Zhone Technologies Announces Revised Third Quarter 2006 Financial Guidance and Earnings Announcement Date.

OAKLAND, Calif. -- Zhone Technologies, Inc. (Nasdaq:ZHNE), the first company dedicated to building total-delivery solutions for voice, data, video and entertainment services worldwide today released revised third quarter 2006 financial guidance.

Based on preliminary information, revenue for the third quarter 2006 is expected to range between $41 million and $43 million compared to previous estimates of approximately $54 million. Due to the anticipated lower revenue level, gross margins are expected to be between 35% and 36% which is below the previous guidance of approximately 38%. Operating expenses are expected to be on the low end of the previously provided guidance range of between $22.5 million to $24.5 million excluding any impairment charges. The company is currently evaluating whether and to what extent its long-lived and intangible assets are impaired.

Zhone's chief executive officer Mory Ejabat stated, "Our revenue for the third quarter is expected to be substantially below expectations primarily due to weakness in our international business. In particular, we experienced the effects of fluctuations in the buying patterns of our largest customers in the Middle East and Latin America and a greater than expected seasonal slowdown in Europe. Due to this weakness, our SLMS revenue will also decline sequentially which is particularly disappointing after five consecutive quarters of strong growth in both our international and SLMS businesses. Despite this temporary setback, we expect our revenue to rebound over the next few quarters with continuing customer wins and expansion from our existing customer base of over 600 customers."

These results are preliminary, and therefore, subject to the company's completion of its customary quarterly closing and review procedures. Zhone is scheduled to release its final third quarter results on Thursday, October 19, 2006, after the close of regular market trading.

Zhone will conduct a conference call and audio webcast to discuss further details of its third quarter 2006 results at approximately 2:00 p.m. PT / 5:00 p.m. ET on Thursday, October 19, 2006. This call is open to the public by dialing [phone] for U.S. callers and [phone] for international callers and then entering passcode 22654363. The audio webcast will be simultaneously available on the Investor Relations section of Zhone's website at http://www.zhone.com/about/investors/.

A replay of the conference call will be available after the original call by dialing [phone] for U.S. callers and [phone] for international callers and then entering passcode 75427209. An audio webcast replay will also be available online at http://www.zhone.com/about/investors/ for approximately one week following the original call.

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 third quarter 2006 financial guidance; projections of revenue, margins, expenses or other financial items; and anticipated rebound in revenue, customer wins and expansion. 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 SLMS and optical 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 Zhone's SEC filings available at www.sec.gov, including without limitation, Zhone's annual report on Form 10-K for the year ended December 31, 2005 and Zhone's quarterly reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006. 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, whether as a result of new information, future events or otherwise.

About Zhone Technologies, Inc. (www.zhone.com)

Zhone 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[TM]), Multi-Access Line Concentrator (MALC[TM]), Raptor[TM] ATM/IP DSLAMs, Zhone Residential Gateways (ZRG[TM]), GigaMux[TM] Optical Transport Systems and Zhone Management System (ZMS[TM]). With deployments at over 600 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 [c] 2006 Zhone Technologies, Inc. All rights reserved.