Telecom Industry - Maintain Positive Outlook (Upgraded From Neutral in March 2009)

Based on extreme industry weakness in late 2008 and early 2009, we believe valuation levels now reflect remedial conditions in the economy. Depressed stock prices foster improved investment entry points more favorable at this juncture should stimulus plans, restricted operating expenses and higher earnings level result along with sustainable purchasing activity.

Telecom companies are starting to report minimal financial improvements in terms of revenue and earnings levels. In addition, economic stimulus plans throughout the world, including the U.S. broadband infrastructure development program -- and similar structural subsidies in China and India -- may be a boon for selected service providers and equipment manufacturers.

Telecom carriers and equipment providers that offer the most attractive opportunities are focused on third-generation (3G) wireless, broadband (DSL) and fiber-to-the-home/node networking. There are also a few market leaders that have proven able to survive the sometimes turbulent

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Dismal economic events have culminated in drastic declines of market valuation among companies in nearly every industry/sector, including impacts to telecom industry performance. Capital spending constraints among carriers, and limited funds available to sustain (grow) telecom services over the next six- to twelve-months, may be outcomes of credit markets remaining restricted and overall GDP growth remaining tepid or even retracting. Telecom carriers often resort to credit markets for funding capital projects, while telecom equipment companies conventionally use equity share offerings in lieu of debt instruments. The outcome has been a disappointment, regardless of the selected financing mechanism.

As a result of weakening macroeconomic indicators, telecom carriers' capital expenditures remain limited in 2008 and early 2009. There has been more selectivity on technology choices and leveraging cost-savings synergies, such as streamlining purchasing arrangements and reducing the number of preferred vendors. Shareholders continue to foster an environment where executives are

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