UTStarcom (UTSI)

Operating Activities

2008

Net cash provided by operating activities for the six months ended June 30, 2008 was $59.9 million. Cash flow generated from operations during the six months ended June 30, 2008 is not indicative of future cash flows from operations. Operating cash was significantly impacted by changes in net operating assets and liabilities providing net cash of $89.5 million, offset partially by adjusting net income for gains on sales of investments and liquidation of ownership interest in a variable interest entity, as well as certain noncash charges, which resulted in a net use of cash of $29.7 million, as discussed below.

Operating cash was negatively affected by the net loss of $13.4 million, adjusted for gains on sale of investments of $40.2 million, the $8.2 million gain on liquidation of ownership interest in a variable interest entity and non-cash charges of $32.1 million, which resulted in a net use of cash of $29.7 million. The non-cash charges of $32.1 million included $19.9 million in depreciation and amortization of acquisition-related intangible assets, $9.8 million in stock-based compensation expense, $2.7 million provision for doubtful accounts and a $9.1 million provision for deferred costs, partially offset by a benefit of $11.7 million resulting from a change in the China Corporate Income Tax Law.

Cash provided by the net change in operating assets and liabilities totaled $89.5 million and was primarily the result of management of working capital during the six months ended June 30, 2008, in part, necessitated by the repayment of the convertible subordinated notes due March 1, 2008.  Operating cash was positively impacted by decreases in accounts receivable of $65.1 million, decreases in deferred costs of $42.7 million and increases in accounts payable of $116.5 million, offset partially by an increase in inventory of $69.5 million, decreases in customer advances of $16.5 million and decreases in other current liabilities of $40.0 million.  The decrease in accounts receivable was primarily due to strong customer collections in our PCD business segment.  The increase in inventory and accounts payable was due to the high level of inventory purchasing related to a significant customer project, as well as a management decision to forgo early payment discounts with a significant vendor.

2007

Net cash used in operating activities for the six months ended June 30, 2007 was $149.3 million. Operating cash was negatively affected by the net loss of $115.7 million and changes in accounts payable and inventories offset by changes in accounts receivable and customer advances, as discussed below.

During the first six months of 2007, accounts payable decreased $89.5 million, due to our decision to change the timing of payments to vendors in the first quarter of 2007 to comply with vendor payment terms. In addition, inventories increased $19.4 million primarily due to inventory purchases related to an infrastructure deployment contract that we entered into in the fourth quarter of 2006.

The cash used in operating activities was partially offset by a reduction in accounts receivable of $84.7 million as a result of strong cash collections and the high percentage of revenue in the first half of 2007 from our PCD segment which generally has experienced a shorter collection period on related receivables. Customer advances increased by $27.1 million for the six months ended June 30, 2007. Customer advances represents cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. The reduction in other current liabilities is primarily due to decreases in compensation and warranty related accruals.

Operating Activities

2008

Net cash provided by operating activities for the three months ended March 31, 2008 was $96.7 million. Cash flow generated from operations during the first quarter of 2008 is not indicative of future cash flows from operations.  Operating cash was significantly impacted by changes in net operating assets and liabilities providing net cash of $116.7 million, offset partially by adjusting net income for gains on sales of investments and liquidation of ownership interest in a variable interest entity, as well as certain noncash charges, which resulted in a net use of cash of $20.0 million, as discussed below.

Net income of $25.4 million, adjusted for gains on sale of investments of $39.7 million, the $8.2 million gain on liquidation of ownership interest in a variable interest entity as well as non-cash charges of $2.5 million, resulted in a net use of cash of $20.0 million. The non-cash charges of $2.5 million included $10.1 million in depreciation and amortization of acquisition-related intangible assets and $4.8 million in stock-based compensation expense, partially offset by a benefit of $11.7 million resulting from a change in the China Corporate Income Tax Law.

Cash provided by the net change in operating assets and liabilities totaled $116.7 million and was primarily the result of management of working capital in the first quarter of 2008 in preparation for the repayment of the convertible subordinated notes due March 1, 2008.  Operating cash was positively impacted by decreases in accounts receivable of $75.2 million, increases in accounts payable of $64.3 million and increases in customer advances of $19.9 million, offset partially by increases in other assets of $19.6 million and decreases in other current liabilities of $34.4 million.  The decrease in accounts receivable was primarily due to strong customer collections in our PCD business segment.  The increase in accounts payable was due to the high level of inventory purchasing activity late into the first quarter of 2008, as well as a management decision to forgo early payment discounts with a significant vendor.

2007

Net cash used in operating activities for the three months ended March 31, 2007 was $106.7 million. Operating cash was negatively affected by the net loss of $54.0 million and changes in other assets, inventories, payables and other current liabilities offset by changes in accounts receivable and customer advances, as discussed below.

During the first three months of 2007, inventories increased $2.4 million primarily due to inventory purchases related to a large infrastructure deployment contract that we entered into in the fourth quarter of 2006, and increases in other assets of $31.4 million primarily due to advances to our suppliers and the prepayment of taxes and insurance.  In addition, accounts payable decreased $41.3 million, due to our decision to change the timing of payments to vendors in the first quarter of 2007 to comply with shorter vendor payment terms.  Other current liabilities decreased $79.3 million in the first three months of 2007, due primarily to payments of bonuses and commissions earned in the prior year and warranty settlements.

The cash used in operating activities was partially offset by a reduction in accounts receivable of $60.3 million as a result of strong cash collections and the high percentage of revenue in the first quarter of 2007 from our PCD segment which generally has experienced a shorter collection period on related receivables.

Customer advances increased by $44.3 million at March 31, 2007.  Customer advances represents cash deposits we have received from our customers for orders that have not yet received final acceptance.  Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

Operating Activities

2007

        Net cash used in operating activities for 2007 was $218.2 million. Operating cash was negatively affected by the net loss of $195.6 million (including $53.7 million in gain on sale of a short term investment) and changes in accounts payable, customer advances, deferred revenue and other assets, partially offset by favorable changes in accounts receivable, inventories and deferred costs as discussed below.

        During 2007, accounts payable decreased $165.1 million due to decrease in purchases of inventory during 2007, and due to a change in the timing of payments to vendors beginning in the first quarter of 2007 to comply with accelerated vendor payment terms. In addition, deferred revenue decreased $40.7 million primarily due to the recognition of revenue that was deferred from prior periods, other assets increased by $21.2 million primarily due to advance payments to suppliers and customer advances decreased by $48.1 million for 2007. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

        The cash used in operating activities was partially offset by a reduction in accounts receivable of $93.9 million, inventory of $82.4 million and deferred costs of $36.6 million. The reduction in accounts receivable was as a result of strong cash collections and the high percentage of revenue in 2007 from our PCD segment which generally has experienced a shorter collection period on related receivables. Days sales outstanding was 48 days at December 31, 2007 as compared to 60 days at December 31, 2006. The decrease in inventory and deferred cost was primarily due to a decrease in purchases of inventory during 2007.

        Non-cash charges for 2007 included $57.4 million of depreciation and amortization, $12.8 million of stock-based compensation expense and $19.9 million of impairment charges of long-lived assets.

2006

        Net cash provided by operating activities for the year ended December 31, 2006 was $66.1 million. Cash from operating activities was positively affected by changes in accounts receivable, deferred costs and customer advances, partially offset by the net loss as well as changes in inventories, payables and other current liabilities.

        The decrease in accounts receivable resulting from improved cash collections in 2006 compared to 2005 provided cash of $133.1 million. Days sales outstanding was 60 days at December 31, 2006 as compared to 66 days outstanding at December 31, 2005 due to strong cash collections in the fourth

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quarter of 2006 and the high percentage of fourth quarter revenue derived from our PCD segment, which generally has experienced a shorter collection period on related receivables.

        Customer advances increased by $38.4 million at December 31, 2006. The decrease in payables and other current liabilities primarily resulted from a decrease in accounts payable of $22.3 million, a decrease in income taxes payable of $28.9 million, and a decrease in other current liabilities of $27.6 million. The decrease in other current liabilities included decreases in payroll and other taxes payable, accrued contract costs, which relate to purchase of goods and services for which invoices have not been received, and warranty costs, offset by a $32.1 million increase in other current liabilities related to a loss contract reserve.

        Non-cash charges for the year ended December 31, 2006 included $68.0 million of depreciation and amortization, $16.6 million of stock-based compensation expense, and a $13.5 million other-than-temporary charge related to impairment of a long-term investment. The net gain on sale of assets of $9.6 million, included the gain of $12.3 million related to the sale of the semiconductor design business division to Marvell Technology Group, Ltd.

2005

        Net cash provided by operating activities for the year ended December 31, 2005 was $218.4 million. Operating cash was affected by changes in accounts receivable, inventories, income taxes payable and accounts payable.

        The $268.2 million decrease in accounts receivable was primarily attributable to increased collections in the final quarter of 2005 as compared to the final quarter of 2004. Days sales outstanding was 66 days at December 31, 2005 as compared to 113 days at December 31, 2004. The shorter days sales outstanding was primarily a result of a shift in sales from China, which typically has a long collection cycle, to the United States, which typically has a shorter collection cycle. The decrease in inventory balance of $165.9 million, primarily a result of a shift in sales to the PCD segment which has faster inventory turnover, has also contributed to our increase in operating cash.

        Customer advances decreased by $150.3 million during the year ended December 31, 2005. Income taxes payable decreased by $110.2 million due to the losses incurred during 2005. In addition, accounts payable decreased by $87.8 million due to lower inventory and lower forecast sales. All of these factors contributed to a decrease in operating cash.

        The reduction of customer advances in 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. ("JT"), an affiliate of Softbank Corp., as well as the decline in sales and the corresponding cash advances for products sold in China. All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as customer advances in prior periods. Revenue for certain of these agreements has been recognized during the year ended December 31, 2005. For additional information, see Note 19, "Related Party Transactions," of Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report.

Operating Activities

2007

        Net cash used in operating activities for 2007 was $218.2 million. Operating cash was negatively affected by the net loss of $195.6 million
(including $53.7 million in gain on sale of a short term investment) and changes in accounts payable, customer advances, deferred revenue and other assets, partially offset by favorable changes
in accounts receivable, inventories and deferred costs as discussed below.

        During
2007, accounts payable decreased $165.1 million due to decrease in purchases of inventory during 2007, and due to a change in the timing of payments to vendors beginning in
the first quarter of 2007 to comply with accelerated vendor payment terms. In addition, deferred revenue decreased $40.7 million primarily due to the recognition of revenue that was deferred
from prior periods, other assets increased by $21.2 million primarily due to advance payments to suppliers and customer advances decreased by $48.1 million for 2007. Customer advances
represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer
advances are reduced and revenue and cost of sales is recorded.

        The
cash used in operating activities was partially offset by a reduction in accounts receivable of $93.9 million, inventory of $82.4 million and deferred costs of
$36.6 million. The reduction in accounts receivable was as a result of strong cash collections and the high percentage of revenue in 2007 from our PCD segment which generally has experienced a
shorter collection period on related receivables. Days sales outstanding was 48 days at December 31, 2007 as compared to 60 days at December 31, 2006. The decrease in
inventory and deferred cost was primarily due to a decrease in purchases of inventory during 2007.

        Non-cash
charges for 2007 included $57.4 million of depreciation and amortization, $12.8 million of stock-based compensation expense and $19.9 million of
impairment charges of long-lived assets.

2006

        Net cash provided by operating activities for the year ended December 31, 2006 was $66.1 million. Cash from operating activities was positively
affected by changes in accounts receivable, deferred costs and customer advances, partially offset by the net loss as well as changes in inventories, payables and other current liabilities.

        The
decrease in accounts receivable resulting from improved cash collections in 2006 compared to 2005 provided cash of $133.1 million. Days sales outstanding was 60 days at
December 31, 2006 as compared to 66 days outstanding at December 31, 2005 due to strong cash collections in the fourth

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quarter
of 2006 and the high percentage of fourth quarter revenue derived from our PCD segment, which generally has experienced a shorter collection period on related receivables.

        Customer
advances increased by $38.4 million at December 31, 2006. The decrease in payables and other current liabilities primarily resulted from a decrease in accounts
payable of $22.3 million, a decrease in income taxes payable of $28.9 million, and a decrease in other current liabilities of $27.6 million. The decrease in other current
liabilities included decreases in payroll and other taxes payable, accrued contract costs, which relate to purchase of goods and services for which invoices have not been received, and warranty costs,
offset by a $32.1 million increase in other current liabilities related to a loss contract reserve.

        Non-cash
charges for the year ended December 31, 2006 included $68.0 million of depreciation and amortization, $16.6 million of stock-based compensation
expense, and a $13.5 million other-than-temporary charge related to impairment of a long-term investment. The net gain on sale of assets of
$9.6 million, included the gain of $12.3 million related to the sale of the semiconductor design business division to Marvell Technology Group, Ltd.

2005

        Net cash provided by operating activities for the year ended December 31, 2005 was $218.4 million. Operating cash was affected by changes in
accounts receivable, inventories, income taxes payable and accounts payable.

        The
$268.2 million decrease in accounts receivable was primarily attributable to increased collections in the final quarter of 2005 as compared to the final quarter of 2004. Days
sales outstanding was 66 days at December 31, 2005 as compared to 113 days at December 31, 2004. The shorter days sales outstanding was primarily a result of a shift in
sales from China, which typically has a long collection cycle, to the United States, which typically has a shorter collection cycle. The decrease in inventory balance of $165.9 million,
primarily a result of a shift in sales to the PCD segment which has faster inventory turnover, has also contributed to our increase in operating cash.

        Customer
advances decreased by $150.3 million during the year ended December 31, 2005. Income taxes payable decreased by $110.2 million due to the losses incurred
during 2005. In addition, accounts payable decreased by $87.8 million due to lower inventory and lower forecast sales. All of these factors contributed to a decrease in operating cash.

        The
reduction of customer advances in 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. ("JT"), an
affiliate of Softbank Corp., as well as the decline in sales and the corresponding cash advances for products sold in China. All cash received from JT in advance of revenue recognition and in advance
of spending for promotional activities was reflected as customer advances in prior periods. Revenue for certain of these agreements has been recognized during the year ended December 31, 2005.
For additional information, see Note 19, "Related Party Transactions," of Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report.

Operating Activities

2007

        Net cash used in operating activities for the nine months ended September 30, 2007 was $189.7 million. Operating cash was negatively affected by the net loss of $171.0 million and changes in accounts payable, deferred revenue and other current liabilities, offset by changes in accounts receivable and customer advances, as discussed below.

        During the first nine months of 2007, accounts payable decreased $115.3 million, due to a change in the timing of payments to vendors beginning in the first quarter of 2007 to comply with accelerated vendor payment terms. In addition, deferred revenue decreased $40.1 million primarily due to recognition of approximately $15.9 million of revenue related to deferred revenues from prior periods as a result of the China Sales Investigation restatements concluded in September 2007, and other current liabilities decreased $31.5 million.

        The decrease in other current liabilities was primarily the result of a decrease in warranty liabilities of $10.6 million as warranty settlements outweighed new accruals due to decreasing Company sales and a reduction in new claims, a decrease in accrual for uninvoiced receipts of goods of approximately $14.1 million as certain receipts accrued at the year ended December 31, 2006 have been processed through accounts payable as of September 30, 2007, and a decrease in accrued payroll and other related benefits of $6.9 million due to a reduction in anticipated bonus and other personnel cost accruals resulting from the headcount reductions initiated in October 2007.

        The cash used in operating activities was partially offset by a reduction in accounts receivable of $75.7 million as a result of strong cash collections and the high percentage of revenue in the first nine months of 2007 from our PCD segment which generally has experienced a shorter collection period on related receivables. Customer advances increased by $30.3 million for the nine months ended September 30, 2007. Customer advances represents cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

        Non-cash charges for the nine months ended September 30, 2007 included $43.8 million of depreciation and amortization and a $7.0 million stock-based compensation expense.

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2006

        Net cash provided by operating activities for the nine months ended September 30, 2006 was $18.1 million. Operating cash was affected by changes in accounts receivable and customer advances, and offset by the net loss as well as changes in inventories and other current liabilities.

        The $105.5 million decrease in accounts receivable was attributable to a decline in sales preceding the end of the September 30, 2006 quarter as compared to sales preceding December 31, 2005. Days sales outstanding, when calculated using the preceding quarterly sales, decreased to 69 days at September 30, 2006 as compared to 95 days at September 30, 2005 as a result of improved cash collections.

        Customer advances increased by $61.8 million for the nine months ended September 30, 2006, primarily due to a longer construction and testing period for the IPAS market. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

        The decrease in other current liabilities is primarily the result of a decrease in other taxes payable of approximately $13.5 million, a decrease in warranty liabilities of $11.8 million, a decrease in accrued contract costs, which relate to purchase of goods and services for which invoices have not been received of approximately $9.1 million and a decrease of approximately $24.7 million in other liabilities.

        Non-cash charges for the nine months ended September 30, 2006 included $51.5 million of depreciation and amortization and a $13.1 million of stock-based compensation expense. In addition, a $12.3 million gain was recognized from the sale of semiconductor design assets to Marvell Technology Group, Ltd. during the nine months ended September 30, 2006.

Operating Activities

2007

                Net cash used in operating activities for the six months ended June 30, 2007 was $149.3 million. Operating cash was negatively affected by the net loss of $115.7 million and changes in accounts payable and inventories offset by changes in accounts receivable and customer advances, as discussed below.

                During the first six months of 2007, accounts payable decreased $89.5 million, due to our decision to change the timing of payments to vendors in the first quarter of 2007 to comply with vendor payment terms. In addition, inventories increased $19.4 million primarily due to inventory purchases related to an infrastructure deployment contract that we entered into in the fourth quarter of 2006

The cash used in operating activities was partially offset by a reduction in accounts receivable of $84.7 million as a result of strong cash collections and the high percentage of revenue in the first half of 2007 from our PCD segment which generally has experienced a shorter collection period on related receivables. Customer advances increased by $27.1 million for the six months ended June 30, 2007. Customer advances represents cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. The reduction in other current liabilities is primarily due to decreases in compensation and warranty related accruals.

2006

                Net cash provided by operating activities for the six months ended June 30, 2006 was $79.2 million. Operating cash was affected by changes in accounts receivable, customer advances, and accounts payable, and offset by the net loss as well as changes in other current liabilities and inventories.

                The $97.6 million decrease in accounts receivable was attributable to a decline in sales preceding the end of the June 30, 2006 quarter as compared to sales preceding December 31, 2005. Days sales outstanding, when calculated using the preceding quarterly sales, remained constant at 70 days at June 30, 2006 and December 31, 2005. Days sales outstanding lengthened in the Broadband and PCD segments and shortened in the Handset and Wireless segments.

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Operating Activities

2007

Net cash used in operating activities for the three months ended March 31, 2007 was $106.7 million. Operating cash was negatively affected by the net loss of $54.0 million and changes in other assets, inventories, payables and other current liabilities offset by changes in accounts receivable and customer advances, as discussed below.

During the first three months of 2007, inventories increased $2.4 million primarily due to inventory purchases related to a large infrastructure deployment contract that we entered into in the fourth quarter of 2006, and increases in other assets of $31.4 million primarily due to advances to our suppliers and the prepayment of taxes and insurance.  In addition, accounts payable decreased $41.3 million, due to our decision to change the timing of payments to vendors in the first quarter of 2007 to comply with shorter vendor payment terms.  Other current liabilities decreased $79.3 million in the first three months of 2007, due primarily to payments of bonuses and commissions earned in the prior year and warranty settlements.

The cash used in operating activities was partially offset by a reduction in accounts receivable of $60.3 million as a result of strong cash collections and the high percentage of revenue in the first quarter of 2007 from our PCD segment which generally has experienced a shorter collection period on related receivables.

Customer advances increased by $44.3 million at March 31, 2007.  Customer advances represents cash deposits we have received from our customers for orders that have not yet received final acceptance.  Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

2006

Net cash provided by operating activities for the three months ended March 31, 2006 was $53.7 million. Operating cash was affected by changes in deferred costs, customer advances, accounts receivable, and accounts payable and offset by the net loss as well as changes in other current liabilities and inventory.

Customer advances increased by $43.1 million for the three months ended March 31, 2006. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. Deferred costs decreased by $3.2 million from December 31, 2005 to March 31, 2006 due to a net increase in cost of sales recognition resulting from customer acceptances during this three month timeframe..

The $28.8 million decrease in accounts receivable was attributable to a decline in sales preceding the end of the March 31, 2006 quarter as compared to sales in the preceding quarter. Partially offsetting this is a lengthening of days sales outstanding to 74 days at March 31, 2006 as compared to 66 days at December 31, 2005.

Accounts payable increased by $18.1 million and inventory increased by $4.3 million primarily due to handset unit inventory purchases in China partially offset by lower inventory purchases by PCD.  Other current liabilities decreased by $51.0 million, primarily as a result of a decrease in taxes payable of approximately $14.2 million, a decrease in compensation related costs of approximately $8.8 million, a decrease in accrued expenses, such as warranty, royalty and legal, of approximately $13.9 million, and a decrease of approximately $14.1 million in other liabilities.

Operating Activities

2006

Net cash provided by operating activities for the nine months ended September 30, 2006 was $18.1 million.  Operating cash was affected by changes in accounts receivable and customer advances, and offset by the net loss as well as changes in inventories and other current liabilities.

The $105.5 million decrease in accounts receivable was attributable to a decline in sales preceding the end of the September 30, 2006 quarter as compared to sales preceding December 31, 2005.  Days sales outstanding, when calculated using the preceding quarterly sales, decreased to 69 days at September 30, 2006 as compared to 95 days at September 30, 2005 as a result of improved cash collections.

Customer advances increased by $61.8 million for the nine months ended September 30, 2006, primarily due to a longer construction and testing period for the IPAS market.  Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance.  Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

The decrease in other current liabilities is primarily the result of a decrease in other taxes payable of approximately $13.5 million, a decrease in warranty liabilities of $11.8 million, a decrease in accrued contract costs, which relate to purchase of goods and services for which invoices have not been received of approximately $9.1 million and a decrease of approximately $24.7 million in other liabilities.

Non-cash charges for the nine months ended September 30, 2006 included $51.5 million of depreciation and amortization, and a $13.1 million of stock-based compensation expense.  In addition, a $12.3 million gain was recognized from the sale of semiconductor design assets to Marvell Technology Group, Ltd. during the nine months ended September 30, 2006.

2005

Net cash provided by operating activities for the nine months ended September 30, 2005, was $83.6 million.  Operating cash was primarily affected by changes in accounts receivable, inventory, and current and non-current assets, offset by changes in customer advances, income tax payable and accounts payable.

The $202.7 million reduction in accounts receivable was primarily attributable to the stronger collections in the third quarter of 2005, and offset by the incremental sales and related receivables from PCD.  Days sales outstanding was 140 days, excluding PCD, at September 30, 2005 as compared to 83 days at September 30, 2004.  Days sales outstanding was 95 days including PCD at September 30, 2005.  The longer days sales outstanding is a direct result of longer collection cycles in China due to the slow-down in the telecommunication industry which has necessitated a corresponding increase in the provision for doubtful accounts.

The decreases in inventory balance of $116.0 million and other assets of $85.0 million have contributed to our increase in operating cash.

Customer advances decreased by $164.8 million and income tax payable decreased by $118.6 million for the nine months ended September 30, 2005.  In addition, accounts payable decreased by $120.5 million.  All of these factors contributed to a decrease in operating cash.  Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance.  Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales are recorded.

The reduction of customer advances in the nine months ended September 30, 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. (“JT”), an affiliate of Softbank Corp., as well as the decline in sales and the corresponding cash advances for product sold in China.  All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as a customer advance in prior periods.  Revenue for certain of these agreements has been recognized in the nine months ended

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September 30, 2005.  For additional information, refer to Note 18, “Related Party Transactions,” to our condensed consolidated financial statements.

Non-cash charges for the nine months ended September 30, 2005 included a change of $192.4 million in deferred income taxes as a result of recording the valuation allowance, a $218.1 million asset impairment charge, $78.5 million of depreciation and amortization, a $38.1 million provision for doubtful accounts and a $14.6 million provision for deferred costs, excluding $5.5 million write-off of inventory associated with the Restructuring.  In the nine months ended September 30, 2005, we recorded a $31.4 million non-cash gain on extinguishment of debt which offsets activities that increase operating cash.

Operating Activities

2006

Net cash provided by operating activities for the year ended December 31, 2006 was $66.1 million. Cash from operating activities was positively affected by changes in accounts receivable, deferred costs and customer advances, partially offset by the net loss as well as changes in inventories, payables and other current liabilities.

The decrease in accounts receivable resulting from improved cash collections in 2006 compared to 2005 provided cash of $133.1 million. Days sales outstanding was 60 days at December 31, 2006 as compared to 66 days outstanding at December 31, 2005 due to strong cash collections in the fourth quarter of 2006 and the high percentage of fourth quarter revenue derived from our PCD segment, which generally has experienced a shorter collection period on related receivables. In 2007, we expect the days sales outstanding to increase in line with historical trends.

Customer advances increased by $38.4 million at December 31, 2006. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

The decrease in payables and other current liabilities primarily resulted from a decrease in accounts payable of $22.3 million, a decrease in income taxes payable of $28.9 million, and a decrease in other current liabilities of $27.6 million. The decrease in other current liabilities included decreases in payroll and other taxes payable, accrued contract costs, which relate to purchase of goods and services for which invoices have not been received, and warranty costs, offset by a $32.1 million increase in other current liabilities related to a loss contract reserve.

Non-cash charges for the year ended December 31, 2006 included $68.0 million of depreciation and amortization, $16.6 million of stock-based compensation expense, and a $13.5 million other-than-temporary charge related to impairment of a long-term investment. The net gain on sale of assets of $9.6 million, included the gain of $12.3 million related to the sale of the semiconductor design business division to Marvell Technology Group, Ltd.

2005

Net cash provided by operating activities for the year ended December 31, 2005 was $218.4 million. Operating cash was affected by changes in accounts receivable, inventories, income taxes payable and accounts payable.

The $268.2 million decrease in accounts receivable was primarily attributable to increased collections in the final quarter of 2005 as compared to the final quarter of 2004. Days sales outstanding was 66 days at December 31, 2005 as compared to 113 days at December 31, 2004. The shorter days sales outstanding was primarily a result of a shift in sales from China, which typically has a long collection cycle, to the United States, which typically has a shorter collection cycle. The decrease in inventory balance of $165.9 million, primarily a result of a shift in sales to the PCD segment which has faster inventory turnover, has also contributed to our increase in operating cash.

Customer advances decreased by $150.3 million during the year ended December 31, 2005. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. Income taxes payable decreased by $110.2 million due to the losses incurred during 2005. In addition, accounts payable decreased by $87.8 million due to lower inventory and lower forecast sales. All of these factors contributed to a decrease in operating cash.

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The reduction of customer advances in 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. (“JT”), an affiliate of Softbank Corp., as well as the decline in sales and the corresponding cash advances for products sold in China. All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as customer advances in prior periods. Revenue for certain of these agreements has been recognized during the year ended December 31, 2005. For additional information, see Note 20, “Related Party Transactions”, of Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report.

2004

Net cash used in operating activities for the year ended December 31, 2004 was $95.0 million. Operating cash was affected by changes in accounts receivable, inventory and customer advances offset by changes in accounts payable and deferred costs.

The $453.9 million increase in accounts receivable was attributable to increased sales, and longer collection periods experienced during 2004. The increase in accounts receivable was, in part, due to the addition of the PCD business of Audiovox Communications Corporation. Approximately 14.4% of the accounts receivable balance outstanding at December 31, 2004 was attributable to PCD. Inventory increased by $175.9 million in 2004 and includes $156.0 million of inventory attributable to the PCD acquisition. Customer advances decreased by $116.9 million for the year ended December 31, 2004. Upon receipt of final acceptances, customer advance is reduced and revenue and cost of sales is recorded. The reduction of customer advances and deferred costs for inventory at customer sites in 2004 is largely a result of our customers in China transitioning from new system installations to system expansions, which generally requires a shorter period between customer advance and acceptance. Our working capital of $1.1 billion increased in proportion to the growth of our business in addition to the $175.0 million increase associated with our acquisition of ACC.

Offsetting the activity that decreased operating cash for the period were net income and non-cash charges including a $12.7 million provision for long-lived asset impairment, $76.2 million in depreciation and amortization, a $21.3 million provision for doubtful accounts, and a $18.3 million deferred cost provision. Accounts payable increased by $97.7 million, consistent with increased inventory purchasing. Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs, separate from what was historically considered inventory. The title and risk of loss of this inventory is transferred to the customer. Revenue and costs of sales are recorded when final acceptance is received from the customer. Deferred costs decreased by $207.4 million from December 31, 2003 to December 31, 2004. The decrease in deferred costs resulted from a greater number of customer acceptances, corresponding to the decrease in customer advances.

OPERATING ACTIVITIES

2006

        Net cash provided by operating activities for the six months ended June 30, 2006 was $79.2 million. Operating cash was affected by changes in accounts receivable, customer advances, and accounts payable, and offset by the net loss as well as changes in other current liabilities and inventories.

        The $97.6 million decrease in accounts receivable was attributable to a decline in sales preceding the end of the June 30, 2006 quarter as compared to sales preceding December 31, 2005. Days sales outstanding, when calculated using the preceding quarterly sales, remained constant at 70 days at June 30, 2006 and December 31, 2005. Days sales outstanding lengthened in the Broadband and PCD segments and shortened in the Handset and wireless segments.

        Customer advances increased by $69.3 million for the six months ended June 30, 2006. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded.

        Accounts payable increased by $39.7 million, other current liabilities decreased by $89.5 million and inventory increased by $36.9 million. The decrease in other current liabilities is primarily the result of a decrease in other taxes payable of approximately $19.1 million, a decrease in compensation related

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costs of approximately $10.2 million, a decrease in accrued warranty costs of approximately $12.6 million, a decrease in accrued contract costs, which relate to purchase of goods and services for which invoices have not been received of approximately $13.5 million and a decrease of approximately $34.1 million in other liabilities.

        Non-cash charges for the six months ended June 30, 2006 included $34.7 million of depreciation and amortization, an $8.8 million of stock compensation expense and a $6.0 million provision for inventory.

2005

        Net cash used in operating activities for the six months ended June 30, 2005 was $139.4 million. Operating cash was primarily affected by changes in accounts receivable, income tax payable and customer advances, offset by changes in payables, inventory, and current and non-current assets.

        The $74.9 million increase, as restated, in accounts receivable was primarily attributable to two factors: (i) incremental sales derived from PCD sales and (ii) longer collection cycles in China which we have been experiencing since late 2004. Days sales outstanding was 170 days, excluding PCD, at June 30, 2005 as compared to 70 days at June 30, 2004. Days sales outstanding was 106 days including PCD at June 30, 2005. The longer days sales outstanding is a direct result of longer collection cycles in China due to the slow-down in the telecommunication industry which has necessitated in a corresponding increase in the provision for doubtful accounts.

        Income tax payable decreased by $140.4 million and customer advances decreased by $225.2 million for the six months ended June 30, 2005, as restated, as compared to December 31, 2004. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales are recorded.

        The reduction of customer advances in the six months ended June 30, 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. ("JT"), an affiliate of Softbank Corp. as well as the decline in sales and the corresponding cash advances for product sold in China. All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as a customer advance in prior periods. Revenue for certain of these agreements has been recognized in the six months ended June 30, 2005, as restated. For additional information, refer to Note 18, "Related Party Transactions," to our condensed consolidated financial statements.

        The decreases in inventory balance of $41.9 million and other current and non-current assets of $58.4 million, as restated, have contributed to our increase in operating cash. In addition, accounts payable increased by $24.8 million, and deferred revenue increased by $19.9 million, as restated, both contributing to the increase in operating cash.

        Non-cash charges for the six months ended June 30, 2005, as restated, included $51.4 million of depreciation and amortization, a $6.7 million loss on asset impairment, a $33.6 million provision for doubtful accounts and a $28.2 million inventory provision excluding $5.5 million write-off of inventory associated with the Restructuring. In the six months ended June 30, 2005, as restated, we recorded an $11.1 million non-cash gain on extinguishment of debt which offsets activities that increase operating cash.

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Operating Activities

2006

        Net cash provided by operating activities for the three months ended March 31, 2006 was $53.7 million. Operating cash was affected by changes in deferred costs/inventories at customer sites under contract, customer advances, accounts receivable, and accounts payable and offset by the net loss as well as changes in other current liabilities and inventory.

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        Customer advances increased by $43.1 million for the three months ended March 31, 2006. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. Deferred costs/inventories at customer sites under contracts decreased by $0.8 million from December 31, 2005 to March 31, 2006. The decrease in deferred costs results from a greater number of customer acceptances.

        The $28.8 million decrease in accounts receivable was attributable to a decline in sales preceding the end of the March 31, 2006 quarter as compared to sales in the preceding quarter. Partially offsetting this is a lengthening of days sales outstanding to 74 days at March 31, 2006 as compared to 65 days at December 31, 2005.

        Accounts payable increased by $18.1 million, inventory decreased by $4.3 million, and other current liabilities decreased by $51.0 million. The decrease in other current liabilities is primarily the result of a decrease in taxes payable of approximately $14.2 million, a decrease in compensation related costs of approximately $8.8 million, a decrease in accrued expenses, such as warranty, royalty and legal, of approximately $13.9 million, and a decrease of approximately $14.1 million in other liabilities.

2005

        Net cash used in operating activities for the three months ended March 31, 2005 was $182.9 million. Operating cash was affected by changes in accounts receivable, inventory and customer advances offset by changes in accounts payable and deferred revenue.

        The $120.6 million increase in accounts receivable was attributable to incremental sales derived from PCD sales and longer China collection cycles experienced during the three months ended March 31, 2005 as compared to the same quarter in the prior year. Days sales outstanding was 119 days excluding PCD, or 90 days including PCD, at March 31, 2005 as compared to 63 days at March 31, 2004. Also contributing to the increase was a larger volume of sales, from $901.9 million for the three months ended March 31, 2005 compared to $617.6 million for the same quarter in 2004. The longer days sales outstanding is a direct result of slower collection cycles in China due to the recent slow-down in the economy.

        Inventory increased by $15.7 million, due to the increase in sales volume noted above. Also contributing to the increase was a larger volume of sales, from $901.9 million for the three months ended March 31, 2005. Customer advances decreased by $223.7 million for the three months ended March 31, 2005. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. The reduction of customer advances in the three months ended March 31, 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. ("JT"), an affiliate of Softbank Corp. All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as a customer advance in prior periods. Revenue for certain of these agreements has been recognized in the three months ended March 31, 2005. For additional information, refer to Note 18, "Related Party Transactions," to our condensed consolidated financial statements.

        Offsetting the activity that decreased operating cash for the period were net income and non-cash charges, including $25.9 million of depreciation and amortization, $17.5 million of provision for doubtful accounts and $15.2 million of inventory provision. Accounts payable increased by $33.4 million, deferred revenue increased by $28.0 million and other current and non-current assets decreased by $49.6 million, all of which contributed to the increase in operating cash.

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Operating Activities

2005

        Net cash provided by operating activities for the year ended December 31, 2005 was $218.4 million. Operating cash was affected by changes in accounts receivable, inventories, income taxes payable and accounts payable.

        The $268.2 million decrease in accounts receivable was primarily attributable to increased collections in the final quarter of 2005 as compared to the final quarter of 2004. Days sales outstanding was 65 days at December 31, 2005 as compared to 107 days at December 31, 2004. The shorter days sales outstanding was primarily a result of a shift in sales from China, which typically has a long collection cycle, to the United States, which typically has a shorter collection cycle. The decrease in inventory balance of $165.9 million, primarily a result of a shift in sales to the PCD segment which has faster inventory turnover, has also contributed to our increase in operating cash.

        Customer advances decreased by $150.3 million during the year ended December 31, 2005. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. Income taxes payable decreased by $110.2 million due to the losses incurred during 2005. In addition, accounts payable decreased by $87.8 million due to lower inventory and lower forecast sales. All of these factors contributed to a decrease in operating cash.

        The reduction of customer advances in 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. ("JT"), an affiliate of Softbank Corp., as well as the decline in sales and the corresponding cash advances for products sold in China. All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as customer advances in prior periods. Revenue for certain of these

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agreements has been recognized during the year ended December 31, 2005. For additional information, refer to Note 22, "Related Party Transactions." The reduction in income taxes payable was due to the effects of the current year tax provision.

2004

        Net cash used in operating activities for the year ended December 31, 2004 was $95.0 million. Operating cash was affected by changes in accounts receivable, inventory and customer advances offset by changes in accounts payable and deferred costs/inventories at customer sites under contract.

        The $453.9 million increase in accounts receivable was attributable to increased sales, and longer collection periods experienced during 2004. The increase in accounts receivable was, in part, due to the addition of the PCD business of Audiovox Communications Corporation. Approximately 14.4% of the accounts receivable balance outstanding at December 31, 2004 was attributable to PCD. Inventory increased by $175.9 million in 2004 and includes $156.0 million of inventory attributable to the PCD acquisition. Customer advances decreased by $116.9 million for the year ended December 31, 2004. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon receipt of final acceptances, customer advance is reduced and revenue and cost of sales is recorded. The reduction of customer advances and deferred costs for inventory at customer sites in 2004 is largely a result of our customers in China transitioning from new system installations to system expansions, which generally requires a shorter period between customer advance and acceptance. Our working capital of $1.1 billion increased in proportion to the growth of our business in addition to the $175.0 million increase associated with our acquisition of ACC.

        Offsetting the activity that decreased operating cash for the period were net income and non-cash charges including a $12.7 million provision for long-lived asset impairment, $76.2 million in depreciation and amortization, a $21.3 million provision for doubtful accounts, and a $18.3 million inventory provision. Accounts payable increased by $97.7 million, consistent with increased inventory purchasing. Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs, separate from what was historically considered inventory. The title and risk of loss of this inventory is transferred to the customer. Revenue and costs of sales are recorded when final acceptance is received from the customer. Deferred costs/inventories at customer sites under contracts decreased by $285.1 million from December 31, 2003 to December 31, 2004. The decrease in deferred costs resulted from a greater number of customer acceptances, corresponding to the decrease in customer advances.

2003

        Net cash provided by operating activities for the year ended December 31, 2003 was $45.2 million. Operating cash was affected by changes in accounts receivable, inventory, accounts payable, other assets and offset by changes in deferred revenue. The $151.0 million increase in our accounts receivable balance, attributable to a 98% increase in sales in 2003, reduced our net cash provided by operations. In 2003, we sold $298.8 million of our notes receivable with associated expenses of $2.3 million. Cash provided by operating activities was also reduced by a $68.0 million and $316.2 million increase in inventory and deferred costs, respectively. Operating cash also decreased due to a $5.3 million decrease in accounts payable. The decrease in operating cash in 2003 was offset by an increase in customer advances and deferred revenue of $317.2 million and $27.5 million, respectively. We collected approximately $2.5 billion in cash from our customers in 2003.

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Operating Activities

2006

        Net cash provided by operating activities for the three months ended March 31, 2006 was $53.7 million. Operating cash was affected by changes in deferred costs/inventories at customer sites under contract, customer advances, accounts receivable, and accounts payable and offset by the net loss as well as changes in other current liabilities and inventory.

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        Customer advances increased by $43.1 million for the three months ended March 31, 2006. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. Deferred costs/inventories at customer sites under contracts decreased by $0.8 million from December 31, 2005 to March 31, 2006. The decrease in deferred costs results from a greater number of customer acceptances.

        The $28.8 million decrease in accounts receivable was attributable to a decline in sales preceding the end of the March 31, 2006 quarter as compared to sales in the preceding quarter. Partially offsetting this is a lengthening of days sales outstanding to 74 days at March 31, 2006 as compared to 65 days at December 31, 2005.

        Accounts payable increased by $18.1 million, inventory decreased by $4.3 million, and other current liabilities decreased by $51.0 million. The decrease in other current liabilities is primarily the result of a decrease in taxes payable of approximately $14.2 million, a decrease in compensation related costs of approximately $8.8 million, a decrease in accrued expenses, such as warranty, royalty and legal, of approximately $13.9 million, and a decrease of approximately $14.1 million in other liabilities.

2005

        Net cash used in operating activities for the three months ended March 31, 2005 was $182.9 million. Operating cash was affected by changes in accounts receivable, inventory and customer advances offset by changes in accounts payable and deferred revenue.

        The $120.6 million increase in accounts receivable was attributable to incremental sales derived from PCD sales and longer China collection cycles experienced during the three months ended March 31, 2005 as compared to the same quarter in the prior year. Days sales outstanding was 119 days excluding PCD, or 90 days including PCD, at March 31, 2005 as compared to 63 days at March 31, 2004. Also contributing to the increase was a larger volume of sales, from $901.9 million for the three months ended March 31, 2005 compared to $617.6 million for the same quarter in 2004. The longer days sales outstanding is a direct result of slower collection cycles in China due to the recent slow-down in the economy.

        Inventory increased by $15.7 million, due to the increase in sales volume noted above. Also contributing to the increase was a larger volume of sales, from $901.9 million for the three months ended March 31, 2005. Customer advances decreased by $223.7 million for the three months ended March 31, 2005. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. The reduction of customer advances in the three months ended March 31, 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. ("JT"), an affiliate of Softbank Corp. All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as a customer advance in prior periods. Revenue for certain of these agreements has been recognized in the three months ended March 31, 2005. For additional information, refer to Note 18, "Related Party Transactions," to our condensed consolidated financial statements.

        Offsetting the activity that decreased operating cash for the period were net income and non-cash charges, including $25.9 million of depreciation and amortization, $17.5 million of provision for doubtful accounts and $15.2 million of inventory provision. Accounts payable increased by $33.4 million, deferred revenue increased by $28.0 million and other current and non-current assets decreased by $49.6 million, all of which contributed to the increase in operating cash.

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Operating Activities

2005

        Net cash provided by operating activities for the year ended December 31, 2005 was $218.4 million. Operating cash was affected by changes in accounts receivable, inventories, income taxes payable and accounts payable.

        The $268.2 million decrease in accounts receivable was primarily attributable to increased collections in the final quarter of 2005 as compared to the final quarter of 2004. Days sales outstanding was 65 days at December 31, 2005 as compared to 107 days at December 31, 2004. The shorter days sales outstanding was primarily a result of a shift in sales from China, which typically has a long collection cycle, to the United States, which typically has a shorter collection cycle. The decrease in inventory balance of $165.9 million, primarily a result of a shift in sales to the PCD segment which has faster inventory turnover, has also contributed to our increase in operating cash.

        Customer advances decreased by $150.3 million during the year ended December 31, 2005. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon subsequent receipt of final acceptances and revenue recognition, customer advances are reduced and revenue and cost of sales is recorded. Income taxes payable decreased by $110.2 million due to the losses incurred during 2005. In addition, accounts payable decreased by $87.8 million due to lower inventory and lower forecast sales. All of these factors contributed to a decrease in operating cash.

        The reduction of customer advances in 2005 was primarily due to the completion of the revenue earning process for most of the agreements with Japan Telecom, Inc. ("JT"), an affiliate of Softbank Corp., as well as the decline in sales and the corresponding cash advances for products sold in China. All cash received from JT in advance of revenue recognition and in advance of spending for promotional activities was reflected as customer advances in prior periods. Revenue for certain of these

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agreements has been recognized during the year ended December 31, 2005. For additional information, refer to Note 22, "Related Party Transactions." The reduction in income taxes payable was due to the effects of the current year tax provision.

2004

        Net cash used in operating activities for the year ended December 31, 2004 was $95.0 million. Operating cash was affected by changes in accounts receivable, inventory and customer advances offset by changes in accounts payable and deferred costs/inventories at customer sites under contract.

        The $453.9 million increase in accounts receivable was attributable to increased sales, and longer collection periods experienced during 2004. The increase in accounts receivable was, in part, due to the addition of the PCD business of Audiovox Communications Corporation. Approximately 14.4% of the accounts receivable balance outstanding at December 31, 2004 was attributable to PCD. Inventory increased by $175.9 million in 2004 and includes $156.0 million of inventory attributable to the PCD acquisition. Customer advances decreased by $116.9 million for the year ended December 31, 2004. Customer advances represent cash deposits we have received from our customers for orders that have not yet received final acceptance. Upon receipt of final acceptances, customer advance is reduced and revenue and cost of sales is recorded. The reduction of customer advances and deferred costs for inventory at customer sites in 2004 is largely a result of our customers in China transitioning from new system installations to system expansions, which generally requires a shorter period between customer advance and acceptance. Our working capital of $1.1 billion increased in proportion to the growth of our business in addition to the $175.0 million increase associated with our acquisition of ACC.

        Offsetting the activity that decreased operating cash for the period were net income and non-cash charges including a $12.7 million provision for long-lived asset impairment, $76.2 million in depreciation and amortization, a $21.3 million provision for doubtful accounts, and a $18.3 million inventory provision. Accounts payable increased by $97.7 million, consistent with increased inventory purchasing. Inventories at customer sites under contracts awaiting final acceptance are classified as deferred costs, separate from what was historically considered inventory. The title and risk of loss of this inventory is transferred to the customer. Revenue and costs of sales are recorded when final acceptance is received from the customer. Deferred costs/inventories at customer sites under contracts decreased by $285.1 million from December 31, 2003 to December 31, 2004. The decrease in deferred costs resulted from a greater number of customer acceptances, corresponding to the decrease in customer advances.

2003

        Net cash provided by operating activities for the year ended December 31, 2003 was $45.2 million. Operating cash was affected by changes in accounts receivable, inventory, accounts payable, other assets and offset by changes in deferred revenue. The $151.0 million increase in our accounts receivable balance, attributable to a 98% increase in sales in 2003, reduced our net cash provided by operations. In 2003, we sold $298.8 million of our notes receivable with associated expenses of $2.3 million. Cash provided by operating activities was also reduced by a $68.0 million and $316.2 million increase in inventory and deferred costs, respectively. Operating cash also decreased due to a $5.3 million decrease in accounts payable. The decrease in operating cash in 2003 was offset by an increase in customer advances and deferred revenue of $317.2 million and $27.5 million, respectively. We collected approximately $2.5 billion in cash from our customers in 2003.

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OPERATING ACTIVITIES

2005

Net cash provided by operating activities for the nine months ended September 30, 2005 was $83.6 million. Operating cash was primarily affected by changes in accounts receivable, inventory, and current and non-current assets, offset by changes in customer advances, income tax payable and accounts payable.

The $197.9 million reduction in accounts receivable was primarily attributable to the stronger collections in the third quarter of 2005, and offset by the incremental sales and related receivables from PCD.  Days sales outstanding was 154 days, excluding PCD, at September 30, 2005 as compared to 102 days at September 30, 2004. Days sales outstanding was 82 days including PCD at September 30, 2005.   The longer days sales outstanding is a direct result of longer collection cycles in China due to the slow-down in the telecommunication industry which has necessitated a corresponding increase in the provision for doubtful accounts.  We do not expect a significant improvement to shorten days sales outstanding in the near future.

The decreases in inventory balance of $88.5 million and other current and non-current assets of $79.6 million have contributed to our increase in operating cash.

Customer advances decreased by $167.7 million and income tax payable decreased by $118.6 million for the nine months ended September 30, 2005.  In addition, accounts payable decreased by $120.5 million.  All of these factors contributed to a

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