At this time I would like to welcome everyone to the UTStarcom second quarter 2006 earnings release conference call. (Operator Instructions) Thank you. Mr. Barton you may begin your conference.

Thank you. Good afternoon, and thank you for joining UTStarcom's second quarter 2006 earnings conference call. I 'm Fran Barton, UTStarcom's CFO, and I 'm pleased to host today’s call with our CEO, Hong Lu. I would like to remind everyone that some of the information we will discuss today constitutes forward-looking statements. Actual results could differ materially from our current expectations. To understand the risks that could cause results to differ, please refer to the risk factors identified in our latest annual report on form 10 K, quarterly reports on form 10 Q and current reports on Form 8 K, which are filed with the Securities and Exchange Commission. With that, I will turn the call over to Hong. Hong?

Thank you, Fran, and thank you everyone for joining us this afternoon. Let me begin by providing a brief summary of our second quarter financial results. Second quarter revenues were $549 million, which is within our guidance range. Gross margins exceeded our expectations for the quarter, and came in at 19.9%. Gross margin upside combines with a lower than anticipated operating expenses allowing us to report a net loss that compared favorably to guidance. The second quarter net loss was $0.18 per share versus the guidance range of loss of $0.45 to $0.55 per share. I'm also pleased to report that Q2 was the fifth consecutive quarter in which we generated positive cash flow from operations. Fran will provide detailed financial results later in the call. From an operation perspective, I am also pleased with our progress in the second quarter. We remain focused in our efforts, concentrating on the product areas where we can leverage our advantages at an added value. I'm encouraged by continuing traction we demonstrate in key target markets such as IPTV, next generation broadband and wireless networks and handsets in the multiple geographies during the quarter. With that, I would like to cover four key areas focus for the company. One, core networks. In terms of technology trend we continue to see operators desire to migrate and, in some cases, replace their existing circuit switch infrastructure to next generation IP based networks. But doing so, they are able to offer multiple IP based services and significantly reduce the amount of space and energy needs to run their networks. This creates significant operational cost savings. UTStarcom has been the leader in the deployment of next generation network technologies and currently has the largest soft switch deployment in the world, supporting over 50 million subscribers. In the…

Thank you, Hong. Now, let me go over the performance of our business units in greater detail. PCD. The personal communications division generated $266 million in revenues, just below our guidance range. Total PCD shipments for the quarter were 1.7 million units, with an ASP of $142. Going into Q2, we anticipated the sequential decline in PCD revenues partially due to a difficult comparison with a strong Q1, but also reflecting the short term impact of Curitel’s departure as well as shipment delays for some of our new products, and the overall competitive environment for the quarter. Overall, our PCD unit is definitely on the right track. In the second quarter, despite the delays, we shipped a record 750,000 units of our internally designed handsets. This compares to 250,000 units sold in the first quarter of 2006, and only 200,000 units for all of 2005. The fact that every CDMA carrier in North America added our CDMA 7025 and/or our CDMA 7075 to their product road map also demonstrates the success of our models. In addition, we signed an agreement with Sharp making us their exclusive distributor for their popular Sidekick 3, which began shipping in the third quarter into North America and Latin America. We expect that PCD will have a stronger third quarter benefiting from Sidekick shipments, continuing demand for our high end PDA phones, as well as further growth in sales of the internally designed handsets. Now, let me give a quick update on our PAS business. In the first half of 2006, the total number of PAS subscribers in China increased by approximately 6 million subscribers to a total of approximately 92 million subscribers. The cumulative number of PAS subscribers on UTStarcom's network reached more than 51 million at the end of the second quarter. Chinese…

Certainly, sir. (Operator Instructions) Your first response comes from Mike Ounjian. Jack [Capadia] – Credit Suisse: Hi, it’s actually Jack [Capadia] for Mike Ounjian.

Who? Jack [Capadia] – Credit Suisse: It’s Jack Capadia from Mike Ounjian. Could you give me a mix of your current back log and maybe expectations for past subscribers for second half of the sale?

Let's see. In terms of back log, something on the order of 40% of it is PCD. There’s probably almost a similar amount for past infrastructure. The rest are smaller -- smaller amounts. So, I can – yeah. We usually don't go into too much detail on that breakout, but that just gives you a rough mix. Predominantly PAS wireless and PCD, in other words. Jack [Capadia] – Credit Suisse: That's helpful. Can we get what your expectations are for past subscribers for the second half of this year?

We have seen the Q1 has been faster growth in the second quarter; seems to be a little slower than Q1. And Q3 usually is the slowest quarter in the year. And Q4 will be picking up. So, I will probably say with the first half of the year we have 6 million. And if we go for the normal pace, we should be able to do maybe a little short of 6 million, maybe closer to 5-ish in the second half. Jack, is that enough? Jack [Capadia] – Credit Suisse: That's great. Thank you.

Excellent. Thanks.

Your next question comes from Tim Long. Tim Long – Banc of America Securities: Thank you. Just a few questions on the margin front. It seems you had a pretty good bump in the internally produced handsets that might have expect better gross margin on the PCD side. Could you talk a little bit about the margin development in that division with moving to internal? Secondly, on the PAS handset side, could you just talk about – obviously, the new chip set is having a benefit there, but could you just talk about sustainability of gross margins in that business? That would be great.

Yeah. So, Tim, with regard to the individual gross margins, the PAS terminals are certainly continuing to do well, and hitting it at around 30% or so. In addition to that, we’ve got even higher margins on the dual mode. So the average of that business unit is really doing well. The PCD is highly - margins are highly dependent on the various mixes of products there and we’ve got our products ramping up, which have better than average gross margins; we have traditional Curitel products which are kind of less than average gross margins. So a lot depends on the mix of high end, low end, special products, there. In terms of just trends, we -- it is -- the margin is up a little bit from Q1, not much. But we expect going into the next quarter margins to be up over 5%. And we have broken out a bunch of information in our 10 Q so you can kind of sort through that. I realize it just came out today. We can take you off line a little bit. There's just a couple of things. In terms of the chip set within PAS, again, we've had some very good cost reductions there. I don't think we will see any incremental further reductions. In other words, we've got the full benefit by now. Any benefits that come there will be basically on pricing. And that will be somewhat dependent on the competition, of course. Tim Long – Banc of America Securities: Okay and then, so, Fran, nothing, even though the internally developed units went up a lot there was nothing inherent in the margin on those products where it’s not giving you the type of gross margin improvement you would have expected? It's just --

Yeah. I think, without getting into too much detail, those margins are doing really well, Tim. I think because of the inventory we put in place for future quarter's growth, I think you will see somewhat that the margins are a little bit depressed as we are making sure that we have adequate reserves and so forth for our inventory that we have there. So a little bit -- let's say the margins are masked by short term inventory.

Tim, this is Hong and I wanted to just say that our own design seems to be -- we are very pleased with some of our progress in margin. And so it is unfortunately not really reflecting it to the overall. So the more we start making it, we see that progress has been made. Tim Long – Banc of America Securities: Okay, just, maybe a follow up on that. With Nokia's decision to exit, can you talk about opportunity -- I think you mentioned some opportunities to more broadly get some of the CDMA phones out there. Could you maybe talk about if that's something already started to show up on your radar screen, and how you might be able to take advantage of the changing environment?

Well, Nokia has actually not decided to really get out of the CDMA North America market. They pretty much decided to getting out of other Asian markets such as China or India or, for that matter Taiwan and several other places. But North America, they haven't really decided yet and they have been still working with some of the OEM suppliers. So we haven't really seen a lot of the changes in North America. And saying that, actually Nokia was not a very active player in CDMA, neither in the United States, either. So we really haven't really got that full benefit of them getting out, or of us potentially getting out at this moment. Tim Long – Banc of America Securities: Okay, and that wouldn't influence the decision to be more aggressive in the markets where they were doing well where you are entering?

Yeah, I think North America is something that they’re really contemplating to keep staying and the rest of the other areas that they think they’re not making any progress so they decide pretty much not to stay in those areas. Tim Long – Banc of America Securities: Okay. Thank you.

Okay. Thanks Tim.

Your next question comes from Larry Harris.

Hi. Thanks for taking the question. This is actually David Freeman for Larry Harris.

Yep.

Just a few quick questions on the handsets here. I was wondering how the 7075 is doing, and if it's been accepted out of Verizon or Sprint yet?

Yeah, 7025 has been pretty much accepted by all the carriers. We have been still in the middle of finalization of being formally accepted, but so far we’ve been seeing a very good progress. Other than those two, we also have a few other models that we will be seeing coming into Q3 as well.

Okay, I was also wondering Sidekick 3 is doing at T Mobile and if Sharp plans to manufacture anymore than the original projection of 100,000 units per month?

Well, actually it is doing quite well, and we have seen the reception - acceptance is quite good. We just wish that they came in earlier, or as they planned. So, so far we are keeping up with the pace of a 100,000 a month.

Thanks, and just one more question. I was wondering on Verizon how the XV6700 is doing in the face of the Motorola Q, and if you’re concerned for the QPC 6700 at Sprint when the Q is being launched there in Q4?

Yeah, I think we see some of -- has some effect. But we also are getting a fairly good sign that we are going to do the promotion with our carriers. So I still see they will be fairly well accepted in Q3 and Q4. And we are, at least in our plan, we are very hopeful about those units going to move. And we will keep very close eyes on Motorola’s Q.

Okay. All right. Thank you very much.

Sure. Thanks, David.

Your next question comes from Jeff Kvaal. Jeff Kvaal – Lehman Brothers: Thanks very much for taking the question. I have two lines of questioning. I think the first is, Fran, on your revenue outlook it seems as though you are shading things to the lower end of your prior range. It sounds as though that may be just on the PHS net adds. Is that a fair characterization, or are there other elements to the story there?

Jeff, are you referring to full year now? Jeff Kvaal – Lehman Brothers: Yes. I'm sorry.

Yeah, I think all we are really doing is rolling through the Q2 actuals, and then sort of resetting the bar a little bit. So the single thing is some of the PCD things that didn't happen this quarter basically aren't recoverable. So we are just adjusting the year for that. That's pretty much it. Jeff Kvaal – Lehman Brothers: Okay, and when you say revenue growth through the balance of the year, does that mean you're looking for 2Q2H06 to be higher than 1H? Or for 3Q over 2Q and 4Q over 3Q?

Actually both. So 3Q will be above 2Q. And Q4 will be above that. I haven't added to two together but I have to believe the second half’s over first half as well Jeff Kvaal – Lehman Brothers: Okay. That sounds about right. Then secondly, I believe last quarter you had issued fairly cautious gross margin guidance, which you of course ended up beating. But I think you had suggested that some of the -- the margin benefit of the chip set outsourcing would ease. Is that how you were thinking about margins for the third quarter as well?

Yeah. Good question. So in terms of specifically PAS terminals, we were able to have no erosion in the second quarter that just ended, so that basically we're flat with the first quarter. We are signalling with our guidance of 23% to 25% a reduction from the 30% we ran for the last two quarters. So, there's always the opportunity that we can continue maybe somewhere in between. So for right now we want to be careful. That market is a very volatile market, and so that's why we've given guidance for that product line that way.

Jeff, I think it’s about - regarding the margin past, typically we see they are coming down margin by average about 6% per quarter, and we have been strategically holding it by focusing more of our higher end product. But on the other hand, I let some of the lower end with the higher volume not to persuade them, and we also need to make a conscious decision to say how much market do we want to capture those? And if we have to capture that and we need to suffer some of the margin to getting more, bigger market share. So, we're contemplating on that and therefore we have seen the Q3 -- we should be a little bit more aggressive to pursue some of those – the lower end market as well. Jeff Kvaal – Lehman Brothers: Okay. Makes sense. Thank you, Hong. Thanks, Fran.

Okay, Jeff. Thank you.

Your next question comes from Tim Base. Tienyu Sieh – Merrill Lynch: Hi. This is Tienyu from Merrill Lynch. Just a question on IPTV. You mentioned the projections for 4 million subs in ‘07 doubling to 8 million subs in ‘08. Can you help us get a sense as to what that would translate in revenue terms in terms of set top boxes, in terms of net interest and give us a sense also for the pricing trends in terms of ASP, I guess deflation over that between now and, say, 2008. What do you expect to be the rate of deflation over the next two couple of years?

Okay. Obviously you've asked a very, very fair question. There's -- there's multiple numerous forecasts what the market will be and then, given that, it's virtually an unknown what pricing competition is going to be. In our assumptions, we’re assuming kind of some business as usual as we look at margins on our infrastructure products. Hence, the set top boxes we think are going to be extremely competitive. I think people will start even giving them away or sell them at cost or below or something. So I 'm dancing around your question because we don't have a very specific model out that far. We are kind of at the front end. We are okay at extrapolating for the next quarter and maybe the one after that, but getting into '08 is really tough right now. Tienyu Sieh – Merrill Lynch: I wanted to just say that 4 million or 8 million subscribers doesn't really mean that that's all from equipment vendors to provide the capacity. Capacity is usually higher than that.

Oh, of course it is. Tienyu Sieh – Merrill Lynch: So you have to build that into your model, and predominantly, the revenue will be coming in from set top boxes because each set top box is anywhere in the range I will probably say today, around $70 to $100 range. And that depends on the functionality that each operator will require. Either they will require H.264 or they want to require the Impact 4, or they want to have a hard disk or not. If you have a hard disk and whatnot, that they will actually be exceeding $100. So it really depends on their requirement, I believe, that based on the different market, they will probably have big varieties of set top boxes to make it available to the end users and that will probably vary this forecast a bit more. Jeff Kvaal – Lehman Brothers: Fine. Maybe another way to ask the question would be, what are your expectations in terms of the split between infrastructure revenue and say set top box revenue? You know, for every dollar spent $0.50 goes into infrastructure and $0.50 goes into set top box? Or what kind of split should we be looking at?

Somewhere between 50/50 and 60/40 on the infrastructure side, set top box side at 60, infrastructure 40. Something like that. I think a third way to think about it is -- what I would do if you I was sitting out there and you were sitting in here, what I’d be watching over the next two quarters is for every government-approved trial or commercial sale, keep track of who's locking up each city as they roll out. Who are the players? I think you’re going to find the answer will be, there’ll be a very small number of players, count them on one hand, and I think you’re going to find as it rolls out, as people take control of one city at a time, there will be one, a small number of players – and you’ll be able to, people will be able to announce that I just had a paying customer on a government-approved network work. A lot of people are announcing free trials; some people are announcing, you know, try it, but they are not on government-approved networks and so forth. We feel very comfortable that we are far and away the leading provider of government-approved paying customers in China. I would be watching that kind of metric. You can extrapolate it to wherever you want to extrapolate it to, but that is a key factor. We’re going to try to do a little better in helping with some of those metrics to help people understand that, but there's so many people being reported in the paper they have this trial or that trial, all of which, by the way they are not government approved. There is no license for them. In other words, it’s not authorized. The great majority of those are not paying. They are just out there. We're talking about paying customers on government approved networks which we feel very comfortable we are in excess of 50%, and that's what I would be watching in the short term. 2008, 2009, 2010, who knows where that's going to end up? Is that helpful at all?

Your final question comes from Evan Erlanson. Evan Erlanson – Bear Stearns: Hi guys. Evan Erlanson here from Bear Stearns.

Hi Evan. Evan Erlanson – Bear Stearns: Hi. My first question is on the agreement with Marvell. I believe that you referred to some potential one-off income that could come in Q3 or Q4, and I think that there's also the possibility of another $16 million coming in from Marvell providing that certain milestones are met by September 30th. Could you actually tell us -- this is on the PAS handset front obviously - could you tell us what the milestones on PAS subscribers would be for that agreement?

In a simple term, Evan, it's just a volume commitment that when X volumes are hit, this trigger is in effect. So we are anticipating that we should some point this year hit that trigger which, as you suggested, would cause us to be able to receive a $16 million dollar cash payment. The P&L impact would be less than that, something, I don’t know, maybe a little over $10 million or something. So we don't know whether that's Q3 or Q4, but that is something that we are aiming for. We’re nearly there and we would hope that we would continue on track and hit that milestone. Evan Erlanson – Bear Stearns: Okay. Thank you, and on that subject, just looking at the PAS subscribers, the trend and also last year's trend and what the fixed-line operators are actually seeing, we had about 6.7 million net additions on the PAS networks in the first half of the year. You sold about 4.4 million handsets. I think that your competitors are also shipping probably in excess of 3 million handsets in the first half. So, and last year we saw about 70% of the net additions in the year being added in the first half. So, when we’re looking at how many handsets are actually going out there in the market, are you concerned about inventory build up given that you've had a fairly strong first half relative to the actual subscriber trend?

We actually keep a very close look at inventory at this moment, and we have -- I think our inventories are very manageable right now. We actually, last year we had a very bad experience of not having enough handsets on our hands. We were in short supply until the end of the Q1 this year. We had a really bad experience. So we need to balance those experiences versus what's likely going to happen. So, we need to see what is the trend in Q3. So far we see Q3 is expected to be a very, very slow quarter. But we are getting a good number of the shares from those markets, so we will be continuing to monitor it and I don't think inventory will be an issue. Evan Erlanson – Bear Stearns: Yep.

There are no further questions at this time, sir. Were there any closing remarks?

No. Janet. I thank everybody for tuning in today, and look forward to talking to you next quarter. Thank you.

This does conclude today's conference. You may now disconnect.