Press Release

Zhone Technologies Reports Fourth Quarter 2009 Financial Results

Oakland, CA — January 27, 2010 — Zhone Technologies, Inc. (NASDAQ:ZHNE - News), a global leader in network access solutions, today reported its financial results for the fourth quarter ended December 31, 2009.

Revenue for the fourth quarter of 2009 increased by 16% to $36.0 million from $31.0 million for the fourth quarter of 2008 and remained flat as compared with $36.0 million for the third quarter of 2009. Net income for the fourth quarter of 2009, calculated in accordance with generally accepted accounting principles (�GAAP�), was $0.3 million or $0.00 per share compared with a net loss of $4.7 million or $0.03 per share for the fourth quarter of 2008 and a net loss of $1.2 million or $0.01 per share for the third quarter of 2009. Pro forma earnings before stock-based compensation, interest, taxes, depreciation, restructuring, lease liability accrual, gain on sale of intangible assets and goodwill impairment (�pro forma EBITDA�) was a pro forma EBITDA profit of $1.9 million for the fourth quarter of 2009, compared to a pro forma EBITDA loss of $4.5 million for the fourth quarter of 2008 and a pro forma EBITDA profit of $0.1 million for the third quarter of 2009.

"We�re excited by stronger than expected profitability associated with the market acceptance of the MXK product family. The initial positive reaction to our new products is very encouraging and we hope to build on that momentum in 2010," stated Mory Ejabat, Zhone's chief executive officer. "In the fourth quarter, we achieved our primary financial goal of generating positive quarterly pro forma EBITDA and GAAP net income and now focus on improving that profitability for 2010 and beyond."

Zhone will conduct a conference call and audio webcast today, January 27, 2010, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its fourth 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 18383089. 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									Year Ended
	December 31,			September 30,			December 31,			December 31,			December 31,
	2009			2009			2008			2009			2008

Net revenue	$	36,036		$	36,016		$	31,038		$	126,501		$	146,160
Cost of revenue		21,545			23,929			21,017			81,002			100,938
Stock-based compensation		32			20			23			104			158
Gross profit		14,459			12,067			9,998			45,395			45,064
Operating expenses:
Research and product development (1)		5,414			5,338			6,283			22,113			27,063
Sales and marketing (1)		5,670			5,323			6,189			22,042			28,269
General and administrative (1)		2,624			2,300			2,920			9,933			15,154
Gain on sale of intangible assets		-			-			(1,100	)		-			(4,397	)
Goodwill impairment		-			-			-			-			70,401
Total operating expenses		13,708			12,961			14,292			54,088			136,490
Operating income (loss)		751			(894	)		(4,294	)		(8,693	)		(91,426	)
Other expense, net		(305	)		(302	)		(343	)		(1,163	)		(839	)
Income (loss) before income taxes		446			(1,196	)		(4,637	)		(9,856	)		(92,265	)
Income tax provision		102			8			94			171			270
Net income (loss)	$	344		$	(1,204	)	$	(4,731	)	$	(10,027	)	$	(92,535	)

Weighted average shares outstanding
Basic		151,270			151,108			150,595			150,999			150,342
Diluted		163,650			151,108			150,595			150,999			150,342

Earnings per common share net income (loss)
Basic	$	0.00		$	(0.01	)	$	(0.03	)	$	(0.07	)	$	(0.62	)
Diluted (*)	$	0.00		$	(0.01	)	$	(0.03	)	$	(0.07	)	$	(0.62	)

(*) Assumes exercise of dilutive stock options under the treasury stock method

(1) Amounts include stock-based compensation costs as follows:
Research and product development		133			90			90			414			479
Sales and marketing		156			104			99			484			511
General and administrative		396			266			257			1,258			1,195
		685			460			446			2,156			2,185

GAAP net income (loss)	$	344		$	(1,204	)	$	(4,731	)	$	(10,027	)	$	(92,535	)
Stock-based compensation		717			480			469			2,260			2,343
Interest expense, net		340			349			298			1,383			917
Income taxes		102			8			94			171			270
Depreciation		428			446			496			1,834			2,204
Restructuring		-			-			-			-			380
Lease liability accrual		-			-			-			-			3,305
Gain on sale of intangible assets		-			-			(1,100	)		-			(4,397	)
Goodwill impairment		-			-			-			-			70,401
Non-GAAP pro forma EBITDA profit (loss)	$	1,931		$	79		$	(4,474	)	$	(4,379	)	$	(17,112	)

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

	December 31,			December 31,
	2009			2008

Assets
Current assets:
Cash, cash equivalents and short-term investments	$	21,766		$	36,243
Accounts receivable		37,107			23,665
Inventories		30,228			40,706
Prepaid expenses and other current assets		2,098			2,654
Total current assets		91,199			103,268
Property and equipment, net		18,961			20,003
Restricted cash		58			123
Other assets		41			55
Total assets	$	110,259		$	123,449
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	14,914		$	12,719
Line of credit		10,000			15,000
Current portion of long-term debt		411			380
Accrued and other liabilities		12,031			13,162
Total current liabilities		37,356			41,261
Long-term debt, less current portion		18,285			18,698
Other long-term liabilities		2,945			4,193
Total liabilities		58,586			64,152
Stockholders’ equity:
Common stock		151			151
Additional paid-in capital		1,066,853			1,064,493
Other stockholders’ equity		293			250
Accumulated deficit		(1,015,624	)		(1,005,597	)
Total stockholders’ equity		51,673			59,297
Total liabilities and stockholders' equity	$	110,259		$	123,449

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 fourth 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 quarters ended September 30, 2009, June 30, 2009 and 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.