Press Release

Zhone Technologies Reports Second Quarter 2009 Financial Results

Oakland, CA — July 22, 2009 — Zhone Technologies, Inc. (NASDAQ: ZHNE), a global leader in access network solutions, today reported its financial results for the second quarter ended June 30, 2009.

Revenue for the second quarter of 2009 was $30.3 million compared with $24.1 million for the first quarter of 2009 and $40.1 million for the second quarter of 2008. Net loss for the second quarter of 2009, calculated in accordance with generally accepted accounting principles ("GAAP"), was $2.3 million or $0.02 per share compared with a net loss of $6.9 million or $0.05 per share for the first quarter of 2009, and a net loss of $80.3 million or $0.53 per share for the second quarter of 2008. Pro forma earnings before stock-based compensation, interest, taxes, depreciation, lease liability accrual, gain on sale of intangible assets and goodwill impairment ("EBITDA") was a $0.9 million loss for the second quarter of 2009, compared to a pro forma EBITDA loss of $5.5 million for the first quarter of 2009, and pro forma EBITDA loss of $5.2 million for the second quarter of 2008.

"Strong sequential revenue growth, improving gross margins and continued expense control contributed to better than expected earnings for the quarter," stated Mory Ejabat, Zhone's chief executive officer. "We are encouraged by the immediate acceptance of our new products and hope to build on that momentum to achieve our primary goal of reaching quarterly EBITDA profitability by year end."

Zhone will conduct a conference call and audio webcast today, July 22, 2009, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its second quarter 2009 results. This call is open to the public by dialing +1 (800) 237-9752 for U.S. callers and +1 (617) 847-8706 for international callers and then entering passcode 51358333. 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 48028058. 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									Six Months Ended
	June 30, 2009			March 31, 2009			June 30, 2008			June 30, 2009			June 30, 2008

Net revenue	$	30,346		$	24,103		$	40,069		$	54,449		$	83,102
Cost of revenue		19,266			16,262			28,412			35,528			57,589
Stock-based compensation		24			28			41			52			91
Gross profit		11,056			7,813			11,616			18,869			25,422
Operating expenses:
Research and product development (1)		5,565			5,796			7,156			11,361			14,300
Sales and marketing (1)		5,014			6,035			7,855			11,049			15,597
General and administrative (1)		2,431			2,578			6,388			5,009			9,400
Gain on sale of intangible assets		-			-			(93	)		-			(3,297	)
Goodwill impairment		-			-			70,401			-			70,401
Total operating expenses		13,010			14,409			91,707			27,419			106,401
Operating loss		(1,954	)		(6,596	)		(80,091	)		(8,550	)		(80,979	)
Other expense, net		(263	)		(293	)		(150	)		(556	)		(170	)
Loss before income taxes		(2,217	)		(6,889	)		(80,241	)		(9,106	)		(81,149	)
Income tax provision		47			14			93			61			126
Net loss	$	(2,264	)	$	(6,903	)	$	(80,334	)	$	(9,167	)	$	(81,275	)
Basic and diluted net loss per share	$	(0.02	)	$	(0.05	)	$	(0.53	)	$	(0.06	)	$	(0.54	)
Weighted average shares outstanding used to compute basic and diluted net loss per share		150,916			150,719			150,260			150,817			150,166

(1) Amounts include stock-based compensation costs as follows:
Research and product development		94			97			128			191			273
Sales and marketing		110			114			128			224			266
General and administrative		315			281			343			596			646
		519			492			599			1,011			1,185

GAAP net loss	$	(2,264	)	$	(6,903	)	$	(80,334	)	$	(9,167	)	$	(81,275	)
Stock-based compensation		543			520			640			1,063			1,276
Interest expense, net		325			369			190			694			326
Income taxes		47			14			93			61			126
Depreciation		468			492			579			960			1,135
Lease liability accrual		-			-			3,305			-			3,305
Gain on sale of intangible assets		-			-			(93	)		-			(3,297	)
Goodwill impairment		-			-			70,401			-			70,401
Non-GAAP pro forma EBITDA	$	(881	)	$	(5,508	)	$	(5,219	)	$	(6,389	)	$	(8,003	)

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


	June 30, 2009			December 31, 2008

Assets
Current assets:
Cash, cash equivalents and short-term investments	$	26,841		$	36,243
Accounts receivable		19,062			23,665
Inventories		33,569			40,706
Prepaid expenses and other current assets		2,203			2,654
Total current assets		81,675			103,268
Property and equipment, net		19,460			20,003
Restricted cash		58			123
Other assets		41			55
Total assets	$	101,234		$	123,449
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	5,292		$	12,719
Line of credit		10,000			15,000
Current portion of long-term debt		399			380
Accrued and other liabilities		12,400			13,162
Total current liabilities		28,091			41,261
Long-term debt, less current portion		18,457			18,698
Other long-term liabilities		3,446			4,193
Total liabilities		49,994			64,152
Stockholders’ equity:
Common stock		153			151
Additional paid-in capital		1,065,575			1,064,493
Other stockholders’ equity		276			250
Accumulated deficit		(1,014,764	)		(1,005,597	)
Total stockholders’ equity		51,240			59,297
Total liabilities and stockholders’ equity	$	101,234		$	123,449

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 only fully-integrated portfolio of MSAP, FTTx, EFM and Wi-Fi access technologies, improving network agility and reducing the costs of delivering the full spectrum of access services, including residential and business broadband, VoIP, and High-Definition IPTV over copper, fiber, and wireless. Zhone is headquartered in California, and its MSAP products are all manufactured in the USA, in a facility that is emission, waste-water, and CFC free.
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 second quarter 2009 financial estimates; projections of revenue, margins, expenses or other financial items; and improvement of financial markets. 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, 2008 and Zhone�s quarterly report on Form 10-Q for the quarter ended March 31, 2009. 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.