross margins from our remaining core segments were generally higher than that of the PCD segment. Additionally, on July 31, 2008, we completed the divestiture of our Mobile Solutions Business Unit ("MSBU") to a global private equity firm. During the third quarter of 2008, we recorded a net gain on divestiture of MSBU of $3.9 million.

In September 2007, we announced the results of an in-depth strategic analysis of the Company undertaken by the management team with the aim of defining a new corporate strategy and making UTStarcom an even stronger global competitor. We completed the workforce reduction during the first quarter of 2008, having reduced our worldwide work force by approximately 800 employees, or approximately 12% of the Company's headcount. We expect cost savings from planned restructuring activities to

provide liquidity for operations, to be used to offset market forces or to be reinvested in our businesses to strengthen our competitiveness.

Primarily as a result of the success in executing on management's strategy of divesting our non-core businesses, at September 30, 2008, we had cash and cash equivalents of $329.0 million as compared to $253.9 million at June 30, 2008. Although management believes we now have sufficient liquidity to finance our anticipated working capital and capital expenditure requirements for the next twelve months, in an effort to further improve our profitability and cash flows, management has intensified its focus on our fixed cost base to better align with operations, market demand and projected sales levels. If projected sales do not materialize, management may need to further reduce expenses. In addition, we may require additional equity or debt financing. If future funds are raised through issuance of stock or debt, these securities could have rights, privileges or preference senior to those of our common stock and debt covenants could impose restrictions on our operations. The sale of additional equity securities or debt financing could result in additional dilution to our current shareholders. There can be no assurance that additional financing, if required, will be available on terms satisfactory to us or at all.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience, knowledge of economic and market factors and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.

On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that the estimates, assumptions and judgments involved in revenue recognition, receivables and allowances for doubtful accounts, accruals including third party commissions payable, restructuring liabilities, litigation and other contingencies, stock-based compensation, product warranty, variable interest entities, inventories, deferred costs, research and development and capitalized software development costs, income taxes, impairment of goodwill, intangible assets and long-lived assets, and valuation and impairment of investments have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Management believes that there have been no significant changes during the nine months ended September 30, 2008 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of the new accounting pronouncements that affect us, see Note 2 to our Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

During the fourth quarter of 2007, the Company announced a new organization structure to align the business units with its corporate strategy. This new organization structure changed the reporting segments on which the Company measures performance and allocates resources. Effective October 1, 2007, the new reporting segments were as follows:

† Broadband Infrastructure;

† Multimedia Communications;

† Personal Communications Division;

† Handsets;

† Services; and

† Other, which includes the Mobile Solutions and Custom Solutions business units.

Our Broadband Infrastructure segment is responsible for software and hardware products that enable end users to access high-speed, cost effective wireline data, voice and media communication. Our products within each of these categories include multiple hardware and software subsystems that can be offered in various combinations to suit individual carrier needs. Our system products are based on widely-adopted global communications standards and are designed to allow service providers to quickly and cost-efficiently integrate our systems into their existing networks and deploy our systems in new broadband, IP and wireless network rollouts. Our products are also designed for quick and cost-effective transition to future network technologies, enabling our customers to make the best use of their existing infrastructure.

Our Multimedia Communications segment is responsible for the development and management of internet protocol television ("IPTV") and related technologies plus our core Next Generation Network ("NGN") software. The Personal Handyphone System ("PHS") infrastructure and wireless systems teams are also a part of this segment.

On July 1, 2008, we sold our Personal Communications Division, which sold and supported handsets other than Personal Access System ("PAS") handsets, mainly in the United States. See Note 3 to our Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our Handsets segment designs, builds and sells consumer handset devices, including PAS handsets, that allow customers to access wireless services. All handset revenues within China are included in this segment. After the disposition of the Personal Communications Division, all revenue related to handset sales to the newly formed entity, Personal Communications Devices, LLC, ("New PCD") are also included in this segment.

We support the growth and operation of the installed base of our system solutions through our professional services business, UTStarcom Services. Our globally-deployed experts assist the Company's customers with activities ranging from network planning, circuit-to-packet network migration planning, systems integration, program management, operations management and support, and knowledge transfer.

Included in our Other segment are our Mobile Solutions Business Unit and our Custom Solutions Business Unit. On July 31, 2008, we sold our Mobile Solutions Business Unit ("MSBU") which was responsible for the development, sales and service of our wireless IPCDMA/IPGSM product line. Our Custom Solutions Business Unit is responsible for the development, sales and service of other non-core products such as IP messaging, transaction gateways, and Remote Access Server ("RAS") which enables users to access network data and services from remote locations and our Packet Data Services Node ("PDSN") product line which connects CDMA cellular network infrastructure equipment to IP networks.

NET SALES



                                 Three months ended September 30,                  Nine months ended September 30,
                                       % of net                % of net                  % of net                  % of net
                             2008       sales        2007       sales         2008        sales         2007        sales
                                                                    (in thousands)
Net Sales by Segment
Broadband Infrastructure   $  31,112         17 %  $  40,892          6 %  $    92,591          7 %  $   105,673          6 %
Multimedia Communication      57,787         32 %     58,289          9 %      199,251         14 %      194,283         12 %
PCD                                -          -      458,301         71 %      879,588         63 %    1,104,428         67 %
Handsets                      71,906         40 %     59,254          9 %      165,390         12 %      191,150         11 %
Services                      14,197          8 %     14,655          2 %       41,172          3 %       38,320          2 %
Other                          5,605          3 %     15,103          3 %       21,360          1 %       26,786          2 %
                           $ 180,607        100 %  $ 646,494        100 %  $ 1,399,352        100 %  $ 1,660,640        100 %




                           Three months ended September 30,                 Nine months ended September 30,
                                  % of net               % of net                 % of net                 % of net
                        2008       sales       2007       sales        2008        sales        2007        sales
                                                             (in thousands)
Net Sales by region
United States         $  43,127         24 % $ 457,945         71 % $   907,770         65 % $ 1,112,448         67 %
China                    97,605         54 %   124,228         19 %     325,479         23 %     390,184         24 %
Japan                    10,303          6 %    19,863          3 %      32,696          2 %      54,701          3 %
Other                    29,572         16 %    44,458          7 %     133,407         10 %     103,307          6 %
Total net sales       $ 180,607        100 % $ 646,494        100 % $ 1,399,352        100 % $ 1,660,640        100 %

Three months ended September 30, 2008 and 2007

Net sales decreased by $465.9 million, or 72%, to $180.6 million during the three months ended September 30, 2008 compared to the same period in 2007. The decrease was primarily due to PCD and MSBU being sold in July 2008. For the three months ended September 30, 2007, the disposed PCD segment and MSBU represented $458.3 million and $9.4 million of net sales, respectively.

Net sales excluding PCD and MSBU increased by $1.5 million during the three months ended September 30, 2008 compared to the same period in 2007. Net sales of our Handset segment increased by $12.7 million, or 21%, mainly due to sales to New PCD in the third quarter of 2008. The increased sales to New PCD more than offset the decline in sales of PAS handsets in China. Multimedia Communication segment net sales decreased by $0.5 million, or 1%, for the three months ended September 30, 2008 compared to the same period in 2007, mainly due to higher RollingStream, Set Top Box ("STB") and NGN sales offset by the decline in PAS infrastructure sales which continue to experience weakening demand. Broadband Infrastructure segment net sales decreased by $9.8 million due to lower CPE sales.

Nine months ended September 30, 2008 and 2007

Net sales decreased by 16%, or $261.3 million, for the nine months ended September 30, 2008 compared to the same period in 2007. The decrease was primarily due to PCD and MSBU being sold in July 2008. The net sales of the disposed PCD segment and MSBU decreased by $224.8 million and $8.2 million, respectively, for the nine months ended September 30, 2008 compared to the same period in 2007.

Multimedia Communication segment net sales increased by $5.0 million, or 3%, during the nine months ended September 30, 2008 compared to the same period in 2007, mainly due to an increase of our NGN and STB sales, partially offset by the continued weakening demand for our PAS infrastructure products. Broadband Infrastructure segment net sales decreased by $13.1 million or 12% during the nine months ended September 30, 2008 compared to the same period in 2007. This decrease was mainly due to lower CPE sales. Due to the customer concentration in this segment, revenues fluctuate based upon the magnitude and timing of revenue recognition on certain contracts. Handset sales declined by $25.8 million, or 13%, during the nine months ended September 30, 2008

due to both price and volume declines of our PAS handsets sold when compared to the same period in 2007. As we have been experiencing in recent quarters, increased competition and a decline in PAS subscribers have resulted in lower demand and decrease in average selling price for our handsets.

For additional discussion see "Segment Reporting" section of this Item 2.

In 2008 and beyond, we expect that new orders for PAS handsets and infrastructure equipment will continue to decline due to the China telecommunications industry restructuring as well as increased pricing pressure. We expect our CDMA and TDSCDMA handsets will contribute more to our revenue and partially offset the decline of our PAS business. We also plan to introduce HSDPA ("High Speed Downlink Packet Access") data cards supported by TDSCDMA networks and EVDO ("Evolution Data Only") data cards supported by CDMA 3G networks, which we expect to have relatively higher gross margins and average selling prices in mid-2009 to capitalize on the data business in China. However, we do not anticipate that these sales will fully offset the decline in PAS handsets and infrastructure sales. We currently offer and have initial market acceptance of our IPTV products in China, Japan, India, Taiwan and other geographic regions. We believe that the IPTV market presents a meaningful growth opportunity in these regions as well as other regions where we have targeted to expand our IPTV offerings.

GROSS PROFIT



                         Three months ended September 30,               Nine months ended September 30,
                                 Gross                 Gross                   Gross                  Gross
                       2008     profit %     2007     profit %      2008      profit %     2007      profit %
                                                          (in thousands)
Gross profit by
Segment
Broadband
Infrastructure       $  3,032         10 % $ (4,770 )      (12 )% $   6,922          7 % $   9,544          9 %
Multimedia
Communication          30,846         53 %   16,643         29 %     92,820         47 %    67,052         35 %
PCD                         -          -     26,983          6 %     69,005          8 %    59,750          5 %
Handsets               14,965         21 %   16,966         29 %     37,961         23 %    64,409         34 %
Services                4,720         33 %    3,517         24 %     11,832         29 %     4,248         11 %
Other                   3,764         67 %    5,094         34 %     12,814         60 %    14,444         54 %
                     $ 57,327         32 % $ 64,433         10 %  $ 231,354         17 % $ 219,447         13 %

Cost of sales consists primarily of material and labor costs, including stock-based compensation, associated with manufacturing, assembly and testing of products, costs associated with installation and customer training, warranty costs, fees to agents, inventory write-downs and overhead. Cost of sales also includes import taxes and tariffs on components and assemblies. Some components and materials used in our products are purchased from a single supplier or a limited group of suppliers and, in some cases, are subject to obtaining Chinese import permits and approvals. We also rely on third party manufacturers to manufacture and assemble most of our CDMA handsets.

Our gross profit has been affected by average selling prices, material costs, product mix, the impact of warranty charges and contract loss provisions as well as inventory reserves and release of deferred revenues and related costs pertaining to prior years. Our gross profit, as a percentage of net sales, varies among our product families. We expect that our overall gross profit, as a percentage of net sales, will fluctuate in the future as a result of shifts in product mix, stage of product life cycle, anticipated decreases in average selling prices and our ability to reduce cost of sales.

Three months ended September 30, 2008 and 2007

Gross profit was $57.3 million, or 32% of net sales for the three months ended September 30, 2008, compared to $64.4 million, or 10% of net sales for the corresponding quarter of 2007. The overall gross profit decrease in absolute dollars was primarily due to the disposition of PCD and MSBU during July 2008 which accounted for $28.1 million decrease in gross profit

resulting from the related decrease in sales. Gross profit as a percentage of sales increased mainly due to the disposition of PCD which had relatively lower gross profit percentages compared to our other segments.

Excluding PCD and MSBU, gross profit increased by $21.0 million for the three months ended September 30, 2008 compared to the corresponding quarter of 2007. Gross profit in the Broadband Infrastructure segment increased primarily due to higher inventory and loss contract provision recorded in the third quarter of 2007. Gross profit in the Multimedia Communication segment improved mainly due to increased sales of higher margin NGN products as well as the impact of the reduction of $4.5 million of accrued third party commissions in 2008. In addition, the three months ended September 30, 2007 included reserves related to the exit of certain product lines.

Nine months ended September 30, 2008 and 2007

Gross profit was $231.4 million, or 17% of net sales for the nine months ended September 30, 2008, compared to $219.4 million, or 13% of net sales in the corresponding period of 2007. The overall gross profit increase in absolute dollars was primarily due to the increase in sales and improved profit margins in the PCD segment in the first six months of the year and increased sales of higher margin products of the Multimedia Communication segment, partially offset by decrease in sales and gross profit of the Handsets segment as well as the disposition of PCD in the third quarter of 2008. However, the overall gross profit as a percentage of sales increased slightly due primarily to the disposition of the PCD segment in July 2008 which had a lower gross profit percentage as compared to our other segments.

Excluding PCD and MSBU, our gross profit was $158.2 million, or 31% of net sales for the nine months ended September 30, 2008, compared to $153.9 million, or 28% of net sales in the corresponding period of 2007.

For additional discussion see "Segment Reporting" section of this Item 2.

OPERATING EXPENSES



The following table summarizes our operating expenses:



                        Three months ended September 30,            Nine months ended September 30,
                                  % of                 % of                   % of                 % of
                                   net                  net                    net                  net
                       2008       sales      2007      sales       2008       sales      2007      sales
                                                       (in thousands)
Selling, general
and
administrative      $   59,445       33 %  $  74,297      11 %  $   211,199      15 %  $ 242,999      15 %
Research and
development             35,971       20 %     41,881       7 %      116,657       8 %    127,700       8 %
Amortization of
intangible assets          279        0 %      4,046       1 %        3,833       0 %     12,137       1 %
Net gain on
divestitures            (3,455 )     (2 )%    (4,271 )    (1 )%      (3,455 )     0 %     (4,271 )    (1 )%
Total operating
expenses            $   92,240       51 %  $ 115,953      18 %  $   328,234      23 %  $ 378,565      23 %

Selling, general and administrative expenses ("SG&A") include compensation and . . .