Updated from July 27

Supply-chain problems took a bite out of UTStarcom ( UTSI) Tuesday.

The Alameda, Calif., maker of wireless communications systems posted solid second-quarter numbers but slashed earnings and revenue guidance, citing problems with its supply chain and pricing pressure in its core Chinese market. Its shares dropped 28% early Wednesday.

For its second quarter ended June 30, UTStarcom posted a second-quarter profit of $43 million, or 32 cents a share. That's up from the year-ago $39 million, or 33 cents a share, but a penny shy of the Thomson First Call analyst consensus estimate.

Revenue surged 70% from a year ago to $689 million, easily beating the $659 million Wall Street estimate. But the company highlighted the issues that caused its profit to fall short of investors' expectations, taking particular issue with a second-quarter gross margin of 25.4%. The company had forecast margins of 27%-28%.

"This second quarter is an example of both the successes and the challenges we experience as a company going through such a transformation," CEO Hong Lu said. "We are disappointed with the weaker than anticipated gross margins and earnings per share, which are primarily the result of continued pricing pressure in China as well as supply chain constraints that delayed recognition of some higher-margin international revenues.

"At the same time, we are optimistic as we experience an increasingly strong global demand for our products and are committed to executing on our long-term strategy of delivering profitable growth to our shareholders," Lu added. "In the second quarter, we signed nearly $300 million in international contracts, bringing the total to more than $400 million in the first half of the year."

UTStarcom makes so-called personal access systems, which are short-range wireless networks used primarily in nations without extensive telecom infrastructure.

The company said it believes margins have hit a low point and projected margins in the 27% range for the rest of the year. But UTStarcom guided earnings expectations sharply lower for the third quarter, saying it expects to earn 35-34 cents a share on revenue of $695 million-$700 million. Wall Street had expected earnings of 50 cents a share on revenue of $707 million.

The company also trimmed earnings guidance for fiscal 2004 and fiscal 2005.

In early Wednesday trading, UTStarcom slipped $7.14 to $18.11.