Press Release

Zhone Technologies Reports Fourth Quarter 2008 Financial Results

Oakland, CA — January 28, 2009 — Zhone Technologies, Inc. (NASDAQ: ZHNE), the global leader in single-platform delivery of voice, DSL, EFM, FTTx and wireless services, today reported its financial results for the fourth quarter ended December 31, 2008.

Revenue for the fourth quarter of 2008 was $31.0 million compared with $32.0 million for the third quarter of 2008 and $46.6 million for the fourth quarter of 2007. Net loss for the fourth quarter of 2008, calculated in accordance with generally accepted accounting principles ("GAAP"), was $4.7 million or $0.03 per share compared with a net loss of $6.5 million or $0.04 per share for the third quarter of 2008, and a net loss of $1.2 million or $0.01 per share for the fourth quarter of 2007. Pro forma earnings before stock-based compensation, interest, taxes, depreciation, restructuring, lease liability accruals, gain on sale of intangible assets, and goodwill impairment ("EBITDA") was a $4.5 million loss for the fourth quarter of 2008, compared to a pro forma EBITDA loss of $4.6 million for the third quarter of 2008, and pro forma EBITDA was breakeven for the fourth quarter of 2007.

Zhone's chief executive officer Mory Ejabat stated, "Our customer wins and RUS certification of our MALC GPON solution were unfortunately overshadowed by continued difficult business conditions affecting our financial performance. Until the economic environment improves, we will continue to increase focus on the growth segments in access while reducing operating expenses and improving gross margins by reducing the cost of our products."

Zhone will conduct a conference call and audio webcast today, January 28, 2009, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its fourth quarter 2008 results. This call is open to the public by dialing +1 (866) 543-6407 for U.S. callers and +1 (617) 213-8898 for international callers and then entering passcode 13147718. The audio webcast will be simultaneously available on the Investor Relations section of Zhone's website at http://www.zhone.com/investors/.

A replay of the conference call will be available after the original call by dialing +1 (888) 286-8010 for U.S. callers and +1 (617) 801-6888 for international callers and then entering passcode 33011332. An audio webcast replay will also be available online at http://www.zhone.com/investors/ for approximately one week following the original call.

Non-GAAP Financial Measures

To supplement Zhone's consolidated financial statements presented in accordance with GAAP, Zhone uses pro forma EBITDA, a non-GAAP measure Zhone believes is appropriate to enhance an overall understanding of Zhone's past financial performance and prospects for the future. These adjustments to GAAP results are made with the intent of providing greater transparency to supplemental information used by management in its financial and operational decision-making. These non-GAAP results are among the primary indicators that management uses as a basis for 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 to fund 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. The presentation of this additional information is not meant to be considered in isolation or as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between net loss calculated on a GAAP basis and pro forma EBITDA on a non-GAAP basis is provided in a table immediately following the Unaudited Condensed Consolidated Statements of Operations.

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


	Three Months Ended									Year Ended
	December 31,			September 30,			December 31,			December 31,			December 31,
		2008			2008			2007			2008			2007

Net revenue	$	31,038		$	32,020		$	46,613		$	146,160		$	175,448
Cost of revenue		21,017			22,332			30,493			100,938			116,074
Stock-based compensation		23			44			28			158			296
Gross profit		9,998			9,644			16,092			45,064			59,078
Operating expenses:
Research and product development (1)		6,283			6,480			7,382			27,063			32,720
Sales and marketing (1)		6,189			6,483			8,051			28,269			33,192
General and administrative (1)		2,920			2,834			1,643			15,154			9,511
Gain on sale of intangible assets		(1,100	)		-			-			(4,397	)		(5,000	)
Goodwill impairment		-			-			-			70,401			-
Total operating expenses		14,292			15,797			17,076			136,490			70,423
Operating loss		(4,294	)		(6,153	)		(984	)		(91,426	)		(11,345	)
Other expense, net		(343	)		(326	)		(142	)		(839	)		(363	)
Loss before income taxes		(4,637	)		(6,479	)		(1,126	)		(92,265	)		(11,708	)
Income tax provision		94			50			106			270			394
Net loss	$	(4,731	)	$	(6,529	)	$	(1,232	)	$	(92,535	)	$	(12,102	)
Basic and diluted net loss per share	$	(0.03	)	$	(0.04	)	$	(0.01	)	$	(0.62	)	$	(0.08	)

Weighted average shares outstanding used to compute basic and diluted net loss per share		150,595			150,443			149,907			150,331			149,623

(1) Amounts include stock-based compensation costs as follows:
Research and product development		90			116			92			479			717
Sales and marketing		99			146			91			511			603
General and administrative		257			292			193			1,195			1,250
		446			554			376			2,185			2,570

GAAP net loss	$	(4,731	)	$	(6,529	)	$	(1,232	)	$	(92,535	)	$	(12,102	)
Stock-based compensation		469			598			404		$	2,343			2,866
Interest expense, net		298			293			118		$	917			400
Income taxes		94			50			106		$	270			394
Depreciation		496			573			616		$	2,204			2,660
Restructuring		-			380			-		$	380			-
Lease liability accrual		-			-			-		$	3,305			-
Gain on sale of intangible assets		(1,100	)		-			-		$	(4,397	)		(5,000	)
Goodwill impairment		-			-			-		$	70,401			-
Non-GAAP pro forma EBITDA	$	(4,474	)	$	(4,635	)	$	12		$	(17,112	)	$	(10,782	)

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets
(In thousands)


	December 31,			December 31,
		2008			2007

Assets
Current assets:
Cash, cash equivalents and short-term investments	$	36,243		$	50,165
Accounts receivable		23,665			33,258
Inventories		40,706			44,698
Prepaid expenses and other current assets		2,654			3,804
Total current assets		103,268			131,925
Property and equipment, net		20,003			20,818
Goodwill		-			70,401
Restricted cash		123			186
Other assets		55			76
Total assets	$	123,449		$	223,406
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	12,719		$	21,276
Line of credit		15,000			15,000
Current portion of long-term debt		380			265
Accrued and other liabilities		13,162			17,888
Total current liabilities		41,261			54,429
Long-term debt, less current portion		18,698			19,140
Other long-term liabilities		4,193			290
Total liabilities		64,152			73,859
Stockholders' equity:
Common stock		151			150
Additional paid-in capital		1,064,493			1,061,849
Other stockholders' equity		250			610
Accumulated deficit		(1,005,597	)		(913,062	)
Total stockholders' equity		59,297			149,547
Total liabilities and stockholders' equity	$	123,449		$	223,406

About Zhone Technologies -- Access for a Converging World

Zhone Technologies, Inc. (NASDAQ: ZHNE) is a global leader in multi-service access network solutions, serving more than 700 of the world's most innovative network operators. The company offers the industry's broadest fully-integrated portfolio of MSAP, FTTx, EFM and Wi-Fi access technologies, enabling a full suite of services, including residential and business broadband, VoIP, and High-Definition IPTV. Zhone's converged multi-service access platform helps operators rapidly deploy premium services using copper, fiber, and wireless while improving network agility and reducing costs. www.zhone.com

Contacts:

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

Media
Tel : +1 510-777-7020
Fax : +1 510-777-7001
Email: public-relations@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.

Forward-Looking Statements

This press release contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would," variations of such words, and similar expressions are intended to identify forward-looking statements. In addition, forward-looking statements include, among others, statements that refer to projected improvement of gross margins; and anticipated reduction of expenses. Readers are cautioned that actual results could differ materially from those expressed in or contemplated by the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, commercial acceptance of our products; intense competition in the communications equipment market; our ability to execute on our strategy and operating plans; and economic conditions specific to the communications, networking, internet and related industries. In addition, please refer to the risk factors contained in the Company's SEC filings available at www.sec.gov, including without limitation, the Company's annual report on Form 10-K for the year ended December 31, 2007 and Zhone's quarterly reports on Form 10-Q for the quarters ended September 30 2008, June 30, 2008 and March 31, 2008. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. Zhone undertakes no obligation to update or revise any forward-looking statements for any reason.