1101680--3/8/2007--ZHONE_TECHNOLOGIES

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{customer, product, revenue}

{condition, economic, financial}

{property, intellectual, protect}

{competitive, industry, competition}

{personnel, key, retain}

{acquisition, growth, future}

{stock, price, operating}

{system, service, information}

{product, market, service}

{operation, natural, condition}

{control, financial, internal}

{financial, litigation, operation}

{operation, international, foreign}

{provision, law, control}

{cost, regulation, environmental}

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{loss, insurance, financial}

Our future operating results are difficult to predict and our stock price may continue to be volatile. We have incurred significant losses to date and expect that we will continue to incur losses in the foreseeable future. If we fail to generate sufficient revenue to achieve or sustain profitability, our stock price could decline. We have significant debt obligations, which could adversely affect our business, operating results and financial condition. If we are unable to obtain additional capital to fund our existing and future operations, we may be required to reduce the scope of our planned product development, and marketing and sales efforts, which would harm our business, financial condition and results of operations. If demand for our SLMS products does not develop, then our results of operations and financial condition will be adversely affected. We depend upon the development of new products and enhancements to existing products, and if we fail to predict and respond to emerging technological trends and customers changing needs, our operating results and market share may suffer. Because our products are complex and are deployed in complex environments, our products may have defects that we discover only after full deployment, which could seriously harm our business. A shortage of adequate component supply or manufacturing capacity could increase our costs or cause a delay in our ability to fulfill orders, and our failure to estimate customer demand properly may result in excess or obsolete component inventories that could adversely affect our gross margins. We rely on contract manufacturers for a portion of our manufacturing requirements. We depend on sole or limited source suppliers for several key components. If we are unable to obtain these components on a timely basis, we will be unable to meet our customers product delivery requirements, which would harm our business. Our target customer base is concentrated, and the loss of one or more of our customers could harm our business. Industry consolidation may lead to increased competition and may harm our operating results. We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets, which could result in material losses. The market we serve is highly competitive and we may not be able to compete successfully. Our success largely depends on our ability to retain and recruit key personnel, and any failure to do so would harm our ability to meet key objectives. Any strategic acquisitions or investments we make could disrupt our operations and harm our operating results. We have been, and may continue to be, adversely affected by unfavorable economic and market conditions, and geopolitical uncertainties. Sales to communications service providers are especially volatile, and weakness in sales orders from this industry may harm our operating results and financial condition. Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees. Due to the international nature of our business, political or economic changes or other factors in a specific country or region could harm our future revenue, costs and expenses and financial condition. Compliance or the failure to comply with current and future environmental regulations could cause us significant expense. Adverse resolution of litigation may harm our operating results or financial condition. Our intellectual property rights may prove difficult to enforce. We may be subject to intellectual property infringement claims that are costly and time consuming to defend and could limit our ability to use some technologies in the future. We rely on the availability of third party licenses. The long and variable sales cycles for our products may cause revenue and operating results to vary significantly from quarter to quarter. The communications industry is subject to government regulations, which could harm our business. The ability of unaffiliated stockholders to influence key transactions, including changes of control, may be limited by significant insider ownership, provisions of our charter documents and provisions of Delaware law. Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic events.

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1101680--3/8/2007--ZHONE_TECHNOLOGIES_INC