OAKLAND, Calif.--(BUSINESS WIRE)--October 21, 2008--Zhone Technologies, Inc. (NASDAQ:ZHNE), a global leader in multi-service access solutions, today reported its financial results for the third quarter ended September 30, 2008.

Revenue for the third quarter of 2008 was $32.0 million compared with $40.1 million for the second quarter of 2008 and $41.6 million for the third quarter of 2007. Net loss for the third quarter of 2008, calculated in accordance with generally accepted accounting principles (“GAAP”), was $6.5 million or $0.04 per share compared with a net loss of $80.3 million or $0.53 per share for the second quarter of 2008, and a net loss of $1.5 million or $0.01 per share for the third 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 $4.6 million loss for the third quarter of 2008, compared to a pro forma EBITDA loss of $5.2 million for the second quarter of 2008, and pro forma EBITDA loss of $4.9 million for the third quarter of 2007.

Zhone’s chief executive officer Mory Ejabat stated, “Our new product releases and customer wins were unfortunately overshadowed by weaker than expected financial performance. The global credit contraction caused many of our customers to defer or reduce network expansion. Until the economic environment improves, we will continue to reduce operating expenses and improve gross margins by reducing the cost of our products.”

Zhone will conduct a conference call and audio webcast today, October 21, 2008, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its third quarter 2008 results. This call is open to the public by dialing +1 (800) 901-5213 for U.S. callers and +1 (617) 786-2962 for international callers and then entering passcode 83213297. 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 66470411. An audio webcast replay will also be available online at http://www.zhone.com/investors/ for approximately one week following the original call.

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. (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

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 © 2008 Zhone Technologies, Inc. All rights reserved.

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 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.

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

	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2008			2008			2007			2008			2007

Net revenue	$	32,020		$	40,069		$	41,604		$	115,122		$	128,835
Cost of revenue		22,332			28,412			29,066			79,921			85,581
Stock-based compensation		44			41			67			135			268
Gross profit		9,644			11,616			12,471			35,066			42,986
Operating expenses:
Research and product development (1)		6,480			7,156			8,154			20,780			25,338
Sales and marketing (1)		6,483			7,855			8,446			22,080			25,141
General and administrative (1)		2,834			6,388			2,260			12,234			7,868
Gain on sale of intangible assets		-			(93	)		(5,000	)		(3,297	)		(5,000	)
Goodwill impairment		-			70,401			-			70,401			-
Total operating expenses		15,797			91,707			13,860			122,198			53,347
Operating loss		(6,153	)		(80,091	)		(1,389	)		(87,132	)		(10,361	)
Other expense, net		(326	)		(150	)		(16	)		(496	)		(221	)
Loss before income taxes		(6,479	)		(80,241	)		(1,405	)		(87,628	)		(10,582	)
Income tax provision		50			93			125			176			288
Net loss	$	(6,529	)	$	(80,334	)	$	(1,530	)	$	(87,804	)	$	(10,870	)
Basic and diluted net loss per share	$	(0.04	)	$	(0.53	)	$	(0.01	)	$	(0.58	)	$	(0.07	)
Weighted average shares outstanding used to compute basic and diluted net loss per share		150,443			150,260			149,715			150,258			149,512

(1) Amounts include stock-based compensation costs as follows:
Research and product development		116			128			179			389			625
Sales and marketing		146			128			154			412			512
General and administrative		292			343			308			938			1,057
		554			599			641			1,739			2,194

GAAP net loss	$	(6,529	)	$	(80,334	)	$	(1,530	)	$	(87,804	)	$	(10,870	)
Stock-based compensation		598			640			708			1,874			2,462
Interest expense, net		293			190			38			619			282
Income taxes		50			93			125			176			288
Depreciation		573			579			716			1,708			2,044
Restructuring		380			-			-			380			-
Lease liability accrual		-			3,305			-			3,305		-
Gain on sale of intangible assets		-			(93	)		(5,000	)		(3,297	)		(5,000	)
Goodwill impairment		-			70,401			-			70,401			-
Non-GAAP pro forma EBITDA	$	(4,635	)	$	(5,219	)	$	(4,943	)	$	(12,638	)	$	(10,794	)

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

	September 30,			December 31,
	2008			2007

Assets
Current assets:
Cash, cash equivalents and short-term investments	$	41,251		$	50,165
Accounts receivable		26,595			33,258
Inventories		42,858			44,698
Prepaid expenses and other current assets		2,908			3,804
Total current assets		113,612			131,925
Property and equipment, net		20,102			20,818
Goodwill		-			70,401
Restricted cash		122			186
Other assets		55			76
Total assets	$	133,891		$	223,406
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	17,196		$	21,276
Line of credit		15,000			15,000
Current portion of long-term debt		363			265
Accrued and other liabilities		14,276			17,888
Total current liabilities		46,835			54,429
Long-term debt, less current portion		18,811			19,140
Other long-term liabilities		4,563			290
Total liabilities		70,209			73,859
Stockholders’ equity:
Common stock		151			150
Additional paid-in capital		1,064,012			1,061,849
Other stockholders’ equity		385			610
Accumulated deficit		(1,000,866	)		(913,062	)
Total stockholders’ equity		63,682			149,547
Total liabilities and stockholders' equity	$	133,891		$	223,406

CONTACT:
Zhone Investor Relations
Molly Deltoro, +1 510-777-7013
Fax: +1 510-777-7001
investor-relations@zhone.com
or
Zhone Public Relations
Tracy Oliver, +1 510-665-7984
Mobile: +1 925-640-0989
tracy@skycastlemedia.com