Zhone Technologies Reports Second Quarter 2008 Financial Results

OAKLAND, Calif.--(Business Wire)--
Zhone Technologies, Inc. (NASDAQ:ZHNE), a global leader in
multi-service access solutions, today reported its financial results
for the second quarter ended June 30, 2008.

Revenue for the second quarter of 2008 was $40.1 million compared
with $43.0 million for the first quarter of 2008 and $44.1 million for
the second quarter of 2007. Net loss for the second quarter of 2008,
calculated in accordance with generally accepted accounting principles
("GAAP"), was $80.3 million or $0.53 per share compared with a net
loss of $0.9 million or $0.01 per share for the first quarter of 2008,
and a net loss of $4.6 million or $0.03 per share for the second
quarter of 2007. Pro forma earnings before stock-based compensation,
interest, taxes, depreciation, lease liability accruals, gain on sale
of intangible assets, and goodwill impairment ("EBITDA") was a $5.2
million loss for the second quarter of 2008, compared to a pro forma
EBITDA loss of $2.8 million for the first quarter of 2008, and pro
forma EBITDA loss of $2.9 million for the second quarter of 2007.

Zhone's chief executive officer Mory Ejabat stated, "Our results
for the second quarter were unfortunately overshadowed by events with
our largest customer in Latin America, who made a request for
unacceptably aggressive price reductions late in the negotiations over
a multi-million dollar expansion. Our fundamentals in other markets
remain strong, and we will continue to build on them to improve gross
margins while reducing expenses to achieve profitability."

Zhone will conduct a conference call and audio webcast today, July
22, 2008, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its
second 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.

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.

About Zhone Technologies -- Access for a Converging World

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 (C) 2008 Zhone Technologies, Inc. All rights reserved.

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 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 quarter ended 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.

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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,
2008 2008 2007 2008 2007
-------------------------------------------------

Net revenue $ 40,069 $ 43,033 $ 44,085 $ 83,102 $ 87,231
Cost of revenue 28,412 29,177 29,028 57,589 56,515
Stock-based
compensation 41 50 81 91 201
-------------------------------------------------
Gross profit 11,616 13,806 14,976 25,422 30,515
-------------------------------------------------
Operating expenses:
Research and
product
development (1) 7,156 7,144 8,528 14,300 17,184
Sales and
marketing (1) 7,855 7,742 8,068 15,597 16,695
General and
administrative
(1) 6,388 3,012 2,783 9,400 5,608
Gain on sale of
intangible
assets (93) (3,204) - (3,297) -
Goodwill
impairment 70,401 - - 70,401 -
-------------------------------------------------
Total operating
expenses 91,707 14,694 19,379 106,401 39,487
-------------------------------------------------
Operating loss (80,091) (888) (4,403) (80,979) (8,972)
Other expense, net (150) (20) (26) (170) (205)
-------------------------------------------------
Loss before
income taxes (80,241) (908) (4,429) (81,149) (9,177)
Income tax provision 93 33 125 126 163
-------------------------------------------------
Net loss $(80,334) $ (941) $ (4,554) $(81,275) $ (9,340)
=================================================
Basic and diluted
net loss per share $ (0.53) $ (0.01) $ (0.03) $ (0.54) $ (0.06)

Weighted average
shares outstanding
used to compute
basic and diluted
net loss per share 150,260 150,072 149,533 150,166 149,462

(1) Amounts include
stock-based
compensation costs
as follows:
Research and
product
development 128 145 184 273 446
Sales and
marketing 128 138 147 266 358
General and
administrative 343 303 360 646 749
-------------------------------------------------
599 586 691 1,185 1,553

GAAP net loss $(80,334) $ (941) $ (4,554) $(81,275) $ (9,340)
Stock-based
compensation 640 636 772 1,276 1,754
Interest expense,
net 190 136 77 326 244
Income taxes 93 33 125 126 163
Depreciation 579 556 672 1,135 1,328
Lease liability
accrual 3,305 - - 3,305 -
Gain on sale of
intangible assets (93) (3,204) - (3,297) -
Goodwill impairment 70,401 - - 70,401 -
-------------------------------------------------
Non-GAAP pro forma
EBITDA $ (5,219) $ (2,784) $ (2,908) $ (8,003) $ (5,851)
=================================================
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ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets
(In thousands)

June 30, December 31,
2008 2007
----------- -------------

Assets
Current assets:
Cash, cash equivalents and short-term
investments $ 50,068 $ 50,165
Accounts receivable 30,246 33,258
Inventories 37,199 44,698
Prepaid expenses and other current assets 2,624 3,804
-------------------------
Total current assets 120,137 131,925
Property and equipment, net 20,482 20,818
Goodwill - 70,401
Restricted cash 121 186
Other assets 62 76
-------------------------
Total assets $ 140,802 $ 223,406
=========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 17,525 $ 21,276
Line of credit 15,000 15,000
Current portion of long-term debt 356 265
Accrued and other liabilities 14,485 17,888
-------------------------
Total current liabilities 47,366 54,429
Long-term debt, less current portion 18,884 19,140
Other long-term liabilities 4,950 290
-------------------------
Total liabilities 71,200 73,859
-------------------------
Stockholders' equity:
Common stock 150 150
Additional paid-in capital 1,063,372 1,061,849
Other stockholders' equity 417 610
Accumulated deficit (994,337) (913,062)
-------------------------
Total stockholders' equity 69,602 149,547
-------------------------
Total liabilities and stockholders'
equity $ 140,802 $ 223,406
=========================
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Zhone Investor Relations
Susie Choy, +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

Copyright Business Wire 2008