Zhone Technologies Inc. (NASDAQ: ZHNE)(D*)

* Financial status indicator is deficient: Issuer failed to meet NASDAQ continued listing requirements

Zhone Technologies Inc. (ZHNE) designs, develops and manufactures communications network equipment for telephone companies and cable operators worldwide. The Company’s products allow network service providers to deliver video and interactive entertainment services in addition to their existing voice and data service offerings.

Its single line multi-service (SLMS) architecture provides support for voice over Internet protocol (VoIP) and IP video (IPTV). Within this SLMS architecture, ZHNE products allow service providers to deliver all of these converged packet services over their existing copper lines while providing support for fiber build-out. With its products, network service providers can migrate from traditional circuit-based networks to packet-based networks and from copper-based access lines to fiber-based access lines without abandoning the investments they have made in their existing infrastructures. These products deliver voice, data and video interface connectivity for broadcast and subscription television, Internet routers and telephony equipment.

In addition, ZHNE offers products that are deployed by service providers, which support various voice and data services; and offers technical support, product repair, and education and support services. The company sells its products and services to network service providers that offer voice, data and video services to businesses, governments, utilities, and residential consumers, as well as to telecommunications carriers. ZHNE sells its products and services through channel partners, including distributors, resellers, system integrators and service providers.

The Company was founded in 1999 and is headquartered in Oakland, California.

Share Statistics Oct-22-09			2007	2008	%Chg	Q2 2008	Q2 2009	% Chg
Symbol	ZHNE	Revenue, Mn	175.5M	146.2M	16.7%	40.1M	30.4M	24.2%
Current price	$0.60	Gross margin	33.7%	30.8%	8.6%	28.9%	36.6%	21.0%
52wk Range:	$0.05-$0.93	Oper. margin	-6.5%	-62.6%	863.1%	-199.8%	-6.6%	96.7%
Avg Vol (3m):	949,954	Net margin	-6.9%	-63.3%	940.0%	-200.2%	-7.6%	96.2%
Market Cap.	91.40M
Dil. Shares Outst.	151.1M	EPS, $	-0.08	-0.62	675.0%	-0.53	-0.01	5,200%

Source: https://trading.scottrade.com/quotesresearch/ScottradeResearch.aspx?symbol=ZHNE , http://www.reuters.com/finance/stocks/incomeStatement?stmtType=INC&perType=INT&symbol=ZHNE.W , http://www.zhone.com/investors/stock/

Financial Summary

Revenue for the third quarter of 2009 was $36.0 million compared with $30.3 million for the second quarter of 2009 and $32.0 million for the third quarter of 2008. Net loss for the third quarter of 2009, calculated in accordance with generally accepted accounting principles (”GAAP”), was $1.2 million or $0.01 per share compared with a net loss of $2.3 million or $0.02 per share for the second quarter of 2009, and a net loss of $6.5 million or $0.04 per share for the third quarter of 2008. Pro forma earnings before stock-based compensation, interest, taxes, depreciation, restructuring, lease liability accrual, gain on sale of intangible assets and goodwill impairment (”EBITDA”) was a $0.1 million profit for the third quarter of 2009, compared to a pro forma EBITDA loss of $0.9 million for the second quarter of 2009, and pro forma EBITDA loss of $4.6 million for the third quarter of 2008.

ZHNE’s global customer base includes regional, national and international telecommunications carriers. To date, its products are deployed by more than 700 network service providers on six continents worldwide. The Company believes that it has assembled the employee base, technological breadth and market presence to provide a simple yet comprehensive set of next-generation solutions to the bandwidth bottleneck in the access network and the other problems encountered by network service providers when delivering communications services to subscribers.

Since inception, the Company has incurred significant operating losses and had an accumulated deficit of $1,014.8 million as of June 30, 2009.

Going forward, the Company’s key financial objectives include the following:

• Increasing revenue while continuing to carefully control costs;

• Continued investments in strategic research and product development activities that will provide the maximum potential return on investment; and

• Minimizing consumption of cash and short-term investments.

Recent global market and economic conditions have been unprecedented and challenging, with tighter credit conditions and recession in most major economies continuing in 2009. Continued concerns about the systemic impact of potential long-term and widespread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility and diminished expectations for Western and emerging economies. In the second half of 2008, federal government interventions in the U.S. financial system led to increased market uncertainty and instability in both United States and international capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have contributed to volatility of unprecedented levels. These global unfavorable economic and market conditions and the financial crisis may result in an adverse affect on ZHNE’s financial condition and results of operations.

Source: http://www.nasdaq.com/aspx/company=repros-therapeutics-inc-reports-second-quarter-2009-financial-results and-provides-update

Analyst Consensus

Buy

Outperform

Hold

Underperform

Sell

No Opinion

This is the consensus forecast amongst 1 polled investment analysts. Against the Zhone Technologies Inc. company.

Analyst Detail	Buy	Outperform	Hold	Underperform	Sell	No Opinion
Latest	0	0	1	0	0	0
4 weeks ago	0	0	1	0	0	0
2 months ago	0	0	1	0	0	0
3 months ago	0	0	1	0	0	0
Last year	0	0	1	1	0	0

On October 20, 2009, ZHNE reported third quarter 2009 losses of -0.01 per share. This result was in line with the expectation of the one analyst following the company and under-performed last year’s third-quarter results by -75.00%. The next earnings announcement is expected on January 31, 2010.

Source: Financial Times.com

	# of Estimates	Mean	High	Low	1 Year Ago
SALES (in millions)
Quarter Ending Dec-09	1	34.45	34.45	34.45	40.50
Quarter Ending Mar-10	1	32.30	32.30	32.30	–
Year Ending Dec-09	1	121.56	121.56	121.56	152.55
Year Ending Dec-10	1	140.68	140.68	140.68	–
Earnings (per share)
Quarter Ending Dec-09	1	-0.01	-0.01	-0.01	-0.02
Quarter Ending Mar-10	1	-0.01	-0.01	-0.01	–
Year Ending Dec-09	1	-0.06	-0.06	-0.06	-0.10
Year Ending Dec-10	1	-0.01	-0.01	-0.01	–

Source: http://www.reuters.com/finance/stocks/estimates?symbol=ZHNE.W

Investment Highlights

ZHNE yesterday posted its third-quarter results, reporting revenue growth for the second straight quarter, resulting in better-than-expected earnings. The Company attributed this growth to its broad-based deployment of new products in the United States, as well as internationally.

The Company posted revenue for the third quarter of 2009 at $36.0 million compared with $32.0 million for the third quarter of 2008. Net loss for the third quarter of 2009 was $1.2 million, or $0.01 per share, compared a net loss of $6.5 million, or $0.04 per share, for the third quarter of 2008.

ZHNE announced earlier this month that leading town developer, Orascom Development, has selected ZHNE as its end-to-end FTTx GPON equipment provider, delivering premium FTTx services to its flagship self-sufficient town, El Gouna, Red Sea. ZHNE provides El Gouna with a single source for a tightly integrated FTTx GPON system with RF video overlay, including ZHNE’s MXK intelligent terabit access concentrator, zNID Optical Network Terminals (ONTs), RF equipment and the Zhone Management Systems (ZMS). ZHNE’s recently announced MXK platform will serve as the cornerstone of El Gouna’s new FTTx network, delivering premium triple play services to a multicultural community of 15,000 residents. The MXK provides a 2x bandwidth improvement over the closest competing platform and is designed expressly for multi-stream HD and immersion game media that requires massive amounts of dedicated bandwidth. El Gouna’s entire FTTx GPON network will be integrated via ZHNE’s powerful SLMS access operating system software, giving OD a rich complement of advanced networking and security features, with a high degree of flexibility in adding future services.

ZHNE last month announced the telecommunications consortium Estracom, working with major IT solutions provider Dimension Data (LSE: DDT) has selected ZHNE’s MXK terabit access concentrator to deliver GPON services in what has been referred to as one of the most ambitious “Green” initiatives in Italy. Estracom is a telecommunications consortium representing 24 municipalities serving a half million residents throughout Italy’s Tuscany region. Estracom’s objective is to provide high quality fiber services to residences and businesses at a low cost per user, all by adopting high-efficiency green technology. Additionally, Estracom intends to supply municipal police a modern video surveillance network to efficiently support the growing economic and security needs of its citizens.

ZHNE also announced last month that the Nasdaq Stock Market (”NASDAQ”) has approved its application to transfer the listing of its common stock from The NASDAQ Global Market to The NASDAQ Capital Market. ZHNE voluntarily filed its transfer application on September 10, 2009, and received NASDAQ approval on September 23, 2009. ZHNE’s common stock will continue to trade under the symbol “ZHNE.”

The NASDAQ Capital Market is one of the three markets for NASDAQ-listed stock and operates in the same manner as The NASDAQ Global Market. Companies listed on The NASDAQ Capital Market must meet certain financial requirements and adhere to NASDAQ’s corporate governance standards. As of the date of its transfer application, ZHNE met the financial requirements and various other criteria for continued listing on The NASDAQ Capital Market, except for the $1.00 minimum bid price requirement, which had been suspended through September 25, 2009. As a result of the market transfer, NASDAQ granted ZHNE an additional 180-day period until March 29, 2010, to comply with the $1.00 minimum bid price requirement. ZHNE has accordingly postponed its plans to regain compliance with the $1.00 minimum bid price requirement by affecting the reverse stock split that was approved by its shareholders in October 2008.

Source: Scottrade.com, Reuters.com, http://www.zhone.com/investors/

Technical Analysis

Source: www.stockcharts.com

Moving Average Price Compare

ZHNE is trading above its 50-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

Bollinger Bands

ZHNE is trading above its upper Bollinger Band. Relative to recent price action, the stock is currently overextended and due for either a pause or retracement.

MACD

The MACD for ZHNE currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

Comparative Analysis

Company Name	Ticker	Price per	Mrkt. Cap.	P/E		P/S
Oct-22-2009	symbol	Share, $	$ Mn	2009	2010	2009	2010
Cisco Systems Inc.	CSCO	23.96	138.71B	22.98	N/M	N/A	N/M
QUALCOMM Inc.	QCOM	41.41	68.82B	41.44	N/M	N/A	N/M
Nokia Corp.	NOK	13.00	48.20B	N/A	N/M	N/A	N/M
Motorola Inc.	MOT	8.20	18.82B	N/A	N/M	N/A	N/M
Median		21.64	68.63B	32.21
Zhone Technologies Inc.	ZHNE	0.60	91.40M	N/A	N/M	0.81	N/M

Source: Reuter.com, Nasdaq.com

Insider Trading Activity

Net Share Purchase Activity

Insider Purchases - Last 6 Months Shares Trans Purchases 868,496 4 Sales N/A 0 Net Shares Purchased (Sold) 868,496 4 Total Insider Shares Held 39.98M N/A % Net Shares Purchased (Sold) 2.2% N/A

Net Institutional Purchases - Prior Qtr to Latest Qtr Shares Net Shares Purchased (Sold) (7,965,120) % Change in Institutional Shares Held (28.3%)

Data provided by Thomson Financial

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