DZS Inc.

Kirk Misaka – CFO Mory Ejabat –Chairman and CEO

George Tomsey – Scott Macon David Lamond – Artis Capital Ronald Mullins – Segmar Joseph Beaulieu – Morningstar

Thank you, operator. Hello and welcome to the second quarter 2011 Zhone Technologies Inc.

conference call. I am Kirk Misaka, Zhone’s Chief Financial Officer.

The purpose of this call is to discuss Zhone’s second quarter 2011 financial results as reported in our earnings release, which was distributed over Business Wire at the close of market today and has been posted on our website at www.zhone.com. I am here today with Mory Ejabat, Zhone’s Chairman and Chief Executive Officer.

Mory will begin by discussing the key financial results and business developments of the second quarter. Following Mory’s comments, I will discuss Zhone’s detailed financial results for the second quarter of 2011 and provide guidance for next quarter.

After our prepared remarks, we will conclude with questions and answers. As a reminder, this conference is being recorded for replay purposes and will be available for approximately one week.

The dial-in instructions for the replay are available on our press release issued today. An audio webcast replay will also be available online at www.zhone.com following the call.

During the course of the conference call, we will make forward-looking statements, which reflect management’s judgment based on factors currently known. However, these statements involve risks and uncertainties, including those related to projections of financial performance; the anticipated growth and trends in our business; the development of new technologies and market acceptance of new products; and statements that express our plans, objectives and strategies for future operations.

We refer you to the risk factors contained in our SEC filings available at www.sec.gov, including our annual report on Form 10-K for the year ended December 31st, 2010, and our quarterly reports on Form 10-Q for the quarter ended March 31st, 2011. We’d like to caution you that actual results could differ materially from those contemplated by the forward-looking statements and you should not place undue reliance on any forward-looking statements.

We also undertake no obligation to update any forward-looking statements. During the course of this call, we will also make reference to adjusted EBITDA and adjusted operating expenses.

Non-GAAP measures we believe are appropriate to enhance an overall understanding of past financial performance and prospects for the future. These adjustments to our 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 of making operating decisions, because they provide meaningful supplemental information regarding our operational performance and they 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.

We have provided GAAP reconciliation information for adjusted EBITDA within the press release, which as previously mentioned has been posted on our website at www.zhone.com. With those comments in mind, I would now like to introduce Mory Ejabat, Zhone’s Chairman and Chief Executive Officer.

Thank you, Kirk. Good afternoon and thank you for joining us today for our second quarter 2011 earnings call.

The second quarter revenue increased by 6% to $31.3 million versus $29.6 million for the previous quarter. The increase was driven primarily by increase in international customer acquisition and a significant MXK competitive advantages overall competition.

Domestic growth remain on target largely delivered by MXK expansion by new and existing customer base and increased stimulus activity in the region. Some of our domestic customers experienced fiber storages which resulted in lower than expected results in North America.

Our last report reflected that the following results for Zhone, top three leadership for GPON in Caribbean and Latin America; top three leadership for GPON in Europe, Middle East and Africa, Top four market positions for GPON in North America. Top five market positions for GPON globally.

In the Midwest Pulaski-White Rural telephone cooperative expanded their broadband services. The Indiana operator leverage new fiber network using the MXK platform to deliver high speed internet, voice and video offers.

Regarding new products and solutions Zhone R&D in June worked diligently to develop and launch several new products targeting the mobile backhaul market signal. But specifically we expanded the MXK portfolio with a new offering cost for mobile backhaul.

Our new mobile backhaul solution Zhone FiberCell allows a multiple step transition from copper to fiber. In conjunction with the offering card, we also developed a comprehensive new line of zNID for the deployment at the mobile progress tower locations.

Now our customers have their benefit to use MXK for multiservice copper and FTTx convergence while also accommodating complex mobile backhaul over copper or fiber within the same solution. Now I will turn the call over to Kirk to provide more details about our financial results for the last quarter and to discuss our financial guidance for next quarter.

Kirk?

Regarding new products and solutions Zhone R&D in June worked diligently to develop and launch several new products targeting the mobile backhaul market signal. But specifically we expanded the MXK portfolio with a new offering cost for mobile backhaul.

Our new mobile backhaul solution Zhone FiberCell allows a multiple step transition from copper to fiber. In conjunction with the offering card, we also developed a comprehensive new line of zNID for the deployment at the mobile progress tower locations.

Now our customers have their benefit to use MXK for multiservice copper and FTTx convergence while also accommodating complex mobile backhaul over copper or fiber within the same solution. Now I will turn the call over to Kirk to provide more details about our financial results for the last quarter and to discuss our financial guidance for next quarter.

Kirk?

Today, I will announce financial results for the second quarter of 2011. Second quarter revenue of $31.3 million increased 6% from first quarter revenue of $29.6 million driven by strong demand for our products especially in our international markets which represents 59% of revenue for the second quarter versus 55% for the first quarter.

We continue to serve over 750 active customers and experience less customer concentration this quarter with the top five customers representing approximately 37% of revenue for the second quarter of 2011 as compared to 44% of revenue for the first quarter of 2011. As usual, we continued to have just one 10% customer.

Gross margins at 35.4% for the second quarter were at the upper end of our previously provided guidance range of between 34% and 36% and approximately the same in the first quarter gross margins of 35.8%. In our long term model, we continue to see some margin expansion associated with the benefits of the extensive hardware reengineering that we have undertaken to cost reduce our products and from additional manufacturing cost leverage at higher future anticipated revenue levels.

For now however, we are continuing to forecast between 34% and 36% gross margins for the third quarter of 2011. Operating expenses of $12.9 million for the second quarter was in the middle of our lowered guidance range of between $12.5 million and $13.5 million and consistent with our $13.1 million for the first quarter.

We expect operating expenses for the third quarter of 2011 to continue at this reduced level. Operating expenses for the second quarter included depreciation of approximately $400,000 and stock based compensation of approximately $300,000.

Going forward we expect approximately the same amount of depreciation and stock based compensation. Finally, our adjusted EBITDA loss for the second quarter of 2011 improved as it was approximately $1.1 million as compared to $1.8 million for the first quarter due to growth in revenue and stable gross margins in operating expenses.

Despite the EBITDA loss, cash and short-term investments at June 30, 2011 improves slightly to $19.3 million from $19.2 million at March 31, 2011 due to improved working capital balance changes during the quarter. Also notably, accounts receivables declined by $2.6 million to $26.8 million at June 30th from $29.4 million at March 31st.

improving the number of days sales outstanding on accounts receivable for the second quarter to 77 days as compared to 90 days for the first quarter.

As previously announced, we renew this facility annually in the first quarter as we have done for many years. Lastly the weighted average basic and diluted shares outstanding remained at $30.6 million for the second quarter of 2011.

With that financial overview, I will turn the call back to Mory for a few final comments before we open the call to questions and answers. Mory?

Thank you, Kirk. Reflecting on Q2, we had a good quarter achieving 6% growth and increased revenue globally.

Once again we were recognized as a leader in both GPON and Ethernet FTTx solutions in the leading emerging markets globally. We experienced organic growth internationally, domestically and from new stimulus wins.

We launched a compelling line of new mobile backhaul products at leverages or industry leading MXK as the cornerstone of this solution. As ever growing demand for bandwidth continues to rapidly increase Zhone has timed the market with the right solution at the right time.

Thank you for joining us today. We would now like to open up the call to questions.

Operator, please begin the Q&A portion of the call.

Definitely we have some drawbacks in Egypt but it’s coming back again in the last couple of weeks. But in the other areas in that region that we actively are involved, we haven’t seen any pressure of any kind irrespective to our customers and their orders.

You mentioned new products in particularly backhaul I was under the impression that had been introduced last quarter?

Right. We had some trial on that as well, normally this was has taken about six to nine months to accommodate.

Is that potentially a big area?

Mobile backhaul is a growing market, I don’t have numbers about how weak the market is but its growing and a conversion of TDM (ph) to fiber is becoming or to the IP is becoming more and more prevalent right now.

And can you give us share any light on what revenue you lost this quarter due to the shortage of fiber what you referred to and as some of your competitors have referred to that as well?

We don’t disclose those numbers at this point because I don’t think my customers will be really happy with that.

I really don’t know what Jefferies came up their numbers based on that I cannot really comment where they came in but the way you look at it might be correct but I cannot verify Jefferies numbers.

Can you give us any feel I mean you talked about the stimulus projects and stuffs specific customers but can you give us any feel for what kind of revenues that could potentially contribute this year and potentially contribute next year?

Unfortunately I cannot comment on that. I cannot expect because we are still in the process of dealing with RFPs and RFIs for their stimulus projects or many projects that have been awarded for the vendors haven’t been selected.

So I cannot comment on any of those I can call be able to win or not.

What gives you confidence that you are going to grow and get profitable like you have said that you will in the second half?

Our plans are --- we are on our plans and the forecast that we are seeing has given us a comfortable position to be profitable unless they can have and that’s our plan.

I may have missed this part of the call but I was just wondering Kirk could you provide any EBITDA guidance for the second half of this year?

We did not.

You did not. From a cash balance perspective we are still very solid and no need at all to capital there?

No we had the improvements in DSOs on the balance sheet and with improving EBITDA loss, our reducing EBITDA loss we don’t just paid 18 additional cash this year.

Okay, great and are there any covenants in the line of credit or anything we need to be aware of that could cause a problem?

I have to comment that this quarter is very discouraging and said many previous quarters been and you talk very positively in some of the conference calls about the products and the possibilities denoting how many encouraging results. I would appreciate it if you say anything and I believe you were asked about the second half didn’t make any comments but I am thinking somewhat longer term for the company from next year.

How long do the existing products that you have so much confidence going to last and how much will it contribute to the sales of the company?

First of all, I would like to thank you for giving me the opportunity to ask what appeared to be whole lot of questions and I hope I am not going to take too much time. But I have some questions and as an investor I have been generally disappointed with this stock price performance.

So some of the question may be little blunt but I don’t intend them to be rude, I just want to get some insights. Today’s press release there is a quote we are encouraged by the increase in demand of our innovative product, and when I looked at essentially flat sales for the first three quarter of this year last quarter, this quarter and then your projecting flat possibly next quarter.

Where in the financial statement should be look for that sign of increase in demand?

Well, I think going back to that 6% sequential increase but please correct me if I am wrong if we take out the $2 million of revenue that you could not ship during the last quarter; your revenue actually has decreased sequentially for this quarter isn’t that correct?

Hi, I just wanted to ask about you mentioned that your products primarily have a six to nine month lead over the competition and I wanted to check if you thought that your current R&Ds spending track is enough to maintain?

It is for the size of our company we are spending over 20% in R&D and that makes us very comfortable to enhance the product launch and keep it that way.

Once again thank you for joining us today and for your continued support. We are looking forward to speaking with you on our next earnings conference call.

Thank you, operator.