Zhone Technologies Reports Fourth Quarter 2006 Financial Results.

OAKLAND, Calif. -- Zhone Technologies, Inc. (NASDAQ:ZHNE), a global provider of advanced communications equipment and a leader in VoIP, IPTV, and Ethernet over both copper and fiber access lines, today reported its results for the fourth quarter ended December 31, 2006.

Revenue for the fourth quarter of 2006 was $44.3 million compared with $43.1 million for the third quarter of 2006 and $53.2 million for the fourth quarter of 2005. Net loss for the fourth quarter of 2006, calculated in accordance with generally accepted accounting principles ("GAAP"), was $4.6 million or $0.03 per share compared with a net loss of $121.0 million or $0.81 per share for the third quarter of 2006, and a net loss of $107.2 million or $0.73 per share for the fourth quarter of 2005. The third quarter 2006 and fourth quarter 2005 results included charges of $113.7 million and $102.1 million, respectively, for impairment of goodwill and intangible assets. These non-cash impairment charges were calculated in accordance with GAAP and are expected to be non-recurring. The results for 2006 also included incremental, non-cash, employee stock-based compensation expenses associated with the implementation of SFAS 123R. Pro forma earnings before stock-based compensation, interest, taxes, impairment, depreciation and amortization (EBITDA) was a $2.3 million loss for the fourth quarter of 2006, compared to a pro forma EBITDA loss of $5.1 million for the third quarter of 2006, and a pro forma EBITDA earnings of $1.1 million for the fourth quarter of 2005.

"We are encouraged by the level of customer activity involved in the evaluation of our next generation technologies," said Mory Ejabat, chairman and chief executive officer of Zhone Technologies, Inc. "For the fourth quarter as compared to the third quarter of 2006, these next generation technologies drove 11% growth in our SLMS revenue, and 3% growth in total revenue. We also quickly streamlined the business by reducing operating expenses excluding impairment charges by 10%, and improved operational execution without sacrificing our commitment to new research and development."

Zhone will hold a conference call today, January 25, 2007, at approximately 5:00p.m. Eastern Time to review its fourth quarter results. This call is open to the public by dialing [phone] for U.S. callers, and [phone] for international callers. The passcode is: 11277115. An 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 for approximately one week following the original call by dialing [phone] for U.S. callers, and [phone] for international callers, and then entering passcode 90551835. An audio webcast replay will also be available online at www.zhone.com/about/investors/ 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 and operating expenses excluding impairment charges, non-GAAP measures Zhone believes are 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 acquisitions and 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.

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 statements that refer to the expectation that impairment charges will be non-recurring. 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 Zhone's SLMS and optical products; intense competition in the communications equipment market; Zhone's ability to execute on the company's 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, June 30, 2006, and September 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 for any reason.

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

Zhone Technologies, Inc. (NASDAQ:ZHNE) is a global provider of advanced communications equipment to more than 600 operators in both emerging and established markets. Zhone's market-leading broadband loop carrier equipment (BLC) enables operators to rapidly deploy revenue-generating access services using existing infrastructure, while providing a migration path to a cost-efficient, all-IP access network. The company's products address a broad range of applications including residential and business broadband, VoIP, IPTV, and Ethernet over both copper and 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 the Zhone Management System (ZMS[TM]).

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] 2007 Zhone Technologies, Inc. All rights reserved.

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