Press Release

Zhone Technologies Reports Second Quarter 2010 Financial Results

Oakland, CA — July 21, 2010 — Zhone Technologies, Inc. (NASDAQ: ZHNE), a global leader in network access solutions for fiber, copper and wireless broadband infrastructures, today reported its financial results for the second quarter ended June 30, 2010.

Revenue for the second quarter of 2010 increased by 10% to $33.3 million from $30.3 million for the second quarter of 2009 and increased by 7% from $31.1 million for the first quarter of 2010. Net loss for the second quarter of 2010, calculated in accordance with generally accepted accounting principles ("GAAP"), was $2.0 million or $0.07 per share compared with a net loss of $2.3 million or $0.08 per share for the second quarter of 2009 and a net loss of $3.2 million or $0.11 per share for the first quarter of 2010. Pro forma earnings before stock-based compensation, interest, taxes, and depreciation ("pro forma EBITDA") was a pro forma EBITDA loss of $0.8 million for the second quarter of 2010, compared to a pro forma EBITDA loss of $0.9 million for the second quarter of 2009 and a pro forma EBITDA loss of $1.0 million for the first quarter of 2010.

"We are proud of achieving our revenue and margin guidance for Q2 2010 based on continued growth of our new MXK and the launch of the new zNID ONT," stated Mory Ejabat, Zhone's chief executive officer. "We continue to remain confident about the remainder of 2010 based on strong interest in our new products and our end-to-end multi-service solutions being deployed by service providers in North America and continued strength in the Middle East, Caribbean and Latin America and new growth in the Nordic Regions."

Zhone will conduct a conference call and audio webcast today, July 21, 2010, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its second quarter 2010 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 18383089. The audio webcast will be simultaneously available on the Investor Relations section of Zone'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 17788318. 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,			March 31,			June 30,			June 30,			June 30,
		2010			2010			2009			2010			2009

Net revenue	$	33,255		$	31,082		$	30,346		$	64,337		$	54,449
Cost of revenue		21,234			19,710			19,266			40,944			35,528
Stock-based compensation		16			55			24			71			52
Gross profit		12,005			11,317			11,056			23,322			18,869
Operating expenses:
Research and product development (1)		5,198			5,277			5,565			10,475			11,361
Sales and marketing (1)		6,076			5,780			5,014			11,856			11,049
General and administrative (1)		2,315			3,262			2,431			5,577			5,009
Total operating expenses		13,589			14,319			13,010			27,908			27,419
Operating income (loss)		(1,584	)		(3,002	)		(1,954	)		(4,586	)		(8,550	)
Other expense, net		(407	)		(316	)		(263	)		(723	)		(556	)
Income (loss) before income taxes		(1,991	)		(3,318	)		(2,217	)		(5,309	)		(9,106	)
Income tax provision (benefit)		11			(114	)		47			(103	)		61
Net income (loss)	$	(2,002	)	$	(3,204	)	$	(2,264	)	$	(5,206	)	$	(9,167	)

Weighted average shares outstanding
Basic		30,343			30,282			30,183			30,313			30,163
Diluted		30,343			30,282			30,183			30,313			30,163

Earnings per common share net income (loss)
Basic	$	(0.07	)	$	(0.11	)	$	(0.08	)	$	(0.17	)	$	(0.30	)
Diluted	$	(0.07	)	$	(0.11	)	$	(0.08	)	$	(0.17	)	$	(0.30	)

(1) Amounts include stock-based compensation costs as follows:
Research and product development		86			164			94			250			191
Sales and marketing		67			243			110			310			224
General and administrative		164			1,021			315			1,185			596
		317			1,428			519			1,745			1,011

GAAP net income (loss)	$	(2,002	)	$	(3,204	)	$	(2,264	)	$	(5,206	)	$	(9,167	)
Stock-based compensation		333			1,483			543			1,816			1,063
Interest expense, net		420			350			325			770			694
Income taxes		11			(114	)		47			(103	)		61
Depreciation		435			446			468			881			960
Non-GAAP pro forma EBITDA profit (loss)	$	(803	)	$	(1,039	)	$	(881	)	$	(1,842	)	$	(6,389	)

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets (In thousands)


	June 30,			December 31,
		2010			2009

Assets
Current assets:
Cash, cash equivalents and short-term investments	$	20,271		$	21,766
Accounts receivable		27,711			37,107
Inventories		31,383			30,228
Prepaid expenses and other current assets		2,346			2,098
Total current assets		81,711			91,199
Property and equipment, net		18,478			18,961
Restricted cash		57			58
Other assets		282			41
Total assets	$	100,528		$	110,259
Liabilities and Stockholders� Equity
Current liabilities:
Accounts payable	$	6,839		$	14,914
Line of credit		10,000			10,000
Current portion of long-term debt		18,453			411
Accrued and other liabilities		13,558			12,031
Total current liabilities		48,850			37,356
Long-term debt, less current portion		0			18,285
Other long-term liabilities		3,227			2,945
Total liabilities		52,077			58,586
Stockholders� equity:
Common stock		30			30
Additional paid-in capital		1,068,949			1,066,974
Other stockholders� equity		302			293
Accumulated deficit		(1,020,830	)		(1,015,624	)
Total stockholders� equity		48,451			51,673
Total liabilities and stockholders' equity	$	100,528		$	110,259

About Zhone Technologies

Zhone Technologies, Inc. (NASDAQ: ZHNE) is a global leader in all IP multi-service access solutions, serving more than 750 of the world's most innovative network operators.

The IP Zhone is the only solution that enables service providers to build the network of the future�today, supporting end-to-end Voice, Data, Entertainment Social Media, Business, Mobile Backhaul and Mobility service.

Zhone is committed to building the fastest and highest quality All IP Multi-Service solution for its customers.

Zhone is headquartered in California and its products are manufactured in the USA in a facility that is emission, waste-water and CFC free.

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

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 first quarter 2010 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 http://www.sec.gov, including without limitation, the Company's annual report on Form 10-K for the year ended December 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.