Press Release

Zhone Technologies, Inc. Reports Third Quarter 2004 Financial Results

OAKLAND, CA — October 18, 2004 — Zhone Technologies, Inc. (Nasdaq: ZHNE), the first company dedicated to building total-delivery solutions for voice, data and content services worldwide, today reported its results for the third quarter ended September 30, 2004.

Revenue for the third quarter of 2004 was $27.0 million, compared with $22.2 million for the third quarter of 2003. Net loss for the third quarter of 2004, calculated in accordance with Generally Accepted Accounting Principles ("GAAP"), was $11.0 million, including charges associated with the acquisition of Sorrento Networks, compared with a net loss of $3.5 million applicable to common shareholders for the third quarter of 2003. Net loss calculated on a non-GAAP basis was $5.3 million for the third quarter of 2004, compared to a non-GAAP net loss of $2.0 million for the third quarter of 2003. A reconciliation between net loss calculated on a GAAP basis and a non-GAAP basis is provided in a table immediately following the Unaudited Condensed Consolidated Statements of Operations.

Revenue for the first nine months of 2004 was $69.1 million, compared with $59.8 million for the first nine months of 2003. Net loss for the first nine months of 2004 calculated in accordance with GAAP was $31.8 million, compared with a net loss of $23.5 million applicable to common shareholders for first nine months of 2003. Net loss calculated on a non-GAAP basis was $14.5 million for the first nine months of 2004, compared to a non-GAAP net loss of $19.9 million for the first nine months of 2003.

"We delivered solid financial performance during the quarter despite a challenging environment," said Mory Ejabat, Chairman and Chief Executive Officer of Zhone. "We continue to see growth in our core SLMS business and increasing interest in our product solutions. We currently expect our operating expenses to decrease next quarter, keeping us on track to achieve profitability on a non-GAAP pro forma basis in the near future."

Zhone will hold a conference call today, October 18, 2004, at approximately 2:00 p.m. Pacific Time to review its third quarter results. The call is open to the public by dialing 800-659-1942 for U.S. callers and 617-614-2710 for international callers and entering the passcode 68510488.

Zhone has also scheduled this event to be broadcast live via webcast. To access this webcast please go to the Investor Relations section of the Zhone website at www.zhone.com/about/investors/. A replay of the webcast will be available on the website for at least 30 days. Additional investor information can be accessed at www.zhone.com or by calling Zhone's Investor Relations Department at 510-777-7013.

Non-GAAP Financial Measures

Non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The company's management refers to these non-GAAP financial measures in making operating decisions because they provide meaningful supplemental information regarding the company's operational performance, including the company's ability to provide cash flows to invest in research and development and fund acquisitions and capital expenditures. In addition, these non-GAAP financial measures facilitate management's internal comparisons to the company's historical operating results and comparisons to competitors' operating results. We include these non-GAAP financial measures in our earnings announcement because we believe they are useful to investors in allowing for greater transparency to supplemental information used by management in its financial and operational decision-making. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used in this news release to their most directly comparable GAAP financial measure as provided with the financial statements attached to this news release.

Forward-looking statements

Certain matters discussed in this press release are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Specifically, statements regarding growth, profitability, increased interest in our product solutions, and expectations regarding our future operating expenses are forward-looking statements. These forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties. Actual results could differ materially from those projected in or contemplated by the forward-looking statements. Factors that could cause actual results to differ include general economic conditions, the pace of spending and timing of economic recovery in the telecommunications industry, the company's inability to sufficiently anticipate market needs and develop products and product enhancements that achieve market acceptance, higher than anticipated expenses that the company may incur in future quarters, or the impact of any future acquisitions and any unanticipated charges. In addition, please refer to the risk factors contained in Zhone's SEC filings available at www.sec.gov for other important factors that could cause actual results to differ materially from those contained in the forward-looking statements. Stockholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Zhone undertakes no obligation to update publicly or revise any forward-looking statements.

About Zhone Technologies, Inc. (Zhone)

Zhone (NASDAQ: ZHNE) designs and manufactures network equipment for network operators worldwide. Zhone's products allow network operators to deliver a rich array of voice, data, video, and entertainment services over their existing networks while simultaneously retooling for converged packet based voice (VoIP) and video (IPTV) over copper or fiber access lines.

Zhone's advanced networking solutions include the Single Line Multi-Service architecture (SLMS™), Multi-Access Line Concentrator (MALC ), Raptor™ ATM/IP DSLAMs, Zhone Residential Gateways (ZRG™), GigaMux™ Optical Transport Systems and Zhone Management System (ZMS™). With deployments at over 300 carriers including among some of the world's largest networks, Zhone has enabled network operators to reinvent their businesses. For more information, please visit www.zhone.com

Zhone, the Zhone logo, and all Zhone product names are trademarks of Zhone Technologies, Inc. Other brand and product names are trademarks of their respective holders. Specifications, products, and/or product names are all subject to change without notice. Copyright 2004 Zhone Technologies, Inc. All rights reserved.

ZHONE TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)

	Three Months Ended		Nine Months Ended
	Sept. 30, 2004	Sept. 30, 2003	Sept. 30, 2004	Sept. 30, 2003

Net revenue	$27,006	$22,240	$69,066	$59,849
Cost of revenue	15,603	12,118	39,332	33,014
Stock-based compensation	33	131	181	(155)
Gross profit	11,370	9,991	29,553	26,990
Operating expenses:
Research and product development	5,705	5,513	17,306	15,711
Sales and marketing	6,825	4,513	16,670	13,061
General and administrative	3,429	1,228	8,849	3,152
Purchased in-process research and development	2,446	—	8,631	—
Litigation settlement	—	1,600	—	1,600
Stock-based compensation	338	763	1,265	(667)
Amortization and impairment of intangible assets	2,862	2,053	7,270	5,889
Total operating expenses	21,605	15,670	59,991	38,746
Operating loss	(10,235)	(5,679)	(30,438)	(11,756)
Other income (expense), net	(798)	(879)	(1,222)	(1,964)
Loss before income taxes	(11,033)	(6,558)	(31,660)	(13,720)
Income tax provision (benefit)	(26)	(3,064)	143	(2,967)
Net loss	(11,007)	(3,494)	(31,803)	(10,753)
Accretion on preferred stock	—	—	—	(12,700)
Net loss applicable to holders of common stock	$(11,007)	$(3,494)	$(31,803)	$(23,453)
Basic and diluted net loss per share applicable to holders of common stock	$(0.12)	$(0.49)	$(0.38)	$(3.42)
Weighted average shares outstanding used to compute basic and diluted net loss per share applicable to holders of common stock	93,767	7,149	82,998	6,851

Reconciliation between GAAP net loss and non-GAAP net loss as follows:
GAAP net loss	$(11,007)	$(3,494)	$(31,803)	$(23,453)
Purchased in-process research and development	2,446	—	8,631	—
Litigation settlement	—	1,600	—	1,600
Non-recurring tax benefit	—	(3,064)	—	(3,064)
Stock-based compensation	371	894	1,446	(822)
Amortization and impairment of intangible assets	2,862	2,053	7,270	5,889
Non-GAAP net loss	$(5,328)	$(2,011)	$(14,456)	$(19,850)

Revenue by product line:
SLMS	5,612	4,449	19,552	14,406
Legacy and Service	17,183	17,791	45,303	45,443
Optical Transport	4,211	—	4,211	—
	$27,006	$22,240	$69,066	$59,849

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)

	September 30, 2004	December 31, 2003
Assets
Current assets:
Cash, cash equivalents and short-term investments	$68,618	$98,256
Accounts receivable	19,367	10,693
Inventories	37,165	24,281
Prepaid expenses and other current assets	9,588	3,905
Total current assets	134,738	137,135
Property and equipment, net	23,217	22,585
Goodwill	157,792	100,337
Other acquisition-related intangible assets	20,709	12,877
Restricted cash	758	622
Other assets	817	1,013
Total assets	$338,031	$274,569
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$17,576	$19,998
Line of credit	14,500	4,800
Current portion of long-term debt	1,523	1,351
Accrued and other liabilities	22,869	28,685
Total current liabilities	56,468	54,834
Long-term debt, less current portion	46,552	32,040
Other long-term liabilities	1,599	816
Total liabilities	104,619	87,690
Stockholders’ equity:
Common stock	94	77
Additional paid-in capital	862,229	787,567
Other stockholders’ equity	(1,351)	(5,008)
Accumulated deficit	(627,560)	(595,757)
Total stockholders’ equity	233,412	186,879
Total liabilities and stockholders’ equity	$338,031	$274,569

Contacts:

Zhone Investor Relations
Tel: +1 510-777-7013
Fax: +1 510-777-7001
Email: investor-relations@zhone.com

Zhone Public Relations
Tel : +1 404-460-8578
Email: aurora.arlet@edelman.com