As filed with the Securities and Exchange Commission on May 21, 2004August 1, 2005

Registration No. 333-115211333-126653

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

TO

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

ZHONE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

7001 Oakport Street

Oakland, California 94621

(510) 777-7000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Morteza Ejabat

Chief Executive Officer

Zhone Technologies, Inc.

7001 Oakport Street

Oakland, California 94621

(510) 777-7000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiverupon completion of all other conditions under the merger agreement described herein.in the enclosed joint proxy statement/prospectus.

If the securities being registered on this form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering.¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering.¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment thatwhich specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this joint proxy statement/prospectus is not complete and may be changed. Zhone may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This joint proxy statement/prospectus isshall not constitute an offer to sell these securities nor the solicitation of an offer to buy these securities in any statejurisdiction where thesuch offer, solicitation or sale is not permitted.

Subject to Completion, dated May 21, 2004August 1, 2005

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

On behalf of the boards of directors and management teams of both Zhone Technologies, Inc. and SorrentoParadyne Networks, Corporation,Inc., we are pleased to deliver our joint proxy statement/prospectus for the proposed merger involving Zhone and Sorrento.Paradyne. We believe thatare proposing the merger because we believe it will provide substantial strategic and financial benefits to the stockholders of both companies. Upon completioneach of our respective companies by creating more stockholder value than either company could create individually and allowing stockholders to participate in a larger company.

In the merger, a subsidiary of Zhone will merge with and into Paradyne, with Paradyne surviving as a wholly owned subsidiary of Zhone. As a result of the merger, SorrentoParadyne stockholders will have the rightbe entitled to receive 0.9 of a share1.0972 shares of Zhone common stock for each share of SorrentoParadyne common stock held immediately prior to the merger.they own. Zhone stockholders will continue to own their existing Zhone common stock.

Zhone common stock is traded onshares, which will not be affected by the Nasdaq National Market under the trading symbol “ZHNE.” Sorrento common stock is traded on the Nasdaq National Market under the trading symbol “FIBR.”merger. On April 22, 2004,July 7, 2005, the last trading day before we announced the merger, the closing sales pricesprice of Zhone common stock and Sorrento common stock as reported on the Nasdaq National Market were $3.89 and $2.67, respectively. The closing sales priceswas $3.57. Zhone expects to issue approximately 68,321,000 shares of Zhone common stock and Sorrentoto Paradyne stockholders in connection with the merger. Accordingly, we expect that Paradyne stockholders will, as a group, own approximately 36.8% of the outstanding shares of Zhone common stock as reported onimmediately after the Nasdaq National Market on May 20, 2004, the last practicable trading day before the distribution of this joint proxy statement/prospectus, were $3.27 and $2.85, respectively.merger. Upon completion of the merger, Sorrento will be a wholly owned subsidiary of Zhone and Zhone’s shares will continue to trade on the Nasdaq National Market under the trading symbol “ZHNE.”

Zhone and SorrentoWe cannot complete the merger unless Zhone stockholders approve the issuance of Zhone common stock in the merger and Paradyne stockholders of both of our companies approve it.adopt the merger agreement. Additional information about Zhone, Paradyne and Sorrento will each hold a special meeting of its stockholdersthe proposed merger is contained in this joint proxy statement/prospectus.We encourage you to voteread this entire document carefully, including the section entitled “Risk Factors” beginning on this merger proposal. Thepage 16.

After careful consideration, the Zhone board of directors has unanimously determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and unanimously recommends that Zhone stockholders vote“FOR” “FOR” the proposal to issue shares of Zhone common stock pursuant to the merger agreement. The Sorrento

Similarly, the Paradyne board of directors has unanimously determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and unanimously recommends that SorrentoParadyne stockholders vote“FOR” “FOR” the proposal to adopt the merger agreement.

Your vote is very important. Whether or not you plan to attend the special meeting of stockholders of Zhone or Sorrento,Paradyne, please take the time to vote by completing and mailing the enclosed proxy card and returning it in the accompanying pre-addressedpre-paid envelope as soon as possible.

This joint proxy statement/prospectus contains information regarding the merger agreement, the proposed merger and the two companies. We encourage If your shares are held in “street name,” you must instruct your broker in order to read this entire document carefully, including the discussion under the section entitled “Risk Factors,” which begins on page 19.vote.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this joint proxy statement/prospectus or determined ifpassed upon the adequacy or accuracy of this joint proxy statement/prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense. This joint proxy statement/prospectus is dated [                    ], 2004,2005, and is first being mailed to Zhone and SorrentoParadyne stockholders on or about June 1, 2004.[                    ], 2005.

ADDITIONAL INFORMATION

This joint proxy statement/prospectus incorporates important business and financial information about Zhone and Paradyne from other documents that are not included in or delivered with this joint proxy statement/prospectus. For a listingYou may obtain copies of these documents, without charge, from the documents incorporatedwebsite maintained by reference into this joint proxy statement/prospectus, please see the section entitledSecurities and Exchange Commission at www.sec.gov, as well as other sources. See “Where You Can Find More Information.”Information” on page 87. You may also obtain copies of these documents, without charge, by requesting them in writing or by telephone from the appropriate company at the following addresses.

Zhone will provide you with copies of the information relating to Zhone, without charge, upon written or oral request to:

In order for you to receiveobtain timely delivery of thethese documents in advance ofprior to the Zhone or Sorrento stockholder meetings, ZhoneParadyne special meeting, as applicable, you should receive your request the documents no later than June 23, 2004.August 25, 2005.

ZHONE TECHNOLOGIES, INC.

7001 Oakport Street

Oakland, California 94621

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 30, 2004SEPTEMBER 1, 2005

To the Stockholders of Zhone Technologies, Inc.:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Zhone Technologies, Inc. will be held on September 1, 2005 at 8:00 a.m., local time, at Zhone’s principal offices at 7001 Oakport Street, Oakland, California 94621 on June 30, 2004 at 9:00 a.m., local time, for the following purposes:

Please refer to the attached joint proxy statement/prospectus which forms a part of this notice and is incorporated herein by reference, for further information with respect to the business to be transacted at the special meeting.

Only stockholders of record of Zhone common stock at the close of business on May 25, 2004,July 29, 2005, the record date for the Zhone special meeting, or their proxies are entitled to notice of and to vote at this special meeting or any adjournment or postponement of the special meeting. The presence, in person or by proxy, of a majority of the outstanding shares of Zhone common stock will be required to establish a quorum at the Zhone special meeting. The affirmative vote of a majority of the votes cast at the meeting (a quorum being present) is required to approve the issuance of Zhone common stock in the merger.

Your vote is important. Whether or not you expect to attend the Zhone special meeting in person, please complete, sign, date and return the enclosed proxy card as soon as possible to make sureensure that your shares are represented at the special meeting. Returning the proxy card does not depriveIf your shares are held in “street name,” which means your shares are held of record by a broker, bank or other nominee, you ofmust provide your right to attend the Zhone special meeting andbroker, bank or other nominee with instructions on how to vote your shares in person. You may revoke your proxy at any time before it is actually voted at the meeting by: delivering written notice of revocation to Zhone’s Secretary at 7001 Oakport Street, Oakland, California 94621; submitting a later dated proxy; or attending the special meeting and voting in person.shares. For specific instructions on voting procedures, and revocation of proxies, please refer to the section entitled “The Zhone Special Meeting”Meeting—Voting Procedures and Revocation of Proxies” beginning on page 8577 of this joint proxy statement/prospectus and the instructions on the proxy card.

The Zhone board of directors has unanimously approved the merger agreement and unanimously recommends that Zhone stockholders vote “FOR” the issuance ofproposal to issue Zhone common stock inpursuant to the merger.merger agreement.

[                    ], 20042005

SORRENTOPARADYNE NETWORKS, CORPORATIONINC.

9990 Mesa Rim Road8545 126th Avenue North

San Diego, California 92121Largo, Florida 33773

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 30, 2004SEPTEMBER 1, 2005

To the Stockholders of SorrentoParadyne Networks, Corporation:Inc.:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of SorrentoParadyne Networks, CorporationInc. will be held at Sorrento’s principal offices at 9990 Mesa Rim Road, San Diego, California 92121 on June 30, 2004September 1, 2005 at 10:00 a.m., local time, at Paradyne’s principal offices at 8545 126th Avenue North, Largo, Florida 33773 for the following purposes:

Please refer to the attached joint proxy statement/prospectus which forms a part of this notice and is incorporated herein by reference, for further information with respect to the business to be transacted at the special meeting.

Only stockholders of record of SorrentoParadyne common stock at the close of business on May 25, 2004,July 29, 2005, the record date for the SorrentoParadyne special meeting, or their proxies are entitled to notice of and to vote at this special meeting or any adjournment or postponement of the special meeting. The presence, in person or by proxy, of a majority of the outstanding shares of Sorrento common stock entitled to vote will be required to establish a quorum at the Sorrento special meeting. The affirmative vote of a majority of the outstanding shares of Sorrento common stock is required to adopt the merger agreement.

Your vote is important. Whether or not you expect to attend the SorrentoParadyne special meeting in person, please complete, sign, date and return the enclosed proxy card as soon as possible to make sureensure that your shares are represented at the special meeting. Returning the proxy card does not depriveIf your shares are held in “street name,” which means your shares are held of record by a broker, bank or other nominee, you ofmust provide your right to attend the Sorrento special meeting andbroker, bank or other nominee with instructions on how to vote your shares in person. You may revoke your proxy at any time before it is actually voted at the meeting by: delivering written notice of revocation to Sorrento’s Secretary at 9990 Mesa Rim Road, San Diego, California 92121; submitting a later dated proxy; or attending the special meeting and voting in person.shares. For specific instructions on voting procedures, and revocation of proxies, please refer to the section entitled “The SorrentoParadyne Special Meeting”Meeting—Voting Procedures and Revocation of Proxies” beginning on page 8880 of this joint proxy statement/prospectus and the instructions on the proxy card.

Sorrento stockholders are not entitled to dissenters’ rights of appraisal for their shares under Delaware law in connection with the merger. Please refer to the section entitled “The Merger-No Appraisal Rights” beginning on page 61 of this joint proxy statement/prospectus for a discussion of appraisal rights.

The SorrentoParadyne board of directors has unanimously approved the merger agreement and unanimously recommends that SorrentoParadyne stockholders vote “FOR” the approval ofproposal to adopt the merger agreement.

Please do not send any certificates representing your SorrentoParadyne common stock at this time.

By order of the Board of Directors,

Joe Armstrong

[                    ], 2004

2005

TABLE OF CONTENTS

i

ii

iii

QUESTIONS AND ANSWERS ABOUT THE MERGER

In order to complete the merger, Zhone stockholders must vote to approve the issuance of shares of Zhone common stock in connection with the merger, and Sorrento stockholders must vote to adopt the merger agreement and approve the merger.

Zhone and Sorrento will hold separate meetings of their respective stockholders to obtain these approvals. This joint proxy statement/prospectus contains important information about the merger and the special meetings of the respective stockholders of each of Zhone and Sorrento, and you should read it carefully. The enclosed voting materials allow you to vote your shares without attending your special meeting.

Your vote is important. We encourage you to vote as soon as possible. Q: Why are Zhone and Sorrento proposing the merger? A: Zhone and Sorrento believe the merger will provide substantial strategic and financial benefits to the stockholders of both companies. Zhone and Sorrento believe the combination will position the combined company as a leading provider of next-generation access and metro optical transport solutions to the global telecommunications industry. In addition, Zhone and Sorrento believe the combined company will benefit from increased financial strength and a combined customer base that includes some of the world’s largest telecommunications carriers. To review the reasons for the merger in greater detail, please see “The Merger—Reasons for the Merger—Zhone” and “The Merger—Reasons for the Merger—Sorrento.”   Q: What will happen in the merger?   A: The businesses of Zhone and SorrentoParadyne will be combined in a stock-for-stock transaction.combined. At the closing, SeleneParrot Acquisition Corp., a newly formed and wholly owned subsidiary of Zhone, will merge with and into Sorrento,Paradyne, with SorrentoParadyne surviving the merger as a wholly owned subsidiary of Zhone. In exchange for their shares of SorrentoParadyne stock, the former stockholders of SorrentoParadyne will be entitled to receive shares of Zhone common stock.   Q: What will I receive for my shares of SorrentoParadyne stock?   A: Upon completion of the merger of SeleneParrot with and into Sorrento, SorrentoParadyne, Paradyne stockholders will be entitled to receive 0.9 of a share1.0972 shares of Zhone common stock for each share of SorrentoParadyne common stock owned immediately prior to the closingtheclosing of the merger. Instead of any fractional shares of Zhone common stock, SorrentoParadyne stockholders will receive cash equal to the value of any fractional shares remaining. Please see “The Merger Agreement—Conversion of Securities.” Q: What will I receive for my options or warrants to purchase Sorrento common stock? A: Upon completion of the merger, Zhone will assume all options to purchase Sorrento common stock and warrants to purchase Sorrento common stock then outstanding under Sorrento’s option agreements, stock option plans and warrant agreements. Upon completion of the merger, each outstanding option and warrant to purchase Sorrento stock will cease to represent a right to acquire shares of Sorrento stock and will be converted into an option or warrant to purchase Zhone common stock. In each case, the number of shares of Zhone common stock subject to the new Zhone option or warrant will be equal to the number of shares of Sorrento common stock subject to the Sorrento option or warrant multiplied by 0.9, and the exercise price per share of Zhone common stock will be equal to the existing per share exercise price of the Sorrento option or warrant divided by 0.9. Q: What will I receive for my Sorrento 7.5% senior convertible debenture? A: Upon completion of the merger, each 7.5% senior convertible debenture due August 2, 2007 of Sorrento which is outstanding will be assumed by Zhone and thereafter continue to represent a debenture of Sorrento, except that the Sorrento debentures will be convertible into shares of Zhone common stock as adjusted to give effect to the merger.Securities” on page 52.   Q: When and where are the special meetings?   A: The Zhone special meeting will take place on September 1, 2005 at 8:00 a.m., local time, at 7001 Oakport Street, Oakland, California 9462194621. The Paradyne special meeting will take place on June 30, 2004September 1, 2005 at 9:10:00 a.m., local time.time, at 8545 126th Avenue North, Largo, Florida 33773. The Sorrento special meeting will take place at 9990 Mesa Rim Road, San Diego, California 92121 on June 30, 2004 at 10:00 a.m., local time.   Q: What vote of Zhone stockholders is required to approve the issuance of shares of Zhone common stock pursuant to the merger agreement?   A: Approval of the proposal to issue shares of Zhone common stock pursuant to the merger agreement requires the affirmative vote of a majority of the total votes cast at the Zhone special meeting by holders of Zhone common stock outstanding as of the record date (a quorum being present). Certain stockholders,meeting. The directors and executive officers and specified significant stockholders of Zhone directly and indirectly owning Zhone common stock, representing approximately 43%39.0% of the voting power of the Zhone common stock outstanding as of the record date, have agreed to vote their shares in favor of the merger and adoptionissuance of Zhone common stock pursuant to the merger agreement. Please see “Voting Agreements—Zhone Stockholders” on page 62.   Q: What vote of SorrentoParadyne stockholders is required to adopt the merger agreement?   A: The affirmative vote of a majority of the outstanding shares of SorrentoParadyne common stock is required to adopt the merger agreement. Certain stockholders,The directors and executive officers of SorrentoParadyne directly and indirectly owning SorrentoParadyne common stock, representing less than one percentapproximately 1.4% of the voting power of the SorrentoParadyne common stock outstanding as of the record date, have agreed tovoteto vote their shares in favor of the merger and adoption of the merger agreement. Please see “Voting Agreements—Paradyne Stockholders” on page 62.   Q: How does my company’s board of directors recommend I vote?   A: The Zhone board of directors unanimously recommends that Zhone stockholders vote “FOR” the proposal to approve the issuance of shares ofissue Zhone common stock pursuant to the Sorrento stockholders in the merger.merger agreement. For a more complete description of the recommendation of the Zhone board of directors, see “The Merger—Zhone’s Reasons for the Merger—Zhone.”Merger” on page 27.      The SorrentoParadyne board of directors unanimously recommends that SorrentoParadyne stockholders vote“FORFOR”” the proposal to adopt the merger agreement. For a more complete description of the recommendation of the SorrentoParadyne board of directors, see “The Merger—Paradyne’s Reasons for the Merger—Sorrento.”Merger” on page 29.   Q: What do I do now?   A: Carefully read and consider the information contained in this joint proxy statement/prospectus, including its annexes. There are several ways your shares can be represented at your stockholder meeting. You can attend your stockholder meeting in person or you can indicate on the enclosed proxy card how you want to vote and return it in the accompanying pre-addressed postage paid envelope.   Q: How do I cast my vote?   A: If you are a holder of record, you may vote in person at your special meeting or by submitting a proxy for your special meeting. You can submit your proxy by completing, signing dating and returningdating the enclosed proxy card and promptly returning it in the accompanying pre-addressed postage paidenclosed envelope.   Q: If my broker holds my shares in “street name,” will my broker vote my shares?   A: If you hold your shares in “street name” in a stock brokerage account or if your shares are held by a broker, bank or other nominee, (i.e., in street name), you must provide the record holder of your sharesbroker, bank or othernominee with instructions on how to vote your shares. Please refer tosee the voting instruction card used byform of your broker, bank or nominee. other nominee that accompanies this joint proxy statement/prospectus.   Q: Can I change my vote after I have delivered my proxy?   A: Yes. You can change your vote at any time before your proxy is voted at your company’s stockholder meeting. You can do this in one of three ways: (1) you can send a signedwritten notice of revocation; (2) you can grantsubmit a new, later dated valid proxy;proxy card; or (3) if you are a holder of record, you can attend your stockholder meeting and vote in person; however, your attendance alone will not revoke your proxy. If you choose either of the first two methods, you must submit your notice of revocation or your new proxy to the Corporate Secretary of Zhone or Sorrento,Paradyne, as appropriate, before the applicable stockholder meeting. However, if your shares are held in a street name“street name” account at a brokerage firm or bank, you shouldmust contact your brokerage firm or bank to change your vote. If you would like more information and you are a Zhone stockholder, please see “The Zhone Special Meeting—Voting Procedures and Revocation of Proxies.”Proxies” on page 77. If you would like additional information and you are a SorrentoParadyne stockholder, please see “The SorrentoParadyne Special Meeting—Voting Procedures and Revocation of Proxies.”Proxies” on page 80.   Q: What will happen if I abstain from voting or fail to vote?   A: In the case of Zhone stockholders, the failure to cast your vote will not have any impact on the proposal to issue shares of Zhone common stock in connection with the merger. Abstentions will count toward the presence of a quorum, but will not be considered votes cast and will therefore have no impact on the proposal to issue shares of Zhone common stock in connection with the merger. In the case of SorrentoParadyne stockholders, the failure to cast your vote will have the same effect as voting against the proposal to adopt the merger agreement because the required vote is a majority of the outstanding shares of SorrentoParadyne common stock. Q: Should I send in my SorrentoParadyne stock certificates now?   A: No. After the merger is completed, you will receive written instructions from the exchange agent on how to exchange your SorrentoParadyne stock certificates for Zhone stock certificates. Please do not send in your SorrentoParadyne stock certificates with your proxy. Q: What should I do if I receive more than one set of voting materials? A: You may receive more than one set of voting materials, including multiple copies of this joint proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your Zhone shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. In addition, if you are a stockholder of Zhone and a stockholder of Sorrento, you will receive one or more separate proxy cards or voting instruction cards for each company. Please complete, sign, date and return each proxy card and voting instruction card that you receive.   Q: When do you expect the merger to be completed?   A: Zhone and SorrentoParadyne are working to complete the merger as quickly as practicable. Zhone and SorrentoParadyne currently expect to complete the merger on or about July 1, 2004.in the fall of 2005. However, the exact timing of the completion of the merger cannot be predicted because the merger is subject to stockholder approvals, governmental and regulatory review processes and other conditions. Q: Are Sorrento stockholders entitled to appraisal rights? A: No. Neither Zhone stockholders nor Sorrento stockholders are entitled to dissenters’ rights of appraisal for their shares under Delaware law in connection with the merger. Please see the section entitled “The Merger—No Appraisal Rights” for a discussion of appraisal rights. Q: What are the expected United States federal income tax consequences of the transaction? A: The merger is intended to be treated as a reorganization for U.S. federal income tax purposes. However, the treatment of the merger as a reorganization is not a condition to the closing of the merger and no ruling from the Internal Revenue Service or opinion of counsel has been requested regarding the tax consequences of the merger. Assuming that the merger is treated as a reorganization, then, in general, Sorrento stockholders who exchange their Sorrento stock solely for Zhone common stock in the merger will not recognize gain or loss for U.S. federal income tax purposes as a result of the merger, except that Sorrento stockholders will recognize gain or loss with respect to any cash they receive in lieu of fractional shares of Zhone common stock upon completion of the merger. Tax matters are very complicated, and the tax consequences of the merger to each Sorrento stockholder will depend on each Sorrento stockholder’s particular tax situation. Each Sorrento stockholder is urged to read carefully the discussion in the section entitled “The Merger—United States Federal Income Tax Consequences of the Merger” and to consult its tax advisors regarding the specific tax consequences of the merger.   Q: Who can help answer my questions?   A: Zhone stockholders who have any questions about the merger or how to submit a proxy, or who need additional copies of this joint proxy statement/prospectus or the enclosed proxy card or voting instructions, should contact: Mariann Lackey, Zhone Technologies, Inc., 7001 Oakport Street, Oakland, California 94621, Telephone: (510) 777-7013 or Email: investor-relations@zhone.com. statement/prospectus or the enclosed proxy card or voting instruction card, should contact: Sorrento Georgeson Shareholder Communications Banks and Brokers Call: (212) 440-9800 All Others Call Toll Free: (866) 391-7002 or Zhone Technologies, Inc. Attention: Investor Relations Telephone: (510) 777-7013 Paradyne stockholders who have any questions about the merger or how to submit a proxy, or who need additional copies of this joint proxy statement/prospectus or the enclosed proxy card or voting instructions,instruction card, should contact: Joe Armstrong, Sorrento Georgeson Shareholder Communications Banks and Brokers Call: (212) 440-9800 All Others Call Toll Free: (866) 391-7002 or Paradyne Networks, Corporation, 9990 Mesa Rim Road, San Diego, California 92121, Inc. Attention: Investor Relations Telephone: (858) 450-4934 or Email: jarmstrong@sorrentonet.com.(727) 530-2000 SUMMARY   The following is a summary of information contained in this joint proxy statement/prospectus. This summary mayhighlights selected information from this document. It does not contain all of the information about the merger that is important to you. For a more complete description ofWe urge you to carefully read the entire document and the other documents to which we refer in order to fully understand the merger Zhone and Sorrento encourage you to read carefully this entire joint proxy statement/prospectus, including the attached annexes. In addition, Zhone and Sorrento encourage you to read the information incorporated by reference into this joint proxy statement/prospectus, which includes important business and financial information about Zhone. You may obtain the information incorporated by reference into this joint proxy statement/prospectus without charge by following the instructions in the section entitledrelated transactions. See “Where You Can Find More Information.”Information” on page 87. Each item in this summary refers to the page of this document on which that subject is discussed in more detail.   The Companies (see(page 83 and page 91)84)   Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 (510) 777-7000   Zhone designs, develops and markets telecommunications hardwaremanufactures communications equipment for telephone companies and softwarecable operators worldwide. Zhone’s Single Line Multi-Service, or SLMS, architecture can deliver IP video, voice over internet protocol and high-speed internet service offerings, all on a single platform that simplify today’s telecommunications networks. Zhone’s products, which address the connection between networkpermits a seamless migration from legacy technologies to a converged packet-based architecture. By providing this “triple play” of voice, data and video services on a single platform, Zhone believes that service providers can generate additional revenue sources from these multiple service offerings, and simultaneously lower their subscribers, oroperating costs by integrating the wireline access network, allow network service providers to combinefunctionality that was being provided by separate voice, data and video entertainment and management services over their existing copper wire infrastructure while supporting migration to fiber networks. Zhone’s products also enable network service providers to transition to more cost-competitive VoIP and packet-based services without compromising their current ATM and circuit-based revenue streams. In addition, Zhone’s products allow network service providers to add rich new subscriber services more quickly than is possible with conventional solutions.platforms into a single platform.   Zhone is the first company dedicated solelywas established to developingdevelop the full spectrum of next-generation wireline network solutions.solutions to alleviate the bandwidth “bottleneck” in the access network. Most of Zhone’s flagship products are based primarily upon its Single Line Multi Service, orflagship SLMS architecture. ThisFrom its inception, this new approachSLMS architecture was specifically developeddesigned for the delivery of multiple classes of subscriber services (such as the triple play of voice, data and video), rather than being based on a particular protocol (circuit or packet) or media (copper wire or fiber optic cable). As a result of this interoperability among multiple protocols, media and subscriber services, service providers can seamlessly migrate from traditional circuit to addresspacket technologies, and from copper to fiber technologies without abandoning the unmet challengesinvestments they have made in their existing infrastructures. This flexibility also allowsZhone’s products to adapt to future technologies while allowing service providers to focus on service delivery. With this SLMS architecture, service providers can leverage their existing networks to deliver the converged triple play offering of managing the complex transitionvoice, data and video services today, while they migrate, either simultaneously or at a future date, from legacy equipment to newer broadband equipment with minimal interruption. Zhone’s SLMS solutions provide an evolutionary path for service deliveryproviders from their existing infrastructures, as well as give newer service providers the capability to packet-baseddeploy cost-effective, multi-service networks. In addition to the SLMS product family, Zhone’s product offerings also encompass its optical transport products, and legacy products and services. Zhone’s customer base includes regional, national and international telephone companies, as well as cable service providers. To date, Zhone’s products are deployed by over 300 network service providers on six continents worldwide, including two of the top three cable operators by number of subscribers in North America. Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 (727) 530-2000 Paradyne is a leading developer, manufacturer and distributor of broadband network access products for network service providers and business customers. Paradyne offers solutions for network service providers that utilize existing telephone lines and enable them to offer high speed, cost-effective voice, data and video solutions. Zhone has designed itsNetwork service providers use Paradyne’s broadband products to interoperate with different types of wiring and equipment already deployed in service providers’ networks and in subscribers’ homes. Zhone’senable high-speed connections from the central office to the customer premise. Moreover, Paradyne’s broadband products enable network service providers to elegantly migrate their existing networks to delivervoice, data, video and entertainmentmore efficiently provide network access services to their customers. Zhone’s strategy is to develop products through a combination of internal development and acquisitions of companies with applicable technology or market presence. This strategy has allowed Zhone to rapidly advance its flagship products by incorporating key acquired technologies into its SLMS product architecture. Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 (858) 558-3960 Sorrento is a leading supplier of intelligent optical networking solutions for access, metropolitan and regional applications worldwide. Sorrento’s solutions enable communications carriers and service providers to offer broadband networking services over their existing optical fiber infrastructure. Sorrento’s technologies permit telecommunications service providers to increase fiber capacity and fiber bandwidth utilization, reduce network costs and complexity over scalable and efficient networking platforms. Sorrento’s optical networking systems support a wide variety of protocols, mixed speeds of traffic and accommodate changing traffic patterns directly over optical networks. Sorrento’s product solutions include optical access, optical transport, and network management solutions optimized for access, metro and regional markets, and combine to create powerful, cost-effective, and easy-to- manage optical networks. Sorrento’s dense wavelength division multiplexing, or DWDM, and coarse wavelength division multiplexing, or CWDM, platforms can be used in enterprise,by allowing a high level of management, monitoring and control over network access metropolitanequipment and regionalcircuits. Business customers use Paradyne’s broadband products for high-speed connection of voice and data communications to connect their employees to corporate wide area networks and to the internet using both public and private services provided by network applications. WDM technology allows many optical signals to be transmitted simultaneously on the same optical fiberservice providers. Paradyne’s products are designed for easy installation by using different wavelengths of light to distinguish the signals. This technology increases optical network capacity and flexibility. Sorrento currently has an installed base with over 20 communications service providers and system integrators worldwide, including AT&T Broadband, now Comcast Corporation, Deutsche Telekom, Cox Communications, Time Warner Telecom, United Pan-Europe Communications, El Paso Global Networks and Edison Carrier Solutions.end users, significantly reducing the need for installation by an onsite service technician, thereby reducing costs for network access. As of the end of 2004, Paradyne held more than 205 U.S. patents, more than 90 of which were DSL specific. Paradyne estimates that it sells into more than 400 independent operator companies, or IOCs, which are independent telephone companies. In addition, Paradyne estimates that it shipped to 28 of the top 50 IOCs in 2004.   The Merger (see page 37)(page 22)   Zhone and SorrentoParadyne have agreed to the combination of Zhone and Sorrentoa merger under the terms of the merger agreement described in this joint proxy statement/prospectus. We have attached the merger agreement asAnnex A to this joint proxy statement/prospectus. We encourage you to read the merger agreement in its entirety.   Under the terms of the merger agreement, SeleneParrot Acquisition Corp., a newly formed and wholly owned subsidiary of Zhone, will merge with and into SorrentoParadyne and the separate corporate existence of SeleneParrot will cease. SorrentoParadyne will be the surviving corporation in the merger and will continue as a wholly owned subsidiary of Zhone.   Upon completion of the merger, SorrentoParadyne stockholders will be entitled to receive 0.9 of a share1.0972 shares of Zhone common stock for each share of SorrentoParadyne common stock owned immediately prior to the closing of the merger. Stockholders of Zhone will continue to own their existing shares.   Reasons for the Merger (page 27 and page 29) Zhone believes the merger will provide substantial strategic and financial benefits to thestockholders of Zhone and will position the combined company as a leading provider of next-generation local access network solutions to the global telecommunications industry. In addition, Zhone believes the combined company will benefit from increased financial strength and a combined customer base. Paradyne believes the merger will provide the stockholders of Paradyne with the opportunity to obtain shares of Zhone common stock valued at a substantial premium to the current price of Paradyne common stock and, in addition, as stockholders in the combined company, the opportunity to benefit from the significant cost savings and synergies and growth opportunities available to the combined company. Recommendations of the Boards of Directors (see(page 29 and page 42)32)   The Zhone board of directors unanimously approved the merger agreement and unanimously recommends that Zhone stockholders vote “FOR” the proposal to issue Zhone common stock pursuant to the merger agreement.   The SorrentoParadyne board of directors unanimously approved the merger agreement and unanimously recommends that SorrentoParadyne stockholders vote“FOR” the proposal to adopt the merger agreement.   Stockholders Entitled to Vote; Vote Required (see page 86) You can vote at the Zhone special meeting if you owned Zhone common stock at the close of business on May 25, 2004, the record date for the Zhone special meeting. On that date, there were approximately 78,142,000 shares of Zhone common stock outstanding and entitled to vote. You can cast one vote for each share of Zhone common stock that you owned on that date. Approval of the proposal to issue shares of Zhone common stock pursuant to the merger agreement requires the affirmative vote of a majority of the total votes cast at the special meeting by holders of Zhone common stock outstanding as of the record date (a quorum being present). You can vote at the Sorrento special meeting if you owned Sorrento common stock at the close of business on May 25, 2004, the record date for the Sorrento special meeting. On that date, there were approximately 17,239,475 shares of Sorrento common stock outstanding and entitled to vote. Each share of Sorrento common stock is entitled to one vote. The affirmative vote of a majority of the outstanding shares of Sorrento common stock is required to adopt the merger agreement. Voting Agreements (see page 71) Sorrento has entered into a voting agreement with certain significant stockholders, directors and executive officers of Zhone owning Zhone common stock representing approximately 43% of the voting power of the Zhone common stock outstanding as of the record date, pursuant to which these stockholders have agreed to vote their shares in favor of the merger and adoption of the merger agreement as described in “Voting Agreements-Zhone Stockholders.” This voting agreement is attached to this joint proxy statement/prospectus asAnnex B. Zhone and Selene have entered into a voting agreement with certain significant stockholders, directors and executive officers of Sorrento owning Sorrento common stock representing less than one percent of the voting power of the Sorrento common stock outstanding as of the record date, pursuant to which these stockholders have agreed to vote their shares in favor of the merger and adoption of the merger agreement as described in “Voting Agreements-Sorrento Stockholders.” This voting agreement is attached to this joint proxy statement/prospectus asAnnex C. Opinion of Thomas Weisel Partners LLC to Zhone (see page 46)Needham & Company (page 32)   On April 21, 2004, Thomas Weisel PartnersJuly 7, 2005, Needham & Company, LLC rendered its oral opinion to the Zhone board of directors, subsequently confirmed in writing as of April 21, 2004,July 7, 2005, that, as of the date of its opinion and based upon and subject to the various considerations and assumptions set forth in its written opinion, the considerationexchange ratio pursuant to be issued by Zhone in the merger agreement was fair to Zhone from a financial point of view, to Zhone. The full text of the Thomas Weisel Partners opinion, which sets forth, among other things, assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Thomas Weisel Partners in rendering its opinion, is attached asAnnex D to this joint proxy statement/prospectus. Zhone stockholders are urged to, and should, read the Thomas Weisel Partners opinion carefully and in its entirety. The Thomas Weisel Partners opinion addresses only the fairness, from a financial point of view, of the exchange ratio to Zhone as of the date of the Thomas Weisel Partners opinion, and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matter relating to the merger. Opinion of Needham & Company, Inc. to Sorrento (see page 51) On April 21, 2004, Needham & Company, Inc. rendered its oral opinion to the Sorrento board of directors, subsequently confirmed in writing as of April 21, 2004, that, as of the date of its opinion and based upon and subject to the various considerations set forth in its opinion, the exchange ratio was fair, from a financial point of view, to holders of Sorrento common stock.view.   The full text of the Needham & Company opinion, which sets forth, among other things, assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Needham & Company in rendering its opinion, is attached asAnnex ED to this joint proxy statement/prospectus. SorrentoZhone stockholders are urged to, and should, read the Needham & Company opinion carefully and in its entirety. The Needham & Company opinion addresses only the fairness, from a financial point of view, of the exchange ratio to holders of Sorrento common stockZhone as of the date of the Needham & Company opinion, and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matter relating to the merger. Opinion of Raymond James (page 39) On July 7, 2005, Raymond James & Associates, Inc. rendered its oral opinion to the Paradyne board of directors, subsequently confirmed in writing as of July 7, 2005, that, as of the date of its opinion and based upon and subject to the various qualifications set forth in its opinion, the consideration provided for in the merger of 1.0972 shares of Zhone common stock in exchange for each share of Paradyne common stock was fair, from a financial point of view, to the holders of Paradyne common stock. The full text of the Raymond James opinion, which sets forth, among other things, assumptions made, matters considered and limitations on the scope of the review undertaken by Raymond James in rendering its opinion, is attached asAnnex E to this joint proxy statement/prospectus. Paradyne stockholders are urged to, and should, read the Raymond James opinion carefully and in its entirety. The Raymond James opinion addresses only the fairness to the stockholders of Paradyne, from a financial point of view, of the consideration to be received by the stockholders of Paradyne in the merger, and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matter relating to the merger.   Interests of Directors and Executive Officers of ZhoneParadyne in the Merger (see page 59)(page 49)   In considering the recommendation of the ZhoneParadyne board of directors regarding the merger, ZhoneParadyne stockholders should be aware that some ZhoneParadyne directors and executive officers have interests in the merger and relatedhave arrangements that are different from, or in addition to, their interests as Zhone stockholders. C. Richard Kramlich, a memberthose of Zhone’s board of directors, is a general partner of New Enterprise Associates, a venture capital firm that is affiliated with various New Enterprise Associates entities that hold Zhone common stock and warrants to purchase shares of Sorrento common stock. In addition, Morteza Ejabat, Zhone’s Chairman and Chief Executive Officer, Jeanette Symons, Zhone’s Chief Technology Officer, and Robert Dahl, a member of Zhone’s board of directors, and/or trusts for the benefit of the foregoing persons or their family members, have partnership interests in various New Enterprise Associates entities that are holders of both Zhone common stock and warrants to purchase shares of Sorrento common stock. Upon completion of the merger, these warrants to purchase shares of Sorrento common stock will be converted into warrants to purchase shares of Zhone common stock as adjusted to give effect to the merger exchange ratio. These interests may create potential conflicts of interest for these directors and executive officers because they may be more likely to approve the issuance of Zhone common stock in connection with the merger than ZhoneParadyne stockholders generally. The ZhoneThese include interests relating to consulting agreements, restrictive covenant agreements, severance and change of control agreements, insurance and indemnification.The Paradyne board of directors was aware of these interests and took these interests into account in its deliberations of the merits of the merger and in approving the merger and the transactions contemplated by the merger agreement. See “The Merger—Interests of Directors and Executive Officers of Zhone in the Merger.”   Interests of Directors and Executive Officers of Sorrento in the Merger (see page 60) In considering the recommendation of the Sorrento board of directors that Sorrento stockholders vote in favor of adoption of the merger agreement, Sorrento stockholders should be aware that some Sorrento directors and executive officers may have interests in the merger that may be different from, or in addition to, their interests as stockholders of Sorrento. These include interests relating to: • Acceleration of Vesting of Stock Options. Pursuant to the terms of Sorrento’s 2003 Equity Incentive Plan, all unvested options held by Sorrento’s outside directors vest in full upon a change of control transaction, such as the merger. In addition, pursuant to the terms of their employment agreements with Sorrento, all unvested options held by certain of Sorrento’s officers vest in full upon a change of control transaction, such as the merger. • Severance. Under the terms of their employment agreements with Sorrento, certain of Sorrento’s executive officers, Phillip Arneson, Joe Armstrong and Mitch Truelock, are entitled to severance benefits upon a change of control transaction, such as the merger. • Directors’ and Officers’ Insurance and Indemnification. Zhone has agreed that for a period of six years after the merger, Zhone will not amend, repeal or otherwise modify any indemnification agreements in effect on the date of the merger or the charter and bylaw provisions of Sorrento with respect to indemnification in any manner that would adversely affect the rights of individualscovered thereunder. Zhone has also agreed to provide, for six years after the merger, directors’ and officers’ liability insurance in respect of acts or omissions occurring prior to the merger covering each person currently covered by the directors’ and officers’ liability insurance policy of Sorrento up to a $10 million limit and with other terms no less favorable than those of the policies of Sorrento. The Sorrento board of directors was aware of these interests during its deliberations of the merits of the merger and in determining to recommend to Sorrento stockholders that they vote for the proposal to adopt the merger agreement. See “The Merger—Interests of Directors and Executive Officers of Sorrento in the Merger.” Listing of Zhone Common Stock and Deregistration of Sorrento Common Stock (see page 59) Zhone common stock is currently traded on the Nasdaq National Market under the symbol “ZHNE.” It is a condition to the consummation of the merger that the shares of Zhone common stock issuable in the merger be approved for listing on the Nasdaq National Market. If the merger is completed, Sorrento common stock will be deregistered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Sorrento will no longer file periodic reports with the Securities and Exchange Commission, or SEC. No Appraisal Rights (see page 61)(page 51)   Neither Zhone stockholders nor SorrentoParadyne stockholders are entitled to dissenters’ or appraisal rights in connection with the merger.   Conditions to Completion of the Merger (see page 67)(page 58)   In order to complete the merger, Zhone and SorrentoParadyne must satisfy a number of conditions, including, but not limited to, the following:   the registration statement covering the issuance of shares of Zhone common stock to be issued pursuant to Paradyne stockholders in the merger, of which this joint proxy statement/prospectus forms a part, must have been declared effective by the Securities and Exchange Commission, or SEC; agreement must have been declared effective by the SEC and not be subject to any stop order,   Zhone stockholders must approve the proposal to issue Zhone common stock pursuant to the merger agreement,agreement;   SorrentoParadyne stockholders must approve the proposal to adopt the merger agreement,agreement;   no governmental agency or court must have issued any order decree, judgment or injunction that prevents or prohibits the completion of the merger or any other transaction contemplated by the merger agreement,merger;   all material consents, approvals and authorizations of any governmental entity or third party required by the merger agreement must have been obtained,obtained;   the shares of Zhone common stock issuable to the SorrentoParadyne stockholders in the merger willmust have been approved for listing on the Nasdaq National Market, Sorrento must have, upon completion of the merger, cash on hand of not less than $5 million, after payment of all legal, accounting, banking, severance and bonus obligations, Sorrento must have obtained from the holders of not less than 75% of the outstanding warrants to purchase shares of Sorrento common stock issued in connection with Sorrento’s December 31, 2003 and January 26, 2004 financings (including warrants issued to Sorrento’s financial advisor in connection therewith) such holders’ consent to exchange such warrants for warrants to purchase Zhone common stock on the terms set forth in the merger agreement, including a waiver of any associated warrant purchase obligations on the part of Zhone, andMarket;   since the date of the merger agreement, no event must have occurred that has a material adverse effect on SorrentoParadyne or Zhone.Zhone; The chief executive officer and the chief financial officer of each of Paradyne and Zhone must not have failed to provide the certifications required by the Sarbanes-Oxley Act; Paradyne’s adjusted cash balance must be (1) at least $38.0 million if the merger is completed on or before October 31, 2005, (2) $37.0 million if the merger is completed after October 31, 2005 but on or before November 30, 2005, and (3) $36.0 million if the merger is completed after November 30, 2005 but on or before December 31, 2005; and Paradyne must have received a written opinion of Alston & Bird LLP to the effect that the merger will constitute a reorganization for U.S. federal income tax purposes.   No Solicitation by Sorrento (seeand Termination Fees (page 56 and page 66)60)   The merger agreement contains detailedand the voting agreement between Zhone and Paradyne’s directors and executive officers contain “no shop” provisions restricting Sorrento from seeking an alternative transaction with another party. These “no solicitation” provisions prohibit Sorrento, as well as eachthat restrict the abilities of its subsidiariesParadyne’s directors and representatives, from taking any actionexecutive officers and, subject to limited fiduciary exceptions, restrict the ability of Paradyne, to initiate, solicit an acquisition proposal from another party. The mergeror knowingly encourage competing third-party proposals to acquire all or a significant part of Paradyne. There are only limited exceptions to Paradyne’s agreement does not, however, prohibit Sorrento or itsthat the Paradyne board of directors will not withdraw, modify or amend in a manner adverse to Zhone the recommendation of the Paradyne board of directors to holders of Paradyne common stock that they vote in favor of adopting the merger agreement. The Paradyne board of directors is generally permitted to participate in discussions or negotiations with, request clarifications from, considering, and potentially recommending,or furnish information to a third party that has made an unsolicited bona fide superior writtenacquisition proposal under limited circumstances.and may withdraw, modify or amend its recommendation in a manner adverse to Zhone if the Paradyne board of directors determines in good faith that failure to take such actions would be inconsistent with its fiduciary duties. If the Paradyne board of directors fails to recommend that stockholders of Paradyne vote to adopt the merger agreement or withdraws or adversely modifies or changes its recommendation or approves or recommends a competing acquisition proposal or, upon Zhone’s request, within five days of Paradyne’s receipt of a competing acquisition proposal fails to affirm its recommendation to stockholders, Zhone generally will be able to terminate the merger agreement and be entitled to bepaid a $2.0 million termination fee by Paradyne. In addition, in some situations where a competing acquisition proposal has been made and the merger agreement is subsequently terminated, Paradyne would be required to pay Zhone the $2.0 million termination fee if Paradyne completes, or enters into a binding agreement with respect to, that competing acquisition proposal during the twelve-month period following the termination.   Termination of the Merger Agreement (see page 68)(page 59)   Zhone and SorrentoParadyne can jointly agree to terminate the merger agreement at any given time. Either company may also terminate the merger agreement if the merger is not completed by September 30, 2004,December 31, 2005, subject to certain limitations, and under other circumstances described in this joint proxy statement/prospectus.   Termination Fees and Expenses (see page 69)Voting Agreements (page 62)   The mergerParadyne has entered into a voting agreement provides that, underwith the directors and executive officers and specified circumstances,significant stockholders of Zhone or Sorrento may be requireddirectly and indirectly owning Zhone common stock representing approximately 39.0% of the voting power of the Zhone common stock outstanding as of the record date, pursuant to reimbursewhich these stockholders have agreed to vote their shares in favor of the other party’s expenses relatedissuance of Zhone common stock pursuant to the merger upagreement as described in “Voting Agreements—Zhone Stockholders.” This voting agreement is attached to $1 million. In addition, Sorrento hasthis joint proxy statement/prospectus asAnnex B. Zhone and Parrot have entered into a voting agreement with the directors and executive officers of Paradyne directly and indirectly owning Paradyne common stock representing approximately 1.4% of the voting power of the Paradyne common stock outstanding as of the record date, pursuant to which these stockholders have agreed to pay Zhone a termination feevote their shares in favor of $2 million (less the amount, if any, previously paid by Sorrento to reimburse Zhone for out-of-pocket expenses) in the event thatadoption of the merger agreement as described in “Voting Agreements—Paradyne Stockholders.” This voting agreement is terminated under other specified circumstances.attached to this joint proxy statement/prospectus asAnnex C.   Sorrento Stock Options and Warrants (see page 62)Regulatory Approvals (page 46)   Upon completionUnder the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act, certain transactions, including the merger, may not be completed unless certain waiting period requirements have been satisfied. The merger may also be subject to review by the governmental authorities of various other jurisdictions under the antitrust laws of those jurisdictions. On August 1, 2005, Zhone and Paradyne received notice from the United States Federal Trade Commission that early termination of the applicable waiting period under the HSR Act had been granted. Under the merger agreement, both Zhone and Paradyne have agreed to use their reasonable best efforts to obtain all required governmental approvals in connection with the execution of the merger Zhone will assume all options to purchase Sorrento common stockagreement and warrants to purchase Sorrento common stock then outstanding under Sorrento’s option agreements, stock option plans and warrant agreements. Upon completion of the merger, each assumed option and warrant to purchase Sorrento stock will cease to represent a right to acquire shares of Sorrento stock and will be converted into an option or warrant to purchase Zhone common stock. In each case, the number of shares of Zhone common stock subject to the new Zhone option or warrant will be equal to the number of shares of Sorrento common stock subject to the Sorrento option or warrant multiplied by 0.9, and the exercise price per share of Zhone common stock will be equal to the existing per share exercise price of the Sorrento option or warrant divided by 0.9. Sorrento Debentures (see page 63) Upon completion of the merger, each 7.5% senior convertible debenture due August 2, 2007 of Sorrento which is outstanding will be assumed by Zhone and thereafter continue to represent a debenture of Sorrento, except that the Sorrento debentures will be convertible into shares of Zhone common stock as adjusted to give effect to the merger.   Material United States Federal Income Tax Consequences of the Merger (see page 57)(page 47)   TheIt is expected that the merger is intended towill be treated as a reorganization for U.S. federal income tax purposes. However, the treatment of the merger as a reorganization is not a condition to the closing of the merger and no ruling from the Internal Revenue Service or opinion of counsel has been requested regarding the tax consequences of the merger. Assuming that the merger is treated as a reorganization, then, in general, SorrentoParadyne stockholders who exchange their SorrentoParadyne stock solely for Zhone common stock in the merger will not recognize gain or loss for U.S. federal income tax purposes as a result of the merger, except that SorrentoParadyne stockholders will recognize gain or loss with respect to any cash they receive in lieu of fractional shares of Zhone common stock upon completion of the merger.   Tax matters are very complicated, and the tax consequences of the merger to SorrentoParadyne stockholders will depend on each SorrentoParadyne stockholder’s particular tax situation. Each SorrentoParadyne stockholder is urged to read carefully the discussion in the section entitled “The Merger—Material United States Federal Income Tax Consequences of the Merger” and to consult its tax advisors regarding the specific tax consequences of the merger.   Accounting Treatment (see page 58)(page 49)   The merger will be accounted for using the purchase method of accounting under U.S. generally accepted accounting principles.   Regulatory Approvals (see page 57)Comparison of Stockholder Rights (page 71)   Under the Hart-Scott-Rodino Antitrust Improvements ActThe rights of 1976 and the rules promulgated thereunder by the Federal Trade Commission, certain transactions, includingParadyne stockholders will change as a result of the merger may not be completed unless certain waiting period requirements have been satisfied. The merger may also be subjectdue to review by the governmental authorities of various other jurisdictions under the antitrust laws of those jurisdictions. On May 14, 2004, Zhonedifferences in Zhone’s and Sorrento each filed notification reports with the Department of Justice and the Federal Trade Commission and requested an early termination of the required waiting period. If early termination is not granted and a request for additional information by the relevant antitrust authorities is not made, the waiting period will expire at midnight on June 14, 2004. Under the merger agreement,Paradyne’s governing documents. Although both Zhone and Sorrento have agreed to use their reasonable best efforts to obtain all required governmental approvalsParadyne are incorporated under the laws of the State of Delaware, the rights of Paradyne stockholders receiving Zhone common stock in connection with the executionmerger currently are governed by the Paradyne certificate of incorporation and the Paradyne bylaws. Upon completion of the merger, agreementParadyne stockholders will be entitled to receive shares of capital stock of Zhone, and completiontheir rights will be governed by the Delaware General Corporation Law, the Zhone certificate of incorporation and the merger. Zhone bylaws. SummarySelected Historical Financial Data of Zhone   The following information is provided to aid you in your analysis of the financial aspects of the merger. This information was derived from the audited financial statements of Zhone for the periods indicated.five years ended December 31, 2004. This information is only a summary, and you should read it together with the historical financial statements and related notes contained in the annual and quarterly reports and other information filed by Zhone with the SEC and incorporated by reference in this joint proxy statement/prospectus. See “Where You Can Find More Information.”Information” on page 87.     Year Ended December 31,   Period From September 1, 1999 (inception) through December 31, 1999     Three Months Ended     Year Ended December 31,   Three Months Ended,     2003   2002   2001   2000   March 31, 2004   March 31, 2003     2004   2003   2002   2001   2000   March 31, 2005   March 31, 2004     (in thousands, except per share data)     (in thousands, except per share data)   Statement of Operations Data:     Net revenue   $ 83,138     $ 112,737     $ 110,724     $ 80,756     $ —       $ 21,033     $ 17,075     $ 97,168     $ 83,138     $ 112,737     $ 110,724     $ 80,756     $ 27,563     $ 21,033   Cost of revenue     51,081       69,689       106,006       59,384       —         11,980       9,303       55,305       51,081       69,689       106,006       59,384       15,594       11,980                               Gross profit     32,057       43,048       4,718       21,372       —         9,053       7,772       41,863       32,057       43,048       4,718       21,372       11,969       9,053                 Operating expenses:     Research and product development     22,495       29,802       63,869       85,959       4,016       5,953       5,744       23,210       22,495       29,802       63,869       85,959       5,910       5,953   Sales and marketing     15,859       19,676       35,472       35,153       226       4,682       4,277       21,958       15,859       19,676       35,472       35,153       6,134       4,682   General and administrative     5,324       10,843       13,095       15,911       1,321       2,482       765       10,416       5,324       10,843       13,095       15,911       2,027       2,482   Purchased in-process research and development     —         59       11,983       439       21,320       6,185       —         8,631       —         59       11,983       439       —         6,185   Restructuring charges     —         4,531       5,115       —         —         —         —         —         —         4,531       5,115       —         —         —     Litigation settlement     1,600       —         —         —         —         —         —         —         1,600       —         —         —         —         —     Stock-based compensation     1,238       10,376       17,098       42,316       2,891       528       (2,570 )     1,396       1,238       10,376       17,098       42,316       128       528   Amortization and impairment of intangible assets     7,942       15,995       88,834       38,082       147       2,078       1,784       10,132       7,942       15,995       88,834       38,082       2,257       2,078   Impairment of long-lived assets     —         50,759       —         —         —         —         —         —         —         50,759       —         —         —         —                                 Total operating expenses     54,458       142,041       235,466       217,860       29,921       21,908       10,000       75,743       54,458       142,041       235,466       217,860       16,456       21,908                               Operating loss     (22,401 )     (98,993 )     (230,748 )     (196,488 )     (29,921 )     (12,855 )     (2,228 )     (33,880 )     (22,401 )     (98,993 )     (230,748 )     (196,488 )     (4,487 )     (12,855 ) Other income (expense), net     (2,552 )     (9,434 )     (12,627 )     (1,849 )     (104 )     (434 )     (533 ) Other expense, net     (1,561 )     (2,552 )     (9,434 )     (12,627 )     (1,849 )     (606 )     (434 )                             Loss before income taxes     (24,953 )     (108,427 )     (243,375 )     (198,337 )     (30,025 )     (13,289 )     (2,761 )     (35,441 )     (24,953 )     (108,427 )     (243,375 )     (198,337 )     (5,093 )     (13,289 ) Income tax (benefit) provision     (7,778 )     140       145       (1,866 )     —         96       41       205       (7,778 )     140       145       (1,866 )     38       96                               Net loss     (17,175 )     (108,567 )     (243,520 )     (196,471 )     (30,025 )     (13,385 )     (2,802 )     (35,646 )     (17,175 )     (108,567 )     (243,520 )     (196,471 )     (5,131 )     (13,385 ) Accretion on preferred stock     (12,700 )     (22,238 )     (3,325 )     (2,775 )     (195 )     —         (10,618 )     —         (12,700 )     (22,238 )     (3,325 )     (2,775 )     —         —                                 Net loss applicable to holders of common stock   $ (29,875 )   $ (130,805 )   $ (246,845 )   $ (199,246 )   $ (30,220 )   $ (13,385 )   $ (13,420 )   $ (35,646 )   $ (29,875 )   $ (130,805 )   $ (246,845 )   $ (199,246 )   $ (5,131 )   $ (13,385 )                             Basic and diluted net loss per share applicable to holders of common stock   $ (1.87 )   $ (25.87 )   $ (59.87 )   $ (56.28 )   $ (8.57 )   $ (0.17 )   $ (2.07 ) Basic and diluted net loss per share applicable to holders of common stock.   $ (0.42 )   $ (1.87 )   $ (25.87 )   $ (59.87 )   $ (56.27 )   $ (0.05 )   $ (0.17 ) Shares used in per-share calculation     15,951       5,057       4,123       3,541       3,525       77,266       6,490       85,745       15,951       5,057       4,123       3,541       94,100       77,266       As of December 31,   As of March 31,      As of December 31,   As of March 31,   2003   2002   2001   2000   1999   2004   2003      2004    2003    2002   2001   2000   2005   (in thousands)      (in thousands) Balance Sheet Data:                  Cash, cash equivalents and short-term investments   $ 98,256   $ 10,614     $ 24,137     $ 71,972     $ 77,921     $ 89,984   $ 3,404      $ 65,216    $ 98,256    $ 10,614     $ 24,137     $ 71,972     $ 61,084 Working capital (deficit)     82,301     (7,957 )     (47,361 )     53,767       53,023       77,889     (11,830 )      71,789      82,301      (7,957 )     (47,361 )     53,767       69,958 Total assets     274,569     163,963       274,051       331,984       282,073       270,117     161,930        325,227      274,877      163,963       274,051       331,984       322,605 Total short-term and long-term debt     33,391     38,703       100,819       47,500       50,000       32,681     37,546   Redeemable convertible preferred stock.     —       165,890       421,601       383,976       186,371       —       186,633   Stockholders’ equity (deficit)   $ 186,879   $ (98,642 )   $ (335,990 )   $ (167,634 )   $ (26,887 )   $ 180,703   $ (77,507 ) Long-term debt      39,935      32,040      33,922       53,040       37,500       40,116 Redeemable convertible preferred stock      —        —        165,890       421,601       383,976       —   Stockholders’ equity (deficit).    $ 229,784    $ 186,879    $ (98,642 )   $ (335,990 )   $ (167,634 )   $ 225,202 SummarySelected Historical Financial Data of SorrentoParadyne   The following information is provided to aid you in your analysis of the financial aspects of the merger. This information was derived from the audited financial statements of SorrentoParadyne for the periods indicated.five years ended December 31, 2004. This information is only a summary, and you should read it together with the historical financial statements and related notes includedcontained in the annual and quarterly reports and other information filed by Paradyne with the SEC and incorporated by reference in this joint proxy statement/prospectus. See “Where You Can Find More Information” on page 87.        Fiscal Year Ended January 31,        2004     2003     2002     2001     2000        (In thousands, except per share data)   Statement of Operations Data:      (a) (b)       (b)       (b)       (b)       (b)   Net sales    $ 25,462     $ 25,137     $ 40,827     $ 44,641     $ 68,372   Gross margin    $ 5,693     $ 3,320     $ 9,320     $ 13,171     $ 31,782   Operating loss    $ (17,634 )   $ (31,329 )   $ (37,154 )   $ (50,415 )   $ (9,951 ) Net loss from continuing operations    $ (6,233 )   $ (26,210 )   $ (43,136 )   $ (41,905 )   $ (2,410 ) Net loss per share from continuing operations (c)                                          Basic    $ (0.87 )   $ (33.29 )   $ (62.00 )   $ (74.20 )   $ (3.40 ) Diluted    $ (0.87 )   $ (33.29 )   $ (76.32 )   $ (74.20 )   $ (3.00 ) Balance Sheet Data:                                          Cash and cash equivalents    $ 17,617     $ 7,747     $ 14,243     $ 9,965     $ 13,511   Working capital (deficit)    $ 25,806     $ (36,460 )   $ 5,839     $ 71,993     $ 189,486   Total assets    $ 50,096     $ 55,805     $ 90,339     $ 113,123     $ 223,265   Total debt (including short-term debt redeemable preferred stock)    $ 16,027     $ 21,987     $ 72,122     $ 24,770     $ 20,727   Stockholders’ equity (deficit)    $ 22,994     $ (34,476 )   $ 18,217     $ 39,733     $ 202,538   The Consolidated Statement of Operations and Balance Sheet data shown above reflect the following:     Year Ended December 31,     Three Months Ended,       2004     2003     2002     2001     2000     March 31, 2005     March 31, 2004       (in thousands, except per share data)   Statement of Operations Data:                                                         Revenue                                                         Sales   $ 96,393     $ 73,378     $ 105,584     $ 142,008     $ 243,715     $ 25,484     $ 20,815   Services     5,895       7,097       5,698       4,425       3,674       1,200       1,482   Royalties     —         800       982       272       293       10       —                     Total revenues     102,288       81,275       112,264       146,705       247,682       26,694       22,297                   Cost of sales                                                         Equipment     60,143       41,754       56,603       96,684       181,497       16,316       12,630   Service     1,994       2,231       1,348       1,791       1,295       481       450                   Total cost of sales     62,137       43,985       57,951       98,475       182,792       16,797       13,080                   Gross margin     40,151       37,290       54,313       48,230       64,890       9,897       9,217                   Operating expenses:                                                         Research and development (1)     16,950       19,313       28,115       25,232       40,514       4,270       3,782   Sales, general and administrative     24,557       27,400       34,691       37,533       59,450       6,230       5,821   Amortization of intangible assets     1,572       1,222       983       575       952       516       304   Impairment of intangible assets     —         —         6,681       5,761       —         —         —     Restructuring charges     1,710       1,900       3,315       3,807       1,371       —         269   Other operating income, net     (800 )     —         —         —         —         (765 )     —                     Total operating expenses     43,989       49,835       73,785       72,908       102,287       10,251       10,176                   Operating loss     (3,838 )     (12,545 )     (19,472 )     (24,678 )     (37,397 )     (354 )     (959 ) Other (income) expenses                                                         Interest     (653 )     (610 )     (790 )     (743 )     (2,439 )     (245 )     (127 ) Other, net     (41 )     95       (37 )     (321 )     (52 )     (45 )     (45 )                 Net loss before provision for income taxes.     (3,144 )     (12,030 )     (18,645 )     (23,614 )     (34,906 )     (64 )     (787 ) Benefit for income tax     —         —         (1,488 )     —         (619 )     —         —                     Net loss   $ (3,144 )   $ (12,030 )   $ (17,157 )   $ (23,614 )   $ (34,287 )   $ (64 )   $ (787 )                 Loss per share:                                                         Basic and diluted   $ (0.07 )   $ (0.28 )   $ (0.42 )   $ (0.72 )   $ (1.08 )   $ (0.00 )   $ (0.02 ) Shares used in computing loss per share:                                                         Basic and diluted     45,614       43,389       40,936       32,879       31,768       46,610       44,801   (1) (a) The resultsIncludes $2,830 and $927 of operationspurchased in-process research and development costs for LuxN, Inc. are reflected from August 8, 2003 forward. (b) Operating (loss)the years ended December 31, 2002 and (loss) from continuing operations includes net capital restructuring charges of approximately $1.8 million in fiscal year 2003 and additions to inventory reserves of $602,000, $4.1 million, $4.0 million, $3.7 million and $1.6 million, which negatively affected gross margin in fiscal years 2004 2003, 2002, 2001 and 2000, respectively.   (c) All per share data have been restated to reflect the twenty-for-one split of Sorrento’s common stock that became effective on October 28, 2002.      As of December 31,    As of March 31,      2004    2003    2002    2001    2000    2005      (in thousands) Balance Sheet Data:                                           Cash and cash equivalents and investments    $ 43,832    $ 46,775    $ 47,706    $ 37,866    $ 19,821    $ 42,239 Working capital      62,839      59,024      61,074      47,868      54,845      63,960 Total assets      90,301      82,442      97,256      86,079      117,280      90,101 Long-term debt      —        —        —        444      684      —   Total debt      —        —        396      928      1,322      —   Total shareholders’ equity    $ 73,965    $ 69,575    $ 77,995    $ 61,197    $ 82,659    $ 74,117 SummarySelected Unaudited Pro Forma Condensed Combined Consolidated Financial Data   The following summaryselected unaudited pro forma condensed combined consolidated financial data were prepared using the purchase method of accounting. The table below presents summary financial data from the Zhone and SorrentoParadyne unaudited pro forma consolidated statements of operations for the year ended December 31, 20032004 and for the three months ended March 31, 20042005 and the unaudited pro forma consolidated balance sheet as of March 31, 20042005 included in this joint proxy statement/prospectus. The unaudited pro forma consolidated statements of operations are presented as if the merger had occurred on January 1, 2003.2004. The unaudited pro forma consolidated balance sheet presents the combined financial position of Zhone and SorrentoParadyne as of March 31, 20042005 assuming that the merger had occurred as of that date. Because the fiscal year ends of Zhone and Sorrento differ, for the purposes of presenting the unaudited pro forma condensed combined financial data below, the financial statements of Zhone for the year ended December 31, 2003 and for the three months ended March 31,On July 1, 2004, were combined with the financial statements of Sorrento for the year and three months ended January 31, 2004. On November 13, 2003, Zhone acquired all of the outstanding stock of Tellium, Inc. in a reverse merger transaction.Sorrento Networks Corporation. This transaction was determined to be significant to Zhone for the purposes of preparing the unaudited pro forma condensed combined consolidated statement of operations for the year ended December 31, 2003. Accordingly,2004. For the purposes of presenting the unaudited pro forma condensed combined financial data below, the statements of operations of Zhone and SorrentoParadyne for the year ended December 31, 2003 as discussed above2004 were combined with the statement of operations of Tellium from January 1, 2003 through November 12, 2003.Sorrento for the six months ended April 30, 2004.   The unaudited pro forma consolidated financial data are based on estimates and assumptions set forth in the notes to suchthese statements, which are preliminary and have been made solely for the purposes of developing suchthe pro forma information. The unaudited pro forma condensed combined consolidated financial statements do not include only a preliminary estimate of theany adjustments for liabilities resulting from integration planning, as management of Zhone and SorrentoParadyne are in the process of making these assessments and estimates of these costs haveare not been finalized.currently known. However, costs will ultimately be recorded for severance or relocation of Sorrento employees, including severance and related benefits for certain directors and executive officers of Sorrento,Paradyne, costs for vacating certain leased facilities of Sorrento, orParadyne, including costs incurred to consolidate Paradyne and Zhone’s manufacturing facilities, and other costs ofassociated with exiting activities, such as the potential cancellation of projects in development and the associated impairment of assets that would affect amounts in the pro forma financial statements. In addition, management is in the process of identifying and evaluating the possible divestiture of the non-strategic and legacy narrowband business of Paradyne. Depending on the timing of such decisions, these costsamounts will either be recorded as part of the purchase price of the acquisition or charged to expense in the combined company’s statement of operations in the period in which they are incurred. The unaudited pro forma consolidated financial data are not necessarily indicative of the financial position or operating results that would have been achieved had the merger been consummated as of the dates indicated, nor are they necessarily indicative of future financial position or operating results. This information should be read in conjunction with the unaudited pro forma condensed combined consolidated financial statements and related notes and the historical financial statements and related notes of Zhone and SorrentoParadyne included in or incorporated by reference into this joint proxy statement/prospectus.   Information relating to the results of operations of Tellium for the period prior to its acquisition by Zhone on November 13, 2003 has been included in these unaudited pro forma condensed combined consolidated financial statements, pursuant to the rules of the SEC regarding the preparation of pro forma financial information. However, management believes that the results of operations relating to Tellium are not indicative of the results that would have been achieved had the transaction occurred on January 1, 2003, and would not be indicative of future results. Following the consummation of the merger with Tellium, Zhone discontinued the development efforts related to the technology acquired from Tellium, terminated substantially all of the former Tellium employees, and exited the Tellium headquarters facility. In addition, Zhone has not generated any revenue from the former Tellium products subsequent to the date of the acquisition. Accordingly, management believes that the results of operations for Tellium that are included in these unaudited pro forma condensed combined consolidated financial statements are not indicative of the continuing impact of the transaction on future periods.    Pro Forma Combined      Pro Forma Combined      Year Ended December 31, 2003   Three Months Ended March 31, 2004      Year Ended   December 31, 2004    Three Months Ended   March 31, 2005      (in thousands, except per share data)      (in thousands, except per share data)   Net revenue    $ 134,848     $ 27,432      $ 210,839     $ 54,094   Cost of revenue      102,105       17,838        126,121       32,228             Gross profit      32,743       9,594        84,718       21,866        Operating expenses:           Research and product development      52,935       8,254        43,805       10,162   Sales and marketing      32,025       6,523        43,475       10,614   General and administrative      31,541       4,249        21,702       3,762   Purchased in-process research and development      —         6,185        9,558       —     Litigation settlement      1,600       —     Stock-based compensation      3,305       528   Amortization and impairment of intangible assets      14,262       3,589   Impairment of long-lived assets      26,944       —     Restructuring charges      1,710       —     Stock based compensation      4,075       450   Amortization and impairment of intangibles      22,628       4,976   Other operating income, net      (779 )     (765 )           Total operating expenses      162,612       29,328        146,174       29,199             Operating loss      (129,869 )     (19,734 )      (61,456 )     (7,333 ) Other income (expense), net      9,603       (2,763 ) Other expense, net      (2,973 )     (316 )           Loss before income taxes      (120,266 )     (22,497 )      (64,429 )     (7,649 ) Income tax provision (benefit)      (7,778 )     96   Income tax provision      205       38             Net loss      (112,488 )     (22,593 )    $ (64,634 )   $ (7,687 ) Accretion on preferred stock      —         —               Net loss applicable to holders of common stock    $ (112,488 )   $ (22,593 )      Basic and diluted net loss per share applicable to holders of common stock    $ (1.25 )   $ (0.25 ) Weighted average shares outstanding used to compute basic and diluted net loss per share applicable to holders of common stock      90,301       91,949   Basic and diluted net loss per share    $ (0.45 )   $ (0.05 ) Weighted average shares outstanding used to compute basic and diluted net loss per share      145,000       145,532          Pro Forma Combined As of March 31, 2004      (in thousands) Balance Sheet Data:        Cash, cash equivalents and short-term investments    $ 108,105 Working capital      101,695 Total assets      365,186 Total debt (including current portion of long-term debt)      36,320 Stockholders’ equity      246,670      Pro Forma Combined as of March 31, 2005      (in thousands) Balance Sheet Data:        Cash, cash equivalents and short-term investments    $ 103,323 Working capital      132,845 Total assets      527,655 Long-term debt      40,116 Stockholders’ equity      413,326 Comparative Per Share Data   The following table presents (1) the unaudited loss per share and net book value per share data for each of Zhone and SorrentoParadyne on a historical basis, (2) the unaudited loss per share and net book value per share data for the combined company on a pro forma basis, and (3) the unaudited loss per share and net book value per share data for SorrentoParadyne on an equivalent pro forma basis. The unaudited pro forma combined financial data are not necessarily indicative of the financial position had the merger been completed on December 31, 20032004 or March 31, 20042005 or operating results that would have been achieved by the combined company had the merger been completed as of the beginning of the periods presented, and should not be construed as representative of future financial position or operating results. The pro forma combined per common share data presented below have been derived from the unaudited pro forma condensed combined financial statements included in this joint proxy statement/prospectus.   This information is only a summary and should be read in conjunction with the selected historical financial data of Zhone and Sorrento,Paradyne, the Zhone and SorrentoParadyne unaudited pro forma condensed combined financial statements, and the separate historical financial statements of Zhone and SorrentoParadyne and related notes included in or incorporated by reference into this joint proxy statement/prospectus.      Sorrento      Year Ended January 31, 2004   Three Months Ended January 31, 2004      Paradyne Year Ended December 31, 2004   Paradyne Three Months Ended March 31, 2005   Historical per common share data:           Loss per share    $ (0.87 )   $ (0.66 )    $ (0.07 )   $ (0.00 ) Net book value per share at period end(1)      1.41       1.41   Net book value per share at period end (1)      1.59       1.59      Zhone      Year Ended December 31, 2003   Three Months Ended March 31, 2004      Zhone Year Ended December 31, 2004   Zhone Three Months Ended March 31, 2005   Historical per common share data:           Loss per share    $ (1.87 )   $ (0.17 )    $ (0.42 )   $ (0.05 ) Net book value per share at period end(1)      2.44       2.31   Net book value per share at period end (1)      2.44       2.38      Combined Year Ended December 31, 2003   Three Months Ended March 31, 2004      Combined Year Ended December 31, 2004   Combined Three Months Ended March 31, 2005   Pro forma combined per common share data:      Pro forma combined company share data:      Loss per combined company share    $ (1.23 )   $ (0.24 )    $ (0.45 )   $ (0.05 ) Loss per equivalent Sorrento share(2)      (1.11 )     (0.22 ) Loss per equivalent Paradyne share (2)      (0.49 )     (0.05 ) Net book value per combined company share      2.77       2.66        2.87       2.83   Net book value per equivalent Sorrento share(1)(2)      2.49       2.39   Net book value per equivalent Paradyne share (1)(2)      3.15       3.11   (1) The historical net book value per share of Zhone common stock and SorrentoParadyne common stock is computed by dividing common stockholders’ equity at period end by the number of shares of common stock outstanding at the respective period end. The pro forma net book value per share of the combined company’s common stock is computed by dividing the pro forma common stockholders’ equity by the pro forma number of shares of common stock outstanding at the respective period end, assuming the merger had been completed on that date. (2) The pro forma loss and net book value per equivalent SorrentoParadyne share is calculated by multiplying the pro forma combined amounts by the exchange ratio of 0.9 of a share1.0972 shares of Zhone common stock for each share of SorrentoParadyne common stock. Comparative Market Price Data   Zhone common stock trades on the Nasdaq National Market under the symbol “ZHNE.” SorrentoParadyne common stock trades on the Nasdaq National Market under the symbol “FIBR.“PDYN.” The table below sets forth the high and low salesclosing prices of Zhone common stock and SorrentoParadyne common stock for the periods indicated. The information relating to Zhone common stock includes information relating to the common stock of Tellium, Inc. prior to its acquisition by Zhone through a reverse merger on November 13, 2003. The prices indicated below have been appropriately adjusted to give retroactive effect to all stock splits that have occurred through the date of this joint proxy statement/prospectus.      Zhone Common Stock    Sorrento Common Stock    Zhone Common Stock    Paradyne Common Stock    High    Low    High    Low        High            Low            High            Low     2002                     First Quarter ended March 31, 2002    $ 27.52    $ 7.68    $ 96.00    $ 40.00 Second Quarter ended June 30, 2002    $ 9.88    $ 2.80    $ 59.00    $ 13.60 Third Quarter ended September 30, 2002    $ 2.60    $ 1.52    $ 17.60    $ 4.20 Fourth Quarter ended December 31, 2002    $ 3.00    $ 1.20    $ 15.07    $ 2.40 2003                                         First Quarter ended March 31, 2003    $ 2.56    $ 2.12    $ 8.30    $ 4.45    $ 2.56    $ 2.12    $ 1.46    $ 1.01 Second Quarter ended June 30, 2003    $ 4.84    $ 2.16    $ 7.19    $ 2.52      4.84      2.16      2.52      1.16 Third Quarter ended September 30, 2003    $ 6.12    $ 3.08    $ 3.81    $ 2.25      6.12      3.08      2.68      1.64 Fourth Quarter ended December 31, 2003    $ 7.36    $ 4.21    $ 3.80    $ 2.38      7.36      4.21      4.79      2.45 2004                                         First Quarter ended March 31, 2004    $ 7.33    $ 3.30    $ 5.35    $ 2.65    $ 7.33    $ 3.30    $ 5.14    $ 3.30 Second Quarter (through May 20, 2004)    $ 4.14    $ 3.24    $ 3.48    $ 2.67 Second Quarter ended June 30, 2004      4.14      3.24 ��    5.76      3.80 Third Quarter ended September 30, 2004      3.65      2.56      5.43      4.17 Fourth Quarter ended December 31, 2004      3.12      2.35      4.74      3.42 2005                     First Quarter ended March 31, 2005    $ 2.81    $ 1.98    $ 3.51    $ 1.97 Second Quarter ended June 30, 2005      3.35      1.85      2.13      1.74 Third Quarter (through July 29, 2005)      3.66      2.77      3.26      1.78   The above table shows only historical comparisons and may not provide meaningful information to SorrentoParadyne stockholders in determining whether to adopt the merger agreement or Zhone stockholders in determining whether to approve the issuance of shares of Zhone common stock in connection with the merger. Zhone and SorrentoParadyne stockholders are urged to obtain current market quotations for Zhone and SorrentoParadyne common stock and to carefully review the other information contained in this joint proxy statement/prospectus and incorporated by reference into this joint proxy statement/prospectus. Please refer to the section of this joint proxy statement/prospectus entitled “Where You Can Find More Information” beginning on page 125 of this joint proxy statement/prospectus.87.   The following table provides the closinghigh and low prices per share of Zhone common stock and SorrentoParadyne common stock, each as reported on the Nasdaq National Market on April 22, 2004,July 7, 2005, the last full trading day preceding the public announcement that Zhone and SorrentoParadyne had entered into the merger agreement, and May 20, 2004,July 29, 2005, the lastlatest practicable trading day for which closing prices were available atprior to the time of the printingdate of this joint proxy statement/prospectus.        Zhone Common Stock    Sorrento Common Stock    Sorrento Common Stock (1) April 22, 2004    $ 3.89    $ 2.67    $ 3.50 May 20, 2004    $ 3.27    $ 2.85    $ 2.94      Zhone Common Stock    Paradyne Common Stock    Paradyne Common Stock Equivalent (1)      High    Low          High                Low          High    Low July 7, 2005    $ 3.62    $ 3.20    $ 1.92    $ 1.75    $ 3.97    $ 3.51 July 29, 2005      3.19      3.04      3.25      3.15      3.50      3.34 (1) Pro forma equivalent per share valuevalues that Paradyne stockholders would receive in exchange for each share of SorrentoParadyne common stock.stock if the merger were completed on these two dates, applying the exchange ratio of 1.0972 offered in the merger. Neither Zhone nor SorrentoParadyne has ever paid any cash dividends on their shares of capital stock. Under the merger agreement, SorrentoParadyne has agreed not to pay dividends pending the completion of the merger without the written consent of Zhone. If the merger is not consummated, the SorrentoParadyne board of directors presently intends that it would continue its policy of retaining earnings, if any, to finance the expansion of its business. The Zhone board of directors presently intends to retain earnings, if any, for use in its business and has no present intention to pay cash dividends before or after the merger. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS   This joint proxy statement/prospectus and the documents incorporated by reference into this joint proxy statement/prospectus contain forward-looking statements withinthat are entitled to the meaningprotection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995 that involve risks1995. These statements are based on current expectations, estimates, forecasts, and uncertainties, as well asprojections about the industries in which Zhone and Paradyne operate and the beliefs and assumptions that, if they ever materialize or prove incorrect, could cause the results of Zhone or Sorrento to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements.and Paradyne. Words such as “estimate,” “project,” “plan,” “intend,” “expect,” “anticipate,” “believe,” “would,“continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “could”“target,” “will,” “would,” variations of such words, and similar expressions are intended to identify forward-looking statements. You should note that the discussion of Zhone’s and Sorrento’s respective boards of directors’ reasons for the merger and the descriptions of their respective financial advisors’ opinions contain many forward-looking statements that describe beliefs, assumptions and estimates as of the indicated dates and those forward-looking expectations may have changed as of the date of this document.   In this joint proxy statement/prospectus, these forward-looking statements include, among others, statements regarding: Zhone’s and Paradyne’s respective reasons for the merger; the completion and timing of the consummation of the merger; the anticipated benefits of the merger, including the expectation of greater revenue opportunities and operating efficiencies and cost savings; the intention that the merger qualify as a reorganization for United States federal income tax purposes; future financial results of Zhone, SorrentoParadyne and the combined company; the effect that the public announcement of the merger may have on each company’s sales and operating results and on their ability to retain key management and personnel; the ability of the merger to increase stockholder value; the integration of the two companies; the anticipated benefits of the merger to customers; the expectation that the complementary nature of Zhone’s and Sorrento’s technologies will yield an integrated telecommunications networks solution; the combined company’s future technologies and growth trends relating to such technologies; growth and growth opportunities; the combined company’s competitive and market position; opportunities for marketing the products of the combined company; and the combined company’s response to technological changes, increased competition and shifting market demand.   These forward-looking statements are subject toinvolve certain risks and uncertainties that could causeuncertainties. The ability of either Zhone or Paradyne to predict results or the actual effects of its plans and strategies, or those of the combined company, is inherently uncertain. Accordingly, actual results or events tomay differ materially and adversely from suchthose expressed in any forward-looking statements. For a detailed discussion of these risks and uncertainties,the factors that may cause such a difference, see the section entitled “Risk Factors” beginning on page 19 of this joint proxy statement/prospectus. You should consider carefully the statements set forth in “Risk Factors” and other sections16 of this joint proxy statement/prospectus, and in other documents that are incorporated by reference into this joint proxy statement/prospectus.prospectus, including each company’s annual report on Form 10-K for the fiscal year ended December 31, 2004, each company’s quarterly report on Form 10-Q for the quarter ended March 31, 2005, and each company’s current reports filed on Form 8-K.   You are cautionedWe caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this joint proxy statement/prospectus, or in the case of documents incorporated by reference, as of the date of those documents. NeitherExcept to the extent required by applicable law or regulation, neither Zhone nor SorrentoParadyne undertakes any obligation to publicly update or release any revisions torevise these forward-looking statements, to reflectwhether as a result of new information, future events or circumstances after the date of this joint proxy statement/prospectus or to reflect the occurrence of unanticipated events, except as required by law.otherwise. RISK FACTORS   The merger involves a high degree of risk for Zhone and SorrentoParadyne stockholders. SorrentoParadyne stockholders will be choosing to invest in Zhone common stock by voting in favor of the adoption of the merger agreement. An investment in shares of Zhone common stock involves a high degree of risk. In addition to the other information contained in, or incorporated by reference into, this joint proxy statement/prospectus, including the matters addressed in “Cautionary Statement Concerning Forward-Looking Statements,”Statements” on page 15, you should carefully consider the risks described below before deciding whether to vote for the adoption of the merger agreement, in the case of SorrentoParadyne stockholders, or for the issuance of shares of Zhone common stock pursuant to the merger agreement, in the case of Zhone stockholders. You should also read and consider the other information in this joint proxy statement/prospectus. See “Where You Can Find More Information.”Information” on page 87. Additional risks and uncertainties not presently known to Zhone and SorrentoParadyne or that are not currently believed to be important to you, if they materialize, also may adversely affect the merger and Zhone and SorrentoParadyne as a combined company.   In addition, Zhone’s and Sorrento’sParadyne’s respective businesses are subject to numerous risks and uncertainties, including the risks and uncertainties described in each company’s annual report on Form 10-K for the case of Zhone, in its Quarterly Reportfiscal year ended December 31, 2004, each company’s quarterly report on Form 10-Q for the quarter ended March 31, 2004,2005, and in the case of Sorrento, in its Annual Reporteach company’s current reports filed on Form 10-K for the fiscal year ended January 31, 2004.8-K. These risks and uncertainties will continue to apply to Zhone and SorrentoParadyne as independent companies if the merger is not consummated.   Risks Related to the Merger   The exchange ratio, which determines the number of shares of Zhone common stock that SorrentoParadyne stockholders will receive for each share of SorrentoParadyne common stock in the merger, is fixed at 0.9,1.0972, and such shares of Zhone common stock may not maintain their current value or the value they had when the merger agreement was signed.   The value of Zhone common stock issued in the merger will depend on its market price at the time the merger closes and afterwards. When the merger closes, each share of SorrentoParadyne common stock will be exchanged for 0.9 of a share1.0972 shares of Zhone common stock. This exchange ratio will not be adjusted for changes in the market price of Zhone common stock or changes in the value of Sorrento stock.Paradyne common stock, and the merger agreement does not provide for any price-based termination right. Accordingly, the then current dollar value of Zhone common stock that SorrentoParadyne stockholders will receive upon the merger’s completion will depend entirely upon the market value of Zhone common stock at the time the merger is completed. The share prices of Zhone common stock and SorrentoParadyne common stock are subject to the general price fluctuations in the market for publicly-traded equity securities, and the prices of both companies’ common stock have experienced volatility in the past. Any reduction in the price of Zhone common stock will result in SorrentoParadyne stockholders receiving less value in the merger at the closing. Any increase in Zhone’s stock price will result in SorrentoParadyne stockholders receiving more value in the merger at the closing. Zhone and SorrentoParadyne stockholders will not know the exact value of Zhone common stock to be issued to SorrentoParadyne stockholders in the merger at the time of the special meetings of stockholders. Zhone and SorrentoParadyne urge you to obtain recent market quotations for Zhone common stock and SorrentoParadyne common stock. Neither Zhone nor SorrentoParadyne can predict or give any assurances as to the respective market prices of its common stock at any time before or after the completion of the merger.   Zhone may fail to realize the anticipated cost savings, revenue enhancements and Sorrento may not achieve theother benefits they expectexpected from the merger, which maycould adversely affect the value of Zhone common stock after the merger. Zhone and Paradyne entered into the merger agreement with the expectation that the merger will result in cost savings, revenue enhancements and other benefits to the combined company. However, the ability to realize these anticipated benefits of the merger will depend, in part, on the ability of Zhone to integrate the business of Paradyne with the businesses of Zhone. The integration of two independent companies is a complex, costly and time-consuming process. It is possible that these integration efforts will not be completed as smoothly as planned or that these efforts will divert management attention for an extended period of time. Delays encountered in the integration process could have a material adverse effect on the combined company’s business,revenues, expenses, operating results and financial condition of Zhone following the merger. Although Zhone and results of operations and couldParadyne expect significant benefits, such as increased cost savings, to result in the loss of key personnel. In order to realize any benefits or synergies from the merger, the combined company will need to overcome significant challenges, including timely, efficient and successful execution of a number of post-merger strategies, which include: combining the operations of the two companies; integrating and managing the combined company; combining diverse product and service offerings; coordinating research and development activities to enhance introduction of new products and services; minimizing the diversion of management attention from ongoing business concerns; retaining and assimilating the key personnel of each company; preserving customer, distribution, reseller, manufacturing, supplier and other important relationships of both Zhone and Sorrento and resolving potential conflicts that may arise; and creating and maintaining uniform standards, controls, procedures and policies. The execution of these post-merger strategies will involve considerable risks and may not be successful. These risks include: potential disruption of the combined company’s ongoing business and diversion of management attention from business matters to integration issues; unanticipated expenses and potential delays related to integration of technology and other resources of the two companies; risks associated with the integration of systems and controls, including internal controls over financing reporting; impairment of relationships with employees, suppliers and customers as a result of any integration of new management personnel; potential unknown liabilities associated with the merger and the combined operations; and differences in the business cultures of Zhone and Sorrento, maintaining employee morale and retaining key employees. The failure of the combined company to overcome these risks or any other problems encountered in connection with the merger could slow the growth of the combined company or lower the quality of its services, which could reduce customer demand and have a negative impact upon the price of Zhone common stock that Sorrento stockholders acquire in the merger. The costs of completing the merger are substantial and will affect the combined company’s results of operations. Zhone and Sorrento expect to incur transaction costs of at least $2 million in connection with the merger. These, primarily, are costs associated with combining the businesses of the two companies and the fees of financial advisors, attorneys, consultants and accountants. Unanticipated events could increase the costs of combining the two companies. If the benefits of the merger do not exceed the associated costs, including transaction and severance costs, costs associated with integrating the two companies and dilution of Zhone and Sorrento stockholders resulting from the issuance of shares in connection with the merger, the combined company’s financial results, including earnings per share, could be materially harmed. Therethere can be no assurance that the combined companyZhone will not incur additional material charges in subsequent quarters to reflect additional costs associated with the merger and the integrationrealize any of the two companies.these anticipated benefits.   If Zhone and Sorrento are not successfully integrated or the benefitsExecutive officers of Paradyne have interests in the merger do not meetthat may be different from, or in addition to, the expectationsinterests of investors or financial or industry analysts, the market price of the combined company’s stock may decline.Paradyne stockholders.   The market price of the combined company’s stock may decline as a result of the merger for a variety of reasons, including, among others, the following: the integration of Zhone and Sorrento is not completed in a timely and efficient manner; the combined company does not achieve the benefits of the merger as rapidly as, or to the extent, anticipated by financial or industry analysts; and significant numbers of stockholders of the combined company dispose of their shares after the merger. During the pendency of the merger, Sorrento may not be able to enter into a merger or business combination with another party at a favorable price because of restrictions in the merger agreement and voting agreements. In general, until the merger is completed or the merger agreement is terminated, Sorrento is prohibited from soliciting, initiating or encouraging any inquiries or proposals that may lead to a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, tender offer, sale of shares of stock or other similar transactions with any other party. Moreover, as an inducement to Zhone to enter into the merger agreement, certain significant stockholders, directors and executive officers of Sorrento owning Sorrento common stock agreed with Zhone to vote all of their shares of Sorrento stock in favor of the merger with Zhone and against other transactions. As a result of the prohibition on soliciting another proposal and the voting agreement, Sorrento may not be able to enter into an alternative transaction at a favorable price. The directors and executive officers of Zhone and Sorrento have conflicts of interest that may have influenced them to support or approve the merger. You should be aware of potential conflicts of interest of, and the benefits available to, directors and executive officers of Zhone and Sorrento whenWhen considering the recommendation of the boardsParadyne board of directors that Paradyne stockholders vote in favor of Zhone and Sorrento. The directors andthe adoption of the merger agreement, Paradyne stockholders should be aware that certain Paradyne executive officers of Zhone and Sorrento participate in arrangements that provide them withhave interests in the merger and have arrangements that are different from, or in addition to, those of other ZhoneParadyne stockholders and Sorrento stockholders. These include: • Acceleration of Vesting of Stock Options. Pursuant to the terms of Sorrento’s 2003 Equity Incentive Plan, all unvested options held by Sorrento’s outside directors vest in full upon a change of control transaction, such as the merger. In addition, pursuant to the terms of their employment agreements with Sorrento, all unvested options held by certain officers vest in full upon a change of control transaction, such as the merger. • Severance. Under the terms of their employment agreements with Sorrento, certain of Sorrento’s executive officers, Phillip Arneson, Joe Armstrong and Mitch Truelock, are entitled to severance benefits upon a change of control transaction, such as the merger. • Directors’ and Officers’ Insurance and Indemnification. Zhone has agreed that for a period of six years after the merger, Zhone will not amend, repeal or otherwise modify any indemnification agreements in effect on the date of the merger or the charter and bylaw provisions of Sorrento with respect to indemnification in any manner that would adversely affect the rights of individuals covered thereunder. Zhone has also agreed to provide, for six years after the merger, directors’ and officers’ liability insurance in respect of acts or omissions occurring prior to the merger covering each person currently covered by the directors’ and officers’ liability insurance policy of Sorrento up to a $10 million limit and with other terms no less favorable than those of the policies of Sorrento. • Zhone Affiliate Ownership of Sorrento Warrants. C. Richard Kramlich, a member of Zhone’s board of directors, is a general partner of New Enterprise Associates, a venture capital firm that is affiliated with various New Enterprise Associates entities that hold Zhone common stock and warrants to purchase shares of Sorrento common stock. In addition, Morteza Ejabat, Zhone’s Chairman and Chief Executive Officer, Jeanette Symons, Zhone’s Chief Technology Officer, and Robert Dahl, a member of Zhone’s board of directors, and/or trusts for the benefit of the foregoing persons or their family members, have partnership interests in various New Enterprise Associates entities that are holders of both Zhone common stock and warrants to purchase shares of Sorrento common stock. Upon completion of the merger, these warrants to purchase shares of Sorrento common stock will be converted into warrants to purchase shares of Zhone common stock as adjusted to give effect to the merger exchange ratio. As a resultgenerally. The Paradyne board of directors was aware of these interests that are likely different from thoseand took these interests into account in its deliberations of other Zhone or Sorrento stockholders, the directors and executive officers of Zhone and Sorrento are or may have been more likely to vote to approve (and recommend that stockholders vote to approve) the merger agreement and the merger than if they did not have these interests. In addition, officers and directors of Zhone and Sorrento have each entered into voting agreements pursuant to which they have agreed to vote their shares in favormerits of the merger and adoption ofin approving the merger and the transactions contemplated by the merger agreement. Zhone and Sorrento stockholders should consider whetherFor a full description of these interests, may have influenced these directors and executive officers to support or recommend the merger. You may read more about these interests as described under “Voting Agreements—Zhone Stockholders,” “Voting Agreements—Sorrento Stockholders,”see “The Merger—Merger—Interests of Directors and Executive Officers of ZhoneParadyne in the Merger” and “The Merger—Interestsbeginning on page 49. The market price of Directors and Executive Officersthe shares of SorrentoZhone common stock may be affected by factors different from those affecting the shares of Paradyne common stock. If the merger is completed, holders of Paradyne common stock will become holders of Zhone common stock. Former holders of Paradyne common stock will be subject to additional risks upon exchange of their shares of Paradyne common stock for Zhone common stock in the merger, some of which are described below in the section entitled “Risk Factors—Risks Related to Zhone After the Consummation of the Merger.” For a discussion of the business of Zhone and other risks related to Zhone’s business, see the documents incorporated by reference into this joint proxy statement/prospectus and referred to in the section entitled “Where You Can Find More Information” on page 87. Paradyne stockholders may receive a lower return on their investment after the merger. Although Zhone and Paradyne believe that the merger will create financial, operational and strategic benefits for the combined company and its stockholders, these benefits may not be achieved. The combination of Zhone’s and Paradyne’s businesses, even if conducted in an efficient, effective and timely manner, may not result in combined financial performance that is better than what each company would have achieved independently if the merger had not occurred.   Uncertainty regarding the merger may cause customers, distributors, resellers and others to delay or defer decisions concerning Zhone and Sorrento,Paradyne, which may harm the results of operations of either or both companies.   In response to the announcement or consummationcompletion of the merger, Zhone and SorrentoParadyne customers and suppliers may delay or defer purchasing or supply decisions or otherwise alter existing relationships with Zhone and Sorrento.Paradyne. Prospective customers could be reluctant to purchase the combined company’s products due to uncertainty about the direction of the combined company’s products and willingness to support and service existing products. In addition, customers, distributors, resellers and others may also seek to change existing agreements with Zhone or SorrentoParadyne as a result of the merger. These and other actions by customers, distributors, resellers and others could negatively affect the business of the combined company.   Zhone may not consummate the merger if Paradyne is not able to satisfy the minimum adjusted cash balance closing condition. As a condition to completing the merger, Paradyne’s adjusted cash balance must be (1) at least $38.0 million if the merger is completed on or before October 31, 2005, (2) $37.0 million if the merger is completed after October 31, 2005 but on or before November 30, 2005, and (3) $36.0 million if the merger is completed after November 30, 2005 but on or before December 31, 2005. Paradyne’s ability to satisfy the minimum cash balance closing condition will depend on the performance of its business and its earnings and results of operations through the end of the calendar month preceding the closing. Changes in any of the factors that affect Paradyne’s business, including a loss of customers, increased costs, downturns in international, national and local economic conditions and competition and changing technological trends in the access equipment products industry, could adversely affect Paradyne’s cash balances and prevent it from satisfying the minimum adjusted cash balance closing condition. The merger agreement and the voting agreement with Paradyne’s directors and executive officers restrict Paradyne’s and its directors’ and executive officers’ abilities to pursue alternatives to the merger and may discourage alternative transaction proposals. The merger agreement and the voting agreement between Zhone and Paradyne’s directors and executive officers contain “no shop” provisions that restrict the abilities of Paradyne’s directors and executive officers and, subject to limited fiduciary exceptions, restrict the ability of Paradyne, to initiate, solicit or knowingly encourage competing third-party proposals to acquire all or a significant part of Paradyne. There are only limited exceptions to Paradyne’s agreement that the Paradyne board of directors will not withdraw, modify or amend in a manner adverse to Zhone the recommendation of the Paradyne board of directors to holders of Paradyne common stock that they vote in favor of adopting the merger agreement. The Paradyne board of directors is generally permitted to participate in discussions or negotiations with, request clarifications from, or furnish information to a third party that has made an unsolicited acquisition proposal and may withdraw, modify or amend its recommendation in a manner adverse to Zhone if the Paradyne board of directors determines in good faith that failure to take such actions would be inconsistent with its fiduciary duties. If the Paradyne board of directors fails to recommend that stockholders of Paradyne vote to adopt the merger agreement or withdraws or adversely modifies or changes its recommendation or approves or recommends a competing acquisition proposal or, upon Zhone’s request, within five days of Paradyne’s receipt of a competing acquisition proposal fails to affirm its recommendation to stockholders, Zhone generally will be able to terminate the merger agreement and be entitled to be paid a $2.0 million termination fee by Paradyne. In addition, in some situations where a competing acquisition proposal has been made and the merger agreement is subsequently terminated, Paradyne would be required to pay Zhone the $2.0 million termination fee if Paradyne completes, or enters into a binding agreement with respect to, that competing acquisition proposal during the twelve-month period following the termination. Zhone required that Paradyne and its directors and executive officers agree to these provisions as a condition to Zhone’s willingness to enter into the merger agreement. Such restrictions and termination fees could discourage a third party with an interest in acquiring all or a significant part of Paradyne from considering or proposing an alternative or competing transaction. See “The Merger Agreement—No Solicitation of Other Transactions.” If the merger is not completed, the stock prices and businesses of Zhone and Paradyne may be adversely affected. If the merger is not completed, Zhone and Paradyne could each suffer a number of consequences that would adversely affect its business, including: Paradyne may be obligated to pay Zhone a termination fee of $2.0 million if the merger agreement is terminated in certain circumstances; the price of Zhone and Paradyne common stock may decline to the extent that the current market price of Zhone and Paradyne common stock, as applicable, reflects a market assumption that the merger will be completed; either company’s operations may be harmed to the extent that customers, distributors, resellers and others believe that such company cannot effectively compete in the marketplace without the merger, or there is uncertainty surrounding the future direction of the product and service offerings and strategy of Zhone or Paradyne on a stand-alone basis; Zhone and Paradyne would not derive the strategic benefits expected to result from the merger, which could adversely affect their respective businesses; and many costs related to the merger, such as legal, accounting and financial advisory fees, must be paid regardless of whether the merger occurs. Uncertainties associated with the merger may cause Zhone and SorrentoParadyne to lose key personnel.   Current and prospective Zhone employees and SorrentoParadyne employees may experience uncertainty about their future roles with the combined company until or after strategies with regard to the combined company are announced or executed. This uncertainty may adversely affect Zhone’s and Sorrento’sParadyne’s ability to attract and retain key management, sales, marketing and technical personnel. If a substantial number of key employees leave as a result of the announcement of the merger or after completion of the merger, or the combined company fails to attract key personnel, the combined company’s business could be adversely affected. Risks Related to Zhone After the Consummation of the Merger Zhone’s success will depend on the acceptance of new telecommunications services based on DSL technology. Zhone’s future success is substantially dependent upon whether DSL technology continues to gain widespread market acceptance by network service providers and end users of their services. If DSL technology does not continue to gain widespread acceptance, Zhone’s revenues and results of operations will be adversely affected. Zhone currently focuses its business investment almost exclusively on the broadband access market. Zhone has invested substantial resources in the development of DSL technology, and many of Zhone’s products are based on DSL technology. Many network service providers continue to evaluate DSL technology and other alternative high-speed data access technologies, but they may not continue to pursue the deployment of DSL technology. Even if network service providers adopt policies favoring full-scale deployment of DSL technology, they may not choose to purchase Zhone’s DSL product offerings. In addition, Zhone has limited ability to influence or control decisions made by network service providers. Network service providers are continuously evaluating alternative high-speed data access technologies and may, at any time, adopt technologies other than the DSL technologies offered by Zhone. If demand for SLMS products does not develop, then Zhone’s results of operations and financial condition will be adversely affected. Although Zhone expects that its Single Line Multi-Service, or SLMS, product line will account for a substantial portion of revenue in the future, to date Zhone has generated a significant portion of its revenue from sales of products from the legacy and service product lines that it acquired from other companies. Zhone’s future revenue depends significantly on its ability to successfully develop, enhance and market its SLMS products to the network service provider market. Most network service providers have made substantial investments in their current infrastructure, and they may elect to remain with their current architectures or to adopt new architectures, such as SLMS, in limited stages or over extended periods of time. A decision by a customer to purchase Zhone’s SLMS products will involve a significant capital investment. Zhone must convince its service provider customers that they will achieve substantial benefits by deploying Zhone products for future upgrades or expansions. Zhone does not know whether a viable market for its SLMS products will develop or be sustainable. If this market does not develop or develops more slowly than Zhone expects, its business, financial condition and results of operations will be seriously harmed. Zhone depends upon the development of new products and enhancements to existing products, and if Zhone fails to predict and respond to emerging technological trends and customers’ changing needs, its operating results and market share may suffer. The markets for Zhone’s products are characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements, frequent new product introductions and changes in communications offerings from network service provider customers. Zhone’s future success depends on its ability to anticipate or adapt to such changes and to offer, on a timely and cost-effective basis, products that meet changing customer demands and industry standards. Zhone may not have sufficient resources to successfully and accurately anticipate customers’ changing needs, technological trends, manage long development cycles or develop, introduce and market new products and enhancements. The process of developing new technology is complex and uncertain, and if Zhone fails to develop new products or enhancements to existing products on a timely and cost-effective basis, or if its new products or enhancements fail to achieve market acceptance, Zhone’s business, financial condition and results of operations would be materially adversely affected. The market Zhone serves is highly competitive and Zhone may not be able to compete successfully. Competition in the communications equipment market is intense. This market is characterized by rapid change, converging technologies and a migration to networking solutions that offer superior advantages. Zhone is aware of many companies in related markets that address particular aspects of the features and functions that its products provide. Many of Zhone’s competitors have longer operating histories, greater name recognition, larger customer bases and greater financial, technical, sales and marketing resources than Zhone does and may be able to undertake more extensive marketing efforts, adopt more aggressive pricing policies and provide more customer financing than Zhone can. Moreover, Zhone’s competitors may foresee the course of market developments more accurately than Zhone does and could develop new technologies that render Zhone’s products less valuable or obsolete. If Zhone is unable to compete successfully against its current and future competitors, Zhone may have difficulty obtaining or retaining customers, and Zhone could experience price reductions, order cancellations, increased expenses and reduced gross margins, any of which could have a material adverse effect on its business, financial condition and results of operations. Zhone has been, and may continue to be, adversely affected by recent unfavorable developments in the communications industry, geopolitical uncertainties and unfavorable economic and market conditions. Adverse economic conditions worldwide have contributed to slowdowns in the communications industry and may continue to impact Zhone’s business. Zhone’s customers and potential customers continue to experience a severe economic slowdown that has led to significant decreases in their revenues. For most of the last five years, the markets for Zhone’s equipment have been influenced by the entry into the communications services business of a substantial number of new companies. In the United States, this was due largely to changes in the regulatory environment, in particular those brought about by the Telecommunications Act of 1996. These new companies raised significant amounts of capital, much of which they invested in new equipment, causing acceleration in the growth of the markets for communications equipment. More recently, there has been a reversal of this trend, including the failure of a large number of the new entrants and a sharp contraction of the availability of capital to the industry. This industry trend has been compounded by the weakness in the United States economy as well as the economies in virtually all of the countries in which Zhone markets its products. In addition, the continuing turmoil in the geopolitical environment in many parts of the world, including terrorist activities and military actions, particularly the aftermath of the war in Iraq, may continue to adversely affect global economic conditions. If the economic and market conditions in the United States and the rest of the world do not improve, or if they deteriorate further, Zhone may continue to experience material adverse impacts on its business, operating results, and financial condition. Capital constraints in the communications industry could restrict the ability of Zhone’s customers to buy Zhone products. Due to the economic slowdown affecting the communications industry and the technology industry in general, Zhone’s customers and potential customers have significantly reduced the rate of their capital expenditures. Any reduction of capital equipment acquisition budgets or the inability of Zhone’s current and prospective customers to obtain capital could cause them to reduce or discontinue purchases of Zhone products, and as a result Zhone could experience reduced revenues and its operating results could be adversely impacted. In addition, many of the current and prospective customers for Zhone products are emerging companies with limited operating histories. These companies require substantial capital for the development, construction and expansion of their businesses. Neither equity nor debt financing may be available to these companies on favorable terms, if at all. To the extent that these companies are unable to obtain the financing they need, Zhone’s ability to successfully integratemake future sales to these customers and realize revenue from any such sales could be harmed. In addition, to the two companiesextent Zhone chooses to provide financing to these prospective customers, Zhone will be subject to additional financial losses in the event that the customers are unable to pay Zhone for the products and services they purchase. The communications industry is subject to government regulations, which could harm Zhone’s business. The Federal Communications Commission, or FCC, has jurisdiction over the entire communications industry in the United States and, as a result, Zhone’s existing and future products and Zhone’s customers’ products are subject to FCC rules and regulations. Changes to current FCC rules and regulations and future FCC rules and regulations could negatively affect Zhone’s business. The uncertainty associated with future FCC decisions may cause network service providers to delay decisions regarding their capital expenditures for equipment for broadband services. In addition, international regulatory bodies establish standards that may govern Zhone’s products in foreign markets. Changes to or future domestic and international regulatory requirements could result in postponements or cancellations of customer orders for products and services, which would harm Zhone’s business, financial condition and results of operations. Further, Zhone cannot be adversely affected ifcertain that it will be successful in obtaining or maintaining regulatory approvals that may, in the future, be required to operate its business. Adverse resolution of litigation may harm Zhone’s operating results or financial condition. Zhone and Paradyne are parties to various lawsuits and claims in the normal course of their businesses. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a significant numberparticular lawsuit could have a material adverse effect on the business, operating results and financial condition of key personnel depart before or afterthese companies. For additional information regarding litigation in which Zhone and Paradyne are involved, see Item 1, “Legal Proceedings,” contained in Part II of Zhone’s and Paradyne’s quarterly report on Form 10-Q for the merger.quarter ended March 31, 2005.   Your ability to influence key transactions, including changes of control, may be limited by significant insider ownership.   Upon completion of the merger, the combined company’s current directors, executive officers and principal stockholders and entities affiliated with them will own approximately 35%22.9% of the outstanding shares of the combined company’sZhone common stock, based on the number of shares currently outstanding for each of Zhone and Sorrento. As a result, the combined company’s directors, executive officers and principalParadyne. These stockholders, and entities affiliated with them, if acting together, will be able to significantly influence all matters requiring approval by the combined company’sZhone stockholders, including the election of directors and the approval of mergers or other business combination transactions. Circumstances may arise in which the interests of these stockholders could conflict with the interests of the combined company’s other stockholders. These stockholders could delay or prevent a change of control of the combined company even if such a transaction would be beneficial to its other stockholders. The stock prices and businesses of Zhone and Sorrento may be adversely affected if the merger is not completed. Completion of the merger is subject to several closing conditions, including obtaining requisite regulatory and stockholder approvals. Additionally, Sorrento is required to have a minimum closing cash balance of $5 million and must secure the election of the holders of at least 75% of its outstanding PIPE warrants to receive warrants to purchase Zhone common stock in the merger in exchange for their PIPE warrants. Zhone and Sorrento may be unable to obtain such approvals on a timely basis or at all. We believe that Sorrento common stock currently trades based upon the market price of Zhone common stock, discounted due to the uncertainties regarding the ability of the companies to complete the merger. Accordingly, if the merger is not completed, Zhone and Sorrento could each suffer a number of consequences that would aversely affect its business, including: termination of the merger agreement under some circumstances would require Sorrento to pay Zhone a termination fee of $2 million; the price of Zhone and Sorrento common stock may decline to the extent that the current market price of Zhone common stock reflects a market assumption that the merger will be completed; either company’s operations may be harmed to the extent that customers, distributors, resellers and others believe that such company cannot effectively compete in the marketplace without the merger, or there is uncertainty surrounding the future direction of the product and service offerings and strategy of Zhone or Sorrento on a standalone basis; Zhone and Sorrento would not derive the strategic benefits expected to result from the merger, which could adversely affect their respective businesses; and significant costs related to the merger, such as legal, accounting and financial advisory fees, must be paid even if the merger is not completed. The $16 million in additional debt that Zhone will assume in connection with the merger may limit the combined company’s financing options in the future and could weaken the combined company’s business. At December 31, 2003, Sorrento had $12.4 million principal amount of 7.5% senior convertible debentures due August 2, 2007 and other debt totaling $3.6 million. Zhone will assume this debt at the effective date of the merger. In addition, Zhone had outstanding $32.0 million of long-term debt at December 31, 2003. The assumption of Sorrento indebtedness by Zhone could materially and adversely affect the combined company in a number of ways, including: limiting the combined company’s ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes; limiting the combined company’s flexibility to plan for, or react to, changes in its business or market conditions; requiring the combined company to use a significant portion of its cash flow from operations to repay or service the debt, thereby reducing the amount of cash available for other purposes, including reinvestment in the combined company; making the combined company more highly leveraged than some of its competitors, which may place it at a competitive disadvantage; and making the combined company more vulnerable to the impact of adverse economic and industry conditions and increases in interest rates. Zhone and Sorrento cannot assure you that the combined company will generate sufficient cash flow or be able to borrow funds in amounts sufficient to enable the combined company to service its debt or to meet its working capital and capital expenditures requirements. If the combined company is unable to generate sufficient cash flow from operations or to borrow sufficient funds to service its debt, due to borrowing base restrictions or otherwise, the combined company may be required to sell assets, reduce capital expenditures, refinance all or a portion of existing debt or obtain additional financing. Zhone and Sorrento cannot assure you that the combined company will be able to sell assets, refinance its debt or borrow more money on terms acceptable to it, if at all. Significant merger-related charges against earnings resulting from the application of the purchase method of accounting will reduce the combined company’s earnings and may adversely affect the market value of the combined company’s common stock following the merger. In accordance with United States generally accepted accounting principles, the combined company will account for the merger using the purchase method of accounting, which will require purchase accounting adjustments that could have a material adverse effect on the market value of the common stock of the combined company following completion of the merger. Under the purchase method of accounting, Zhone will allocate the total estimated purchase price to Sorrento’s net tangible assets and amortizable intangible assets based on their fair values as of the date of completion of the merger, and record the excess of the purchase price over those fair values as goodwill. Zhone will incur amortization expense over the useful lives of amortizable intangible assets acquired in connection with the merger. In addition, to the extent the value of goodwill becomes impaired, Zhone may be required to incur material charges relating to the impairment of that asset. These amortization and potential impairment charges could have a material impact on the combined company’s results of operations. The market price of the shares of Zhone common stock may be affected by factors different from those affecting the shares of Sorrento common stock. Upon completion of the merger, holders of Sorrento common stock will become holders of Zhone common stock. An investment in Zhone common stock has different risks than an investment in Sorrento common stock. Former holders of Sorrento common stock will be subject to additional risks upon exchange of their shares of Sorrento common stock for Zhone common stock in the merger, some of which are described below in the sections entitled “Risk Factors—Risks Related to the Combined Company’s Business and Financial Results,” “Risk Factors—Risks Related to the Combined Company’s Products,” “Risk Factors—Risks Related to the Expansion of the Combined Company’s Business,” and “Risk Factors—Risks Related to the Combined Company’s Product Manufacturing.” For a discussion of the business of Zhone, see the documents incorporated by reference into this document and referred to in the section entitled“Where You Can Find More Information”beginning on page 125 of this joint proxy statement/prospectus. Risks Related to the Combined Company’s Business and Financial Results Zhone and Sorrento have each incurred significant losses to date and expect that the combined company will continue to incur losses in the foreseeable future. If the combined company fails to generate sufficient revenue to achieve or sustain positive cash flow from operations, its stock price could decline. Zhone and Sorrento have incurred significant losses to date and expect that the combined company will continue to incur losses in the foreseeable future. Zhone had net losses applicable to holders of common stock of approximately $29.9 million for the fiscal year ended December 31, 2003. Sorrento had net losses applicable to holders of common stock of approximately $6.2 million for the fiscal year ended January 31, 2004. As of December 31, 2003, Zhone had an accumulated deficit of approximately $595.8 million. As of January 31, 2004, Sorrento had an accumulated deficit of approximately $193.8 million. Neither Zhone nor Sorrento has positive cash flow from operations since their inception dates, and the combined company may not generate them in the future. Both Zhone and Sorrento have had significant fixed expenses and expect that the combined company will continue to incur significant manufacturing, research and development, sales and marketing, customer support, administrative and other expenses in connection with the ongoing development of the business. In addition, the combined company may be required to spend more on research and development than originally budgeted to respond to industry trends. The combined company may also incur significant new costs related to possible acquisitions and the integration of new technologies. Further, in light of the increased costs associated with compliance with the Sarbanes-Oxley Act of 2002, the combined company is likely to incur increased expenses related to regulatory and legal compliance. The combined company may not be able to adequately control costs and expenses or achieve or maintain adequate operating margins. As a result, its ability to achieve and sustain profitability will depend on its ability to generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels. If the combined company fails to generate sufficient revenue to achieve or sustain positive cash flow from operations, it will continue to incur substantial operating losses and its stock price could decline. The combined company will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which will be beyond the combined company’s control, that may prevent its stockholders from selling the combined company’s common stock at a profit. The market price of Zhone common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Since the consummation of Zhone’s merger with Tellium, Inc. on November 13, 2003, the trading price of Zhone common stock has ranged from a high of $7.38 per share to a low of $3.07 per share. The securities markets have experienced significant price and volume fluctuations in the past and the market prices of the securities of telecommunications related companies have been especially volatile. This market volatility, as well as general economic, market or political conditions, could reduce the market price of the combined company’s common stock regardless of the combined company’s actual operating performance. The market price of the combined company’s common stock may fluctuate significantly in response to a number of factors, including: actual or anticipated fluctuations in the combined company’s operating results; changes in expectations as to the combined company’s future financial performance; changes in financial estimates of securities analysts; release of lock-up or other transfer restrictions on the combined company’s outstanding shares of common stock or sales of additional shares of common stock; changes in market valuations of other technology companies; and announcements by the combined company or its competitors of significant technical innovations, contracts, standards or acquisitions. The combined company may be adversely affected by recent unfavorable developments in the communications industry, world events and the economy in general. Zhone’s and Sorrento’s customers and potential customers continue to experience a severe economic slowdown that has led to significant decreases in each company’s revenues. For most of the last five years, the markets for Zhone’s and Sorrento’s equipment have been influenced by the entry into the communications services business of a substantial number of new telecommunications companies. In the United States, this was due largely to changes in the regulatory environment, in particular those brought about by the Telecommunications Act of 1996. These new companies raised billions of dollars in capital, much of which they invested in new equipment, causing acceleration in the growth of the markets for telecommunications equipment. More recently, there has been a reversal of this trend, including the failure of a large number of the new entrants and a sharp contraction of the availability of capital to the industry. This industry trend has been compounded by the slowing not only of the U.S. economy, but the economies in virtually all of the countries in which Zhone and Sorrento are marketing their products. This, in turn, has caused a substantial reduction in demand for Zhone’s and Sorrento’s equipment. The continuing acts and threats of terrorism and the geo-political uncertainties in other continents are also having an adverse effect on the U.S. economy and could possibly induce or accelerate the advent of a more severe economic downturn. The U.S. government’s political, social and economic policies and policy changes as a result of these circumstances could have consequences that the combined company cannot predict, including causing further weaknesses in the economy. The long-term impact of these events on the combined company’s business is uncertain. Additionally, the amount of debt being held by the combined company’s carrier customers, and the continued cuts to capital spending, put the businesses of the combined company’s customers and potential customers in jeopardy. As a result, the combined company’s operating results and financial condition could be materially and adversely affected. Capital constraints in the telecommunications industry could restrict the ability of the combined company’s customers to buy its products. As a result of the economic slowdown affecting the telecommunications industry and the technology industry in general, the combined company’s customers and potential customers have significantly reduced the rate of their capital expenditures, a trend that is expected to continue for the rest of 2004. The reduction of capital equipment acquisition budgets or the inability of the combined company’s target customers to obtain capital could cause them to reduce or discontinue purchase of the combined company’s products, and as a result the combined company could experience reduced revenues or operating results. In addition, many of the current and prospective customers for the combined company’s products are emerging companies with limited operating histories. These companies require substantial capital for the development, construction and expansion of their businesses. Neither equity nor debt financing may be available to these companies on favorable terms, if at all. To the extent that these companies are unable to obtain the financing they need, the combined company’s ability to make future sales to these customers and realize revenue from any such sales could be harmed. In addition, to the extent the combined company chooses to provide financing to these prospective customers, the combined company will be subject to additional financial risk which could increase its expenses. If demand for Zhone’s and Sorrento’s products does not develop, then the combined company’s results of operations and financial condition will be adversely affected. The future growth of the combined company depends significantly on its ability to successfully develop, enhance and market Single Line Multi Service (SLMS) and optical transport products to the network service provider market. Most network service providers have made substantial investments in their current infrastructure, and they may elect to remain with their current architectures or to adopt new architectures in limited stages or over extended periods of time. A decision by a customer to purchase the combined company’s products will involve a significant capital investment. The combined company will need to convince these service providers of the benefits of its products for future upgrades or expansions. In addition, the success of the combined company’s SLMS and optical transport products will depend on factors outside of its control, including a resumption of increasing capital equipment purchases by network service providers, regulatory and legal developments and the addition of new, financially viable customers to the market. Zhone and Sorrento do not know whether viable markets for the combined company’s products will develop or be sustainable. If these markets do not develop or develop more slowly than Zhone and Sorrento expect, the business, financial condition and results of operations of the combined company will be seriously harmed. The future operating results of the combined company are difficult to predict due to limited operating histories of Zhone and Sorrento. Zhone began its business operations in September 1999 and Sorrento Networks, Inc., the primary telecommunications operating subsidiary of Sorrento, began its operations in February 2000. Although Zhone and Sorrento expect that the SLMS product line developed internally at Zhone will account for a substantial portion of the combined company’s revenue in the future, to date Zhone has generated a significant portion of its revenue from sales of product lines that it acquired from other companies. Due to the limited operating histories of Zhone and Sorrento, the combined company will have difficulty accurately forecasting its revenue, and will have limited historical financial data upon which to base its operating expense budgets. You should consider the combined company’s business and prospects in light of the heightened risks and unexpected expenses and problems it may face as a company in a relatively early stage of development in the unpredictable telecommunications industry which is in the midst of a prolonged downturn. Any strategic acquisitions or investments the combined company makes could dilute its stockholders or result in the assumption of additional contingent liabilities, loss of sales and disruption of its business. Zhone and Sorrento expect that the combined company will consider acquisitions of, or investments in, complementary companies, products or technologies to supplement the combined company’s internal growth. Zhone has acquired ten companies or product lines since its inception in 1999. The combined company may encounter difficulties in identifying and acquiring suitable candidates on reasonable terms. In the event of any future acquisitions, the combined company could: issue stock that would dilute its current stockholders’ percentage ownership; incur substantial debt; assume liabilities; increase its ongoing operating expenses and level of fixed costs; record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges; incur amortization expenses related to certain intangible assets; incur large and immediate write-offs; and become subject to litigation. Any strategic acquisitions or investments that the combined company makes in the future will involve numerous risks, including the following: problems combining the acquired operations, technologies or products; unanticipated costs; diversion of management’s time and attention from its existing business; adverse effects on existing business relationships with suppliers and customers; risks associated with entering markets in which the combined company has no or limited prior experience; and potential loss of key employees, particularly those of acquired companies. The combined company may not be able to successfully integrate the businesses, products, technologies or personnel that it might acquire in the future. Neither Zhone nor Sorrento can assure you that any strategic investments the combined company may make will meet its financial or other investment objectives. Any failure to do so could seriously harm the combined company’s business, financial condition and results of operations. The success of the combined company will depend on its executive officers and key employees, and the loss of the services of one or more of them could harm the combined company’s business. The future success of the combined company will depend on the continued services of its executive officers and other key engineering, manufacturing, operations, sales, marketing and support personnel who have critical industry experience and relationships that the combined company will rely on to build its business, especially Morteza Ejabat, Jeanette Symons, Kirk Misaka, and other key engineering, sales, marketing and support personnel, who have critical industry experience and relationships that the combined company will rely on to implement its business plan. The loss of the services of any of the combined company’s key employees could delay the development and production of the combined company’s products and negatively impact its ability to maintain customer relationships, which would harm the combined company’s business, financial condition and results of operations. Because of the long and variable sales cycles for Zhone’s and Sorrento’s products, the combined company’s revenue and operating results may vary significantly from quarter to quarter. The target customers for Zhone’s and Sorrento’s products have substantial and complex networks that they traditionally expand in increments on a periodic basis. Accordingly, the combined company’s sales efforts will be focused on prospective customers that may purchase the combined company’s products as part of large-scale network deployments. The combined company’s target customers may require a lengthy evaluation, testing and product qualification process. Throughout this process, the combined company may spend considerable time and incur significant expense educating and providing information to prospective customers about the uses and features of the combined company’s products. Even after a company makes the final decision to purchase the combined company’s products, it may deploy the products slowly. The timing of deployment of the combined company’s products may vary widely, and will depend on a number of factors, including: skill sets of the combined company’s customers; geographic density of potential subscribers; degree of configuration necessary to deploy the combined company’s products; ability of a customer to finance its product purchases as well as its operations; accuracy of customer traffic growth demands; specific network deployment plans of the customer; seasonal purchasing patterns; size of the network deployment; degree of configuration necessary to deploy its products; and complexity of the customer’s network. As a result of any of these factors, the combined company may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis, which may cause the combined company’s revenue and operating results to vary significantly and unexpectedly from quarter to quarter. The markets that the combined company will serve are highly competitive and, as an early stage company, the combined company may not be able to compete successfully. Competition in the communications equipment market is intense. Zhone and Sorrento are aware of many companies in related markets that address particular aspects of the features and functions that the combined company’s products will provide. Currently, Zhone’s primary competitors include larger equipment companies, such as Advanced Fibre Communications, Alcatel and Lucent Technologies. Sorrento’s primary competitors include ADVA AG Optical Networking, CIENA Corporation, Cisco Systems, Fujitsu, Lucent Technologies and Nortel Networks. The combined company also may face competition from other large communications equipment companies or other companies with significant market presence and financial resources that may enter the combined company’s markets in the future. In addition, a number of new public and private companies have announced plans for new products to address the same network needs that the combined company’s products will address, both domestically and abroad. Some of these companies may have lower cost structures than the combined company. Many of the combined company’s competitors, in comparison to Zhone and Sorrento, have longer operating histories, greater name recognition, larger customer bases and greater financial, technical, sales and marketing resources. These competitors may be able to undertake more extensive marketing efforts, adopt more aggressive pricing policies and provide more customer financing than the combined company can. Moreover, the combined company’s competitors may foresee the course of market developments more accurately than the combined company will and could develop new technologies that render the combined company’s products less valuable or obsolete. In the combined company’s markets, competitive factors include: performance; reliability and scalability; ease of installation and use; interoperability with existing products; upgradeability; geographic footprints for products; ability to support customer financing; breadth of services; price; technical support and customer service; and brand recognition. If the combined company is unable to compete successfully against its competitors, it may have difficulty obtaining customers, and the combined company could experience price reductions, order cancellations, increased expenses and reduced gross margins, any of which would harm its business, financial condition and results of operations. Zhone’s and Sorrento’s target customer base is concentrated, and the loss of one or more of their customers could harm the combined company’s business. The target customers for Zhone’s and Sorrento’s products are network service providers that operate voice, data and video communications networks. There are a limited number of potential customers in the combined company’s target markets. Zhone realized 28% of its revenue from two customers in its fiscal year ended December 31, 2003, and Sorrento realized 48% of its net sales from five customers in its fiscal year ended January 31, 2004. A significant portion of the combined company’s future revenue will depend on sales of its products to a limited number of customers. Any failure of one or more network service providers to purchase products from the combined company for any reason, including any downturn in their businesses, would seriously harm the combined company’s business, financial condition and results of operations. Zhone and Sorrento expect the average selling prices of the combined company’s products to decline, which may reduce revenue and gross margins. The industry in which Zhone and Sorrento do business has experienced a rapid erosion of average product selling prices. Consistent with this general trend, Zhone and Sorrento anticipate that the average selling prices of the combined company’s products will decline in response to a number of factors, including: competitive pressures; increased sales discounts; and new product introductions by competitors. If the combined company is unable to achieve sufficient cost reductions and increases in sales volumes, this decline in average selling prices of its products will reduce its revenue and gross margins. Pending lawsuits against Zhone and Sorrento could distract the combined company’s management and could result in substantial costs or large judgments against the combined company. Zhone and Sorrento are each a party to various lawsuits and claims in the normal course of their businesses. In addition, Zhone is currently involved in several litigation matters which it inherited as a result of its acquisition of Tellium. These suits and any future litigation could result in substantial costs and the diversion of management’s attention and resources away from the operation of the business of the combined company in order to respond to the litigation. There can be no assurance that actions that have been brought against Zhone or Sorrento or that may be brought against the combined company will be resolved in their favor. Regardless of whether they are resolved in their favor, these lawsuits are, and any future lawsuits to which the combined company may become a party in the future will likely be, expensive and time consuming to defend or resolve. Any losses resulting from these claims could adversely affect the combined company’s profitability and cash flow. For additional information regarding certain of the lawsuits in which Zhone is involved, see the documents incorporated by reference into this document and referred to in the section entitled“Where You Can Find More Information” beginning on page 125 of this joint proxy statement/prospectus. The communications industry is subject to governmental regulations that could negatively affect the combined company’s growth and reduce its revenue. The Federal Communications Commission, or FCC, has jurisdiction over the communications industry in the United States and, as a result, Zhone’s and Sorrento’s products and their customers’ products are subject to FCC rules and regulations. Current and future FCC rules and regulations affecting communications services or customers’ businesses or products could negatively affect the combined company’s business. The uncertainty associated with future FCC decisions may result in network service providers delaying decisions regarding expenditures for equipment for broadband services. In addition, international regulatory standards will govern the combined company’s products in foreign markets. Domestic and international regulatory requirements could result in postponements or cancellations of product orders, which would harm the combined company’s business, financial condition and results of operations. Further, Zhone and Sorrento cannot be certain that the combined company will be successful in obtaining or maintaining any regulatory approvals that may, in the future, be required to operate its business. The combined company does not anticipate paying dividends in the foreseeable future. Neither Zhone nor Sorrento has ever paid any dividends to their stockholders, and the combined company does not anticipate paying a cash dividend to its stockholders in the foreseeable future. After the merger, the combined company expects to retain its earnings, if any, for the future operation and expansion of the combined company’s business. Accordingly, the combined company’s stockholders will have to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Risks Related to the Combined Company’s Products Because the combined company’s products are complex and will be deployed in complex environments, the combined company’s products may have defects that are discovered only after full deployment, which could result in the combined company losing customers and revenue. Zhone’s and Sorrento’s products are complex and are designed to be deployed in large quantities and across complex networks. Because of the nature of these products, they can only be fully tested when completely deployed in large networks with high amounts of traffic. Customers may discover errors or defects in the combined company’s hardware or software, or the combined company’s products may not operate as expected, after they have been fully deployed. If the combined company is unable to fix defects or other problems that may be identified after full deployment, the combined company could experience: loss of revenue and market share; loss of existing customers; failure to attract new customers or achieve market acceptance; diversion of development resources; increased service and warranty costs; legal actions by its customers; and increased insurance costs. Defects, integration issues or other performance problems in the combined company’s products could also result in financial or other damages to its customers. Customers could seek damages for related losses from the combined company, which could seriously harm its business, financial condition and results of operations. A product liability claim brought against the combined company, even if unsuccessful, would likely be time consuming and costly and would put a strain on its management and resources. The occurrence of any of these problems would seriously harm the combined company’s business, financial condition and results of operations. If the combined company fails to enhance its existing products or develop and introduce new products that meet changing customer requirements and technological advances, the combined company’s ability to sell its products would be materially and adversely affected. Zhone’s and Sorrento’s target markets are characterized by rapid technological advances, evolving industry standards, changes in end-user requirements, frequent new product introductions and changes in communications offerings from network service providers. The combined company’s future success will significantly depend on its ability to anticipate or adapt to such changes and to offer, on a timely and cost-effective basis, products that meet changing customer demands and industry standards. The combined company may not have sufficient resources to successfully and accurately anticipate technological and market trends, manage long development cycles or develop, introduce and market new products and enhancements. Zhone and Sorrento cannot assure you that the combined company’s existing and future third-party licenses will be available on commercially reasonable terms, if at all. The combined company’s inability to maintain or obtain any third-party license required to sell or develop its products and product enhancements could require the combined company to obtain substitute technology of lower quality or performance standards or at greater cost. If the combined company is not able to develop new products or enhancements to existing products on a timely and cost-effective basis, or if the new products or enhancements fail to achieve market acceptance, the combined company’s business, financial condition and results of operations would be materially adversely affected. If the combined company’s products do not meet industry standards that may emerge, or if some industry standards are not ultimately adopted, the combined company will not gain market acceptance and its revenue will not grow. Zhone’s and Sorrento’s success depends, in part, on both the adoption of industry standards for new technologies in its target markets and product compliance with these industry standards. The absence of industry standards may cause potential customers to delay purchases of new equipment until standards are adopted and prevent market acceptance of the combined company’s products. In addition, in developing their products, Zhone and Sorrento have made, and will, as a combined company, continue to make, assumptions about the industry standards that may be adopted by their competitors and existing and potential customers. If industry standards are adopted which are different from those that Zhone and Sorrento have chosen to support, customers may not select and purchase the combined company’s products, and its sales and related revenue will be significantly reduced. The combined company’s ability to compete could be jeopardized and its business plan seriously compromised if it is unable to protect its intellectual property. Zhone and Sorrento rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect their intellectual property rights. They also enter into confidentiality or license agreements with their employees, consultants, corporate partners and customers, and control access to, and distribution of, their software, documentation and other proprietary information. Despite efforts to protect the combined company’s proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology. Monitoring unauthorized use of technology is difficult, and neither Zhone nor Sorrento can assure you that the steps they have taken will prevent unauthorized use of the combined company’s technology, particularly in foreign countries where the laws may not protect its proprietary rights as fully as in the United States. In the future the combined company may become involved in disputes over intellectual property, which could subject it to significant liability, divert the time and attention of its management and prevent it from selling its products. The combined company or its customers may become a party to litigation in the future to protect their intellectual property or to respond to allegations that the combined company infringes another party’s intellectual property. In the future, the combined company may receive communications from third parties inquiring about its interest in licensing certain of the third party’s intellectual property or more generally identifying intellectual property that may be the basis of a future infringement claim. Zhone has received letters from Lucent Technologies stating that many of Zhone’s products are using technology covered by or related to Lucent patents and inviting Zhone to discuss a licensing arrangement with Lucent. To date, no lawsuit or other formal action has been filed by Lucent. However, Zhone and Sorrento cannot assure you that Zhone or the combined company would be successful in defending against any Lucent infringement claims. To the extent Zhone or the combined company is not successful in defending such claims, Zhone or the combined company may be subject to substantial damages (including possible treble damages and attorneys’ fees). If a party accuses the combined company of infringing upon its proprietary rights, the combined company would have to defend itself and possibly its customers against the alleged infringement. Neither Zhone nor Sorrento can assure you that the combined company would prevail in any intellectual property litigation, given its complex technical issues and inherent uncertainties. If the combined company is unsuccessful in any such litigation, it could be subject to significant liability for damages and loss of its proprietary rights. Intellectual property litigation, regardless of its outcome, would likely be time consuming and expensive to resolve. Any such litigation could force the combined company to stop selling, incorporating or using its products that include the challenged intellectual property, or redesign those products that use the technology. In addition, if a party accuses the combined company of infringing upon its proprietary rights, the combined company may have to enter into royalty or licensing agreements, which may not be available on terms acceptable to the combined company, if at all. Any of these results could have a material adverse effect on the combined company’s business, financial condition and results of operations. Risks Related to the Expansion of the Combined Company’s Business The combined company’s business will suffer if it fails to properly manage its growth and continually improve its internal controls and systems. Zhone and Sorrento expect to increase the scope of their businesses and operations over time. The combined company’s ability to successfully offer its products and implement its business plan in a rapidly evolving market requires an effective planning and management process. To manage growth properly, the combined company must: hire, train, manage and retain qualified personnel, including engineers and research and development personnel; carefully manage and expand its manufacturing relationships and related controls and reporting systems; effectively integrate its information technology systems and controls; effectively manage multiple relationships with its customers, suppliers and other third parties; implement additional internal controls over financial reporting, and disclosure controls and procedures; and successfully integrate employees of acquired companies. Failure to do any of the above in an efficient and timely manner could seriously harm the combined company’s business, financial condition and results of operations. If the combined company is unable to expand its sales, marketing and distribution channels, it may be unable to increase market awareness and sales of its products, which may prevent the combined company from increasing its sales and achieving and maintaining profitability. Zhone’s and Sorrento’s products require a sophisticated sales and marketing effort targeted towards a limited number of key individuals within the combined company’s current and prospective customers’ organizations. These customers may have long-standing vendor relationships that may inhibit the combined company’s ability to generate business. Zhone and Sorrento currently use their direct sales forces and the combined company expects to develop a distribution channel as required in different regions, using both direct and indirect sales. Zhone and Sorrento believe that the success of the combined company will depend on its ability to establish successful relationships with various distribution partners as required by customer or region. Customer partnerships may be with vendors that are also competitors and as such the combined company is at greater risk of failing to establish these potential customer-driven partnerships. If the combined company is unable to expand its sales, marketing and distribution operations, it may not be able to effectively market and sell its products, which may prevent the combined company from increasing its sales and achieving and maintaining profitability. If the combined company is unable to deliver the high level of customer service and support demanded by customers, it may be unable to increase its sales or may lose customers and its operating results will suffer. Zhone’s and Sorrento’s products are complex, and customers demand that a high level of customer service and support be available at all hours. Customer service and support functions are provided by a small internal customer service and support organization at Zhone and Sorrento. The combined company may need to increase its staff to support new and existing customers. The reduction of on-site and regional support personnel may negatively impact its ability to properly service customer activities in a timely manner and may also negatively impact customer satisfaction. If the combined company is unable to manage these functions internally and satisfy its customers with a high level of service and support, any resulting customer dissatisfaction could impair the combined company’s ability to retain customers and make future sales. The combined company may consider using third parties to provide certain customer support services. The combined company may be unable to manage effectively those third parties who may provide support services, and the third parties may not provide adequate levels of customer support. If the combined company is unable to expand its customer service and support organization (internally or externally) and rapidly train these personnel, it may not be able to increase its sales, which could cause its business, financial condition and results of operations to be materially and adversely affected. If the combined company is unable to successfully develop, manage and expand its international operations, its business could be harmed. Zhone currently has international operations consisting of sales, technical support and marketing teams in various locations worldwide. Zhone and Sorrento expect that the combined company will continue expanding its international operations in the future. The successful management and expansion of the combined company’s international operations, including the development of sales and support channels, will require significant human and financial resources. Further, the combined company’s international operations may be subject to certain risks and challenges that could harm its operating results, many of which will be beyond its control, including: compliance with international technical and regulatory standards that differ from domestic standards; expenses associated with developing and customizing the combined company’s products for foreign countries; unexpected changes in regulatory requirements, taxes, trade laws and tariffs; fluctuations in currency exchange rates; longer sales cycles for its products; greater difficulty in accounts receivable collection and longer collection periods; difficulties and costs of staffing and managing foreign operations; reduced protection for intellectual property rights; potentially adverse tax consequences; and changes in a country’s or region’s political and economic conditions. Any of these factors could harm the combined company’s existing international operations and business or impair its ability to continue expanding into international markets. If the combined company is unable to obtain additional capital to fund its existing and future operations, it may be required to reduce the scope of its planned product development and marketing and sales efforts, which would harm the combined company’s business, financial condition and results of operations. The development and marketing of new products and the expansion of the combined company’s direct sales operation and associated support personnel requires a significant commitment of resources. The combined company may incur significant operating losses or expend significant amounts of capital if: the market for its products develops more slowly than anticipated; the combined company fails to establish market share or generate revenue at anticipated levels; its capital expenditure forecasts change or prove inaccurate; or the combined company fails to respond to unforeseen challenges or take advantage of unanticipated opportunities. As a result, the combined company may need to raise substantial additional capital. Additional capital, if required, may not be available on acceptable terms, or at all. If additional capital is raised through the issuance of debt securities, the terms of such debt could impose financial or other restrictions on the combined company’s operations. If the combined company is unable to obtain additional capital or is required to obtain additional capital on terms that are not favorable to the combined company, it may be required to reduce the scope of its planned product development and sales and marketing efforts, which would harm the combined company’s business, financial condition and results of operations. If the combined company fails to attract and retain qualified personnel, its business might be harmed. The combined company’s future success will depend in large part upon its ability to identify, attract and retain qualified individuals, particularly research and development and customer service engineers and sales and marketing personnel. The combined company’s products are generally of a highly technical nature, and therefore require a sophisticated sales effort targeted at several key people within each prospective customer’s organization. The combined company’s target customers will include large network service providers that require high levels of service and support from customer service engineers and sales and marketing personnel. Competition for these employees in the communications industry and in the San Francisco Bay Area in particular, as well as other areas in which the combined company will recruit, may be intense and the combined company may not be successful in attracting or retaining these personnel. If the combined company is not able to hire the kind and number of sales and marketing personnel and customer service engineers required by its product offerings and customers, it may not reach the level of sales necessary to achieve profitability or may be impaired from meeting existing customer demands, either of which could materially harm the combined company’s business. Risks Related to the Combined Company’s Product Manufacturing The combined company will rely on contract manufacturers for a significant portion of its manufacturing requirements Through the third quarter of 2003, Zhone utilized Solectron for the majority of its manufacturing requirements for all product lines. During the fourth quarter of 2003, Zhone transitioned the manufacturing of certain product lines to another contract manufacturer, and for another product line, transitioned the manufacturing process internally. Zhone continues to use Solectron to manufacture certain product lines under the terms of an agreement which expired in March 2004. While Zhone has become somewhat less dependent on Solectron for its manufacturing requirements, Zhone expects to continue to rely on contract manufacturers to fulfill a significant portion of its product manufacturing requirements. Zhone and Sorrento anticipate that the combined company will depend on independent contract manufacturers to manufacture the combined company’s products. Any future manufacturing disruption could impair the combined company’s ability to fulfill orders. The combined company’s future success will depend, in significant part, on its ability to have contract manufacturers produce the combined company’s products cost-effectively and in sufficient volumes. The combined company faces a number of risks associated with its dependence on third-party manufacturers, including: reduced control over delivery schedules; the potential lack of adequate capacity during periods of excess demand; manufacturing yields and costs; quality assurance; increases in prices; and the potential misappropriation of its intellectual property. Neither Zhone nor Sorrento currently has any long-term contracts or arrangements with any of their vendors that guarantee product availability, the continuation of particular payment terms or the extension of credit limits. Zhone and Sorrento have experienced in the past, and the combined company may experience in the future, problems with their contract manufacturers, such as inferior quality, insufficient quantities and late delivery of product. To date, these problems have not materially adversely affected Zhone or Sorrento. The combined company may not be able to obtain additional volume purchase or manufacturing arrangements on terms that it considers acceptable, if at all. If the combined company enters into a high-volume or long-term supply arrangement and subsequently decides that it cannot use the products or services provided for in the agreement, the combined company’s business will be harmed. Neither Zhone nor Sorrento can assure you that the combined company will be able to effectively manage its relationship with its contract manufacturers, or that these manufacturers will meet its future requirements for timely delivery of products of sufficient quality or quantity. Any of these difficulties could harm the combined company’s relationships with customers and cause it to lose orders. While Zhone’s existing contract with Solectron expired in March 2004, Zhone continues to use Solectron to manufacture products under the terms of the expired agreement. If Zhone is unable to continue to use Solectron for these manufacturing requirements, then it may be required to manufacture the products produced under this agreement internally or find another outside contract manufacturer. If Zhone fails to successfully transition manufacturing operations in-house or fails to locate and qualify suitable manufacturing candidates capable of satisfying its product specifications or quantity requirements, then it may experience product shortages and, as a result, be unable to fulfill customer orders accurately and timely which could negatively affect its customer relationships and operating results. Further, new third-party manufacturers may encounter difficulties in the manufacture of Zhone’s products resulting in product delivery delays. The combined company may depend on sole or limited source suppliers for several key components. If the combined company is unable to obtain these components on a timely basis, it will be unable to meet its customers’ product delivery requirements, which would harm its business. Zhone currently purchases, and the combined company may continue to purchase, several key components from single or limited sources pursuant to limited term supply contracts. If any of the combined company’s sole or limited source suppliers experiences capacity constraints, work stoppages or any other reduction or disruption in output, the combined company may be unable to meet its delivery schedule. The combined company’s suppliers may enter into exclusive arrangements with its competitors, be acquired by its competitors, stop selling their products or components to the combined company at commercially reasonable prices, refuse to sell their products or components to the combined company at any price or be unable to obtain or have difficulty obtaining components for their products from their suppliers. In these events, the combined company could be forced to commence a time consuming and difficult process of identifying and qualifying an alternative supplier of the key components. There is no guarantee that such a search would be successful. If the combined company does not receive critical components from its suppliers in a timely manner, it will be unable to meet its customers’ product delivery requirements. Any failure to meet a customer’s delivery requirements could harm the combined company’s reputation and decrease its sales, which would harm its business, financial condition and results of operations. THE MERGER   The following is a description of thediscussion contains material aspects of the merger. While we believe that the following description covers the material terms ofinformation pertaining to the merger and the merger agreement. This discussion does not purport to be complete and is qualified in its entirety by reference to the merger agreement, voting agreements and financial advisor opinions attached as annexes to this description may not contain all of the information that is important to you.document. We encourageurge you to read carefullyand review those documents as well as the discussion in this entire joint proxy statement/prospectus, including thedocument. The merger agreement attached tois included in this joint proxy statement/prospectus in order to provide you with information regarding its terms. It is not in any way intended to provide you with factual information about the current state of affairs of either Zhone or Paradyne. Such information can be found elsewhere in this joint proxy statement/prospectus (including the attached annexes) and in the other public filings that Zhone and Paradyne make with the SEC, which are available without charge at www.sec.gov. The merger agreement contains representations, warranties, covenants and other agreements, each as Annex A, for a more complete understandingof specific dates. These representations, warranties, covenants and other agreements are qualified by information contained in confidential disclosure memoranda that the parties exchanged in connection with the execution of the merger.merger agreement. The disclosure memoranda contain information that modifies, qualifies and creates exceptions to the representations, warranties, covenants and other agreements set forth in the merger agreement. Although some of the information contained in the disclosure memoranda may be non-public, Zhone and Paradyne do not believe that this information is required to be publicly-disclosed under the federal securities laws. Moreover, certain of these representations, warranties, covenants and/or other agreements may not be accurate or complete as of a specific date because they are subject to a contractual standard of materiality that may be different from the standard generally applied under the federal securities laws and/or were used for the purpose of allocating risk between Zhone and Paradyne rather than establishing matters as facts. Finally, information concerning the subject matter of these representations, warranties, covenants and other agreements may have changed since the date of the merger agreement, which may or may not be fully-reflected in Zhone’s and Paradyne’s public disclosures. Accordingly, you should not rely on these representations, warranties, covenants and other agreements as statements of fact.   General Structure   Each of the Zhone board of directors and the SorrentoParadyne board of directors by unanimous vote, has unanimously approved the merger agreement pursuant to which the businesses of Zhone and SorrentoParadyne will be combined in a stock-for-stock merger. Upon completion of the merger, SeleneParrot Acquisition Corp., a newly formed and wholly owned subsidiary of Zhone, will merge with and into Sorrento,Paradyne, with SorrentoParadyne surviving the merger and continuing as a wholly owned subsidiary of Zhone. Upon completion of the merger, SorrentoParadyne stockholders will be entitled to receive 0.9 of a share1.0972 shares of Zhone common stock for each share of SorrentoParadyne common stock owned immediately prior to the closing of the merger.   Upon completion of the merger, each outstanding option and warrant to purchase SorrentoParadyne common stock will be assumed by Zhone and will cease to represent a right to acquire shares of SorrentoParadyne common stock and will be converted into an option or warrant to purchase Zhone common stock. In each case, the number of shares of Zhone common stock subject to the new Zhone option or warrant will be equal to the number of shares of SorrentoParadyne common stock subject to the SorrentoParadyne option or warrant multiplied by the exchange ratio (which is 0.9)1.0972), and the exercise price per share of Zhone common stock will be equal to the existing per share exercise price of the SorrentoParadyne option or warrant divided by the exchange ratio. In addition, upon completion of the merger, each 7.5% senior convertible debenture due August 2, 2007 of Sorrento which is outstanding will be assumed by Zhone and thereafter continue to represent a debenture of Sorrento, except that the Sorrento debentures will be convertible into shares of Zhone common stock as adjusted to give effect to the merger.   Background of the Merger   The board of directors and senior management of Zhone regularly review the telecommunications industry environment, including the trend towards consolidation in the industry, and periodically discuss ways in which to enhance the company’s competitive position. Senior management of Zhone has, from time to time, considered the possibility of strategic acquisitions withand transactions involving a variety of telecommunications companies and the potential strategic fit with such companies based on their linessynergies with respect to products, technology, customer base, financial and other considerations. The board of directors and senior management of Paradyne have periodically examined Paradyne’s strategic alternatives and have, on occasion, explored the desirability of a potential business combination with a third party. While these explorations have included preliminary discussions over the last few years with third parties other than Zhone, none has ultimately led to a proposal that the Paradyne board of directors and management considered to be superior to the potential benefits to stockholders of Paradyne that they believed could be obtained by Paradyne continuing to operate as a stand-alone entity. On various occasions during the period from 2000 to 2004, Morteza Ejabat, Zhone’s technology, products,Chief Executive Officer, and researchSean Belanger, Paradyne’s Chief Executive Officer, discussed the possibility of a business combination or strategic alliance between the companies. These informal discussions occurred at industry conferences and development capabilities.in periodic telephone conversations.   In DecemberOctober 2003, representativesMr. Ejabat and Mr. Belanger met with Kirk Misaka, Zhone’s Chief Financial Officer, and Patrick Murphy, Paradyne’s Chief Financial Officer, to further explore the possibility of Needham & Company, Inc. contacted David Markowitz (Vice President of Marketing of Zhone) to discuss strategica business combination opportunities foror strategic alliance. On October 8, 2003, the parties entered into a confidentiality, non-use and non-disclosure agreement with the intention of sharing information about their respective companies. After a limited amount of due diligence, the companies decided not to pursue a potential transaction or alliance at that time. No material discussions between senior officers of Zhone withand Paradyne regarding a varietypossible business combination occurred until the spring of optical transport companies. During this period of time, representatives of Needham & Company and Mr. Markowitz continued to have informal discussions concerning possible acquisition targets, including Sorrento.2005.   On January 5, 2004, representatives of Needham & Company arranged for an introduction between Zhone and Sorrento via a conference call. On behalf of Zhone, Kirk Misaka (Chief Financial Officer) and Mr. Markowitz participated in the call, and on behalf of Sorrento, Joe Armstrong (Chief Financial Officer) and Mitch Truelock (Vice President of Corporate Development) participated. During this initial conversation, the senior management of Zhone and Sorrento explored the strategic benefits of a possible transaction between the two companies, but no definitive terms were discussed at the time. On January 6, 2004, Morteza Ejabat (Chief Executive Officer of Zhone) attended an investor conference in New York that was facilitated by Needham & Company. Following the conference,April 21, 2005, Mr. Ejabat and representativesMr. Misaka met over dinner with Mr. Belanger and Mr. Murphy. In the course of Needham & Company met to discuss whether Zhone had any interest in pursuingtheir conversation, the parties once again discussed the possibility of a potential business combination between Zhone and Sorrento. Paradyne and agreed to raise the possibility of a merger with their respective board of directors. On April 27, 2005, in anticipation of a meeting of the board of directors of Paradyne scheduled for the following day, Raymond James provided Paradyne with a preliminary financial analysis with respect to Zhone and a possible business combination with Zhone. At the April 28, 2005 meeting of the board of directors of Paradyne, Mr. Belanger and Mr. Murphy informed the Paradyne board of directors of Zhone’s preliminary interest in pursuing a possible business combination. Because Zhone had not made even a preliminary proposal, no further action was taken at that board meeting regarding such a transaction. At a regularly scheduled meeting of the board of directors of SorrentoZhone held on January 8, 2004, Phillip Arneson (Chief Executive OfficerMay 12, 2005, Mr. Ejabat provided general information regarding possible acquisition candidates including their market capitalization, revenues, net cash position and potential strategic fit. Paradyne was one of Sorrento)nine potential candidates. On May 19, 2005, representatives from Needham & Company, LLC sent Mr. Ejabat and Mr. ArmstrongMisaka a preliminary presentation of two potential acquisition opportunities. One of those candidates was Paradyne. Needham & Company’s presentation included a preliminary analysis of the benefits of merging the two companies. From June 7, 2005 to June 9, 2005, senior officers of Zhone and Paradyne attended an industry conference in Chicago. On June 7, 2005, Mr. Ejabat and Mr. Belanger met and discussed the steps that would be necessary to advance discussions regarding a potential business combination, including the negotiation of mutually satisfactory agreements and obtaining all necessary board authorizations and approvals. They both believed that the potential cost savings and synergies of a merger were much greater than in the past, particularly because of the success of Zhone’s broadband loop carrier technology enhancements. They also agreed that increased size and scale would enhance their ability to compete in the access equipment and telecommunications industries. On June 9, 2005, Mr. Ejabat and Mr. Misaka met with Mr. Belanger and Mr. Murphy and discussed the broad parameters of a potential merger proposal that Mr. Belanger and Mr. Murphy could discuss with the board of directors several alternative strategies, including a plan for continued organic growth that could require Sorrentoof Paradyne. During the period from June 10, 2005 to seek additional financing, as well as a plan to explore prospects for growth through a combination or partnership with a complementary company. The board of directors directed management of Sorrento to pursue discussions regarding a possible strategic partnership, merger or other business combination as well as additional capital raises. Commencing in January and continuing through April 2004, at the direction of the Sorrento board of directors, Mr. Arneson and Mr. Armstrong explored the interest of several companies, other than Zhone, in a strategic marketing arrangement, partnership or combination with Sorrento. Discussions included a transaction in which Sorrento would acquire a complementary privately-held company and a transaction in which Sorrento would acquire a foreign public company but result in a minority interest following the acquisition because of the size and market capitalization of the target. On January 15, 2004, Mr. Arneson, Mr. Armstrong and Mr. Truelock met with Mr. Misaka, Mr. Markowitz and Sam Madani (Vice President of Business Development of Zhone) at Zhone’s headquarters in Oakland, California. After Zhone and Sorrento executed a confidentiality, non-use and non-disclosure agreement, Zhone management began its due diligence investigation of Sorrento, including Sorrento’s business, finances, products and employees, and began providing similar due diligence information to representatives of Sorrento. On JanuaryJune 22, 2004, representatives of Needham & Company and Mr. Markowitz met to discuss other potential acquisition targets in the optical transport industry. Subsequently on that same day, representatives of Needham & Company and Mr. Markowitz contacted Mr. Ejabat by phone to discuss further actions concerning Sorrento. On January 26, 2004,2005, senior managementexecutives of Zhone and Sorrento met at Sorrento’s headquarters in San Diego, California to review Sorrento’s business in detail. Zhone representatives at those meetings included Mr. Ejabat, Jeanette Symons (Chief Technology Officer) and David Misunas (Vice President and General Manager). Sorrento representatives at those meetings included Mr. Arneson, Mr. Armstrong, Mr. Truelock and Subrata Datta (Chief Technology Officer). At the meetings, Zhone and Sorrento presented information on various topics, including business overview, operations, technology, products, sales, marketingParadyne exchanged certain product and financial outlook. Commencing in late January and continuing through the middle of March 2004, Zhone’s senior management and representatives of Needham & Company communicated with each other on several occasions. Mr. Ejabat, Mr. Misaka and Mr. Markowitz participated in these discussions on behalf of Zhone. These discussions initially involved Zhone’s investigation of the architecture and technical aspects of Sorrento’s products. Zhone also made further inquiries regarding Sorrento’s current financial and competitive position. On February 26, 2004, Mr. Ejabat and representatives of Needham & Company discussed the trend towards consolidation in the telecommunications industry, and in particular the impact that a recently announced business combination involving two peer companies would have on the valuations of both Zhone and Sorrento should they electinformation to engage in a similar transaction. The next day, on February 27, 2004, representatives of Needham & Company informed Mr. Armstrong that Sorrento’s discussions with Zhone had increased the interest of Zhone senior management in the strategic benefitsfacilitate an evaluation of a possible transaction with Sorrento, and that Zhone was prepared to engage in a discussion with respect to a business combination.by their respective boards. During this call,period, Mr. Armstrong agreedEjabat and Mr. Belanger discussed the broad terms of a transaction including a possible exchange ratio, potential cost savings and synergies and matters relating to retain Needhamthe management and integration of the two companies. From June 10, 2005 to June 15, 2005, Mr. Ejabat contacted each Zhone board member to discuss the potential terms of a merger with Paradyne. During this time, Mr. Misaka engaged Latham & CompanyWatkins LLP to advise Zhone on legal matters and to begin drafting the merger agreement and related documents. Between June 14, 2005 and June 17, 2005, Mr. Belanger and Mr. Murphy contacted each member of the board of directors of Paradyne and updated them on the status of discussions with Zhone regarding a possible business combination and the potential terms of a merger as Sorrento’s exclusive financial advisor in connectiondiscussed with Mr. Ejabat. Each director confirmed his support for continuing discussions with Zhone regarding a merger with a potential transaction with Zhone. On March 11, 2004, a Zhoneparticular focus on performing due diligence team conducted another serieson Zhone’s technology and products, including its next-generation broadband loop carrier technology, and Zhone’s business, operations, financial condition and results of meetings with Sorrento representatives at Sorrento’s headquarters in San Diego, California to continue Zhone’s due diligence investigation regarding Sorrento’s organizational structure, finances, revenue outlook, sales pipeline, customer relationships, manufacturingoperations, including cash and procurement. Zhone representatives at those meetings included Mr. Ejabat, Mr. Misakacapital resources. Certain directors and Mr. Misunas. Sorrento representatives at those meetings includedBelanger and Mr. Arneson, Mr. Armstrong, Mr. Truelock, Christopher Stecko (Vice President of North American Sales) and Marc Thurman (Vice President of Operations). Representatives of Needham & Company, on behalf of Sorrento,Murphy were also present. In early March 2004, Zhone contacted Thomas Weisel Partners LLCrequested to discuss engaging it as Zhone’s financial advisorcontact companies that they believed might be interested in connection with a potential business combination involving Sorrento. Zhone consultedor similar transaction with Thomas Weisel Partners throughoutParadyne to see whether they would propose a transaction that the due diligence and negotiation process, and formally engaged Thomas Weisel Partners in April 2004. Commencing on March 12, 2004,Paradyne board believed would provide superior benefits to the parties engaged in intensive negotiations surrounding the framework and economicsstockholders of a proposed transaction between Zhone and Sorrento. Between March 12, 2004 and March 17, 2004, Mr. Misaka, Mr. Armstrong and representatives of Needham & Company had a number of conversations regarding valuation proposals and the amount of the premium to be paid to Sorrento stockholders above Sorrento’s trading price on the Nasdaq National Market. At the conclusion of these discussions, Mr. Misaka, on behalf of Zhone, proposed a stock-for-stock merger in which Sorrento would become a wholly owned subsidiary of Zhone upon completion of the merger.Paradyne.   On March 22, 2004, representativesand after June 15, 2005, in accordance with his instructions from the directors of Needham & Company provided Sorrento’s senior management withParadyne, Mr. Belanger and certain other directors began contacting parties that Paradyne believed might be interested in a potential business combination or similar transaction involving Paradyne. Several of those parties responded that they were not interested in or could not pursue such a transaction in the foreseeable future. Only one of such parties indicated an analysisinterest in pursuing a transaction, but did not make a proposal that the Paradyne board of directors believed would lead to a transaction that would provide benefits to the stockholders of Paradyne that were superior to the benefits of the financial implications of the terms proposed bymerger with Zhone. Between March 23, 2004 and March 26, 2004, Nevertheless, Mr. Misaka and representatives of Needham & Company hadBelanger was instructed to maintain a number of telephone conversations and other communicationsdialogue with that party in which they discussed the terms of Zhone’san effort to encourage a better proposal. In particular, Needham & Company, on behalf of Sorrento, expressed Sorrento’s position that the economics of Zhone’s proposal did not provide adequate consideration to Sorrento stockholders. In response to Zhone’s initial proposal, Needham & Company tendered a counterproposal for a strategic transaction that reflected a greater valuation of Sorrento’s shares. Although there was no agreement on the key terms, such as the exchange ratio, the parties continued to engage in further negotiations.   On March 30, 2004,June 22, 2005, the Zhone board of directors heldconvened a telephonicspecial meeting at which Zhone’s senior management provideddiscussed the board of directors withpotential product, distribution and financial synergies between the history oftwo companies and outlined the discussions with Sorrento, the results of due diligence investigations, thepossible terms of the transaction proposed by each of the companies and the status of negotiations surrounding a possible acquisition of Sorrento by Zhone.transaction. During and after the management presentations, the board of directors asked a number of questions and discussions ensued. After actively discussing the potential SorrentoParadyne transaction at length, the ZhoneZhone’s board of directors authorized managementMr. Ejabat to continue discussionsengage financial advisors and to proceed to negotiate the terms of a merger along the lines discussed with Sorrento.the board.   Throughout March and April 2004, Mr. Ejabat and Mr. Misaka hadAt a seriesmeeting of periodic conversations with members of the Zhone board of directors of Paradyne on June 23, 2005, Mr. Belanger and Mr. Murphy provided the board with an update with respect to apprise themthe status of eventsdiscussions with Zhone, and Mr. Belanger and other board members provided an update with respect to their contacts with other parties regarding a possible alternative transaction. In addition, Mr. Belanger and Mr. Murphy advised the board that in the course of discussions with Zhone regarding management transition issues, they expected to engage in negotiations regarding severance arrangements and possible employment by Zhone to facilitate the resolution of management transition and operational integration issues after the merger. Mr. Belanger and Mr. Murphy also advised the board that in the event Zhone determined to divest certain businesses or product lines of Paradyne following the consummation of the merger, Mr. Belanger and Mr. Murphy might be interested in proposing to acquire one or more of such businesses or product lines. Raymond James, Paradyne’s financial advisor, provided the board with a preliminary financial overview of Paradyne, Zhone and a potential merger of Paradyne with Zhone. Mr. Belanger and Mr. Murphy and representatives of Raymond James then provided the board with answers to questions regarding available alternatives, the status of discussions with Zhone and the likely financial terms of a merger with Zhone. Following a detailed discussion of the updated information provided by Mr. Belanger and Mr. Murphy and the preliminary analyses presented by Raymond James and their responses to the directors’ questions, the board (with Mr. Belanger abstaining) authorized Mr. Belanger and Mr. Murphy to engage financial and legal advisors and to seek their views regardingnegotiate the ongoing discussions with Sorrento. Despite lack of agreement on significant terms of a possible transaction,merger with Zhone for review by the board of directors of Paradyne. Because of the potential for an appearance of a conflict of interest arising out of Mr. Belanger’s and Mr. Murphy’s separate negotiation of employment or consulting agreements with Zhone and changes to their severance and other benefit entitlements and their interest in potentially purchasing certain assets if they were divested by Zhone, Scott Chandler, a member of the board of directors of Paradyne, agreed to take a more active and direct role on April 5, 2004, Zhone proposed thatbehalf of the parties proceed toboard in supervising the negotiation of definitive agreements without first resolving disagreements onthe proposed terms of the merger. Subsequently, Thomas Epley, another member of the board of directors of Paradyne, agreed to assist Mr. Chandler and both were actively involved in due diligence and subsequent decisions regarding the negotiation of the terms of the proposed merger. On June 24, 2005, Zhone distributed to Paradyne and its representatives an initial draft of the merger proposals. On April 6, 2004,agreement prepared by Zhone’s outside counsel, Latham & Watkins LLP, distributedLLP. On June 28, 2005, the parties signed an amendment to Sorrentotheir mutual confidentiality agreement adding a termination date of June 28, 2008 and its representativesprohibiting both parties from, among other things, making any offer or proposal to acquire or otherwise effect a first draftchange in control of the mergerother party for a period of two years unless invited in writing by the board of directors of the other party. Also on June 28, 2005, Zhone entered into an agreement with Needham & Company, pursuant to which includedNeedham & Company was engaged to render an opinion with respect to the fairness from a tentatively proposedfinancial point of view of the exchange ratio of 1.0 share of Zhone common stock for each share of Sorrento common stock.in the potential merger with Paradyne.   From April 6, 2004The parties continued to April 22, 2004, Sorrento, Zhone and their respective legal and financial advisors engaged in extensive negotiations regarding the terms of the definitive merger agreement and the ancillary agreements,conduct due diligence and exchanged numerous drafts of these agreements. These discussions included a series of conversations between Zhone’sinformation in response to requests for specific information covering, among other things, products and engineering, manufacturing and operations, finance and human resource matters. On June 28 and 29, 2005, senior management Sorrento’s senior management,of Zhone and representatives of Needham & Company Thomas Weisel Partners, Latham & Watkins,met with senior management of Paradyne and Stradling Yocca Carlson & Rauth (outside counsel to Sorrento), relating to, among other things, retentionrepresentatives of certain key employees, severance payments to these key employees and the final exchange ratio. During this same time period, Sorrento, Zhone and their respective legal and financial advisors continuedRaymond James in Florida to conduct due diligence on Paradyne. On June 30 and exchange extensive information concerning each other’s business, financialJuly 1, 2005, senior management of Paradyne and legal affairs. The due diligence process also included numerous meetings and telephone conversations regarding the strengthrepresentatives of Sorrento’s customer relationships, the comparisonRaymond James met with senior management of Sorrento’s actual revenue to projected revenue, the treatment of Sorrento’s outstanding warrants and the resolution of Sorrento’s outstanding liabilities related to its employee benefit plans. On April 9, 2004, a special telephonic meeting of the Sorrento board of directors was held to discuss the results of due diligence conducted by Sorrento on Zhone and the status of the merger agreement negotiations with Zhone. Mr. Arneson also updated the board of directors on the status of ongoing discussions regarding a possible strategic partnership, merger or other business combination between Sorrento and various third parties. The parties and their legal and financial advisors met in San Diego on April 12, 2004. Present in person were Mr. Arneson, Mr. Armstrong, and representatives of Needham & Company Thomas Weisel Partners, Latham & Watkins and Stradling Yocca Carlson & Rauth.in Oakland, California to conduct due diligence on Zhone. Mr. MisakaChandler and Mr. Misunas attended the meeting via teleconference. DueEpley participated in substantial portions of this due diligence, continued as the partiesparticularly relating to Zhone’s technology, products, financial condition and their legal and financial advisors continued to discuss the terms of the definitive merger agreement and other related documents.customers.   On April 14, 2004, the parties convenedAt a conference call which included representativesmeeting of Zhone, Sorrento, Needham & Company and Thomas Weisel Partners to permit each of Zhone and Sorrento to perform supplemental due diligence investigations of the other party. Later that evening, Mr. Ejabat and Mr. Misaka had a telephone conversation with Mr. Arneson to discuss issues related to the retention of certain key employees and the payment of severance benefits to these key employees. The following day, on April 15, 2004, a representative of Needham & Company, on behalf of Sorrento, contacted two of Zhone’s directors, James Coulter and C. Richard Kramlich, as part of Sorrento’s due diligence review of Zhone. Later that day, Zhone’s senior management, Sorrento’s senior management and their respective legal and financial advisors continued to negotiate the remaining outstanding terms of the transaction. During the morning of April 16, 2004, Sorrento’s board of directors held a telephonic meeting attended by Sorrento’s senior management, K.C. Schaaf of Stradling Yocca Carlson & Rauth, and representatives of Needham & Company. Mr. Arneson and Mr. Schaaf summarized for the board of directors of Paradyne on July 3, 2005, the board was advised by representatives of Alston & Bird, counsel to Paradyne, of its legal duties and obligations in connection with its evaluation of a possible merger with Zhone. Although already generally known by the board, each director and Mr. Murphy proceeded to specifically disclose to the board any past, present or expected future business and financial relationships with Zhone and its principal stockholders. Two directors and Mr. Murphy disclosed investments in private equity funds managed by entities affiliated or associated with the Texas Pacific Group, including the private equity fund that beneficially owns approximately 9.5% of the outstanding common stock of Zhone. In addition, three directors and Mr. Murphy disclosed prior business relationships with the Texas Pacific Group, including relationships that arose in connection with its substantial investment in Paradyne in 1996, all of which it has subsequently sold. It further was disclosed that none of those business relationships was ongoing or had been active for several years. Also, one director disclosed that he indirectly had an interest in a relatively small number of shares of Zhone common stock owned by another private equity fund in which he had an investment. Following discussion of such disclosures, the board of directors of Paradyne concluded that none of such business and financial relationships was material financially to the directors involved and thus did not present a material conflict of interest that would impair the ability of the directors and officers of Paradyne from negotiating and approving a transaction with Zhone in the best interests of the stockholders of Paradyne.Mr. Belanger and Mr. Murphy proceeded to update the board with respect to the status of negotiations regarding the proposed merger including a proposed exchange ratio based upon a 50% premium to the trailing 45-day average closing price of Paradyne common stock as of June 23, 2005, though it was noted that given recent increases in the trading price of Zhone common stock, Zhone might try to renegotiate the proposed exchange ratio. Mr. Belanger and Mr. Murphy then updated the board on the results of their due diligence investigation of Zhone and their plans to conduct additional due diligence including calls with existing customers of Zhone. Mr. Chandler and Mr. Epley then reported in greater detail on the results of the technical due diligence on Zhone’s products in which they participated, and representatives of Alston & Bird reported on the status of the negotiation of the merger agreement and the significant outstanding issues. Mr. Murphy then reported his preliminary views with respect to whether Paradyne would be able to satisfy the adjusted cash balance closing condition proposed by Zhone. Mr. Chandler and Mr. Epley then reported that on behalf of the board they had retained an employee benefits consultant to assist them in evaluating the proposed amendments to the severance and other benefit entitlements of Mr. Belanger and Mr. Murphy and reviewing their proposed consulting and restrictive covenant agreements with Zhone. On July 5 and 6, 2005, Zhone held a series of conference calls with members of its board of directors to discuss the status of negotiations including the key terms of the proposed form of merger agreement, planned product and customer migration, market synergies, cost reduction plan and other financial analysis. During these calls, the directors continued to emphasize their desire that senior management attempt to improve the exchange ratio in light of the large premium being offered. Commencing on July 5, 2005, and particularly in light of recent increases in the trading price of Zhone common stock, Zhone pressed Mr. Belanger, Mr. Chandler and Mr. Epley to reduce the proposed exchange ratio. As a result of these discussions, they agreed to present a revised exchange ratio of 1.075 to their respective boards of directors. At a meeting of the board of directors of Paradyne on July 6, 2005, Mr. Belanger reported on the results of his due diligence conversations with Zhone customers, Mr. Murphy reported with respect to Zhone’s current and projected cash positions. Alston & Bird updated the board with respect to the status of the negotiation of the proposed merger agreement. Mr. Schaaf then discussed withMurphy also updated the board with respect to his views on the ability of Paradyne to meet the adjusted cash balance closing condition insisted upon by Zhone. In addition, Mr. Chandler and Mr. Epley reported on the advice received from the employee benefits consultant that they had retained on behalf of the board and their conversations with individual directors its fiduciary dutiesover the course of the preceding two days. After a thorough discussion among the directors and additional discussions with Mr. Belanger and Mr. Murphy regarding their proposed contracts and amendments, Mr. Chandler and Mr. Epley were authorized to contact Mr. Ejabat to communicate the board’s views regarding Mr. Belanger’s and Mr. Murphy’s proposed compensation arrangements. In conversations later that evening on July 6, 2005, Mr. Chandler and Mr. Epley attempted to negotiate an increase in connection with the proposed merger. Representativesexchange ratio to offset a portion of Needham & Company then presented their preliminary financial analysisthe value of the proposed transaction. After discussion among membersconsulting and restrictive covenant agreements with Mr. Belanger and Mr. Murphy. In response, Mr. Ejabat explained that, from Zhone’s perspective, Mr. Belanger’s and Mr. Murphy’s assistance was critical to the post-merger integration of the board of directorstwo companies and Sorrento’s financial and legal advisors, the board of directors authorized management to continue negotiationsability of the definitive agreement with Zhone. Zhone again inquired ascombined company to Sorrento’s customers as part ofdeliver value to its due diligence efforts. In response, on April 17, 2007,stockholders. Mr. Arneson, Mr. ArmstrongChandler and Mr. Truelock presentedEpley reported the results of this conversation to Mr. Belanger and Mr. Murphy, including Mr. Ejabat’s unwillingness to discuss an increase in the exchange ratio, and that negotiations were at an impasse. At this stage, Mr. Belanger and Mr. Murphy offered to propose a reduction in the value of their consulting and restrictive covenant agreements with Zhone in exchange for an increase in the exchange ratio and were authorized to propose this adjustment to Mr. Ejabat. As a result of their discussion, Mr. Ejabat and Mr. Misaka with additional information about Sorrento’s customers. The next day, on April 18, 2004,Belanger agreed to reduce the amounts payable to Mr. EjabatBelanger and Mr. Misaka contacted someMurphy under their proposed consulting and restrictive covenant agreements with Zhone and present a revised exchange ratio of the members1.0972 to their company’s respective boards of the Zhone board of directors to apprise them of Sorrento’s customer relationships, and to obtain the views of these directors regarding the ongoing discussions with Sorrento. On April 19, 2004, Mr. Misaka indicated to Needham & Company that Zhone would need to perform additional due diligence about Sorrento’s customers by arranging to have Mr. Ejabat speak to Sorrento’s major customers.directors.   On April 19, 2004,the morning of July 7, 2005, the Zhone board of directors held a telephonic meeting to review the status of negotiations with Sorrento, including the material terms of the proposed definitive agreements and material open issues. The board of directors also reviewed and discussed the status of Zhone’s due diligence investigation of Sorrento’s business, financial and legal affairs. At these meetings, representatives of Thomas Weisel Partners reviewed with the Zhone board of directors preliminary financial analyses prepared in connection with the proposed transaction. After discussion among the members of the board of directors and the legal and financial advisors, the Zhone board of directors authorized management to continue negotiations of the definitive agreements with Sorrento. To provide Zhone with additional comfort on due diligence and in accordance with Zhone’s earlier request, Sorrento made arrangements for Mr. Ejabat to communicate directly with Sorrento’s major customers on April 19, 2004 and April 20, 2004. On April 20, 2004 and in the morning of April 21, 2004, Mr. Misaka and Mr. Ejabat had a series of conversations with Mr. Arneson, Mr. Armstrong, Mr. Truelock and, with respect to some of the conversations, representatives of Needham & Company, to discuss Sorrento’s outstanding and contingent liabilities, as well as the impact that these liabilities would have upon the exchange ratio. As a result of Zhone’s due diligence concerns and after extensive discussions, the parties mutually agreed upon an exchange ratio of 0.9 of a share of Zhone common stock for each share of Sorrento common stock, which reflected a premium of 28.8% per share of Sorrento common stock based upon the closing price of Sorrento common stock on April 20, 2004. In addition, Zhone required as conditions to its obligation to close the merger that Sorrento must meet a minimum closing cash requirement of $5 million and secure the election of the holders of at least 75% of its outstanding PIPE warrants to receive a warrant to purchase Zhone common stock in the merger. On April 21, 2004, the Zhone board of directors held aspecial telephonic meeting attended by Zhone’s senior management and financial advisors.representatives of Needham & Company. Prior to the meeting, the board of directors received a package of information which included drafts of the proposed definitive merger agreement and related documents. Zhone’s senior management reviewed with the Zhone board of directors information regarding Zhone and Sorrento,Paradyne, and provided an update on its business, legal and financial due diligence investigations of Sorrento. The Zhone board of directors discussed the interests of certain of Zhone’s directors and executive officers in various New Enterprise Associates entities that hold Sorrento warrants and Zhone common stock.Paradyne. Senior management also made presentations on the outcome of final negotiations of the terms of the proposed definitive agreements. Thomas Weisel Partners providedRepresentatives of Needham & Company reviewed with the Zhone board of directors with a detailedNeedham & Company’s financial analysis of the proposed transaction.merger. Representatives of Thomas Weisel PartnersNeedham & Company also delivered to the Zhone board of directors Thomas Weisel Partners’Needham & Company’s oral opinion, subsequently confirmed in writing, that, as of April 21, 2004,July 7, 2005, and based upon and subject to the various considerations and assumptions described in the written opinion, the considerationexchange ratio pursuant to be issued in the merger agreement was fair to Zhone from a financial point of view, to Zhone.view. Following extensive discussions and consideration, the Zhone board of directors, by unanimous vote, (1) determined that the terms of the merger agreement and the transactions contemplated by the merger agreement were fair,are advisable, and in the best interests of Zhone and its stockholders, (2) approved the merger agreement and the transactions contemplated byadopted the merger agreement, and (3) adopted resolutions recommending that Zhone’s stockholders approve the issuance of Zhone common stock pursuant to be issued in the merger.merger agreement.   Also on April 21, 2004,the morning of July 7, 2005, the board of directors of Paradyne held a special telephonic meeting ofattended by Paradyne’s senior management and outside legal and financial advisors. Prior to the Sorrentomeeting, the board of directors was held to discuss the merger. All membersreceived a package of information which included drafts of the Sorrentoproposed definitive merger agreement and related documents. Paradyne’s senior management and outside legal counsel reviewed with the board information regarding Zhone and Paradyne, and provided an update on its business, legal and financial due diligence investigations of directors were present.Zhone. Mr. Arneson presented a detailed reviewChandler, Mr. Epley, Mr. Belanger and Mr. Murphy reported on the results of the renegotiation of Mr. Belanger’s and Mr. Murphy’s consulting and restrictive covenant agreements with Zhone and the corresponding increase in the proposed exchange ratio. Mr. Belanger, Mr. Murphy and representatives of Alston & Bird then reported on the outcome of the final negotiations of the terms of the proposed merger with Zhone. Representativesdefinitive agreements followed by a presentation by Raymond James of Needham & Company reviewed with the Sorrento board of directors itsa detailed financial analysis of the proposed merger. Needham & Company then deliveredtransaction. Following a thorough discussion of each of those topics, Mr. Belanger and Mr. Epley updated the board regarding further contacts with the third party that previously indicated a possible interest in a potential alternative transaction involving Paradyne. Based on the preliminary indications and further information they had received from the third party and the advice of Raymond James, the Paradyne board concluded that the likelihood of the third party proposing a transaction that the board believed would be superior to the Sorrentoproposed merger with Zhone seemed remote. At that time, the directors determined to adjourn their meeting until later that afternoon, at which time the directors believed any and all remaining issues and procedures, including a review of the disclosure memoranda to be exchanged by the companies and other outstanding items, would be resolved and completed. In the afternoon on July 7, 2005, the special telephonic meeting of the board of directors itsof Paradyne was reconvened and the board received confirmation that all remaining issues had been resolved. Representatives of Raymond James then rendered their oral opinion to the board of directors of Paradyne, subsequently confirmed in writing, that as of April 21, 2004,July 7, 2005, and based upon and subject to the various considerations and assumptions described in thetheir written opinion, the consideration provided for in the merger of 1.0972 shares of Zhone common stock in exchange ratiofor each share of Paradyne common stock was fair, from a financial point of view, to the holders of SorrentoParadyne common stock. Following this presentation, a discussion ensued concerningAt that time, the terms of the merger as set forth in the final drafts of the Agreement and Plan of Merger and related documentation presented to the Sorrento board of directors. The SorrentoParadyne board of directors, considered and discussed, among other things, strategic and financial aspects of the proposed combination, and financial and legal due diligence performed by members of Sorrento’s senior management with respect to Zhone, and the prospects of several alternative transactions. The Sorrento board of directors unanimously approved the merger, the merger agreement and unanimously recommendedunanimous vote, (1) determined that Sorrento’s stockholders adopt the merger agreement. The Sorrento board of directors then authorized Mr. Arneson and Mr. Armstrong to finalize documentation and take reasonably necessary or appropriate actions to complete the merger. Following approval of each board of directors, from April 21, 2004 to April 22, 2004, the parties and their counsel continued to finalize and document the legal terms of the definitive agreements for the transaction, and subsequently the merger agreement and the voting agreementstransactions contemplated by the merger agreement are advisable, (2) approved and adopted the merger agreement, and (3) resolved to recommend that Paradyne’s stockholders adopt the merger agreement. Following the approval of each company’s board of directors, the merger agreement and related documents were executed by the parties at the end of day on April 22, 2004.July 7, 2005 in accordance with their respective board’s authorization. The transaction was announced in a joint press release early in the afternoonmorning of April 22, 2004.July 8, 2005.   Zhone’s Reasons for the Merger—ZhoneMerger   In reachingthe course of making its determinationdecision to approve the merger, and to recommend that the Zhone stockholders vote to approve the issuance of shares of Zhone common stock pursuant to the terms of the merger agreement, the Zhone board of directors identified several potentialconsulted with Zhone management, as well as its legal counsel, Latham & Watkins, and its financial advisor, Needham & Company. Among the matters considered by the Zhone board of directors in its deliberations were the following material factors: the strategic benefits of the merger, for Zhone and its stockholders. These potential benefits include the following: including:   the expectation that the strategic fit between Zhone and SorrentoParadyne would provide the opportunity to create a leader in next-generation access, metro and core optical equipment; a combined customer base that would include some of the world’s largest telecommunications carriers and combined product lines that would bring each company’s current customers advanced new access and transport offerings bridging the gap between existing copper-based loops and fiber optics;communications solutions;   the expectation that the complementary nature of the technologies and products of Zhone and SorrentoParadyne would enhance the combined company’s ability to be better positioned to service its customers; the belief that an improved platform for future growth provides the ability to acquire customers interested in a more comprehensive solution, which is made possible by the merger and provide an integrated solution;the expanded product portfolio;   the increased financial strength resulting from a combinationbelief that the complementary nature of the two companies;respective customer bases and distribution channels of Zhone and Paradyne could result in opportunities to obtain synergies as products are cross-marketed and distributed over broader customer bases; the belief that the customers of Zhone and Paradyne operate principally in different geographic markets, which the Zhone board of directors believed presented a desirable strategic opportunity for expansion of its existing presence and market share;   the expectation that the combined company would have the opportunity to realize significant cost savings from the reduction of operating expenses derived from the elimination of redundant infrastructures and the ability to take advantage of economies of scale; and   the belief that an improved platform for future growth providesincreased financial strength resulting from a combination of the ability to acquire customers interested in a more comprehensive solution, which is made possible by the merger and the expanded product portfolio.two companies;   In reaching its decision to approve the merger agreement and the share issuance, the Zhone board of directors consulted with Zhone’s management, Zhone’s legal counsel regarding the legalattractive financial terms of the merger and Zhone’s financial advisors regarding the financial aspects of the merger and the fairness, from a financial point of view, of the exchange ratio to Zhone. The factors that the Zhone board of directors considered in its deliberations included the following: the strategic and other expected benefits of the merger described above;light of:   information concerning Zhone’s and presentations by Zhone management and legal and financial advisors concerning the business, technology, products, operations, financial condition, organizational structure and competitive position of Zhone and Sorrento, on both an historical and prospective basis; Zhone management’s view of the business and prospects of Zhone and Sorrento as stand-alone companies and as a combined company; Zhone management’s view of theParadyne’s respective businesses, financial condition, results of operations, earnings, technology positions, managements, competitive positions and businesses ofprospects on a stand-alone basis and forecasted combined basis, which indicated that combining Zhone and Sorrento beforeParadyne would be beneficial to stockholders of the combined company because the combined company would be better positioned to be successful over the long term than either company would be on a stand-alone basis; current financial market conditions, including the relative valuations of telecommunications companies and after giving effect to the merger;continuing consolidation in the telecommunications industry; and   the exchange ratio negotiated with SorrentoParadyne and the relative valuation of SorrentoParadyne considering recent and historical market prices of Zhone common stock, as well as how this comparedcompares to prices in several recent comparable transactions involving communications companies; current financial market conditions and historical market prices, volatility and trading information with respectan assessment of alternatives to the common stockmerger, including other possible acquisition candidates and the prospects of Zhone and the common stock of Sorrento; other strategic alternatives for Zhone, including the potential to enter into strategic relationships with third parties or acquire or combine with third parties; the effect of the merger on Zhone’s customers, suppliers and employees;as a stand-alone company;   the belief that the terms of the merger agreement, including the parties’ representations, warranties and covenants, as qualified by the confidential disclosure memoranda, and the conditions to their respective obligations, are reasonable;reasonable for a transaction of this nature; and   the presentation by Thomas Weisel Partners LLCNeedham & Company and its oral opinion presented on April 21, 2004,July 7, 2005, subsequently confirmed by delivery of its written opinion dated as of April 21, 2004,July 7, 2005, to the effect that, as of such date, and based upon and subject to the factorsvarious considerations and assumptions set forth therein,described in its written opinion, the exchange ratio pursuant to the merger agreement was fair to Zhone from a financial point of view to Zhone.view.   The Zhone board of directors also identified and considered a variety of potentially negative factors in its deliberations concerning the merger, agreement, including the following:   the dilution that would result from the issuance of shares of Zhone common stock as merger consideration; the risk that, because the exchange ratio under the merger agreement would not be adjusted for changes in the market price of Zhone common stock or Paradyne common stock, the per share value of the consideration to be paid to Paradyne stockholders on completion of the merger could be significantly more than the per share value of the consideration immediately prior to the announcement of the proposed merger; the risk that the potential benefits sought in the merger, including the synergies and cost-saving opportunities, may not be fully realized;   the risk that integration of the businesses, productsoperations and personnelworkforce of the two companies may not be successfully implemented in a timely and efficient manner, or at all;   the possibility that the merger might not be consummated; the riskconsummated, or that as a result of the announcement of the merger, Zhone’s existing relationships with suppliers and customers couldconsummation might be impaired and Zhone might have increased difficulty attracting new customers;unduly delayed;   the possibility that the market price of Zhone common stock could decrease sharply if the merger was not viewed favorably by stockholders, financial analysts and the press, generally;   the significant costs incurred by Zhone or the combined company as a result ofin connection with the merger, including costs of integrating the businesses of Zhone and Paradyne, the transaction expenses arising from the merger; merger and the diversion of management’s timecosts related to the consulting and attention from Zhone’s existing business; restrictive covenant agreements entered into concurrently with the perception of Zhone as a viable, independent company may be damaged;merger;   the risk of the potential loss of key employees;personnel; and   variousthe other risks associated withdescribed under the merger and the businesses of Zhone, Sorrento and the combined company described in this joint proxy statement/prospectus undercaption “Risk Factors” and in the corresponding section in documents incorporated by reference into this joint proxy statement/prospectus.beginning on page 16.   After due consideration, the Zhone board of directors concluded however, that, on balance, the overall the potential benefits of the merger to Zhone and its stockholders of the merger outweighed the risksnegative factors associated with the merger.   The above discussion of the factors considered by the Zhone board of directors is not intended to be exhaustive, but is believed to set forth the principal factors considered by the Zhone board of directors. The Zhone board of directors collectively reached the conclusion, by unanimous vote, to approve the merger agreement in light of the various factors described above and other factors that each member of the Zhone board of directors felt were appropriate. In view of the wide variety of factors considered by the Zhone board of directors in connection with its evaluation of the merger and the complexity of these matters, the Zhone board of directors did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision. Rather, the Zhone board of directors made its recommendation based on the totality of information presented to, and the investigation conducted by, it. In considering the factors discussed above, individual directors may have given different weights to different factors. Recommendation of the Zhone Board of Directors After careful consideration, the Zhone board of directors, by unanimous vote, has determined that the merger agreement and the transactions contemplated by the merger agreement are advisable. ACCORDINGLY, THE ZHONE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ZHONE STOCKHOLDERS VOTE “FOR” THE PROPOSAL TO ISSUE ZHONE COMMON STOCK PURSUANT TO THE MERGER AGREEMENT. Paradyne’s Reasons for the Merger In the course of making its decision to approve the merger, the Paradyne board of directors consulted with Paradyne management, as well as its legal counsel, Alston & Bird, and its financial advisor, Raymond James. Among the matters considered by the Paradyne board of directors in its deliberations were the following material factors: its understanding of Paradyne’s business, operations, financial condition, earnings and prospects on a stand-alone basis, in light of relevant factors, including the fact that Paradyne is undertaking considerable effort and expense to develop its next generation broadband loop carrier product while Zhone already has developed and is ready to market a next generation broadband loop carrier product; its understanding of Zhone’s business, operations, financial condition, earnings and prospects on a stand-alone basis and a forecasted combined basis with Paradyne; its belief that Zhone had well-designed access equipment and related products, utilizing a common design methodology/platform that facilitated increased software and hardware functionality and enhancements; its understanding of the current and prospective business environment in which Paradyne and Zhone operate, including international, national and local economic conditions, the competitive environment in the access equipment products industry generally, the technological trends in the access equipment products industry, and the likely effect of these factors on the combined company or, in the alternative, on Paradyne on a stand-alone basis; the Paradyne board of directors considered in particular that the competitive nature of the access equipment products industry made it more likely that Paradyne’s prospects for growth would be enhanced if its businesses were combined with Zhone’s to create a more diversified, well-capitalized company; the anticipated strategic fit between Zhone and Paradyne, which the Paradyne board of directors believed will provide the combined company with significantly greater capabilities than either company has, or could develop, on its own, including: the complementary nature of the combined company’s access equipment products; and the complementary nature of Paradyne’s and Zhone’s established customers across different geographic regions; the significant cost savings and synergies that the Paradyne board of directors believed could result from the transaction, including: anticipated cost savings from the elimination of duplicate expenses of compliance with the Sarbanes-Oxley Act and various general and administrative corporate functions and the rationalization of the combined company’s sales, marketing, research and development and manufacturing operations; and potential annual revenue synergies, as the combined company rolls out expanded product offerings to existing and new customers; the financial terms of the transaction, including the relative historical trading prices of Paradyne common stock and Zhone common stock, the fixed exchange ratio of 1.0972 shares of Zhone common stock for each share of Paradyne common stock; in particular, the Paradyne board of directors noted that the exchange ratio offered a substantial premium to Paradyne stockholders based on the trading prices of the companies’ common stock prior to the announcement of the signing of the merger agreement, and that consideration in the form of Zhone common stock offered Paradyne stockholders the ability to become stockholders of Zhone and participate in the benefit of the significant cost savings and synergies that the Paradyne board of directors believed could result from the merger; the fact that Paradyne had contacted several parties that it thought might be interested in discussing a business combination or similar transaction with Paradyne and none of such parties had indicated an interest in pursuing a transaction that the Paradyne board of directors believed would provide benefits to the stockholders of Paradyne that were superior to the benefits of the merger with Zhone; the fact that, based on the closing price of Zhone common stock on July 6, 2005, the last trading day before the meeting of the Paradyne board of directors at which they approved and adopted the merger agreement, the per share merger consideration to be received in the merger by holders of Paradyne common stock was valued at $3.58, representing premiums of 101%, 76% and 97% over the closing share price of Paradyne common stock 1-trading day, 10-trading days, and 45-trading days prior to July 6, 2005, respectively; the financial analyses of Raymond James, Paradyne’s financial advisor, and the oral and written opinions dated July 7, 2005 of Raymond James that, as of such date and subject to the matters described in its written opinion, the consideration was fair, from a financial point of view, to holders of Paradyne common stock (the opinions are discussed further below under “The Merger–Opinion of Raymond James”); in considering the foregoing opinions the Paradyne board of directors was aware that Paradyne had agreed to pay Raymond James an opinion fee upon the delivery of its opinion and a larger transaction fee upon the closing of the merger (the opinion fee and the transaction fee are discussed further below under “The Merger–Opinion of Raymond James”); the expectation that, based on the financial analysis presented by Raymond James prior to their meeting on July 7, 2005, which utilized financial information and assumptions provided by Paradyne, the merger would not be dilutive to the pro forma earnings per share of Zhone; the terms and conditions of the merger agreement, including the nature of the parties’ representations, warranties, covenants and agreements; in particular, the Paradyne board believed, after reviewing the merger agreement with its legal advisors, that the merger agreement offered Paradyne reasonable assurances as to the likelihood of consummation of the merger, and did not impose unreasonable burdens on Paradyne; the amendments to the employment agreements and options agreements between Paradyne and Sean Belanger and Patrick Murphy and the consulting and restrictive covenant agreements between Zhone and each of these executives, which the Paradyne board of directors believed would help assure consummation of the merger and the successful integration and operation of the combined company; information available to the Paradyne board of directors concerning other strategic alternatives as described above under “The Merger–Background of the Merger”; the expectation that the merger would qualify as a reorganization for U.S. federal income tax purposes and that, as a result, the exchange of their Paradyne common stock for Zhone common stock in the merger would be tax-free to holders of Paradyne common stock; the required regulatory consents and the belief that the merger would be approved by the requisite authorities, without the imposition of conditions sufficiently material to preclude the merger, and would otherwise be completed in accordance with the terms of the merger agreement; and the expectation that the merger could be completed by the end of 2005. The Paradyne board of directors also considered a variety of potentially negative factors in its deliberations concerning the merger, including the following: the difficulties and management challenges inherent in completing a merger and integrating the businesses, operations and workforce of Paradyne with those of Zhone; the risk that the potential benefits of the merger, including the expected cost savings and synergies, might not be fully achieved; the risk that Paradyne might not be able to satisfy the adjusted cash balance closing condition and that Zhone might terminate the merger agreement; the risk that the merger might not be consummated and the possible adverse implications to customers, investor relations and employee morale under such circumstances; that certain members of Paradyne’s management have interests that were different from or in addition to the interests of Paradyne stockholders generally, including the interests of Messrs. Belanger and Murphy resulting from the amendments to their employment and stock option agreements and their consulting and restrictive covenant agreements with Zhone; and the risk that, although Paradyne has the right under limited conditions to consider and participate in discussions and negotiations with respect to alternative acquisition proposals, the provisions of the merger agreement relating to the potential payment of a termination fee of $2.0 million to Zhone may have the effect of discouraging such proposals. See “Risk Factors—Risks Related to the Merger—The merger agreement and the voting agreement with Paradyne’s directors and executive officers restrict Paradyne’s and its directors’ and executive officers’ abilities to pursue alternatives to the merger and may discourage alternative transaction proposals.” The Paradyne board of directors also considered that the fixed exchange ratio would not adjust upwards to compensate for declines, or downwards to compensate for increases, in the price of Zhone common stock prior to the closing of the merger, and that the terms of the merger agreement did not include termination rights triggered expressly by a decrease in the value of the merger consideration implied by the market price of Zhone common stock. The Paradyne board of directors determined that this structure was appropriate and the risk acceptable in view of: the Paradyne board of directors’ focus on the relative intrinsic values and financial performance of Zhone and Paradyne and the percentage of the combined company to be owned by former holders of Paradyne common stock; the inclusion in the merger agreement of other structural protections such as the ability to terminate the merger agreement in the event of a material adverse effect on the business, financial condition or results of operations of Zhone; and Paradyne’s ability, under the limited circumstances specified in the merger agreement, to consider and participate in discussions and negotiations with respect to alternative acquisition proposals. After due consideration, the Paradyne board of directors concluded that, on balance, the overall potential benefits of the merger to Paradyne and its stockholders outweighed the negative factors associated with the merger. The above discussion of the factors considered by the Paradyne board of directors is not intended to be exhaustive, but is believed to set forth the principal factors considered by the Paradyne board of directors. The Paradyne board of directors collectively reached the conclusion, by unanimous vote, to approve the merger agreement in light of the various factors described above and other factors that each member of the Paradyne board of directors felt were appropriate. In view of the wide variety of factors considered by the Paradyne board of directors in connection with its evaluation of the merger and the complexity of these matters, the Paradyne board of directors did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision. Rather, the Paradyne board of directors made its recommendation based on the totality of information presented to, and the investigation conducted by, it. The members of the board of directors were aware that, as described below under “The Merger—Interests of Directors and Executive Officers of ZhoneParadyne in the Merger,”Merger” on page 49, directors and officers of ZhoneParadyne have interests in the merger that are different from, or in addition to, or different from, their interests asthose of Paradyne stockholders in Zhone,generally, and the board of directors considered this in determining to recommend the transaction. In considering the factors discussed above, individual directors may have given different weights to different factors.   After careful consideration of allRecommendation of the information and factors discussed in this section, the Zhone boardParadyne Board of directors, by unanimous vote, approved the merger, the merger agreement and the other transactions contemplated by the merger agreement. The Zhone board of directors unanimously recommends that Zhone stockholders vote “FOR” the proposal to issue shares of Zhone common stock pursuant to the terms of the merger agreement. Reasons for the Merger—SorrentoDirectors Sorrento’s decision to enter into the merger with Zhone was the culmination of an investigation of financial and strategic alternatives by Sorrento’s management and board of directors beginning in December 2003. In reaching its decision to approve the merger agreement and the merger, and to recommend that the stockholders approve the merger agreement and the merger, the Sorrento board of directors consulted with senior management and its outside advisors. The Sorrento board of directors also independently considered a number of factors, including: the complementary nature of the two companies’ product lines and sales channels; the stronger balance sheet and cash position resulting from a combination of the two companies; Sorrento’s future prospects as an independent entity, including its financial condition, results of operations and business and earnings, the likely need for additional financing and its ability to obtain future financing on terms acceptable to Sorrento or at all; the fact that Sorrento’s stockholders will have the opportunity to participate in the potential for diversified and enhanced growth of the combined company after the merger; the enhanced functional capabilities of the combined company through the addition of experienced management, sales, service, support and operations personnel; the risks and constraints faced by Sorrento in the intelligent optical networking marketplace, in light of the fact that Sorrento’s major competitors have achieved greater market presence and possess larger financial resources; the operational and administrative cost savings expected to result from the merger with Zhone as redundant operations are eliminated or streamlined; the belief of management that consolidation in the intelligent optical networking industry is inevitable and the fact that the merger will bring together the complementary assets, resources and expertise of the two companies, which Sorrento believes will enable the combined company to more effectively compete in the rapidly changing optical networking markets; and the expectation that the merger will be tax-free to Sorrento’s stockholders who receive Zhone common stock in exchange for their shares of Sorrento common stock in the merger (except to the extent they receive cash in lieu of fractional shares). The Sorrento board of directors also reviewed with senior management and legal and financial advisors a number of additional factors relevant to the merger, including: Sorrento management’s view of the business and prospects of Sorrento and Zhone as stand-alone companies and as a combined company; historical information concerning Zhone’s and Sorrento’s businesses, financial performance and condition, operations, technology, management and competitive position; current financial market conditions and historical market prices and trading information with regard to Sorrento’s common stock and Zhone’s common stock; the terms and provisions of the merger agreement, including the representations and warranties, the covenants and the conditions of each party to closing the merger; the financial outlook for Zhone and the likelihood of Zhone’s ability to complete the merger; several potential alternative strategic transactions, including a potential combination with a private company and a potential combination with a foreign public company, both of which were subject to numerous risks and uncertainties and not viewed as likely to be consummated on terms as favorable as the merger; and the financial analysis and presentation of Needham & Company, Inc., as well as the opinion of Needham & Company delivered to Sorrento’s board of directors on April 21, 2004, that, as of that date, and based upon and subject to the various considerations and assumptions described in the opinion, the exchange ratio pursuant to the merger agreement was fair, from a financial point of view, to the holders of Sorrento common stock. The Sorrento board of directors also identified and considered the following potentially negative factors in its deliberations concerning the merger: the risk that key benefits of each company’s products and services cannot be integrated into a unified product offering delivering all the capabilities of both companies; the risk that the integration of the two companies’ respective operations and employees might not occur in a timely manner and that the operations of the two companies might not be successfully integrated; the risk that, despite the efforts of the combined company, key technical and management personnel might not remain employed by the combined company; the risk that the expected cost savings and other synergies may not be realized; the substantial costs to be incurred in connection with the merger, including costs of integrating the businesses and transaction expenses arising from the merger; the risk that potential benefits sought in the merger might not be fully realized; the risk that the merger may not be completed because certain closing conditions are not met, including, but not limited to, Sorrento’s meeting a minimum closing cash requirement of $5 million and securing the election of the holders of at least 75% of its outstanding PIPE warrants to receive a warrant to purchase Zhone common stock in the merger; the risk that Sorrento would be required to pay Zhone’s expenses up to $1 million and under certain circumstances a termination fee of $2 million in the event Sorrento breaches the merger agreement; and the other risks described under the caption “Risk Factors” presented earlier in this joint proxy statement/prospectus. This discussion of the information and factors considered by the Sorrento board of directors is not intended to be exhaustive but includes all material factors considered by the Sorrento board of directors. In view of the variety of factors considered in connection with its evaluation of the merger, the Sorrento board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weight to the specific factors considered in reaching its determination. In addition, individual members of the Sorrento board of directors may have given different weight to different factors.   After careful consideration, the SorrentoParadyne board of directors, by unanimous vote, has determined that the merger agreement is fair to, and in the best interests of, its common stockholders, and unanimously recommends that Sorrento stockholders vote “FOR” the approval of the merger and the adoption of the merger agreement. Some directors of Sorrento may be deemed to have a conflict of interest with respect to the Sorrento board of directors’ approval of the merger and its recommendation that the Sorrento stockholders approve the merger. See “The Merger—Interests of Directors and Executive Officers of Sorrento in the Merger.” Opinion of Thomas Weisel Partners LLC to Zhone Thomas Weisel Partners LLC has acted as financial advisor to Zhone in connection with the merger. In connection with this engagement, Zhone requested that Thomas Weisel Partners evaluate the fairness, from a financial point of view, to Zhone of the consideration to be paidtransactions contemplated by Zhone pursuant to the merger. On April 21, 2004, at a meeting of the board of directors held to evaluate the merger, Thomas Weisel Partners rendered its oral opinion to the Zhone board of directors that as of such date, and based upon and subject to the assumptions, limitations and qualifications set forth in its written opinion, the consideration to be paid by Zhone pursuant to the merger was fair, from a financial point of view, to Zhone. The opinion was subsequently confirmed by delivery by Thomas Weisel Partners of a written opinion dated April 21, 2004. The full text of the Thomas Weisel Partners opinion, dated April 21, 2004, which we refer to as the TWP opinion, is attached asAnnex D to this joint proxy statement/prospectus and is incorporated into this joint proxy statement/prospectus by reference. Stockholders of Zhone are encouraged to, and should, read the TWP opinion carefully and in its entirety for a discussion of the assumptions made, limitations upon the review undertaken and qualifications in rendering the opinion. However, we have included the following summary of the TWP opinion. Thomas Weisel Partners has directed the TWP opinion to the board of directors of Zhone in connection with that board of directors’ consideration of the merger. The TWP opinion does not constitute a recommendation to you as to how you should vote with respect to the merger. The opinion addresses only the fairness of the consideration to be paid by Zhone pursuant to the merger from a financial point of view. Thomas Weisel Partners was not asked to consider, and its opinion does not address, the relative merits of the merger or any alternative business strategy or transaction in which Zhone may engage. Further, it does not address Zhone’s underlying decision to proceed with or effect the merger or any other aspect of the merger. In addition, Thomas Weisel Partners did not express an opinion regarding the price at which the combined company’s common stock may trade at any future time. The TWP opinion was necessarily based upon economic, monetary, market and other conditions as they existed and were made available to Thomas Weisel Partners as of the date of the opinion. Thomas Weisel Partners indicated that subsequent events, including the subsequent public reporting of Zhone and Sorrento’s financial results on April 22, 2004, may affect the opinion, which Thomas Weisel Partners has no obligation to update, revise or reaffirm. In furnishing its opinion, Thomas Weisel Partners did not admit that it is an expert within the meaning of the term “expert” as used in the Securities Act of 1933, as amended, or the Securities Act, nor did it admit that its opinion constitutes a report or valuation within the meaning of the Securities Act. The TWP opinion includes statements to this effect. In connection with its opinion, Thomas Weisel Partners, among other things: (1) reviewed certain publicly available financial and other data with respect to Zhone and Sorrento, including the consolidated financial statements for recent years and interim periods to December 31, 2003 and January 31, 2004, respectively, and certain other relevant financial and operating data relating to Zhone and Sorrento made available to Thomas Weisel Partners from published sources and from the internal records of Zhone and Sorrento for such periods; (2) reviewed the financial terms and conditions of a draft of the merger agreement dated April 21, 2004; (3) reviewed certain publicly available information concerning the trading of, and the trading market for, Sorrento common stock and Zhone common stock; (4) reviewed publicly available financial and stock market data with respect to selected other companies in the optical networking industry which Thomas Weisel Partners deemed to be relevant; (5) considered the financial terms, to the extent publicly available, of selected recent business combinations in the optical networking industry which Thomas Weisel Partners deemed to be comparable, in whole or in part, to the merger; (6) reviewed and discussed with representatives of the management of Zhone and Sorrento certain information of a business and financial nature regarding Zhone and Sorrento, furnished to Thomas Weisel Partners by them and not publicly available, including financial forecasts and related assumptions; (7) made inquiries regarding and discussed the merger and the merger agreement and other matters related thereto with Zhone’s counsel; and (8) performed such other analyses and examinations as Thomas Weisel Partners deemed appropriate. In connection with its review, Thomas Weisel Partners did not assume any obligation to independently verify the information referred to above. Instead, with Zhone’s consent, Thomas Weisel Partners relied on the information being accurate and complete in all material respects. Thomas Weisel Partners also made the following assumptions, in each case with Zhone’s consent: with respect to the financial forecasts for Zhone and Sorrento provided to Thomas Weisel Partners by management of Zhone, Thomas Weisel Partners assumed for purposes of its opinion, upon the advice and with the consent of Zhone, that the forecasts have been reasonably prepared on bases reflecting the best available estimates and judgments of management of Zhone at the time of preparation as to the future financial performance of Zhone and Sorrento, and these forecasts provide a reasonable basis upon which Thomas Weisel Partners could form its opinion; that there have been no material changes in Zhone’s or Sorrento’s assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statements made available to Thomas Weisel Partners; that the merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act, the Exchange Act, and all other applicable federal and state statutes, rules and regulations; that the representations and warranties of each party contained in the merger agreement are true and correct; that there will be no adjustment to the consideration under the terms of the merger agreement; that each party will perform all of the covenants and agreements required to be performed by it under the merger agreement; and that the merger will be consummated in accordance with the terms described in the merger agreement, without any further amendment thereto, and without waiver by Zhone of any of the conditions to its obligations thereunder. In addition, for purposes of the TWP opinion: Thomas Weisel Partners relied on advice of Zhone’s counsel as to all legal matters with respect to Zhone, the merger and the merger agreement; Thomas Weisel Partners assumed that in the course of obtaining the necessary regulatory approvals for the merger, no restrictions, including any divestiture requirements, will be imposed; Thomas Weisel Partners did not assume responsibility for making an independent evaluation, appraisal or physical inspection of any of the assets or liabilities (contingent or otherwise) of Zhone or Sorrento, nor was Thomas Weisel Partners furnished with any such appraisals; and the TWP opinion was based on economic, monetary and market and other conditions as in effect on, and the information made available to Thomas Weisel Partners as of, the date of its opinion. Accordingly, although subsequent developments may affect its opinion, Thomas Weisel Partners has not assumed any obligation to update, revise or reaffirm its opinion. In rendering its opinion, Thomas Weisel Partners noted that each of Zhone and Sorrento were announcing financial results on April 22, 2004 for financial periods ended March 31, 2004 and January 31, 2004, respectively, and that Thomas Weisel Partners’ opinion was based on the valuations of Zhone and Sorrento as of April 21, 2004 and its opinion did not take into account any consideration or account of any changes in valuations that may occur following such announcements. In performing its analyses, Thomas Weisel Partners made numerous assumptions with respect to industry performance, general business, financial, market and economic conditions and other matters, many of which are beyond the control of Zhone and Sorrento. No company, business or transaction used in those analyses as a comparison is identical to Zhone, Sorrento or their respective businesses or the merger, nor is any evaluation of means, medians or ranges of multiples or premiums entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the operating results, public trading or other values of the companies or transactions being analyzed. The estimates contained in the analyses performed by Thomas Weisel Partners and the rates of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than suggested by these analyses. In addition, analyses relating to the value of securities do not purport to be appraisals or to reflect the prices at which a business might actually be sold or the prices at which any securities may trade at the present time or at any time in the future. The following is a brief summary of the material financial analyses presented by Thomas Weisel Partners to the board of directors of Zhone in connection with the rendering of its opinion. Some of the summaries of financial analyses performed by Thomas Weisel Partners include information presented in tabular format. In order to fully understand the financial analyses performed by Thomas Weisel Partners, you should read the tables together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data set forth in the tables without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Thomas Weisel Partners. Contribution Analysis. Thomas Weisel Partners performed a contribution analysis in which it reviewed certain historical and estimated future operating and financial information for Zhone, Sorrento and the pro forma combined company. The analysis was based on the relative contributions of each party to the pro forma combined company’s revenues and gross profit for the year ended December 31, 2003 and estimated revenues and gross profit for the year ending December 31, 2004. The 2003 gross profit for Zhone was based upon pro forma results, assuming full year contribution of both Zhone and Tellium. The 2003 gross profit for Sorrento was similarly based on pro forma results, excluding one-time items. The 2004 estimated financial information relating to Sorrento was based on projections of Sorrento management and Zhone management, and is presented as both a “high,” more optimistic and “low,” more conservative basis. The 2004 estimated financial information relating to Zhone was based on an average of publicly available investment banking research. The following table shows the percentage contributions of Zhone and Sorrento to the analyzed information for such periods:advisable. ACCORDINGLY, THE PARADYNE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT PARADYNE STOCKHOLDERS VOTE “FOR” THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.      Contribution     Implied Exchange Ratio      Zhone     Sorrento     2003 Revenues    76.7 %   23.3 %   1.159 2004 Revenues (Low Case)    78.6 %   21.4 %   1.041 2004 Revenues (High Case)    73.6 %   26.4 %   1.362 2003 Gross Profit    82.9 %   17.1 %   0.796 2004 Gross Profit (Low Case)    82.5 %   17.5 %   0.819 2004 Gross Profit (High Case)    76.7 %   23.3 %   1.159 Selected Public Companies Analysis. Based on an assessment of public market value of similar publicly-traded companies, Thomas Weisel Partners reviewed and compared specific financial and operating data relating to Sorrento with selected companies that Thomas Weisel Partners deemed in certain respects comparable to Sorrento in the optical networking industry. Based on public and other available information, Thomas Weisel Partners calculated the aggregate enterprise value, which Thomas Weisel Partners defined as market capitalization plus total debt less cash and cash equivalents, as a multiple of projected revenue for the companies listed below in the optical networking industry for calendar years 2003 and 2004. Projected 2004 information for Zhone was based on an average of publicly available investment banking research. Projected 2004 information for Sorrento was based on projections of Sorrento management and Zhone management. Projections for the other selected companies were based on Thomas Weisel Partners’ research and other publicly available investment banking research. Thomas Weisel Partners believes that the nine companies listed below have operations similar to some of the operations of Zhone and Sorrento, but noted that none of these companies has the same management, composition, size or combination of businesses as Zhone and Sorrento: Adtran ADVA Advanced Fibre Carrier Access Ciena Extreme Foundry Sycamore Tellabs The following table sets forth the multiples indicated by this analysis: Aggregate Value/Revenue 2003 2004E First Quartile 2.99x 2.08x Mean 3.94x 2.94x Median 3.65x 2.73x Third Quartile 4.99x 3.87x Zhone 2.99x 2.63x Sorrento (Low) 1.75x 1.72x Sorrento (High) 1.75x 1.30x Implied Exchange Ratio 1.158 to 1.916 0.829 to 1.987 Thomas Weisel Partners compared the revenue multiples for the selected companies with the corresponding revenue multiple for Sorrento using actual results for 2003 and the “high,” more optimistic and “low,” more conservative estimates for Sorrento determined by Sorrento management and Zhone management for 2004. Thomas Weisel Partners further determined implied exchange ratios set forth in the above table based on the Zhone enterprise valuation as a multiple of revenue in 2003 and 2004 and the Sorrento enterprise valuation based on actual revenue for 2003 and estimated revenue ranges for 2004. Based on the inherent differences between the business, operations and prospects, selected companies listed above, and the business, operations and prospects of Sorrento, Thomas Weisel Partners did not believe that it was appropriate to rely solely on the quantitative results of the comparable company analysis and therefore did not do so in evaluating the results of this analysis. Additional, qualitative factors relating to differences in the financial and operating characteristics and prospects of Sorrento and the above listed companies were also considered in the Thomas Weisel Partners analysis. Selected Transactions Analysis. Thomas Weisel Partners performed an analysis of certain merger and acquisition transactions involving other companies in Zhone and Sorrento’s industry and compared the aggregate transaction values as a multiple of revenues of the acquired entity from these other mergers and acquisitions with the revenue multiple value of Sorrento implied by the merger. Based on public and other available information, Thomas Weisel Partners calculated aggregate enterprise value as a multiple of revenue for the last 12 months, or LTM, and for the next 12 months, or NTM, in 14 selected acquisitions of optical networking companies that have been announced since January 1, 2002. For purposes of this analysis, aggregate enterprise value represented the total market capitalization plus total debt plus preferred stock less cash and cash equivalents. The acquisitions reviewed in this analysis were the following: Acquiror Target Tekelec Taqua CIENA Catena Networks CIENA Internet Photonics Advanced Fibre Marconi’s Access Division CIENA Akara Zhone Technologies Tellium Sorrento LuxN Tellabs Vivace Networks CIENA WaveSmith Networks Motorola Next Level Communications Juniper Unisphere Advanced Fibre AccessLan CIENA ONI Systems Alcatel Astral Point Communications The following table sets forth the multiples indicated by this analysis: Aggregate Value / Revenue LTM NTM First Quartile 3.01x 2.61x Mean 5.58x 3.08x Median 5.25x 3.38x Third Quartile 7.63x 3.91x Implied Exchange Ratio 1.167 to 2.910 1.030 to 2.008 No company or transaction used in the public company analysis or selected transactions analyses is identical to Zhone, Sorrento or the merger. Accordingly, an analysis of the results of the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading value of the companies to which Zhone, Sorrento and the merger are being compared. The foregoing description is only a summary of the analyses and examinations that Thomas Weisel Partners deems material to its opinion. It is not a comprehensive description of all analyses and examinations actually conducted by Thomas Weisel Partners. The preparation of a fairness opinion necessarily is not susceptible to partial analysis or summary description. Thomas Weisel Partners believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses and of the factors considered, without considering all analyses and factors, would create an incomplete view of the process underlying the analyses set forth in its presentation to the board of directors of Zhone. In addition, Thomas Weisel Partners may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that this analysis was given greater weight than any other analysis. Accordingly, the ranges of implied values resulting from any particular analysis described above should not be taken to be the view of Thomas Weisel Partners with respect to the actual value of Zhone or Sorrento. In performing its analyses, Thomas Weisel Partners made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Zhone. The analyses performed by Thomas Weisel Partners are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those suggested by these analyses. These analyses were prepared solely as part of the analysis performed by Thomas Weisel Partners with respect to the financial fairness of the consideration to be paid by Zhone pursuant to the merger agreement, and were provided to the board of directors of Zhone in connection with the delivery of the TWP opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities may trade at any time in the future. As described above, the TWP opinion and presentation were among the many factors that the board of directors of Zhone took into consideration in making its determination to approve the merger and merger agreement, and to recommend that its stockholders approve the merger. Zhone has agreed to pay Thomas Weisel Partners a customary fee for its services, no portion of which is contingent on the completion of the transaction. Further, Zhone has agreed to indemnify Thomas Weisel Partners, its affiliates, and their respective partners, directors, officers, agents, consultants, employees and controlling persons against specific liabilities, including liabilities under the federal securities laws. In the ordinary course of its business, Thomas Weisel Partners actively trades the equity securities of Zhone for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in these securities. Thomas Weisel Partners has also acted as an underwriter in connection with offerings of securities of Zhone and Sorrento and performed various investment banking services for Zhone and Sorrento. A venture fund that is affiliated with Thomas Weisel Partners owns equity securities in Zhone that represent less than 5% of Zhone’s outstanding common stock.   Opinion of Needham & Company Inc. to Sorrento   SorrentoZhone retained Needham & Company to furnish financial advisory and investment banking services with respect to the proposed merger and to render an opinion as to the fairness, from a financial point of view, of the exchange ratio to the holders of Sorrento common stock. The exchange ratio was determined through arm’s length negotiations between Sorrento and Zhone and not by Needham & Company, although Needham & Company assisted Sorrento in these negotiations. Zhone. On April 21, 2004,July 7, 2005, Needham & Company delivered to the SorrentoZhone board of directors its oral opinion, which it subsequently confirmed in writing as of April 21, 2004,July 7, 2005, that, as of that date and based upon and subject to the assumptions and other matters described in the written opinion, the exchange ratio pursuant to the merger agreement was fair to the holders of Sorrento common stockZhone from a financial point of view.The Needham & Company opinion is addressed to the SorrentoZhone board of directors, is directedrelates only to the fairness, from a financial termspoint of view, of the merger agreement,exchange ratio to Zhone as of the date of the opinion, and does not constitute a recommendation to any SorrentoZhone stockholder as to how that stockholder should vote or act on or take any other actionmatter relating to the merger. The complete text of the Needham & Company opinion, which sets forth the assumptions made, matters considered, and limitations on and scope of the review undertaken by Needham & Company, is attached to this joint proxy statement/prospectus asAnnex ED. The summary of the Needham & Company opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the Needham & Company opinion.SorrentoZhone stockholders should read the Needham & Company opinion carefully and in its entirety for a description of the procedures followed, the factors considered, and the assumptions made by Needham & Company.   In arriving at its opinion, Needham & Company, among other things:   reviewed a draft of the merger agreement dated April 19, 2004;July 6, 2005; reviewed certain publicly available information concerning Zhone and SorrentoParadyne and certain other relevant financial and operating data of Zhone and SorrentoParadyne furnished to Needham & Company by Zhone and Sorrento;Paradyne;   reviewed the historical stock prices and trading volumes of Zhone common stock and SorrentoParadyne common stock;   held discussions with members of management of Zhone and SorrentoParadyne concerning their current and future business prospects and joint prospects for the combined companies, including the potential cost savings and other synergies that may be achieved by the combined companies;   reviewed certain research analyst projections with respect to Zhone and held discussions with members of the management of Zhone concerning those projections;   reviewed certain financial forecastsresearch analyst projections with respect to Sorrento prepared by the management of SorrentoParadyne and held discussions with members of the management of Zhone and SorrentoParadyne concerning those projections;   compared certain publicly available financial data of companies whose securities are traded in the public markets and that Needham & Company deemed relevant to similar data for Sorrento;Paradyne;   reviewed the financial terms of certain other business combinations that Needham & Company deemed generally relevant; and   performed and considered such other studies, analyses, inquiries and investigations as Needham & Company deemed appropriate.   In arriving at its opinion, Needham & Company did not independently verify, nor did Needham & Company assume responsibility for independent verification of, any of the information reviewed by or discussed with it and assumed and relied on the accuracy and completeness of that information. Needham & Company assumed, based upon discussions with management of Zhone and Paradyne, that the financial forecasts for Sorrento providedresearch analyst projections with respect to it by Sorrento managementZhone and information relatingParadyne represent reasonable estimates as to the joint prospects of the combined companies were reasonably prepared on bases reflecting the best currently available estimates and judgments of management of Sorrento and Zhone, at the time of preparation, of the future operating and financial performance of SorrentoZhone and the combined companies.Paradyne, respectively. Needham & Company relied upon the estimates of management of Sorrentoboth Zhone and ZhoneParadyne of the potential cost savings and other synergies, including the amount and timing thereof, that may be achieved as a result of the merger. Needham & Company assumed, based upon discussions with management of Zhone, that the research analyst projections with respect to Zhone represent reasonable estimates as to the future financial performance of Zhone. Needham & Company did not assume any responsibility for or make or obtain any independent evaluation, appraisal or physical inspection of the assets or liabilities of Zhone or Sorrento.Paradyne. Needham & Company’s opinion states that it was based on economic, monetary and market conditions existing as of its date. Needham & Company expressed no opinion as to what the value of Zhone common stock will be when issued to the stockholders of SorrentoParadyne pursuant to the merger or the prices at which Zhone common stock or SorrentoParadyne common stock will actually trade at any time. In addition, Needham & Company was not asked to consider, and the Needham & Company opinion does not address, Sorrento’sZhone’s underlying business decision to engage in the merger or the relative merits of the merger as compared to other business strategies that might be available for Sorrento.Zhone.   In connection with rendering its opinion, Needham & Company was not requested to, and did not, participate in the negotiation or structuring of the merger. The exchange ratio was determined through arm’s length negotiations between Zhone and Paradyne and not by Needham & Company. No limitations were imposed by SorrentoZhone on Needham & Company with respect to the investigations made or procedures followed by Needham & Company in rendering its opinion.   In preparing its opinion, Needham & Company performed a variety of financial and comparative analyses. The following paragraphs summarize the material financial analyses performed by Needham & Company in arriving at its opinion. The order of analyses described does not represent relative importance or weight given to those analyses by Needham & Company. Some of the summaries of the financial analyses include information presented in tabular format. The tables are not intended to stand alone, and in order to more fully understand the financial analyses used by Needham & Company, the tables must be read together with the full text of each summary. The following quantitative information, to the extent it is based on market data, is, except as otherwise indicated, based on market data as it existed on or prior to July 6, 2005, and is not necessarily indicative of current or future market conditions. Historical Stock Trading and Exchange Ratio Analysis. Needham & Company reviewed the historical trading prices of Zhone common stock and Paradyne common stock as of and for various periods prior to July 6, 2005, the last full trading day prior to the date of Needham & Company’s opinion, in order to determine the various implied exchange ratios that existed for those periods. The following table presents: The Paradyne / Zhone stock price ratios, which represent the implied exchange ratio between the closing prices of Zhone common stock and Paradyne common stock on July 6, 2005 and the implied exchange ratios calculated based on the ratios between the average closing prices of Zhone common stock and the average closing prices of Paradyne common stock for the 45-day, six-month, one-year, and 18-month periods prior to July 6, 2005. “Implied exchange ratio” means the number of shares of Zhone common stock that would be equal in value to one share of Paradyne common stock based on the average closing price data applicable to the given date or period. The premium (discount) to the Paradyne / Zhone stock price ratio, which is equal to the percentage by which the exchange ratio pursuant to the merger agreement (1.0972 shares of Zhone common stock for each share of Paradyne common stock) exceeds (is less than) the Paradyne / Zhone stock price ratio for the specified periods. Date or Period    Paradyne / Zhone Stock Price Ratio    Premium (Discount) to Paradyne / Zhone Stock Price Ratio   July 6, 2005    0.5460    101.0 % 45 day    0.6863    59.9 % Six month    1.0383    5.7 % One year    1.1550    (5.0 )% 18 month    0.8969    22.3 % Contribution Analysis. Needham & Company reviewed and analyzed the pro formaimplied percentage contribution of each of SorrentoZhone and ZhoneParadyne to pro forma combined March 31, 2005 balance sheet information, pro forma combined operating results for calendar 2003the last reported twelve months ended March 31, 2005, and pro forma projected calendar 2004year 2005 and calendar 2005year 2006 combined operating results. In calculating the pro forma combined balance sheet information, Needham & Company used Sorrento’s preliminary January 31, 2004 balance sheet and Zhone’s December 31, 2003 balance sheet. In calculating the pro forma operating results for calendar 2003, Needham & Company used Sorrento’s preliminary operating results for the 12 months ended January 31, 2004 and Zhone’s operating results for the 12 months ended December 31, 2003. In calculating the pro forma projected combined operating results, Needham & Company used financial forecasts prepared by Sorrento management andconsensus published research analyst projectionsestimates for Zhone and assumed no cost savings or other synergies.Paradyne. Needham & Company reviewed, among other things, the implied percentage contributions to pro forma contributions to net sales,combined revenues, gross profit, earnings before interest and taxes, or EBIT, earnings before taxes, cash and equivalents, total assets, long term debt, stockholders’ equity, and stockholders’ equity. Thisworking capital. The following tables present the results of this analysis indicated that Sorrento would have contributed:and the estimated percentage ownership of the combined company on a pro forma basis by the Zhone stockholders and the Paradyne stockholders, based on the exchange ratio of 1.0972, and using the treasury stock method to calculate the number of shares of Zhone common stock outstanding after taking into account outstanding warrants and options.   15.2% of pro forma combined cash and equivalents; 15.3% of pro forma combined total assets; and 15.3% of pro forma combined liabilities and stockholders’ equity. This analysis also indicated that Sorrento would have contributed or would contribute the percentages shown in the following table of: calendar 2003, projected calendar 2004 and projected calendar 2005 pro forma combined net sales; and calendar 2003, projected calendar 2004 and projected calendar 2005 pro forma combined gross profit.      CY 2003     CY 2004     CY 2005   Net sales    23.4 %   26.8 %   28.8 % Gross profit    14.2 %   23.3 %   27.0 %      Implied Actual/Estimated Percentage Contribution            Zhone             Paradyne       Pro forma combined revenues              Last 12 months    49.3 %   50.7 % 2005E    51.1 %   48.9 % 2006E    50.8 %   49.2 % Pro forma combined gross profit              Last 12 months    52.4 %   47.6 % 2005E    53.6 %   46.4 % 2006E    52.7 %   47.3 % Pro forma combined EBIT              Last 12 months    N/M     N/M   2005E    N/M     N/M   2006E    57.2 %   42.8 % Pro forma combined earnings before taxes              Last 12 months    N/M     N/M   2005E    N/M     N/M   2006E    46.6 %   53.4 % Pro forma combined March 31, 2005 balance sheet data:              Pro forma combined cash and equivalents    59.1 %   40.9 % Pro forma combined total assets    78.2 %   21.8 % Pro forma combined long term debt    100.0 %   0.0 % Pro forma combined stockholders’ equity    75.2 %   24.8 % Pro forma combined working capital    52.2 %   47.8 %      Estimated Pro Forma Percentage Ownership        Zhone     Paradyne        63.3 %   36.7 %   Information as to relative contributions to operating income, incomeEBIT and earnings before taxes for the last twelve months and net incomeprojected calendar year 2005 was not meaningful due to Sorrento’s actual and projected losses for all of, and Zhone’s actual and projected losses for some of,those periods and Paradyne’s negative EBIT for the periods in question. last twelve months. The results of the contribution analysis are not necessarily indicative of the contributions that the respective businesses may have in the future.   BasedPro Forma Transaction Analysis. Needham & Company prepared pro forma analyses of the financial impact of the merger using publicly available information and consensus published research analyst estimates for Zhone and Paradyne. Needham & Company analyzed, for the fourth quarter of 2005, calendar year 2005, and calendar year 2006, the pro forma financial impact of the merger on Zhone’s estimated earnings per share, or EPS, and the exchange ratio,amount of accretion or dilution on a per share basis. Needham & Company prepared this analysis assuming no synergies resulting from the merger and usingalso for estimated calendar year 2006 assuming operating synergies equal to 10% of Paradyne’s operating expenses resulting from the treasury stock method to calculatemerger. Needham & Company’s analysis excluded the numberexpected amortization of shares of Sorrento common stock outstanding after taking into account outstanding warrants, optionsintangible assets and convertible securities, Sorrento’s stockholders will own approximately 16.9% of Zhone aftertransaction and other related expenses arising from the merger. Based on these estimates and assumptions, Needham & Company’s analysis showed that the exchange ratio, onmerger would result in accretion to Zhone’s estimated fourth quarter of 2005 EPS, a fully-diluted basis, Sorrento’s stockholders will own approximately 22.6% of Zhone afterdecrease to Zhone’s estimated calendar year 2005 loss per share, and accretion to Zhone’s estimated calendar year 2006 EPS. Needham & Company further noted that the merger.assumed operating synergies described above could increase the accretion to Zhone’s estimated calendar year 2006 EPS from 36.2% to 87.9%. The financial forecasts that underlie this analysis are subject to substantial uncertainty and, therefore, actual results may be substantially different.   Selected Company Analysis. Using publicly available information, Needham & Company compared selected historical and projected financial and market data ratios for Paradyne to the corresponding data and ratios of publicly traded communications equipment companies that Needham & Company deemed relevant because they have lines of business may be considered similar to certain lines of business of Paradyne. These companies, referred to as the selected companies, consisted of the following: ADTRAN, Inc. Carrier Access Corporation Ciena Corporation ECI Telecom Ltd. Occam Networks, Inc. Tellabs, Inc. Tollgrade Communications, Inc. UTStarcom, Inc. Visual Networks, Inc. Westell Technologies, Inc. Zhone The following table sets forth information concerning the following multiples for the selected companies and for Paradyne: Price as a multiple of calendar year 2004 earnings per share; Price as a multiple of projected calendar year 2005 earnings per share; Price as a multiple of projected calendar year 2006 earnings per share; Total enterprise value as a multiple of last twelve months, or LTM, revenues; Total enterprise value as a multiple of calendar year 2004 revenues; Total enterprise value as a multiple of projected calendar year 2005 revenues; and Total enterprise value as a multiple of projected calendar year 2006 revenues. Needham & Company calculated multiples for the selected companies based on the closing stock prices of those companies on July 6, 2005 and for Paradyne based on the Zhone closing stock price of $3.26 on July 6, 2005 and the exchange ratio of 1.0972.      Selected Companies              High     Low     Mean     Median     Paradyne   Price as a multiple of calendar year 2004 EPS    66.6 x   13.4 x   37.0 x   34.1 x   154.1 x Price as a multiple of projected calendar year 2005 EPS    25.8 x   13.3 x   21.9 x   24.0 x   137.4 x Price as a multiple of projected calendar year 2006 EPS    51.8 x   9.9 x   21.3 x   17.0 x   25.7 x Total enterprise value to LTM revenues    10.4 x   0.4 x   2.5 x   1.5 x   1.3 x Total enterprise value to calendar 2004 revenues    12.6 x   0.4 x   2.8 x   1.6 x   1.4 x Total enterprise value to projected calendar year 2005 revenues    3.8 x   0.3 x   1.6 x   1.3 x   1.2 x Total enterprise value to projected calendar year 2006 revenues    3.4 x   0.3 x   1.4 x   1.2 x   1.0 x Stock Price Premium Analysis. Needham & Company analyzed publicly available financial information for 24 selected mergers26 merger and acquisitions of United States-based technology companiesacquisition transactions that represent transactions sinceinvolving publicly-traded technology companies completed between January 1, 20032004 and July 6, 2005 with equitytransaction values of between $25$50 million and $150$300 million. In examining these transactions, Needham & Company analyzed the premium of consideration offered to the acquired company’s stock price one day and one month prior to the announcement of the transaction.   Needham & Company calculated premiums for SorrentoParadyne based on the Zhone closing stock price of $3.84$3.26 on April 21, 2004July 6, 2005 and the exchange ratio of 0.90.1.0972. The following table sets forth information concerning the stock price premiums in the selected transactions and the stock price premium implied by the merger.        Selected Transactions     Zhone/ Sorrento Merger        High     Low     Mean     Median     One day stock price premium    72.2 %   2.4 %   23.3 %   18.6 %   26.6 %      Selected Transactions     Paradyne / Zhone Merger        High     Low     Mean     Median     One day stock price premium    69 %   6 %   30 %   28 %   100 % One month stock price premium    90 %   5 %   36 %   37 %   92 % Selected Transaction Analysis.Needham & Company analyzed publicly available financial information for the following selected merger and acquisition transactions, which represent transactions since January 1, 20032004 with transaction values of greater than $20exceeding $10 million involving companies in Zhone’s and Sorrento’s industry:that involved targets that were communications equipment companies:   Acquirer    Target Carrier AccessECI Telecom Ltd. Laurel Networks, Inc. Nortel Networks Corporation    ParagonPEC Solutions, Inc. Radyne ComStream Inc. Xicom Technology Chelton Microwave Corporation REMEC, Inc. (REMEC Defense & Space, Inc.) Cisco Systems, Inc. Airespace, Inc. Alcatel Native Networks Limited Tandberg Television ASA N2 Broadband, Inc. 3Com Corporation Tippingpoint Technologies, Inc. Black Box Corporation Norstan, Inc. C-COR Incorporated nCUBE Corporation Alvarion Ltd. interWAVE Communications International, Ltd. Tellabs, Inc. Advanced Fibre Communications, Inc. Cisco Systems, Inc.    Latitude CommunicationsNetSolve, Incorporated Harris Corporation Encoda Systems Holdings, Inc. Acquirer Target LeCroy Corporation Computer Access Technology Corporation Cisco Systems, Inc. P-Cube, Inc. CommScope,Lucent Technologies Inc.    AvayaTelica, Inc. (Connectivity Solutions business) F5 Networks,Verilink Corporation Larscom Incorporated Zhone Technologies, Inc.    uRoam, Inc. Aastra Technologies Ltd. Ascom Holding AG (PBX Div.) Sierra Wireless, Inc. AirPrime,Sorrento Networks, Inc. Tekelec    Santera SystemsTaqua, Inc. Verso Technologies,Cisco Systems, Inc.    MCK Communications, Inc. SR Telecom Inc. Netro Corporation UTStarcom, Inc. 3Com Corporation (CommWorks business) Andrew Corporation Allen Telecom Inc. Motorola, Inc. Next LevelLatitude Communications, Inc.   In examining the selected transactions, Needham & Company analyzed, for the selected transactions and for Sorrento,Paradyne,   the enterprise value as a multiple of sales for the last 12 monthsLTM revenues; and   the marketenterprise value as a multiple of historical book value.LTM earnings before interest, taxes, depreciation and amortization, or EBITDA; and   transaction value as a multiple of LTM net income.   Needham & Company also analyzed, for the selected transactions, the enterprise value as a multiple of earnings before interest and taxes for the last 12 months; and the market value as a multiple of net income for the last 12 months, LTM EBIT, but determined that the results were not meaningful because of Sorrento’s net losses for the last 12 months. In some cases, complete financial data was not publicly available for the selected transactions and only partial information was used in those instances.Paradyne’s negative LTM EBIT.   Needham & Company calculated multiples for SorrentoParadyne based on the Zhone closing stock price of $3.84$3.26 on April 21, 2004,July 6, 2005, the exchange ratio of 0.90, and Sorrento’s preliminary balance sheet and statement of operations as of and for the 12 months ended January 31, 2004.1.0972.   The following table sets forth information concerning the multiples of enterprise value to last 12 months, or LTM salesrevenues and EBITDA and the multiples of markettransaction value to historical book valueLTM net income for the selected transactions and the same multiples implied by the merger.   Selected Transactions Zhone/ Sorrento Merger High Low Mean Median Enterprise value to LTM sales 13.1x 0.2x 2.8x 1.5x 2.3x Market value to historical book value 4.7x 0.8x 2.6x 2.4x 2.9x For these selected transactions that involved acquisitions of publicly traded companies, Needham & Company also analyzed: the premium of consideration offered to the acquired company’s stock price one day prior to the announcement of the transaction; and the premium of consideration offered to the acquired company’s stock price four weeks prior to the announcement of the transaction. Needham & Company calculated premiums for Sorrento based on the Zhone closing stock price of $3.84 on April 21, 2004 and the exchange ratio of 0.90. The following table sets forth information concerning the stock price premiums in the selected transactions and the stock price premiums implied by the merger.      Selected Transactions     Zhone/ Sorrento Merger        High     Low     Mean     Median     One day stock price premium    34.2 %   2.0 %   19.4 %   22.9 %   26.6 % Four week stock price premium    47.0 %   3.1 %   24.6 %   32.1 %   24.8 % Selected Company Analysis. Using publicly available information, Needham & Company compared selected historical and projected financial and market data ratios for Sorrento to the corresponding data and ratios of certain other publicly traded communication network equipment companies that Needham & Company deemed relevant. These companies, referred to as the selected companies, consisted of the following: C-COR.net Corp. CIENA Corporation Redback Networks Inc. Riverstone Networks, Inc. Sonus Networks, Inc. Sycamore Networks, Inc. Tellabs, Inc. Zhone The following table sets forth information concerning the following multiples for the selected companies and for Sorrento: Total enterprise value as a multiple of LTM revenues; Total enterprise value as a multiple of calendar 2003 revenues; Total enterprise value as a multiple of projected calendar 2004 revenues; and Total enterprise value as a multiple of projected calendar 2005 revenues. Needham & Company calculated multiples for the selected companies and Sorrento based on the closing stock prices of those companies on April 21, 2004 and, for Sorrento, using Sorrento’s preliminary balance sheet and statement of operations as of and for the 12 months ended January 31, 2004. Selected Companies Sorrento High Low Mean Median Total enterprise value to LTM revenues 12.6x 1.6x 5.3x 2.9x 1.7x Total enterprise value as a multiple of calendar 2003 revenues 12.6x 1.6x 5.1x 2.9x 1.7x Total enterprise value to projected calendar 2004 revenues 8.0x 1.3x 3.7x 2.6x 1.3x Total enterprise value to projected calendar 2005 revenues 3.5x 1.6x 2.4x 2.3x 0.9x      Selected Transactions     Paradyne / Zhone Merger        High     Low     Mean     Median     Enterprise value to LTM revenues    25.2 x   0.4 x   4.0 x   2.3 x   1.3 x Enterprise value to LTM EBITDA    132.1 x   8.0 x   42.5 x   14.9 x   34.1 x Transaction value to LTM net income    442.2 x   15.9 x   109.8 x   26.1 x   169.2 x   No company, transaction or business used in the “Selected Company Analysis,” “Stock Price Premium Analysis,”Analysis” or “Selected Transaction Analysis,” or “Selected Company Analysis” as a comparison is identical to Sorrento, Zhone, Paradyne or the merger. Accordingly, an evaluation of the results of these analyses is not entirely mathematical; rather, it involves complex considerations and judgments concerning differences in the financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the selected companies or selected transactions or the business segment, company or transaction to which they are being compared.   Accretion/Dilution Analysis. Needham & Company reviewed various pro forma financial impacts of the merger on the holders of Sorrento and Zhone common stock based on the Zhone closing stock price of $3.84 on April 21, 2004 and the exchange ratio of 0.90 and estimated financial results of Sorrento and Zhone for calendar year 2004 and calendar year 2005, and assuming various levels of cost savings and other synergies resulting from the merger. The estimated financial results were based upon Sorrento management estimates and published research analyst estimates for Zhone and the estimated cost savings and other synergies assumptions were based upon estimates by management of Sorrento and Zhone. Based upon these projections and assumptions, Needham & Company noted that the merger would result in accretion to the projected earnings per share of Zhone common stock for calendar year 2004 and calendar year 2005. The actual operating or financial results achieved by the combined entity may vary from projected results, and these variations may be material. Other Analyses.In rendering its opinion, Needham & Company considered various other analyses, including a history of trading prices and volumes for Sorrento and Zhone and an analysis of the exchange ratio based on historical trading prices for Sorrento and Zhone common stock. The summary set forth above does not purport to be a complete description of the analyses performed by Needham & Company in connection with the rendering of its opinion. The preparation of a fairness opinion involvesis a complex analytical process involving various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Accordingly, Needham & Company believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its analyses and opinion. Needham & Company did not attribute any specific weight to any factor or analysis considered by it. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis. In performing its analyses, Needham & Company made numerous assumptions with respect to industry performance, general business and economic and other matters, many of which are beyond the control of SorrentoZhone and Zhone.Paradyne. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable. Additionally, analyses relating to the values of businesses or assets do not purport to be appraisals or necessarily reflect the prices at which businesses or assets may actually be sold.sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. Needham & Company’s opinion and its related analyses were only one of many factors considered by Sorrento’sZhone’s board of directors in its evaluation of the proposed merger and should not be viewed as determinative of the views of Sorrento’sZhone’s board of directors or management with respect to the exchange ratio or the merger.   Under the terms of its engagement letter with Needham & Company, SorrentoZhone has paid or agreed to pay Needham & Company a nonrefundable fee for rendering the Needham & Company opinion and a fee for financial advisory services that SorrentoZhone and Needham & Company believe areis customary infor transactions of this nature. A substantial portion of Needham & Company’s fees, consisting of the fee for financial advisory services, areis not contingent on consummation of the merger. Whether or not the merger is consummated, SorrentoZhone has agreed to reimburseindemnify Needham & Company for its reasonable out-of-pocket expenses and to indemnify it against specifiedcertain liabilities relating to or arising out of services performed by Needham & Company as a financial advisor to Sorrento.in rendering its opinion.   Needham & Company is a nationally recognized investment banking firm. As part of its investment banking services, Needham & Company is frequentlyregularly engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. Needham & Company was retained by the SorrentoZhone board of directors to act as Sorrento’s financial advisorrender an opinion in connection with the merger based on Needham & Company’s experience as a financial advisor in mergers and acquisitions as well as Needham & Company’s familiarity with Zhone and the technology companies.industry generally. Needham & Company acted as financial advisor to Sorrento Networks Corporation in connection with Sorrento’s acquisition by Zhone in July 2004, for which it received compensation, but has had no other investment banking relationship with Sorrento,Zhone, and has had no investment banking relationship with Zhone,Paradyne, during the past two years. Needham & Company may in the future provide investment banking and financial advisory services to SorrentoZhone and ZhoneParadyne unrelated to the proposed merger, for which services Needham & Company expects to receive compensation. In the normal course of its business, Needham & Company may actively trade the equity securities of SorrentoZhone or ZhoneParadyne for its own account or for the account of its customers and, therefore, may at any time hold a long or short position in these securities. Opinion of Raymond James Pursuant to an engagement letter dated June 27, 2005, Paradyne retained Raymond James to act as its sole, external investment banking advisor to evaluate strategic alternatives for Paradyne, including the possible sale of all or a material portion of the assets or securities of Paradyne to, or merger with, Zhone or various other third parties. On July 7, 2005, Raymond James delivered its oral opinion, as confirmed by its written opinion dated July 7, 2005, to the Paradyne board of directors that, as of that date, and based upon and subject to the various qualifications, limitations, factors and assumptions stated in the full text of Raymond James’ opinion, the consideration provided for in the merger of 1.0972 shares of Zhone common stock in exchange for each share of Paradyne common stock was fair, from a financial point of view, to the holders of Paradyne common stock. The full text of Raymond James’ written opinion, which sets forth, among other things, the assumptions made, matters considered and limits on the review undertaken by Raymond James in connection with the opinion, is attached asAnnex E to this joint proxy statement/prospectus and is incorporated into this joint proxy statement/prospectus by reference. You are urged to read Raymond James’ opinion in its entirety. The summary of Raymond James’ written opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion attached asAnnex E. Raymond James’ opinion was given to the Paradyne board of directors for its consideration of the proposed merger and is not a recommendation to any Paradyne stockholder as to whether the merger is in that stockholder’s best interest or as to whether any stockholder should vote for or against the merger. Raymond James neither determined nor recommended to the Paradyne board of directors the amount of consideration to be paid by Zhone in connection with the merger. Additionally, Raymond James does not express any opinion as to the likely trading range of Paradyne common stock or Zhone common stock prior to or following the merger, which may vary depending on numerous factors that generally impact the price of securities or on the financial condition of Paradyne or Zhone, as the case may be. In connection with its review of the proposed merger and the preparation of its opinion, Raymond James, among other things: reviewed the financial terms and conditions as stated in the merger agreement; reviewed the audited financial statements of Paradyne as of and for the years ended December 31, 2002, 2003 and 2004 and its unaudited financial statements for the quarter ended March 31, 2005; reviewed Paradyne’s annual reports filed on Form 10-K for the years ending December 31, 2002, 2003 and 2004 and its quarterly report filed on Form 10-Q for the quarter ended March 31, 2005; reviewed the audited financial statements of Zhone as of and for the years ended December 31, 2002, 2003 and 2004 and its unaudited financial statements for the quarter ended March 31, 2005; reviewed Zhone’s registration statement on Form 10 dated April 30, 2003, as amended, and its annual reports filed on Form 10-K for the years ended December 31, 2003 and 2004 and its quarterly report filed on Form 10-Q for the quarter ended March 31, 2005; reviewed the annual report filed on Form 10-K for the year ending December 31, 2002 of Tellium, Inc. which merged with Zhone in 2003; reviewed other Paradyne and Zhone financial and operating information requested from and/or provided by Paradyne or Zhone; reviewed certain other publicly available information on Paradyne and Zhone, which Raymond James deemed to be relevant to its inquiry; visited the operations and facilities of Zhone located in Oakland, California; and discussed with members of the senior management of Paradyne and Zhone certain information relating to the aforementioned, the business and affairs of Paradyne and Zhone, and any other matters which Raymond James deemed relevant to its inquiry. Raymond James has assumed and relied upon the accuracy and completeness of all information supplied or otherwise made available to it by Paradyne, Zhone or any other party, and Raymond James has undertaken no duty or responsibility to verify independently any of such information. Raymond James has not made or obtained an independent appraisal of the assets or liabilities (contingent or otherwise) of Paradyne or Zhone. With respect to financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Raymond James, Raymond James has assumed, with Paradyne’s consent, that such forecasts and other information and data have been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management, and Raymond James has relied upon each party to advise it promptly if any information previously provided became inaccurate or was required to be updated during the period of Raymond James’ review. Raymond James has assumed, with Paradyne’s consent, that for federal income tax purposes, the merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. Raymond James has also assumed, with Paradyne’s consent, that the merger will be consummated in accordance with the terms of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the merger and the other transactions contemplated by the merger agreement, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Paradyne, Zhone or the contemplated benefits of the merger in any way meaningful to Raymond James’ analysis. In rendering its opinion, Raymond James has assumed and relied on the truth and accuracy of the representations and warranties in the merger agreement. Raymond James’ opinion is based upon market, economic, financial and other circumstances and conditions existing and disclosed to it as of July 6, 2005 and any material change in such circumstances and conditions would require a reevaluation of its opinion, which Raymond James is not obligated to undertake unless Paradyne requests it to do so. Raymond James expresses no opinion as to the underlying business decision to effect the merger, the structure or tax consequences of the merger agreement or the availability or advisability of any alternatives to the merger. Raymond James did not structure the merger or negotiate the final terms of the merger. Raymond James’ opinion is limited to the fairness to the stockholders of Paradyne, from a financial point of view, of the consideration to be received by the stockholders of Paradyne in the merger. Raymond James expresses no opinion with respect to any other reasons, legal, business, or otherwise, that may support the decision of the Paradyne board of directors to approve or consummate the merger. Fairness Opinion Analyses The following is a summary of the financial analyses Raymond James presented to the Paradyne board of directors on July 7, 2005 in connection with the delivery of Raymond James’ opinion. This summary is provided for your convenience but is not a complete description of the analyses underlying the fairness opinion. The complete text of the fairness opinion is attached to this joint proxy statement/prospectus asAnnex E, and Raymond James urges you to read it in its entirety. Raymond James’ opinion was not based on any one analysis or any particular subset of these analyses but rather gave consideration to all of the analyses taken as a whole. No company or transaction used in the analyses described below is directly comparable to Paradyne, Zhone or the contemplated merger. The information summarized in the tables that follow should be read in conjunction with the accompanying text. Acquisition Premiums Analysis Raymond James analyzed the premiums paid for merger and acquisition transactions of publicly-traded companies in the technology and communications industries announced and closed since January 1, 2003 where the acquirer owned 100% of the target’s common stock after closing of the transaction. The maximum and minimum as well as the mean and the median premiums paid over the targets’ stock prices forty-five, ten and one trading day(s) before the transaction announcement date were derived from the available data and are shown in the following table: Acquisition Premiums      Minimum     Mean     Median     Maximum   1 Trading Day Prior    (31 %)   30 %   28 %   134 % 10 Trading Days Prior    (31 %)   36 %   31 %   153 % 45 Trading Days Prior    (57 %)   39 %   28 %   180 % Raymond James then applied the premiums derived from the analysis to Paradyne’s common stock price prior to the announcement of the merger, to determine implied equity values per share of Paradyne common stock. The closing sales price of Paradyne common stock forty-five, ten and one trading day(s) prior to July 7, 2005 was $1.82, $2.03 and $1.78 per share, respectively. The following table summarizes the results of this analysis: Implied Price Per Share of Paradyne Networks Common Stock      Minimum    Mean    Median    Maximum 1 Trading Day Prior    $ 1.23    $ 2.32    $ 2.28    $ 4.16 10 Trading Days Prior    $ 1.40    $ 2.75    $ 2.66    $ 5.13 45 Trading Days Prior    $ 0.79    $ 2.53    $ 2.33    $ 5.10 In its presentation to the Paradyne board of directors, Raymond James noted that the proposed transaction value of $3.01 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the trailing 45-day average closing price of Zhone common stock as of and including July 6, 2005, fell within the minimum/maximum range of implied values derived from the 1-day, 10-day and 45-day acquisition premiums analysis comparisons. Raymond James also noted that the proposed transaction value of $3.58 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the closing price of Zhone common stock on July 6, 2005, fell within the minimum/maximum range of implied values derived from the 1-trading day, 10-trading day and 45-trading day acquisition premiums analysis comparisons. Analysis of Selected Publicly-traded Comparable Companies Raymond James analyzed selected historical financial, operating, and stock market data of Paradyne, Zhone and other publicly-traded companies that Raymond James deemed to be comparable to Paradyne. The thirteen companies deemed by Raymond James to be reasonably comparable to Paradyne were: Company Name ADC Telecom ADTRAN Alcatel Carrier Access Ciena ECI Telecom Lucent Technologies Nortel Networks Netgear Netopia Tellabs Verilink Westell Technologies Raymond James examined certain publicly available financial data of the thirteen publicly-traded comparable companies, including the ratio of enterprise value (equity value plus total debt, including preferred stock, less cash and cash equivalents) to historical and projected revenue and earnings before interest, taxes, depreciation and amortization, or EBITDA, and the ratio of equity value to net income for the trailing-twelve-month, or TTM, period and for the fiscal calendar years ending 2005 and 2006. The projections for future revenue, EBITDA and net income were derived or obtained from estimates in publicly disseminated research reports. These estimates were not prepared solely for use in Raymond James’ opinion, and Raymond James has undertaken no duty or responsibility to verify or update these estimates. The following table summarizes the results of this analysis: Selected Publicly-Traded Comparable Companies Minimum Mean Median Maximum Total Enterprise Value to: TTM Revenue 0.4x 1.5x 1.4x 3.7x 2005E Revenue 0.4x 1.4x 1.3x 3.4x 2006E Revenue 0.3x 1.3x 1.2x 3.0x TTM EBITDA 6.4x 30.1x 31.1x 38.2x 2005E EBITDA 7.3x 14.1x 9.6x 46.3x 2006E EBITDA 2.5x 10.9x 8.5x 38.7x Total Equity Value to: TTM Net Income 6.6x 30.1x 31.1x 58.9x 2005E Net Income 13.8x 23.0x 22.8x 38.6x 2006E Net Income 4.9x 15.4x 15.5x 22.1x Raymond James then applied the ratios derived from its analysis of selected public-traded comparable companies to Paradyne’s unaudited operating results for the TTM period ended March 31, 2005, and to projected revenue, EBITDA and net income for Paradyne for the calendar years ending 2005 and 2006 in order to determine an implied equity value per share for each of the above financial measures. The projections for future revenue, EBITDA and net income for Paradyne were derived or obtained from consensus estimates in publicly disseminated research reports. These estimates were not prepared solely for use in Raymond James’ opinion, and Raymond James has undertaken no duty or responsibility to verify or update these estimates. The following table summarizes the results of the comparable company analysis: Implied Price Per Share of Paradyne Networks Common Stock      Minimum    Mean    Median    Maximum Total Enterprise Value to:                             TTM Revenue    $ 1.81    $ 4.14    $ 3.75    $ 8.77 2005E Revenue    $ 1.79    $ 4.15    $ 3.81    $ 8.78 2006E Revenue    $ 1.66    $ 4.49    $ 4.13    $ 9.05 TTM EBITDA    $ 1.17    $ 2.35    $ 2.40    $ 2.75 2005E EBITDA    $ 1.24    $ 1.60    $ 1.36    $ 3.30 2006E EBITDA    $ 1.28    $ 2.71    $ 2.31    $ 7.48 Total Equity Value to:                             TTM Net Income    $ 0.14    $ 0.65    $ 0.67    $ 1.27 2005E Net Income    $ 0.37    $ 0.61    $ 0.60    $ 1.02 2006E Net Income    $ 0.69    $ 2.18    $ 2.19    $ 3.13 In its presentation to the Paradyne board of directors, Raymond James noted that the proposed transaction value of $3.01 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the trailing 45-day average closing price of Zhone common stock as of and including July 6, 2005, fell within the minimum/ maximum range of implied values derived from all revenue statistics, the 2005E and 2006E EBITDA statistics and 2006E net income statistic and was above the minimum/maximum range of implied values for the TTM EBITDA and the TTM and 2005E net income statistics. Raymond James also noted that the proposed transaction value of $3.58 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the closing price of Zhone common stock on July 6, 2005, fell within the minimum/maximum range of implied values derived from all revenue statistics and the 2006E EBITDA statistic and was above the minimum/maximum range of implied values for the TTM and 2005E EBITDA and all of the net income statistics. Analysis of Selected Merger and Acquisition Transactions Raymond James compared the proposed merger with selected comparable merger and acquisition transactions. No transaction analyzed in Raymond James’ comparable transaction analysis was identical to the merger. Accordingly, this analysis necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics and in other factors that distinguish the Paradyne/Zhone merger from the other transactions considered, because all of these factors, both individually and cumulatively, could affect the acquisition value of the target companies to which Paradyne is being compared. Raymond James analyzed the ratio of the enterprise value to annualized most recent quarter revenue for each of the target companies. Raymond James assessed nineteen comparable merger and acquisition transactions that closed between January 2004 and June 2005. The merger and acquisition transactions considered are listed in the following table: Acquirer Target Tut Systems, Inc. Copper Mountain Networks, Inc. Kinderhook Industries, LLC. NACT Telecommunications, Inc. CITEL Technologies MCK Communications, Inc. Mercury Computer Systems, Inc. Momentum Computer, Inc. UTStarcom, Inc. Audiovox Corporation—Wireless handset division Flextronics International, Ltd. Nortel Networks Corporation—Optical, wireless & enterprise manufacturing operations LeCroy Corporation Computer Access Technology Corporation Tekelec VocalData, Inc. C-COR Incorporated Optinel Systems, Inc. Paradyne Networks, Inc. Net to Net Technologies, Inc. Verilink Corporation Larscom Incorporated Zhone Technologies, Inc. Sorrento Networks Corporation UTStarcom, Inc. TELOS Technology, Inc. ADC Telecommunications, Inc. KRONE Group of Companies Ciena Corporation Catena Networks, Inc. Tekelec Taqua, Inc. Advanced Fibre Communications, Inc. North American Access—business unit of Marconi Communications, Inc. Verilink Corporation XEL Communications, Inc. PCTEL, Inc. MAXRAD, Inc. The following table summarizes the results of this analysis: Selected Merger and Acquisition Transaction Multiples Minimum Mean Median Maximum Annualized Most Recent Quarter Revenue 0.4x 2.7x 1.0x 8.0x Raymond James then applied the multiples derived from the analysis of selected merger and acquisition transactions to Paradyne’s unaudited annualized most recent quarter revenue as of March 31, 2005, to determine implied equity values per share of Paradyne common stock. The following table summarizes the results of this analysis: Implied Price Per Share of Paradyne Networks Common Stock      Minimum    Mean    Median    Maximum Annualized Most Recent Quarter Revenue    $ 1.73    $ 6.62    $ 3.09    $ 18.01 In its presentation to the Paradyne board of directors, Raymond James noted that the proposed transaction value of $3.01 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the trailing 45-day average closing price of Zhone common stock as of and including July 6, 2005, fell within the minimum/maximum range of implied values derived from the analysis of selected merger and acquisition transactions. Raymond James also noted that the proposed transaction value of $3.58 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the closing price of Zhone common stock on July 6, 2005, fell within the minimum/maximum range of implied values derived from the analysis of selected merger and acquisition transactions. The comparable transaction analysis described above, as is typical, was based on market data for companies deemed to be similar to Paradyne and on previous transactions deemed similar to the merger. Since no company or transaction is precisely comparable to Paradyne or the merger, the analysis relies on data from a group of companies and transactions. If single transaction comparisons were to be used, the implied value for Paradyne would vary significantly depending on which transaction is chosen. For this reason, the analysis presents the results for not only the highest and lowest implied values for each analysis, but also for the median and mean values for the entire group transactions analyzed. Contribution Analysis Raymond James analyzed the projected revenue contribution of Paradyne to Zhone on a pro forma basis for the calendar years ending 2005 and 2006 and the projected EBITDA contribution for the calendar year ending 2006. The projections for future revenue and EBITDA were derived or obtained from estimates in publicly disseminated research reports. These estimates were not prepared solely for use in Raymond James’ opinion, and Raymond James has undertaken no duty or responsibility to verify or update these estimates. Raymond James then calculated the implied value per share of Paradyne common stock based on its implied contribution for each period. The implied values are shown in the following table: Implied Price Per Share of Paradyne Networks Common Stock      Contribution     Implied Value Per Paradyne Networks Share 2005E Revenue    49 %   $ 5.82 2006E Revenue    49 %   $ 5.89 2006E EBITDA    46 %   $ 5.31 In its presentation to the Paradyne board of directors, Raymond James noted that the proposed transaction value of $3.01 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the trailing 45-day average closing price of Zhone common stock as of and including July 6, 2005, was below the range of implied values derived from the contribution analysis. Raymond James also noted that the proposed transaction value of $3.58 per share of Paradyne common stock, based on the exchange ratio of 1.0972 and the closing price of Zhone common stock on July 6, 2005, was below the range of implied values derived from the contribution analysis. Opinion of Raymond James The summary set forth above does not purport to be a complete description of the analyses of data underlying Raymond James’ fairness opinion or its presentation to the Paradyne board of directors. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. Raymond James believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering the analyses taken as a whole, would create an incomplete view of the process underlying the analyses set forth in its opinion. In addition, Raymond James considered the results of all such analyses and did not assign relative weights to any of the analyses, so the ranges of valuations resulting from any particular analysis described above should not be taken to be Raymond James’ view of the actual value of Paradyne. In performing its analyses, Raymond James made numerous assumptions with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond Raymond James’ control. The other principal assumptions upon which Raymond James based its analyses are set forth above under the description of each analysis. The analyses performed by Raymond James are not necessarily indicative of actual values, trading values, or actual future results which might be achieved, all of which may be significantly more or less favorable than those suggested by such analyses. Such analyses were prepared solely as part of Raymond James’ analysis of the fairness of the consideration to be received in the merger by the common stockholders of Paradyne from a financial point of view, and said analyses were provided to the Paradyne board of directors. The analyses do not purport to be appraisals or to reflect the prices at which businesses or securities might be sold. In addition, as described above, the opinion of Raymond James was one of many factors taken into consideration by the Paradyne board of directors in making its determination to approve the transaction. Consequently, the analyses described above should not be viewed as determinative of the Paradyne board of directors’ opinion with respect to the value of Paradyne, nor should the analyses be viewed in any way as a recommendation as to how stockholders should vote or act on any manner relating to the merger. Raymond James received a fee from Paradyne upon delivery of its opinion. Raymond James has been engaged to render financial advisory services to Paradyne in connection with the proposed merger and will also receive a fee for such services, which fee is larger than the fee for the fairness opinion and is contingent upon consummation of the merger. In the ordinary course of business, Raymond James may trade in the securities of Paradyne and Zhone for its own account and for the accounts of its customers. Accordingly, Raymond James may at any time hold a long or short position in such securities. Raymond James has also provided financial advisory and investment services to Paradyne in the past, including having provided investment advisory services to Paradyne in July 2004, and in the future may seek to provide similar services to Paradyne or Zhone. Raymond James has consented to the descriptions of its fairness opinion in this joint proxy statement/prospectus and to the inclusion of the full text of its fairness opinion asAnnex E to this joint proxy statement/prospectus. Raymond James is a nationally recognized investment banking firm. Raymond James and its affiliates, as part of their investment banking activities, are regularly engaged in the valuation of businesses and their securities in connection with merger transactions and other types of acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes. Paradyne selected Raymond James as its financial advisor on the basis of Raymond James’ experience and expertise in mergers and acquisitions transactions. Regulatory Approvals Required for the Merger   Zhone’s acquisition of SorrentoParadyne is subject to review by the Antitrust Division of the United States Department of Justice or the United States Federal Trade Commission, which we refer to as the FTC, to determine whether it complies with applicable antitrust law. Under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act, and its related rules, the merger cannot be completed until both Zhone and SorrentoParadyne file notification of the proposed transaction with the Antitrust Division and the FTC and the specified waiting periods have expired or been terminated. On May 14, 2004,August 1, 2005, Zhone and Sorrento each filed notification reports with the Antitrust Division andParadyne received notice from the FTC and requested anthat early termination of the required waiting period. If early termination is not granted and a request for additional information by the relevant antitrust authorities is not made, theapplicable waiting period will expire at midnight on June 14, 2004.under the HSR Act had been granted.   At any time before or after the acquisition is completed, the Antitrust Division or the FTC could take action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the acquisition or seeking divestiture of substantial assets of Zhone or SorrentoParadyne or their subsidiaries. Private parties also may seek to take legal action under the antitrust laws under some circumstances. Based upon an examination of information available relating to the businesses in which the companies are engaged, Zhone and SorrentoParadyne believe that the completion of the merger will not violate U.S. antitrust laws. However, Zhone and SorrentoParadyne can give no assurance that a challenge to the merger on antitrust grounds will not be made, or, if such a challenge is made, that Zhone and SorrentoParadyne will prevail.   In addition, the merger may be reviewed by the state attorneys general in the various states in which Zhone and SorrentoParadyne operate. While Zhone and SorrentoParadyne believe there are substantial arguments to the contrary, these authorities may claim that there is authority, under the applicable state and federal antitrust laws and regulations, to investigate or disapprove the merger under the circumstances and based upon the review set forth in applicable state laws and regulations. There can be no assurance that one or more state attorneys general will not attempt to file an antitrust action to challenge the merger.   Material United States Federal Income Tax Consequences of the Merger   The following discussion describes the material U.S. federal income tax consequences generally applicable to SorrentoParadyne stockholders as a result of the exchange of their shares of SorrentoParadyne common stock for Zhone common stock pursuant to the merger. This discussion is based on existing provisions of the Internal Revenue Code of 1986, as amended, or the Code, existing Treasury regulations, including temporary and proposed Treasury regulations, and current administrative rulings and court decisions, all as in effect as of the date of this joint proxy statement/prospectus and all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences described below.below and could adversely affect Paradyne stockholders.   SorrentoParadyne stockholders should be aware that this summary does not deal with all federal income tax considerations that may be relevant to particular SorrentoParadyne stockholders in light of their particular circumstances. In particular, this discussion does not address the tax consequences to, Sorrentoand does not apply to: Paradyne stockholders who do not hold their Paradyne stock as a capital asset; Paradyne stockholders who are foreign persons or whose functional currency is not the U.S. dollar; Paradyne stockholders who are financial institutions, who arebrokers or dealers in securities, who areregulated investment companies, insurance companies, who are tax-exempt entities, persons who are subject to the alternative minimum tax provisions of the Code, who do not hold their Sorrento stock as a capital asset,or traders in securities that elect mark to market treatment; Paradyne stockholders who acquired their SorrentoParadyne common stock pursuant to the exercise of employee stock options, stock purchase plan rights, or otherwise as compensation,compensation; or Paradyne stockholders who hold their Paradyne stock through a partnership or other pass-through entity or who hold Sorrentotheir Paradyne stock as part of a hedge, straddle or conversion transaction. transaction, synthetic security or other integrated investment. In addition, the following discussion does not address the tax consequences of the merger under foreign, state or local tax laws, the tax consequences of transactions effected prior or subsequent to, or concurrently with, the merger, whether or not any such transactions are undertaken in connection with the merger, including, without limitation, any transaction in which shares of SorrentoParadyne stock are acquired or shares of Zhone common stock are disposed of, or the tax consequences of the assumption by Zhone of the SorrentoParadyne options Sorrento debentures or SorrentoParadyne warrants. SorrentoParadyne urges each SorrentoParadyne stockholder to consult such stockholder’s own tax advisor as to the federal income tax consequences of the merger, and also as to any state, local, foreign or other tax consequences, based on such stockholder’s own particular facts and circumstances.   The merger is intended to constitute a reorganization within the meaning of Section 368(a) of the Code. However, the closing of theA merger is not conditioned upon the receipt by Zhone or Sorrento of an opinion of counsel regarding the qualification of the merger as a reorganization within the meaning of Section 368(a) of the Code. In addition, the parties have not requested and will not request a ruling from the Internal Revenue Service or an opinion of counsel regarding the tax consequences of the merger. Accordingly, no assurance can be given that the Internal Revenue Service would not successfully challenge the treatment of the merger as a reorganization. Nevertheless, Sorrento, Zhone and Selene Acquisition Corp. have agreed in the merger agreement that each intends that the merger qualify as a reorganization and that each will treat and report the merger as such. Assuming the merger qualifies as a reorganization the merger generally will result in the following U.S. federal income tax consequences:   neither Sorrento,Paradyne, Zhone nor Selene Acquisition Corp.Parrot will recognize any income, gain or loss as a result of the completion of the merger;   the holders of SorrentoParadyne stock will not recognize a gain or loss upon the exchange of SorrentoParadyne common stock for Zhone common stock pursuant to the merger, except to the extent of cash received in lieu of a fractional share of SorrentoParadyne common stock, as described below;   the aggregate tax basis of the Zhone common stock received by SorrentoParadyne stockholders in the merger, reduced by any tax basis attributable to fractional shares deemed to be disposed of, will be the same as the aggregate tax basis of the SorrentoParadyne common stock surrendered in exchange therefor;   the holding period of the Zhone common stock received by each SorrentoParadyne stockholder pursuant to the merger will include the period during which the stock surrendered in exchange therefor was held by such SorrentoParadyne stockholder, provided the SorrentoParadyne common stock so surrendered is a capital asset in the hands of the SorrentoParadyne stockholder at the time of the merger; and   cash payments received by holders of SorrentoParadyne common stock in lieu of a fractional share of Zhone common stock generally will be treated as if the fractional share of Zhone common stock had been issued in the merger and then redeemed by Zhone. A SorrentoParadyne stockholder receiving cash in lieu of a fractional share will recognize gain or loss upon the payment measured by the difference, if any, between the amount of cash received and the basis in the fractional share.   SinceParadyne, Zhone and Parrot Acquisition Corp. have agreed in the treatmentmerger agreement that each intends that the merger qualify as a reorganization and that each will treat and report the merger as such. Further, in connection with the completion of the merger, Alston & Bird, counsel to Paradyne, has delivered to Paradyne an opinion to the effect that the merger will qualify as a reorganization within the meaning of Section 368(a) of the CodeCode. An opinion of counsel is not binding on the Internal Revenue Service. The parties have not requested and will not request a condition toruling from the closingInternal Revenue Service regarding the U.S. federal income tax consequences of the merger, Sorrento stockholders should considermerger. Accordingly, we cannot assure you that the merger mayInternal Revenue Service will not qualify aschallenge the conclusions expressed in this discussion or that a reorganization.Acourt will not sustain any such challenge. A successful Internal Revenue Service challenge to the reorganization status of the merger would result in SorrentoParadyne stockholders recognizing taxable gain or loss with respect to each share of SorrentoParadyne common stock surrendered equal to the difference between the stockholder’s basis in that share and the fair market value, as of the effective time of the merger, of the Zhone common stock received in the exchange. In that event, a stockholder’s aggregate basis in the Zhone common stock received would equal its fair market value, and the stockholder’s holding period for that stock would begin the day after the merger. Even if A cash payment received by a Paradyne stockholder in lieu of a fractional share of Zhone common stock may be subject to “backup withholding” at a rate of 28%. Backup withholding will not apply to a Paradyne stockholder that is a corporation or otherwise exempt from the backup withholding rules and that, when required, demonstrates that fact. In addition, backup withholding will not apply to a non-corporate Paradyne stockholder who provides his or her or its taxpayer identification number, which, in the case of an individual, is his or her social security number, and all other required information. A Paradyne stockholder that is a United States person may avoid backup withholding by properly completing a substitute IRS Form W-9 (which is included with this joint proxy statement/prospectus) and submitting it to the exchange agent for the merger when he or she submits his or her Paradyne stock certificates. A Paradyne stockholder who is required to and does not provide a correct taxpayer identification number may be subject to penalties imposed by the Internal Revenue Service successfully challengedService. Any amount paid as backup withholding does not constitute an additional tax but will be refundable or creditable against the reorganization status ofstockholder’s U.S. federal income tax liability provided the merger, each of Sorrento, Zhone and Selene Acquisition Corp. would still not recognize any income, gain or loss as a result of completion ofappropriate information is furnished to the merger.Internal Revenue Service.   Accounting Treatment   In accordance with accounting principles generally accepted in the United States, ZhoneThe merger will accountbe accounted for the merger using the purchase method of accounting.accounting under U.S. generally accepted accounting principles. Under the purchase method of accounting, the estimated purchase price of Sorrento will be the fair value of the common stock that Zhone issues in connection with the merger, the fair value of the options and warrants to purchase shares of Sorrento common stock that Zhone assumes in connection with the merger, the liabilities assumed by Zhone in the merger is allocated among the Paradyne assets acquired and the amountParadyne liabilities assumed to the extent of direct transaction costs incurred by Zhone associatedtheir fair market value, with the merger.any excess purchase price being allocated to goodwill. The fair valueallocation of the common stock exchanged will be calculated based on the average closingpurchase price of Sorrento common stock on the Nasdaq National Market for the two days prior to the announcementassets and liabilities of the merger, the dayParadyne contained in this document is preliminary. The final allocation of the announcement (April 22, 2004) and the two days following the announcement. The purchase price will be allocateddetermined after the merger is completed and after completion of an analysis to determine the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of theirassigned fair values at the date of the completionParadyne’s assets and liabilities. See “Unaudited Pro Forma Condensed Combined Consolidated Financial Statements of the merger. To the extent that the purchase price exceeds the estimated fair value of the net assets acquired, the excess purchase price will be recorded as goodwill.Zhone and Paradyne” beginning on page 64. Public Trading Markets   Zhone has obtained a preliminary third party valuation report for the purpose of preparing the unaudited pro forma condensed combined financial statements. The purchase price allocation will remain preliminary until Zhone completes a final third party valuation of identifiable intangible assets acquired, evaluates integration plansagreed to be implemented in conjunction with the merger, and determines the fair values of other assets acquired and liabilities assumed at the closing date. The final determination of the purchase price allocation is expected to be completed as soon as practicable after consummation of the merger. The final amounts allocated to assets and liabilities acquired could be materially different from the amounts presented in the unaudited pro forma condensed combined financial statements. Listing of Zhone Common Stock The merger agreement provides that Zhone will use its reasonable best efforts to cause the shares of Zhone common stock to be issued in the merger to be approved for listing on the Nasdaq National Market prior to the completion of the merger. It is a condition to the consummationcompletion of the merger that the shares of Zhone common stock issuable in the merger be approved for listing on the Nasdaq National Market.   If the merger is completed, Paradyne common stock will be delisted from the Nasdaq National Market and deregistered under the Securities Exchange Act of 1934, as amended. DeregistrationResales of SorrentoZhone Common Stock   If the merger is completed, Sorrento common stock will be deregistered under the Exchange Act and Sorrento will no longer file periodic reports with the SEC. Restrictions on Sales of Shares of Zhone Common Stock Received in the Merger The shares of Zhone common stock to be issued in the merger will be registered under the Securities Act and will be freely transferable, except forIn general, shares of Zhone common stock issued to any person who is deemed to be an “affiliate” of Sorrento priorParadyne stockholders pursuant to the merger. Personsmerger will be freely transferable, except for any shares received by persons who may be deemed to be “affiliates” of Sorrento priorthe parties under the Securities Act of 1933, as amended. Persons who may be deemed to the mergerbe “affiliates” include individuals or entities that control, are controlled by, or are under common control of Sorrento prior to the merger,with a person, and may include officers and directors, as well as significant stockholders of Sorrento prior to the merger.stockholders. Affiliates of Sorrento prior to the merger may not sell any of thetheir shares of Zhone common stock received by them in connection with the merger exceptonly pursuant to: to an effective registration statement under the Securities Act covering the resale of those shares; shares, an exemption under paragraph (d)Rule 145(d) of Rule 145 under the Securities Act;Act or any other applicable exemption under the Securities Act. Zhone’s registration statement on Form S-4, of which this joint proxy statement/prospectus formsconstitutes a part, does not cover the resale of shares of Zhone common stock to be received by affiliates of Sorrento in the merger.   Interests of Directors and Executive Officers of ZhoneParadyne in the Merger   In considering the recommendation of the ZhoneParadyne board of directors regarding the merger, ZhoneParadyne stockholders should be aware that some ZhoneParadyne directors and executive officers have interests in the merger and relatedhave arrangements that are different from, or in addition to, their interests as Zhone stockholders. These interests may create potential conflictsthose of interest for these directors and executive officers because they may be more likely to approve the merger than ZhoneParadyne stockholders generally. The ZhoneParadyne board of directors was aware of these interests and took these interests into account in its deliberations of the merits of the merger and in approvingdeclaring the merger agreement and the transactions contemplated by the merger agreement.agreement, including the merger, advisable. These interests are summarized below.   On August 8, 2003, Sorrento completed its acquisition of LuxN, Inc., pursuant to which (1) each share of LuxN common stock was cancelled, (2) certain holders of LuxN’s Series A-1 preferred stock elected to receive an aggregate of $14.8 million cash at closing,New Consulting Agreements and (3) certain holders of LuxN’s Series A-1 preferred stock elected to receive an aggregate of 1,879,347 shares of Sorrento common stock. In addition, Sorrento issued warrants to purchase an aggregate of 400,000 shares of Sorrento common stock to the holders of LuxN’s Series A-1 preferred stock. Because various entities affiliated with New Enterprise Associates were holders of LuxN’s Series A-1 preferred stock immediately prior to the completion of Sorrento’s acquisition of LuxN, these entities affiliated with New Enterprise Associates received warrants, and are currently holders of such warrants, to purchase an aggregate of 91,930 shares of Sorrento common stock. Of the 91,930 shares of Sorrento common stock subject to warrants held by New Enterprise Associates entities, (a) 14,197 shares are subject to warrants held by New Enterprise Associates VIII, L.P., (b) 29,833 shares are subject to warrants held by New Enterprise Associates 8A, L.P., and (c) 47,900 shares are subject to warrants held by New Enterprise Associates 10, L.P.Restrictive Covenant Agreements   C. Richard Kramlich,In connection with the execution of the merger agreement, Zhone entered into a memberconsulting agreement with each of Zhone’s boardSean Belanger, Chairman of directors, is a general partner of New Enterprise Associates, a venture capital firm that is affiliated with various New Enterprise Associates entities that hold Zhone common stock and warrants to purchase shares of Sorrento common stock. In addition, Morteza Ejabat, Zhone’s Chairman andthe Board, Chief Executive Officer Jeanette Symons, Zhone’sand President of Paradyne, and Patrick Murphy, Senior Vice President, Chief TechnologyFinancial Officer, Treasurer and Robert Dahl, a memberSecretary of Zhone’s board of directors, and/or trusts forParadyne, which will become effective upon the benefitclosing of the foregoing persons or their family members,merger. Under the terms of the consulting agreements, Messrs. Belanger and Murphy have partnership interestsagreed, for a period of two years, to assist in various New Enterprise Associates entities that are holdersthe retention of both Zhone common stockParadyne customers following the merger and warrantsin the transition of the manufacturing operations of Paradyne to Zhone’s manufacturing model. Under the consulting agreements, Messrs. Belanger and Murphy will receive $480,018 and $295,018 per year, respectively, and will be granted options to purchase shares of Sorrento common stock. Upon completion of the merger, these warrants to purchase shares of Sorrento common stock will be converted into warrants to purchase931,962 and 314,458 shares of Zhone common stock, as adjustedrespectively, for their services. In the event that any payments or benefits to give effectMessrs. Belanger and Murphy under the consulting agreements or any other agreement or plan become subject to the mergerexcise taxes imposed under Section 4999 of the Code, Messrs. Belanger and Murphy will be entitled to an additional payment such that they will be in the same after-tax position as if no excise tax had been imposed. Messrs. Belanger and Murphy have also each entered into a restrictive covenant agreement with Zhone, which will become effective upon the closing of the merger. Under these agreements, Messrs. Belanger and Murphy have agreed not to compete with, or solicit customers or employees of, Zhone during the term of the consulting agreements and for a period of two years thereafter. In exchange ratio.for these non-compete and non-solicitation covenants, Zhone has agreed to pay Messrs. Belanger and Murphy $255,000 and $240,000, respectively, each year during such four-year period.   These interests may create potential conflictsSeverance and Change of interest for these directorsControl Agreements In connection with entering into the merger agreement, Paradyne also entered into agreements with Messrs. Belanger and Murphy to amend each of their employment agreements and all outstanding stock options and stock option agreements held by them. The amendments increased certain severance benefits payable to the executive officers in the event that such executive officer’s employment is terminated by Paradyne without cause or by the executive officer for good reason. In such event, the amended employment agreements provide that the executive officer will be entitled to (1) base salary and accrued benefits through the date of termination, (2) a pro rata target annual bonus for the year in which the termination occurs, (3) a severance payment equal to two times the sum of the executive officer’s base salary and target annual bonus (pursuant to which Messrs. Belanger and Murphy would receive $960,036 and $590,036, respectively, based on their compensation for 2005), and (4) continued participation in the health and welfare benefit plans of Paradyne on the same basis and at the same cost to the executive officer as on the date of termination for a period of 24 months after the date of termination. In addition, with respect to Mr. Belanger, the amendment provides that in the event of a change in control of Paradyne, one half of Mr. Belanger’s unvested options will vest and, if at any time within one year following a change in control, Mr. Belanger voluntarily resigns because they may be more likely to approvehe is not offered continued comparable employment or his employment is terminated by Paradyne without cause, his remaining unvested options will automatically vest. Mr. Murphy’s existing employment agreement already provides for such vesting. The amendments also provide that the issuancestock options held by the executive officers will remain exercisable for a period of Zhone common stockfour years following termination of the executive officer’s employment for any reason other than for cause. Paradyne has agreed in connection with the merger than Zhone stockholders generally. The Zhone boardagreement to deliver the resignation of directors was awareeach officer and director of these interestsParadyne, including Messrs. Belanger and took these interests into account in its deliberations ofMurphy, at or prior to the meritsconsummation of the merger, and in approvingto be effective as of the consummation of the merger. The termination of their employment upon the consummation of the merger will entitle the executive officers to the severance and other benefits provided under the transactions contemplated by the merger agreement.amended employment agreements as described above.   Interests of Directors and Executive Officers of Sorrento in the Merger Some members of Sorrento’s management and board of directors have interests in the merger that are in addition to or different from their interests as Sorrento stockholders. These interests may create potential conflicts of interest. The Sorrento board of directors was aware of these interests and considered them in approving the merger agreement and the merger. Indemnification; Directors’ and Officers’ Insurance and Indemnification   The merger agreement provides that the indemnification obligations set forthrights of Paradyne’s directors and officers to be indemnified as provided in Sorrento’sParadyne’s certificate of incorporation, bylaws and any indemnification agreements will survive the mergercontinue in full force and will not be amended, repealed or modified by the combined companyeffect for a period of six years after the effective datecompletion of the merger. In addition, Zhone must obtain a prepaid director and officer insurance policy for six years after the completion of the merger, Zhone will provide to Sorrento’s currentParadyne’s directors and officers, an insurance and indemnification policy with a $10 million limit and other terms which arecoverage that is no less favorable than Sorrento’sParadyne’s existing policy; provided, however, that Zhone is not required to pay an annual premium for the directors’ and officers’ insurance in excess of $1 million. Severance, Stock Option Acceleration and Other Arrangements Pursuant to the terms of an employment agreement between Sorrento and Phil Arneson, Sorrento’s Chairman and Chief Executive Officer, Mr. Arneson is to be paid his accrued salary plus any accrued and unused vacation upon termination for any reason. In addition, upon termination following a change of control, upon signing a waiver and general release, Mr. Arneson’s then-unvested options will vest and Mr. Arneson will be paid a lump sum amount equal to twice his current annual base salary. Additionally, Mr. Arneson’s health and life insurance and other benefits will continuepolicy, for a two year period. The closingperiod of the merger will constitute a change of control for purposes of Mr. Arneson’s employment agreement.six years. Pursuant to the terms of an employment agreement between Sorrento and Joe Armstrong, Sorrento’s Chief Financial Officer, Mr. Armstrong is to be paid his accrued salary plus any accrued and unused vacation upon termination for any reason. In addition, upon termination following a change of control, upon signing a waiver and general release, Mr. Armstrong’s then-unvested options will vest and Mr. Armstrong will be paid a lump sum amount equal to his current annual base salary. Additionally, Mr. Armstrong’s health and life insurance and other benefits will continue for a one year period. The closing of the merger will constitute a change of control for purposes of Mr. Armstrong’s employment agreement. Pursuant to the terms of an employment agreement between Sorrento and Mitchell Truelock, Sorrento’s Vice President, Corporate Development, in the event Mr. Truelock is terminated without cause prior to certain conditions in the employment agreement, he will receive two months salary continuation and accelerated vesting of his then-unvested stock options. In addition, if Mr. Truelock is terminated without cause within six months following a change of control, Mr. Truelock will receive accelerated vesting of his then-unvested stock options. The closing of the merger will constitute a change of control for purposes of Mr. Truelock’s employment agreement. Pursuant to the terms of Sorrento’s 2003 Equity Incentive Plan, all unvested options held by Sorrento’s outside directors vest in full upon a change of control transaction, such as the merger. As a result of the interests described above, these executive officers and directors could be more likely to vote for, and to recommend the vote for, the proposal to approve the merger and adopt the merger agreement, than if they did not hold these interests. Management and Operations Following the Merger   Upon completion of the merger, the directors and executive officers and board of directors of Zhone will serve as the directors and executive officers and board of directors of the combined company. The directors and executive officers of the combined company intend, following completion of the merger, to undertake a comprehensive review of the business, operations, capitalization and management of the combined company with a view to optimizing development of its potential on a going forward basis. The corporate headquartersIn addition, following the completion of the combined company will be located in Oakland, California, atmerger, Zhone plans to evaluate, and consider pursuing, the locationdivestiture of the current headquartersnon-strategic and legacy narrowband business of Zhone.Paradyne. Messrs. Belanger and Murphy have indicated that they may be interested in acquiring this business from Zhone, if and when Zhone decides to divest it, although no agreements or understandings have been reached in that regard.   No Appraisal Rights   Appraisal rights are statutory rights that enable stockholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to stockholders in connection with the extraordinary transaction. Appraisal rights are not available in all circumstances, and exceptions to these rights are provided under the laws of Delaware, which is the state of incorporation of Zhone and Sorrento.Paradyne. As a result of these exceptions, neither Zhone stockholders nor SorrentoParadyne stockholders are entitled to appraisal rights in the merger. THE MERGER AGREEMENT   The following summary describes specified aspects of the material provisions ofmerger agreement. This discussion does not purport to be complete and is qualified in its entirety by reference to the merger agreement, which is included in this joint proxy statement/prospectusattached asAnnex A and is incorporated herein by reference in this joint proxy statement/prospectus. This summary may not contain all of the information about the merger agreement that is important to you.reference. We encourageurge you to read the merger agreement carefully and in its entirety.   Structure of the Merger   Subject toIn accordance with the terms and subject to satisfaction or waiver of the conditions set forth in the merger agreement, SeleneParrot Acquisition Corp., a newly formed and wholly owned subsidiary of Zhone, will merge with and into Sorrento.Paradyne. The separate corporate existence of SeleneParrot will then cease, and SorrentoParadyne will then continue as the surviving corporation in the merger and will be a wholly owned subsidiary of Zhone.   Effective Time of the Merger   The closing of the merger will take place when all of the conditions contained in the merger agreement are satisfied or waived. The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at such later time as is specified in the certificate of merger.   Conversion of Securities   Upon completion of the merger of SeleneParrot with and into Sorrento,Paradyne, each share of SorrentoParadyne common stock issued and outstanding immediately prior to the completion of the merger will automatically be converted into the right to receive 0.9 of a share1.0972 shares of Zhone common stock. Each share of ZhoneParadyne common stock held in the treasury by Sorrento,Paradyne or by Zhone and Selene,or Parrot, immediately prior to the completion of the merger will be canceled without any payment of consideration.   The exchange ratio, which equals 0.9 of a share1.0972 shares of Zhone common stock for each share of SorrentoParadyne common stock, will be proportionatelyequitably adjusted for any stock dividend, stock split, reverse stock split,subdivision, reclassification, recapitalization, combination, exchange of shares or similar event with respect to shares of Zhone common stock or SorrentoParadyne common stock effected between the date of the merger agreement and the completion of the merger.   Promptly after completion of the merger, Zhone’s transfer agent will mail to former SorrentoParadyne stockholders a letter of transmittal and instructions to be used in surrendering stock certificates whichthat represented shares of SorrentoParadyne common stock prior to the completion of the merger. When a former SorrentoParadyne stockholder delivers these certificates to the exchange agent along with a properly executed letter of transmittal and any other required documents, the former SorrentoParadyne stockholder will receive Zhone stock certificates representing the number of whole shares of Zhone common stock to which the stockholder is entitled under the merger agreement and cash in lieu of any fractional shares of Zhone common stock.   Treatment of SorrentoParadyne Stock Options and Warrants   Upon completion of the merger, Zhone will assume all options to purchase SorrentoParadyne common stock then outstanding under Sorrento’sParadyne’s stock option plans and option agreements. After the merger, each option will represent the right to purchase that number of shares of Zhone common stock equal to the number of shares of SorrentoParadyne common stock covered by the option immediately before the merger multiplied by the exchange ratio, rounded down to the nearest whole share. The exercise price per share of Zhone common stock subject to each option will equal the pre-conversion exercise price per share of SorrentoParadyne common stock subject to such option divided by the exchange ratio, rounded up to the nearest whole cent. Subject to the rights of holders of Sorrento’s PIPE warrants to elect to receive cash in exchange for their PIPE warrants, eachEach warrant to purchase SorrentoParadyne common stock outstanding immediately prior toon the date of completion of the merger automatically will be converted into a warrant to purchase Zhone common stock. After the merger, each assumed warrant will represent the right to purchase that number of shares of Zhone common stock equal to the number of shares of SorrentoParadyne common stock covered by the warrant immediately before the merger multiplied by the exchange ratio, rounded down to the nearest whole share. The exercise price per share of Zhone common stock subject to each warrant will equal the pre-conversion exercise price per share of SorrentoParadyne common stock subject to such warrant divided by the exchange ratio, rounded to the nearest whole cent.   Treatment of RestrictedEmployee Stock Purchase Plan   If any shares of SorrentoParadyne’s employee stock purchase plan, or ESPP, permits eligible Paradyne employees to purchase Paradyne common stock outstanding immediately priorat a discount pursuant to such employees’ participation in the closingplan. Upon the final purchase date (as defined below), (1) the offering period in effect as of the date of the merger are unvested or are subjectagreement will end, (2) all existing offering periods under the ESPP will terminate, (3) all future offering periods will be suspended, (4) all further payroll deductions under the ESPP will cease, and (5) Paradyne will apply the funds credited under the ESPP to a repurchase option or riskthe purchase of forfeiture upon any terminationwhole shares of the stockholders’ employment, directorship or other relationshipParadyne common stock in accordance with Sorrento, under the terms of anythe ESPP. The merger agreement with Sorrento that does not by its terms provide that such repurchase option or risk of forfeiture lapses upon consummationdefines a “final purchase date” as the earlier of the merger, then the shares of Zhone common stock issued upon the conversion of those shares in the merger will continue to be unvested and subjectlast trading day prior to the same repurchase options and risks of forfeiture. Treatment of Sorrento Debentures Upon completion of the merger each 7.5% senior convertible debenture due August 2, 2007or the ending date of Sorrento which is outstanding will be assumed by Zhone and thereafter continue to represent a debenturethe offering period in effect as of Sorrento, except that the Sorrento debentures will be convertible into sharesdate of Zhone common stock and as adjusted to give effect to the merger.merger agreement.   Representations and Warranties   TheIn the merger agreement, contains a number of customaryParadyne and Zhone (along with Parrot) made representations and warranties to each other about their respective companies consistent with representations and warranties made by Zhone and Selene on the one hand, and Sorrento, on the other, relating to, among other things, the following subject matters: incorporation and qualification, certification of incorporation and bylaws, capitalization, authority to enter into the merger agreement, board approval, no conflict with charter documents and contracts, required consents, approvals, authorizations and permits, permits and compliance with laws, SEC filings, financial statements and the accuracy of the information containedcompanies engaging in those documents, broker’s fees, absence of specified material changes or events, tax treatment of the merger, litigation, opinions of financial advisors, and vote required for stockholder approval. Sorrento made additionalsimilar transactions. The representations and warranties regarding:given by Paradyne, Zhone and Parrot will not survive completion of the merger. Certain representations and warranties of Zhone and Paradyne are qualified as to materiality or “material adverse effect.” When used with respect to Zhone or Paradyne, “material adverse effect” means any change, effect or circumstance that, with respect to Zhone or Paradyne as appropriate:   employee benefit plans,has or could reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of that company and its subsidiaries taken as a whole, other than such changes, effects or circumstances reasonably attributable to:   labor and other employment matters and labor contracts,economic conditions generally in the United States or foreign economies in any locations where that company has material operations or sales; provided, that changes in such conditions do not have a material disproportionate effect on such company; conditions generally affecting the industries in which that company participates; provided, that changes in such conditions do not have a material disproportionate effect on such company;   the validity, binding nature and absenceannouncement or pendency of material defaults with respect to specified contracts,the merger;   compliancelegal, accounting, investment banking or other fees or expenses incurred in connection with laws related to environmental matters,the transactions contemplated by the merger agreement;   intellectual property,the payment of any amounts due to, or the provision of any other benefits to, any officers or employees under employment contracts, non-competition agreements, employee benefit plans, severance arrangements or other arrangements in existence on the date of the merger agreement;   tax matters,any action taken with the other company’s express written consent;   insurance policies,any change in the trading price of that company’s common stock in and of itself; or   propertiesany failure, in and assets,of itself, by either company to meet internal or other estimates, predictions, projections or forecasts of revenue, net income or any other measure of financial performance; or   customers, customer revenues, prevents Zhone or Paradyne, as applicable, from consummating the merger and the other transactions contemplated by the merger agreement. These representations and warranties are qualified by information in confidential disclosure memoranda that the parties exchanged in connection with interested persons,signing the merger agreement. The merger agreement is attached asAnnex A to provide you with information regarding its terms and absence conditions. It is not intended to provide any other factual information about the parties. Such information can be found elsewhere in this joint proxy statement/prospectus and in the other public filings each of agreements to sell Sorrento or effect any merger, business combination, recapitalization, liquidation or other reorganization. the parties makes with the SEC, which are available without charge at www.sec.gov.   Conduct of Business by SorrentoParadyne Prior to Completion of the Merger   SorrentoParadyne has agreed that, subject to certain specified exceptions, prior to the completion of the merger, it will conduct operations only in the ordinary and usual course of business consistent with past practice. In addition, SorrentoParadyne will not, between the date of the merger agreement and the completion of the merger, do any of the following without Zhone’s prior written consent: amend its certificate of incorporation or bylaws,bylaws;   issue, sell, pledge, dispose of, grant, transfer or encumber any of its capital stock, convertible securities, or options, warrants or other rights to acquire any capital stock or convertible securities, other than (1) the issuance of SorrentoParadyne common stock upon the exercise or conversion of options and warrants outstanding Sorrento options, warrants,as of the date of the merger agreement and debentures, (2) the granting options to purchase an aggregate of up to 200,000 shares of Sorrento common stock50,000 options in the ordinary course of business consistent with past practice, or (3) the issuance of shares of Sorrento common stock to the holders of Sorrento debentures in satisfaction of periodic interest payments due under the Sorrento debentures,practice;   sell, pledge, dispose, transfer, lease, license, guarantee or encumber any material property or assets, except pursuant to existing contracts or commitments or the sale or purchase of goods in the ordinary course of business consistent with past practice; enter into any commitment or transaction outside the ordinary course of business consistent with past practice;   declare or pay any dividends or make other distributions,distributions;   enter into any agreement with respect to the voting of its capital stock,stock;   reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire any of its capital stock,stock;   acquire any interest in any person or any material assets, other than acquisitions of assets in the ordinary course of business consistent with past practice and any other asset acquisitions for consideration not in excess of $250,000 per calendar quarter;   incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse the obligations of any person for borrowed money, except for indebtedness for borrowed money incurred in the ordinary course of business consistent with past practice or other indebtedness for borrowed money in a principal amount not in excess of $200,000;   terminate, cancel or agree to any material change in any material contract,contract;   increase the compensation or benefits of directors, officers or employees,employees;   grant any rights to severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee,employee; amend or waive any performance or vesting criteria or accelerate vesting, exercisability or funding under any benefit plan,plan;   pay, discharge or satisfy any material claims, liabilities or obligations,obligations;   accelerate or delay collection of material notes and accounts receivable in advance or beyond their regular due dates,dates;   delay or accelerate payment of material accounts payable in advance of their due dates,dates; make any material change in accounting policies or procedures other than in the ordinary course of business consistent with past practice or as required by United States generally accepted accounting principles or by a government entity,entity;   waive, release, assign, settle or compromise any material claims, litigation or arbitration,arbitration;   make any material tax election, settle or compromise any material tax liability, amend any material tax return or file any tax refund take for any action that would prevent the merger from qualifying as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code,material amount;   modify, amend or terminate, or waive, release or assign any material rights or claims with respect to any confidentiality or standstill agreement,agreement;   take any action that isknowingly act in a manner intended or would reasonably be expected to materially delay the consummation of the merger or result in any of the conditions to the merger not being satisfied,satisfied; or authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing. Conduct of Business by Zhone Prior to Completion of the Merger Zhone has agreed that it will not, between the date of the merger agreement and the completion of the merger, do any of the following without Paradyne’s prior written consent: amend its certificate of incorporation or bylaws in a manner that adversely affects the rights of Zhone common stock; declare or pay any dividends or make other distributions; redeem, purchase or otherwise acquire any of its capital stock or other securities at a price above the then prevailing fair market value of such capital stock or other securities; issue, sell, pledge, dispose of, grant, transfer or encumber any of its capital stock, convertible securities, or options, warrants or other rights to acquire any capital stock or convertible securities, other than (1) as may be required by any contracts in existence on the date of the merger agreement, (2) in the ordinary course of business consistent with past practice, (3) in arm’s length transactions, or (4) upon the exercise of options and warrants outstanding as of the date of the merger agreement or subsequently granted in the ordinary course of business consistent with past practice; merge or consolidate Zhone or Parrot with any other person or acquire any business (except in either case as would not reasonably be expected to materially delay the consummation of the merger or result in any of the conditions to the merger not being satisfied); liquidate or dissolve Zhone or Parrot; or   authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing.   Additional Agreements   Stockholder Meetings   Zhone has agreed to call and hold a meeting of its stockholders as promptly as reasonably practicable after the date on which the registration statement becomes effective and the joint proxy/prospectus is cleared by the SEC for the purpose of voting upon the approval of the issuance of Zhone common stock pursuant to the merger agreement.agreement as promptly as reasonably practicable after the date on which the registration statement covering those shares of Zhone common stock becomes effective with the SEC. In connection with the Zhone stockholder meeting, the Zhone board of directors will use its reasonable best efforts to obtain Zhone stockholder approval will recommend that Zhone stockholders approve of the issuance of the shares of Zhone common stock pursuant to the merger agreement, and will not withdraw or adversely modify its recommendation.   SorrentoParadyne has agreed to call and hold a meeting of its stockholders for the purpose of voting on the adoption of the merger agreement as promptly as reasonably practicable after the date on which the registration statement covering the shares of Zhone common stock to be issued in the merger becomes effective andwith the joint proxy/prospectus is cleared by the SEC for the purpose of voting upon the adoption of the merger agreement.SEC. Subject to the fiduciary duty exceptions described in the merger agreement and other applicable laws, the SorrentoParadyne board of directors will use its reasonable best efforts to obtain SorrentoParadyne stockholder approval, will recommend that the SorrentoParadyne stockholders approve the merger agreement, and the merger, and will not withdraw or adversely modify its recommendation.   Access to Information and Confidentiality   Each of Zhone and SorrentoParadyne has agreed to provide access to its books and records to the other party and its directors, officers, employees and other representatives, and to comply with its obligations under confidentiality agreements among the parties.   Consents and Filings   Zhone and SorrentoParadyne have agreed to use their reasonable best efforts to take all necessary action to consummate the transactions contemplated by the merger agreement, obtain any required consents and licenses, and make all necessary filings. Employee Benefits   With respect to each Zhone employee benefit plan in which SorrentoParadyne employees participate after the merger, SorrentoParadyne employees will be granted credit for service with SorrentoParadyne for purposes of determining vesting and entitlement to benefits, including for Paradyne options, severance benefits and vacation entitlement, except to the extent such service credit will result in the duplication of benefits or to the extent that service was not recognized under the SorrentoParadyne employee benefit plan.   Sorrento’s employee stock purchase plan permits eligible Sorrento employees to purchase Sorrento common stock at a discount pursuant to such employees’ participation in the plan. Following the date of the merger agreement, no offering periods will commence. With respect to any offering period that is in effect immediately prior to the consummation of the merger, each participant’s accumulated payroll deductions will be used to purchase shares of Sorrento common stock immediately priorPrior to the completion of the merger. Uponmerger, Paradyne will amend all of its severance plans and policies to provide that any severance payable under these plans and policies will be offset by the amount of damages applicable under the Worker Adjustment Retraining and Notification Act or other similar state law. Zhone has agreed that if any Paradyne employee is terminated after the completion of the merger, the Sorrentosuch employee stock purchase plan will be terminated.entitled to severance equal to the greater of (1) the amount of severance the employee would have been entitled to receive under the severance benefits and policies of Paradyne had the employee been involuntarily terminated as of the completion of the merger or (2) the amount of severance the employee would be entitled to receive under Zhone’s severance policies and practices, assuming (for purposes of calculating his or her severance entitlement) that his or her employment with Zhone commenced as of the completion of the merger.   Indemnification of Officers and Directors   The merger agreement provides that all rights to indemnification in effect as of the indemnification obligations set forthdate of the merger agreement as provided in Sorrento’sParadyne’s certificate of incorporation, bylaws and any indemnification agreements will survive the merger and will notcontinue in full force and effect and be amended, repealed or modifiedhonored, without any amendment, for a period of six years after the completion of the merger.   In addition, for six years after theprior to completion of the merger, Zhone must provide to Sorrento’s currentobtain a prepaid director and officer insurance policy for Paradyne’s directors and officers, an insurance and indemnification policy with a $10 million limit and other terms which arecoverage that is no less favorable than Sorrento’sParadyne’s existing policy. However, Zhone is not requiredpolicy, for a period of six years with respect to pay an annual premium forclaims arising from facts or events that occurred on or before the directors’ and officers’ insurance in excesscompletion of $1 million.the merger, including the transactions contemplated by the merger agreement.   No Solicitation of Other Transactions   The merger agreement provides that SorrentoParadyne and its subsidiaries will not, through any representatives or otherwise:   encourage, initiate, solicit, knowingly encourage, or take any other action to facilitate any acquisition proposal (as defined below),; participate or engage in any discussions or negotiations regarding, or furnish any nonpublic information with respect to, or facilitate any inquiries or anyproposals that may reasonably be expected to lead to an acquisition proposal,proposal;   engage in discussions with any person with respect to any acquisition proposal,proposal;   approve, endorse or recommend any acquisition proposal,proposal; or   enter into any agreement, commitment or understanding contemplating or relating to any acquisition proposal,proposal;   provided that, SorrentoParadyne may, in response to an acquisition proposal that was not solicited after the date of the merger agreement or in violation of the terms of the merger agreement, participate in discussions or negotiations with or furnish information to any person whichthat makes an acquisition proposal if:   such actionthe discussions, negotiations or furnishing of information to that person is taken subject to a confidentiality agreement containing customary terms and conditions,conditions;   the SorrentoParadyne board of directors reasonably determines in good faith, after consultation with its outside legal counsel and financial advisor, that suchthe acquisition proposal maycould reasonably be expected to lead to a superior proposal (as defined below),; and   the SorrentoParadyne board of directors reasonably determines in good faith, after consultation with its outside legal counsel, that a failure to take such actionsparticipate in the discussions or negotiations or furnish information to that person would constitute a breach ofbe inconsistent with its fiduciary duties.duties under applicable law. In addition, SorrentoParadyne has agreed that itsthe Paradyne board of directors will not withdraw, modify or amend in a manner adverse to Zhone its recommendation of the approval of the merger.merger agreement by Paradyne stockholders. However, the SorrentoParadyne board of directors may withdraw, modify or amend its recommendation of the merger by Sorrento stockholders if, following receipt of a superior proposal:   Paradyne has complied with the Sorrentonon-solicitation provisions of the merger agreement; the Paradyne board of directors reasonably determines in good faith, after consultation with its outside legal counsel, that a failure to take such actionswithdraw, modify or amend its recommendation would constitute a breach ofbe inconsistent with its fiduciary duties under applicable laws; and   prior to taking such actions,withdrawing, modifying or amending its recommendation, the SorrentoParadyne board of directors has given Zhone at least five business days’ notice of its intention to take such action and the opportunity to meet with SorrentoParadyne and its outside counsel and financial advisor. In addition, Paradyne has agreed to promptly advise Zhone of any request for information with respect to any acquisition proposal or any inquiries, proposals, discussions or negotiations with respect to any acquisition proposal, and promptly provide to Zhone copies of any written materials received in connection with the foregoing. With respect to any superior proposal, Paradyne must provide Zhone with an opportunity during the five-day period described above to negotiate revisions to the terms of the merger agreement for the good faith consideration by Paradyne’s board of directors.   The merger agreement defines an “acquisition proposal” as any offer or proposal concerning any of the following:   a merger, consolidation, business combination or similar transaction involving Sorrento,Paradyne;   a sale, lease or other disposition by merger, consolidation, business combination, share exchange, joint venture or otherwise of Sorrento’s assets representingof Paradyne that represent 20% or more of the consolidated assets of SorrentoParadyne and its subsidiaries,subsidiaries;   an issuance, sale, or other disposition of (including by way of merger, consolidation, business combination, share exchange, joint venture or any similar transaction) securities (or options, rights or warrants to purchase, or securities convertible into or exchangeable for such securities) representing 20% or more of the Sorrento’s voting power of Paradyne; a transaction in which any person or group acquires beneficial ownership, or the right to acquire beneficial ownership or any group has been formed which beneficially owns or has the right to acquire beneficial ownership, of 20% or more of Sorrento’sParadyne’s outstanding voting capital stock,stock; or   any combination of the foregoing (other than the merger contemplated by the merger agreement).   The merger agreement defines a “superior proposal” as a bona fide written offer made by any person other than Zhone or Parrot that: is not solicited by Paradyne in violation of the non-solicitation provisions of the merger agreement;   concerns an acquisition proposal (exceptinvolving Paradyne, except that for purposes of this definition references in the above definition of acquisition proposal to “20%” will beare changed to “50%”) involving Sorrento,;   is on terms whichthat the SorrentoParadyne board of directors in good faith concludes (following consultation with its financial advisors and outside legal counsel) are more favorable to SorrentoParadyne stockholders than the transactions contemplated by the merger agreement,agreement; and   is, in the good faith judgment of Sorrento,the Paradyne board of directors, reasonably likely to be financed and completed on the terms proposed, taking into account the various legal, financial and regulatory aspects of the proposal.   Conditions to Completion of the Merger   The respective obligations of Zhone and SorrentoParadyne to effect the merger are subject to the satisfaction or waiver, prior to the completion of the merger, of variouscustomary conditions, including the following:   the registration statement covering the issuance of shares of Zhone common stock to be issued pursuant to Paradyne stockholders in the merger agreement has been declared effective by the SEC and no stop order suspending the effectiveness of the registration statement has been issued or threatened by the SEC,SEC;   the merger agreement, the merger and the other transactions contemplated by the merger agreement (including the issuance of the shares of Zhone common stock) have been approved by the requisite vote of the stockholders of Zhone and Sorrento,Paradyne;   no governmental agency or court has issued any order, decree, judgment or injunction that prevents or prohibits consummation of the completion of the merger or any other transaction contemplated by the merger agreement,agreement; all material consents, approvals and authorizations of any governmental entity have been obtained, and any applicable waiting periods have expired or been terminated; and   the shares of Zhone common stock issuable to the SorrentoParadyne stockholders in the merger and upon exercise of the Paradyne options have been approved for listing on the Nasdaq National Market.   In addition, the obligations of Zhone and SeleneParrot to effect the merger are subject to the satisfaction or waiver, prior to the completion of the merger, of each of the following conditions:   the representations and warranties of SorrentoParadyne will be true and correct as of the date the merger is to be completed, except where the failure of those representations and warranties to be true and correct would not have a material adverse effect on Sorrento,Paradyne;   SorrentoParadyne has performed or complied in all material respects with all material agreements and covenants required by the merger agreement to be performed or complied with prior to the date the merger is to be completed,completed;   SorrentoParadyne has obtained all material consents, approvals and authorizations required pursuant to the merger agreement,agreement;   since the date of the merger agreement, no event will have occurred that has a material adverse effect on Sorrento,Paradyne; Paradyne’s chief executive officer and chief financial officer have not failed to provide, with respect to Paradyne’s filings with the SEC after the date of the merger agreement, any necessary certification required by the Sarbanes-Oxley Act; and   Sorrento has, uponParadyne’s adjusted cash balance is (1) at least $38.0 million if the merger is completed on or before October 31, 2005, (2) $37.0 million if the merger is completed after October 31, 2005 but on or before November 30, 2005, and (3) $36.0 million if the merger is completed after November 30, 2005 but on or before December 31, 2005. The merger agreement defines “adjusted cash balance” as (A) the sum of Paradyne’s cash, cash equivalents and securities available for sale (each determined in accordance with GAAP consistently applied) as of the last day of the calendar month preceding the completion of the merger cash on hand of not less than $5 million, after paymentplus (B) the amount of all legal, accounting, banking, severance and bonus obligations, and Sorrento has obtained from the holders of not less than 75% of the outstanding warrantstransaction expenses relating to purchase shares of Sorrento common stock issued in connection with Sorrento’s December 31, 2003 and January 26, 2004 financings (including warrants issued to Sorrento’s financial advisor in connection therewith) such holders’ consent to exchange such warrants for warrants to purchase Zhone common stock on the terms set forth in the merger agreement including a waiverand the merger incurred by Paradyne as of any associated warrant purchase obligations on the part of Zhone.same month end.   In addition, the obligations of SorrentoParadyne to effect the merger are subject to the satisfaction or waiver, prior to the completion of the merger, of each of the following conditions:   the representations and warranties of Zhone and SeleneParrot will be true and correct as of the date the merger is to be completed, except where the failure of those representations and warranties to be true and correct would not have a material adverse effect on Zhone,Zhone;   Zhone has performed or complied in all material respects with all material agreements and covenants required by the merger agreement to be performed or complied with prior to the date the merger is to be completed,completed;   Zhone has obtained all material consents, approvals and authorizations, required pursuant to the merger agreement, andagreement;   since the date of the merger agreement, no event will have occurred that has a material adverse effect on Zhone.Zhone; Zhone’s chief executive officer and chief financial officer have not failed to provide, with respect to Zhone’s filings with the SEC after the date of the merger agreement, any necessary certification required by the Sarbanes-Oxley Act; and Paradyne has received a written opinion of Alston & Bird to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the Code.   Termination of the Merger Agreement   The merger agreement may be terminated and the merger may be abandoned at any time prior to the completion of the merger:   (1) by mutual written consent of the Zhone and Sorrento boards of directors, (1) by mutual written consent of the Zhone and Paradyne boards of directors;   (2) by Zhone or Sorrento if: (2) by Zhone or Paradyne if:   (a) the merger has not been completed prior to September 30, 2004, unless it is the terminating party’s failure to fulfill any obligation under the merger agreement that resulted in the failure of the merger to occur on or before that date, (a) the merger has not been completed prior to December 31, 2005, unless it is the terminating party’s failure to fulfill any obligation under the merger agreement that resulted in the failure of the merger to occur on or before that date; (b) any governmental entity has issued an order or ruling permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the merger agreement, and such order or ruling has become final and nonappealable, or   (c) the approval by the stockholders of Zhone and Sorrento required for consummation of the merger is not obtained, unless it is the terminating party’s failure to fulfill any obligation under the merger agreement that resulted in the failure to obtain the approval of such party’s stockholders, (b) any governmental entity has issued an order or ruling permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the merger agreement, and such order or ruling has become final and nonappealable; or   (3) by Zhone if: (c) the approval by the stockholders of Zhone and Paradyne required for consummation of the merger is not obtained, unless it is the terminating party’s failure to fulfill any obligation under the merger agreement that resulted in the failure to obtain the approval of such party’s stockholders; (3) by Zhone if:   (a) the Sorrento board of directors has: (i) failed to make, or withdrawn or adversely modified its recommendation of the merger, (ii) approved or recommended to its stockholders an acquisition proposal other than that contemplated by the merger agreement or entered into any agreement with respect to an acquisition proposal, (iii) after an acquisition proposal has been made, failed to affirm its recommendation of the merger within five business days of any request by Zhone to do so, or (iv) recommended that its stockholders tender their shares in any tender offer or exchange offer that is commenced (other than by Zhone) that, if successful, would result in any person or group becoming a beneficial owner of 20% or more of its outstanding shares of capital stock, or (a) the Paradyne board of directors has: (i) failed to make, or withdrawn or adversely modified its recommendation of the merger, (ii) approved or recommended to its stockholders an acquisition proposal other than that contemplated by the merger agreement or entered into any agreement with respect to an acquisition proposal, (iii) after an acquisition proposal has been made, failed to affirm its recommendation of the merger within five days of any request by Zhone to do so or (iv) recommended that its stockholders tender their shares in any tender offer or exchange offer that is commenced (other than by Zhone) which, if successful, would result in any person or group becoming a beneficial owner of 20% or more of its outstanding shares of capital stock; or   (b) there has been a breach by Sorrento of any representation, warranty or covenant contained in the merger agreement which (i) would result in a failure to satisfy specified merger conditions and (ii) is not cured within 20 days; provided that Zhone is not in material breach of its obligations or its representations and warranties under the merger agreement and Zhone has given Sorrento at least 20 days’ prior written notice, (b) there has been a breach by Paradyne of any representation, warranty or covenant contained in the merger agreement that (i) would result in Paradyne’s failure to satisfy specified merger conditions and (ii) is not cured within 20 days or prior to December 31, 2005, if sooner;provided that Zhone is not in material breach of its obligations or its representations and warranties under the merger agreement and Zhone has given Paradyne at least 20 days’ prior written notice;   (4) by Sorrento if: (4) by Paradyne if:   (a) it receives a superior proposal and the Sorrento board of directors reasonably determines in good faith, after consultation with outside legal counsel, that it is necessary to terminate the merger agreement and enter into an agreement to effect the superior proposal in order to comply with its fiduciary duties;provided that Sorrento has complied with its obligations under the merger agreement, including (i) giving Zhone the opportunity to submit a competing proposal and (ii) paying Zhone certain fees required under the merger agreement (as described below), (a) it receives a superior proposal and Paradyne has complied with certain obligations under the merger agreement, including (i) giving Zhone five days’ written notice of the Paradyne board of directors’ decision to terminate; (ii) renegotiating in good faith with Zhone during this five-day period without receiving a competing proposal from Zhone that Paradyne’s board of directors has determined to be as favorable to Paradyne’s stockholders as the superior proposal, and (iii) paying Zhone the termination fee required under the merger agreement (as described below);   (b) the Zhone board of directors has failed to make, or has withdrawn or adversely modified its recommendation of the issuance of shares of Zhone common stock, or (b) the Zhone board of directors has failed to make, or has withdrawn or adversely modified its recommendation of the issuance of shares of Zhone common stock; or   (c) there has been a breach by Zhone of any representation, warranty or covenant contained in the merger agreement which (i) would result in a failure to satisfy specified merger conditions and (ii) is not cured within 20 days;provided that Sorrento is not in material breach of its obligations or its representations and warranties under the merger agreement and Sorrento has given Zhone at least 20 days’ prior written notice. (c) there has been a breach by Zhone of any representation, warranty or covenant contained in the merger agreement that (i) would result in Zhone’s failure to satisfy specified merger conditions and (ii) is not cured within 20 days or prior to December 31, 2005, if sooner;provided that Paradyne is not in material breach of its obligations or its representations and warranties under the merger agreement and Paradyne has given Zhone at least 20 days’ prior written notice.   Expenses and Termination Fee Expenses   Generally, all fees and expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring those expenses. However, Zhone and SorrentoParadyne will share equally all expenses related to printing, filing and mailing the registration statement and the joint proxy statement/prospectus, all SEC filing fees incurred in connection therewith, and the filing fees related to any filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.   Termination Fee   Under the terms of the merger agreement, Sorrento has agreed to reimburse Zhone up to $1 million for expenses incurred by Zhone in connection with the merger negotiations if (1) Zhone terminates the merger agreement due to a breach by Sorrento of any representation, warranty or covenant contained in the merger agreement, or (2) either Zhone or Sorrento terminates the merger agreement because Sorrento stockholders failed to approve the adoption of the merger agreement at a meeting of Sorrento stockholders or at an adjournment of that meeting. Zhone must reimburse Sorrento up to $1 million for expenses incurred by Sorrento in connection with the merger negotiations if (1) Sorrento terminates the merger agreement because the Zhone board of directors fails to make, or withdraws or adversely modifies its recommendation of the issuance of shares of Zhone common stock, (2) Sorrento terminates the merger agreement due to a breach by Zhone of any representation, warranty or covenant contained in the merger agreement, or (3) either Zhone or Sorrento terminates the merger agreement because Zhone stockholders failed to approve the issuance of shares of Zhone common stock under the merger agreement at a meeting of Zhone stockholders or at an adjournment of that meeting. In addition, under the terms of the merger agreement, SorrentoParadyne has agreed to pay Zhone a termination fee of $2$2.0 million (less amounts, if any, previously paid to reimburse Zhone for out-of-pocket expenses) in the event that the merger agreement is terminated:   by SorrentoParadyne because it receives a superior proposal and the Sorrento board of directors reasonably determines in good faith, after consultation with outside legal counsel, that it is necessary to terminate the merger agreement and enter into an agreement to effect the superior proposal in order to comply with its fiduciary duties,proposal; or   by Zhone because the SorrentoParadyne board of directors: (1) fails to make, or withdraws or adversely modifies its recommendation to the Paradyne stockholders of the merger agreement, (2) approves or recommends an acquisition proposal other than that contemplated by the merger agreement or enters into any agreement with respect to an acquisition proposal, (3) following an acquisition proposal, fails to affirm its recommendation to the Paradyne stockholders of the merger agreement within five business days of any request by Zhone to do so, or (4) recommends that its stockholders tender their shares in a tender offer or exchange offer that is commenced (other than by Zhone). request by Zhone to do so or (4) recommends that its stockholders tender their shares in a tender offer or exchange offer that is commenced (other than by Zhone) which, if successful, would result in any person or group becoming a beneficial owner of 20% or more of Paradyne’s outstanding shares of capital stock.   SorrentoParadyne will also be required to pay Zhone the $2$2.0 million termination fee (less amounts, if any, previously paid to reimburse Zhone for out-of-pocket expenses) if all of the following conditions are met:   the merger agreement has been terminated on either of the following bases:   Zhone terminates the merger agreement due to a breach by SorrentoParadyne of any representation, warranty or covenant contained in the merger agreement,agreement; or   Zhone or SorrentoParadyne terminates the merger agreement because the merger has not been completed prior to September 30, 2004December 31, 2005 or the SorrentoParadyne stockholders failed to approve the adoption of the merger,merger;   at any time after the date of the merger agreement but before its termination, an acquisition proposal has been publicly made, proposed or communicated,communicated; and   within 12twelve months following the termination of the merger agreement, SorrentoParadyne consummates or enters into an agreement with respect to the acquisition proposal which is subsequently consummated.   Amendment and Waiver   Subject to applicable law, the parties may amend the merger agreement in writing at any time prior to the completion of the merger. In addition, at any time prior to the completion of the merger, any party to the merger agreement may (1) extend the time for performance of any of the obligations of the other party, (2) waive any inaccuracies in the representations and warranties of the other party and (3) waive compliance by the other party with any of the agreements or conditions in the merger agreement. However, after a party has received the approval of its stockholders, no amendment, extension or waiver can be made that by law or in accordance with the rules of the Nasdaq National Market requires further stockholder approval without such further approval. VOTING AGREEMENTS   The following summary describes the material provisionsspecified aspects of the voting agreements,agreements. This discussion does not purport to be complete and is qualified in its entirety by reference to the forms ofvoting agreements, which are attached to this joint proxy statement/prospectus asAnnex B andAnnex C and are incorporated herein by reference in this joint proxy statement/prospectus. This summary may not contain all of the information about the voting agreements that is important to you.reference. We encourageurge you to read the voting agreements carefully and in their entirety.   Zhone Stockholders   As an inducement to SorrentoParadyne to enter into the merger agreement, certain persons and entities affiliated with Texas Pacific Group, Kohlberg Kravis Roberts & Co., L.P., and New Enterprise Associates, and NIF Ventures, each of whom is a significant stockholder of Zhone, Michael Connors, Robert Dahl and Barton Shigemura,James Timmins, each of whom is a director of Zhone, and Morteza Ejabat, Jeanette Symons and Kirk Misaka, each of whom is an executive officer of Zhone, entered into a voting agreement with Sorrento.Paradyne. As of the record date for the Zhone special meeting, these stockholders collectively helddirectly and indirectly owned an aggregate of approximately 34,016,50436,950,972 shares of Zhone common stock representing approximately 43%39.0% of the voting poweroutstanding shares of the Zhone common stock.stock (as well as 963,531 shares subject to outstanding options and warrants that are exercisable within 60 days of this date).   Pursuant to the terms of the voting agreement, each stockholder agreed to vote (1) in favor of the merger, the adoption of the merger agreement, the issuance of Zhone common stock pursuant to the merger and the approval of transactions contemplated by the merger agreement, and (2) against any proposal, action or transaction that would impede, frustrate, prevent or nullify the merger, the merger agreement, the issuance of Zhone common stock pursuant to the merger or the transactions contemplated by the merger agreement. Each stockholder appointed Joe R. ArmstrongPatrick Murphy as such stockholder’s proxy and attorney-in-fact to vote such stockholder’s shares of Zhone common stock in accordance with the provisions of the voting agreement and revoked all prior proxies. Each stockholder also agreed not to sell, transfer or otherwise dispose of such stockholder’s shares of Zhone shares,common stock, subject to certain exceptions provided in the voting agreement.   The voting agreement terminates upon the earlier to occur of (1) the completion of the merger or (2) the termination of the merger agreement in accordance with its terms. See “The Merger Agreement-TerminationAgreement—Termination of the Merger Agreement.”Agreement” on page 59.   SorrentoParadyne Stockholders   As an inducement to Zhone and SeleneParrot to enter into the merger agreement, Phillip W. Arneson, Joe R. Armstrong, Donne F. Fisher, Robert L. Hibbard, Gary M. Parsons, Larry J. Matthews, Don HerzogSean Belanger, Patrick Murphy, Thomas Epley, Scott Chandler, Keith Geeslin, William Stensrud and Tom Schilling,David Walker, each of whom is a director or executive officer or significant stockholder of Sorrento,Paradyne, entered into a voting agreement with Zhone and Selene.Parrot. As of the record date for the SorrentoParadyne special meeting, these stockholders collectively helddirectly and indirectly owned an aggregate of approximately 24,662647,975 shares of SorrentoParadyne common stock, representing less than one percentapproximately 1.4% of the voting poweroutstanding shares of the SorrentoParadyne common stock.stock (as well as 4,364,806 shares subject to outstanding options that are exercisable within 60 days of this date).   Pursuant to the terms of the voting agreement, each stockholder agreed to vote (1) in favor of the merger, the adoption of the merger agreement and the approval of transactions contemplated by the merger agreement, (2) against any acquisition proposal other merger agreement or alternative transaction to thatthan contemplated by the merger agreement with Zhone, and (3) against any proposal, action or transaction that would impede, frustrate, prevent or nullify the merger, the merger agreement or the transactions contemplated by the merger agreement. Each stockholder appointed Morteza Ejabat as such stockholder’s proxy and attorney-in-fact to vote such stockholder’s shares of SorrentoParadyne common stock in accordance with the provisions of the voting agreement and revoked all prior proxies. Each stockholder also agreed not to sell, transfer or otherwise dispose of such stockholder’s Sorrento shares of Paradyne common stock, subject to certain exceptions provided in the voting agreement. In addition, similar to the non-solicitation provisions in the merger agreement, noreach stockholder agreed not to (1) solicit, initiate or knowingly encourage or take any other action to facilitate any competing acquisition proposal, (2) participate or engage in any discussions or negotiations or furnish nonpublic information to any person with respect to any inquiry or proposal that could reasonably be expected to lead to a competing acquisition proposal, or (3) engage in any discussions with any person with respect to a competing acquisition proposal.   The voting agreement terminates upon the earlier to occur of (1) the completion of the merger or (2) the termination of the merger agreement in accordance with its terms. See “The Merger Agreement-TerminationAgreement—Termination of the Merger Agreement.”Agreement” on page 59. UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF ZHONE AND SORRENTOPARADYNE   The following selected unaudited pro forma condensed combined consolidated financial statements give effect to the merger of Zhone and SorrentoParadyne under the purchase method of accounting. The pro forma adjustments are made as if the merger had been completed at the beginning of the year (January 1, 2004) for the results of operations data for the year ended December 31, 20032004 and for the three months ended March 31, 2004,2005, and for balance sheet purposes onas of March 31, 2004. Because the fiscal year ends of Zhone and Sorrento differ, for the purposes of presenting the unaudited pro forma condensed combined financial statements below, the financial statements of Zhone for the year ended December 31, 2003 and for the three months ended March 31,2005. On July 1, 2004, were combined with the financial statements of Sorrento for the year and three months ended January 31, 2004. On November 13, 2003, Zhone acquired all of the outstanding stock of Tellium in a reverse merger transaction.Sorrento Networks Corporation. This transaction was determined to be significant to Zhone for the purposes of preparing the unaudited pro forma condensed combined consolidated statement of operations for the year ended December 31, 2003. Accordingly,2004. For the purposes of presenting the unaudited pro forma condensed combined financial data below, the statements of operations of Zhone and SorrentoParadyne for the year ended December 31, 2003 as discussed above2004 were combined with the statement of operations of Tellium from January 1, 2003 through November 12, 2003.Sorrento for the six months ended April 30, 2004.   Under the purchase method of accounting, the aggregate consideration paid is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the transaction date. Any excess purchase price is recorded as goodwill. A preliminary valuation was conducted in order to assist the management of Zhone in determining the fair values of a significant portion of these assets and liabilities. This preliminary valuation has been considered in management’s estimates of the fair values reflected in these unaudited pro forma condensed combined consolidated financial statements. A final determination of these fair values cannot be made prior to the completion of the merger. The final valuation will be based on the actual net tangible and intangible assets and liabilities assumed of SorrentoParadyne that exist as of the date of the completion of the merger.   The unaudited pro forma condensed combined consolidated financial statements do not include only a preliminary estimate of theany adjustments for liabilities resulting from integration planning, as management of Zhone and SorrentoParadyne are in the process of making these assessments and estimates of these costs haveare not been finalized.currently known. However, costs will ultimately be recorded for severance or relocation of Sorrento employees, including severance and related benefits for certain executive officers of Paradyne, costs for vacating certain leased facilities of Sorrento, orParadyne, including costs incurred to consolidate Paradyne and Zhone’s manufacturing facilities, and other costs ofassociated with exiting activities, such as the potential cancellation of projects in development and the associated impairment of assets that would affect amounts in the pro forma financial statements. In addition, management is in the process of identifying and evaluating the possible divestiture of the non-strategic and legacy narrowband business of Paradyne. Depending on the timing of such decisions, these costs will either be recorded as part of the purchase price of the acquisition or charged to expense in the combined company’s statement of operations in the period in which they are incurred.   These unaudited pro forma condensed combined consolidated financial statements have been prepared based on preliminary estimates of fair values. The actual amounts recorded as of the completion of the merger may differ materially from the information presented in these unaudited pro forma condensed combined consolidated financial statements. In addition, the impact of ongoing integration activities, the timing of completion of the merger and other changes in Sorrento’sParadyne’s net tangible and intangible assets that occur prior to completion of the merger could cause material differences in the information presented.   These unaudited pro forma condensed combined consolidated financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes of Zhone incorporated by reference into this joint proxy statement/prospectus and the historical consolidated financial statements and accompanying notes of Sorrento included elsewhere inParadyne incorporated by reference into this joint proxy statement/prospectus. The unaudited pro forma condensed combined consolidated financial statements are not necessarily indicative of the consolidated results of operations or financial condition of the combined company that would have been reported had the merger been completed as of the dates presented, and are not necessarily representative of future consolidated results of operations or financial condition of the combined company. UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET March 31, 20042005 (in thousands)      Historical   Pro forma Adjustments     Pro forma Combined      Historical   Pro forma Adjustments     Pro forma Combined      Zhone   Sorrento      Zhone   Paradyne              (note 3)                  (note 3)       ASSETS           Current assets:           Cash and cash equivalents    $ 45,096     $ 17,617     $ —       $ 62,713      $ 41,665     $ 42,239     $ —       $ 83,904   Short-term investments      44,888       504       —         45,392        19,419       —         —         19,419   Accounts receivable, net of allowances for sales return and doubtful accounts      13,470       3,754       —         17,224        18,239       17,459       (131 )   a )     35,567   Inventories      28,419       13,893       —         42,312        43,164       18,229       —         61,393   Prepaid expenses and other current assets      2,949       1,214       —         4,163        3,294       2,017       —         5,311                     Total current assets      134,822       36,982       —         171,804        125,781       79,944       (131 )     205,594   Property and equipment, net      22,238       12,267       —         34,505        22,877       3,038       —         25,915   Goodwill      100,337       —         27,083  (f)     127,420        157,232       —         64,385     j)       221,617   Other acquisition related intangible assets, net      11,102       110       (110 )(a)        15,590       6,645       (6,645 )   b)       72,930          18,000  (f)     29,102          57,340     j)     Restricted cash      622       —         —         622        758       —         —         758   Other assets      996       737       —         1,733        367       474       —         841                     Total assets    $ 270,117     $ 50,096     $ 44,973     $ 365,186      $ 322,605     $ 90,101     $ 114,949     $ 527,655                     LIABILITIES AND STOCKHOLDERS’ EQUITY           Current liabilities:           Accounts payable    $ 19,276     $ 2,887     $ —         22,163      $ 20,751     $ 6,641     $ (131 )   a)     $ 27,261   Line of credit      14,500       —         —         14,500        14,500       —         —         14,500   Current portion of long-term debt      878       101       —         979        4,363       —         —         4,363   Accrued and other liabilities      22,279       8,188       2,000  (b)     32,467        16,209       9,343       1,073     c)       26,625                     Total current liabilities      56,933       11,176       2,000       70,109        55,823       15,984       942       72,749   Long-term debt, less current portion      31,803       3,538       —         35,341        40,116       —         —         40,116   Debentures payable      —         12,388       —         12,388   Other long-term liabilities      678       —         —         678        1,464       —         —         1,464                     Total liabilities      89,414       27,102       2,000       118,516        97,403       15,984       942       114,329            Stockholders’ equity:           Preferred stock      —         1       (1 )(c)     —     Common stock      78       16       (16 )(c)        94       47       (47 )   d)       145          15  (d)     93          51     k)     Additional paid-in capital      794,082       216,434       (216,434 )(c)        862,696       149,246       (149,246 )   d)       1,054,939          68,590  (d)     862,672          161,960     k)            30,283     l)     Notes receivable from stockholders      (550 )     —         —         (550 )      (550 )     (16 )     —         (566 ) Deferred compensation      (3,716 )     —         (388 )(e)     (4,104 )      (379 )     (113 )     113     d)       (4,533 ) Other comprehensive loss      (49 )     381       (381 )(c)     (49 ) Common stock in treasury, at cost      —         (69 )     69  (c)     —            (4,154 )   m)     Other comprehensive income (loss)      (125 )     721       (721 )   d)       (125 ) Accumulated deficit      (609,142 )     (193,769 )     193,769  (c)        (636,534 )     (75,768 )     75,768     d)       (636,534 )        (2,250 )(g)     (611,392 )                   Total stockholders’ equity      180,703       22,994       42,973       246,670        225,202       74,117       114,007       413,326                     Total liabilities and stockholders’ equity    $ 270,117     $ 50,096     $ 44,973     $ 365,186      $ 322,605     $ 90,101     $ 114,949     $ 527,655                       See accompanying notes to unaudited pro forma condensed combined consolidated financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 20032004 (in thousands, except per share data)      Historical     Pro forma Adjustments     Pro forma Combined           Historical   Pro forma Adjustments            Pro forma Combined      Zhone   Tellium*   Sorrento      Zhone   Sorrento*   Paradyne                       (note 3)                      (note 3)            Net revenue    $ 83,138     $ 26,248     $ 25,462     $ —       $ 134,848      $ 97,168     $ 12,492     $ 102,288     $ (1,109 )   a)      $ 210,839   Cost of revenue      51,081       31,255       19,769       —         102,105        55,305       9,788       62,137       (1,109 )   a)        126,121                              Gross profit (loss)      32,057       (5,007 )     5,693       —         32,743   Gross profit      41,863       2,704       40,151       —              84,718                   Operating expenses:                  Research and product development      22,495       22,415       8,025       —         52,935        23,210       4,653       15,942       —              43,805   Sales and marketing      15,859       7,760       8,406       —         32,025        21,958       3,826       17,691       —              43,475   General and administrative      5,324       19,692       6,525       —         31,541        10,416       4,480       6,806       —              21,702   Other operating expenses      —         —         320       (320 )(h)     —     Litigation settlement      1,600       —         —         —         1,600   Purchased in process research and development      8,631       —         927       —              9,558   Restructuring charges      —         —         1,710       —              1,710   Stock-based compensation      1,238       25,586       51       388 (i)        1,396       —         141       2,538     o)        4,075   Amortization and impairment of intangible assets      10,132       —         1,572       1,619     e)        22,628          (23,958 )(o)     3,305          8,810     n)        Amortization and impairment of intangible assets      7,942       —         —         6,320 (h,j)     14,262   Impairment of long-lived assets      —         26,944       —         —         26,944          495     p)        Other operating (income) expense, net      —         21       (800 )     —              (779 )                            Total operating expenses      54,458       102,397       23,327       (17,570 )     162,612        75,743       12,980       43,989       13,462            146,174                              Operating loss      (22,401 )     (107,404 )     (17,634 )     17,570       (129,869 )      (33,880 )     (10,276 )     (3,838 )     (13,462 )          (61,456 ) Other income (expense), net      (2,552 )     754       11,401       —         9,603        (1,561 )     (2,106 )     694       —              (2,973 )                            Loss before income taxes      (24,953 )     (106,650 )     (6,233 )     17,570       (120,266 )      (35,441 )     (12,382 )     (3,144 )     (13,462 )          (64,429 ) Income tax benefit      (7,778 )     —         —         —         (7,778 ) Income tax provision      205       —         —         —              205                              Net loss      (17,175 )     (106,650 )     (6,233 )     17,570       (112,488 )    $ (35,646 )   $ (12,382 )   $ (3,144 )   $ (13,462 )        $ (64,634 ) Accretion on preferred stock      (12,700 )     —         —         12,700 (k)     —                                Net loss applicable to holders of common stock    $ (29,875 )   $ (106,650 )   $ (6,233 )   $ 30,270     $ (112,488 )            Basic and diluted net loss per share applicable to holders of common stock    $ (1.87 )   $ (1.06 )   $ (0.87 )   $ (1.25 ) Weighted average shares outstanding used to compute basic and diluted net loss per share applicable to holders of common stock      15,951       100,804       7,205           (7,205 14,683 (41,137 )(l) (m) )(n)     90,301   Basic and diluted net loss per share    $ (0.42 )   $ (0.74 )   $ (0.07 )              $ (0.45 ) Weighted average shares outstanding used to compute basic and diluted net loss per share      85,745       16,649       45,614             7,823 (16,649 (45,614 51,432   ) )     f) g) h) i)        145,000   *—Represents Represents the historical results of operations of TelliumSorrento for the six months ended April 30, 2004 prior to the acquisition by Zhone on November 13, 2003.July 1, 2004.     See accompanying notes to unaudited pro forma condensed combined consolidated financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended March 31, 20042005 (in thousands, except per share data)        Historical     Pro forma Adjustments     Pro forma Combined        Zhone     Sorrento                        (note 3)         Net revenue    $ 21,033     $ 6,399     $ —       $ 27,432   Cost of revenue      11,980       5,858       —         17,838              Gross profit      9,053       541       —         9,594   Operating expenses:                                  Research and product development      5,953       2,301       —         8,254   Sales and marketing      4,682       1,841       —         6,523   General and administrative      2,482       1,767       —         4,249   Other operating expenses      —         11       (11 )(h)     —     Purchased in-process research and development      6,185       —         —         6,185   Stock-based compensation      528       —         —         528   Amortization and impairment of intangible assets      2,078       —         1,511 (h,j)     3,589              Total operating expenses      21,908       5,920       1,500       29,328              Operating loss      (12,855 )     (5,379 )     (1,500 )     (19,734 ) Other income (expense), net      (434 )     (2,329 )     —         (2,763 )            Loss before income taxes      (13,289 )     (7,708 )     (1,500 )     (22,497 ) Income tax provision      96       —         —         96              Net loss    $ (13,385 )   $ (7,708 )   $ (1,500 )   $ (22,593 )            Basic and diluted net loss per share applicable to holders of common stock    $ (0.17 )   $ (0.66 )           $ (0.25 ) Weighted average shares outstanding used to compute basic and diluted net loss per share applicable to holders of common stock      77,266       11,607         (11,607 14,683 )(l) (m)     91,949   See accompanying notes to unaudited pro forma condensed combined consolidated financial statements.      Historical     Pro forma Adjustments          Pro forma Combined        Zhone     Paradyne                             (note 3)              Net revenue    $ 27,563     $ 26,694     $ (163 )   a)    $ 54,094   Cost of revenue      15,594       16,797       (163 )   a)      32,228                   Gross profit      11,969       9,897       —              21,866                   Operating expenses:                                       Research and product development      5,910       4,252       —              10,162   Sales and marketing      6,134       4,480       —              10,614   General and administrative      2,027       1,735       —              3,762   Stock-based compensation      128       33       289     o)      450   Amortization and impairment of intangible assets      2,257       516       2,079     n)      4,976                          124     p)          Other operating income, net      —         (765 )     —              (765 )                 Total operating expenses      16,456       10,251       2,492            29,199                   Operating loss      (4,487 )     (354 )     (2,492 )          (7,333 ) Other income (expense), net      (606 )     290       —              (316 )                 Loss before income taxes      (5,093 )     (64 )     (2,492 )          (7,649 ) Income tax provision      38       —         —              38                   Net loss    $ (5,131 )   $ (64 )   $ (2,492 )        $ (7,687 )                 Basic and diluted net loss per share    $ (0.05 )   $ (0.00 )                $ (0.05 ) Weighted average shares outstanding used to compute basic and diluted net loss per share      94,100       46,610         (46,610 51,432 )     h) i)      145,532   NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS   1. Basis of presentation   These unaudited pro forma condensed combined consolidated financial statements present the pro forma financial position and results of operations of the combined company based upon historical financial information after giving effect to the transaction and adjustments described in these footnotes. Because the fiscal year ends of Zhone and Sorrento differ, for the purposes of presenting the unaudited pro forma condensed combined financial data below, the financial statements of Zhone for the year ended December 31, 2003 and for the three months ended March 31,On July 1, 2004, were combined with the financial statements of Sorrento for the year and three months ended January 31, 2004. On November 13, 2003, Zhone acquired all of the outstanding stock of Tellium in a reverse merger transaction.Sorrento Networks Corporation. This transaction was determined to be significant to Zhone for the purposes of preparing the unaudited pro forma condensed combined consolidated statement of operations for the year ended December 31, 2003. Accordingly,2004. For the purposes of presenting the unaudited pro forma condensed combined financial data below, the statements of operations of Zhone and Sorrento as discussed aboveParadyne for the year ended December 31, 2004 were combined with the statement of operations of Tellium from January 1, 2003 through November 12, 2003.Sorrento for the six months ended April 30, 2004. These unaudited pro forma condensed combined consolidated financial statements are not necessarily indicative of the results of operations that would have been achieved had the transaction actually taken place at the dates indicated and do not purport to be indicative of the effects that may be expected to occur in the future.   Information relating to the results of operations of Tellium for the period prior to its acquisition by Zhone on November 13, 2003 has been included in these unaudited pro forma condensed combined consolidated financial statements, pursuant to the rules of the SEC regarding the preparation of pro forma financial information. However, management believes that the results of operations relating to Tellium are not indicative of the results that would have been achieved had the transaction occurred on January 1, 2003, and would not be indicative of future results. Following the consummation of the merger with Tellium, Zhone discontinued the development efforts related to the technology acquired from Tellium, terminated substantially all of the former Tellium employees, and exited the Tellium headquarters facility. In addition, Zhone has not generated any revenue from the former Tellium products subsequent to the date of the acquisition. Accordingly, management believes that the results of operations for Tellium that are included in these unaudited pro forma condensed combined consolidated financial statements are not indicative of the continuing impact of the transaction on future periods. The unaudited pro forma condensed combined consolidated financial statements should be read in conjunction with the historical financial statements of Sorrento which are included in this joint proxy statements/prospectuseach of Zhone and the historical financial statements of ZhoneParadyne, which are incorporated by reference in this joint proxy statements/statement/prospectus.   The financial statements of Zhone and SorrentoParadyne are prepared in accordance with accounting principles generally accepted in the United States.   2. Pro forma transaction   On April 22, 2004,July 7, 2005, Zhone and SorrentoParadyne entered into a merger agreement, whereby Zhone would acquire all of the issued and outstanding shares, stock options and warrants of SorrentoParadyne in exchange for the issuance of shares, stock options and warrants of Zhone. The estimated fair value per share of Zhone common stock of $3.69$3.15 is based on the average closing market price on the two days prior to the announcement of the merger, the day of announcement and the two days following the announcement.   The fair value of the SorrentoParadyne stock options and warrants, for purposes of the estimated purchase consideration, has been calculated based on the Black-Scholes option pricing model and all options and NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) warrants outstanding at April 22, 2004,July 7, 2005, using an estimated fair market value of $3.69$3.15 per share and the following assumptions:   Risk-free interest rate    3.58%3.72 % Expected dividend yield    0%0 % Expected life    5 years Volatility    95.0%74.0 %   The total purchase consideration is dependent on the actual number of shares, options and warrants to purchase SorrentoParadyne common stock outstanding on the date the merger closes.   The estimated total purchase consideration is as follows (in thousands):      Shares To be Issued by Zhone    Estimated Fair Value    Shares To be Issued by Zhone    Estimated Fair Value Shares of common stock    14,683    $ 54,182    51,432    $ 162,011 Stock options and warrants    5,380      14,423    16,343      30,283 Assumed liabilities           27,102 Estimated acquisition and severance costs to be incurred by Zhone           2,000 Estimated acquisition costs to be incurred by Zhone           1,073                         $ 97,707         $ 193,367                 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)   The purchase consideration was allocated to assets acquired and liabilities assumed based on management’s preliminary analysis and estimates of their fair values, which was based primarily on a preliminary valuation prepared by a third party. Management’s estimates of fair values are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.   The preliminary allocation of the purchase price as of DecemberMarch 31, 2003,2005, which is subject to change based on a final valuation of the assets acquired and liabilities assumed as of the closing date, is as follows:follows (in thousands):      Estimated Fair Value    Estimated Fair Value Tangible assets    $ 49,986 Net tangible assets    $ 67,488 Goodwill      27,083      64,385 Identifiable intangible assets      18,000      57,340 Purchased in-process research and development      2,250 Deferred compensation      388      4,154          $ 97,707    $ 193,367         The charge for purchased in-process researchIdentifiable intangibles consist primarily of developed and development has been excludedcore technology, patents and customer relationships with estimated lives that range from the pro forma condensed combined consolidated statements of operations duefour to its non-recurring nature.seven years.   The intrinsic value of the unvested stock options is recorded as deferred compensation. The allocation of the purchase price to deferred compensation will be affected by the closing price of Zhone common stock and the number of unvested options assumed on the closing date of the merger. For purposes of the pro forma condensed combined consolidated financial statements, a closing date market price of $3.69$3.15 for Zhone common stock has been used in the calculation of the intrinsic value allocated to deferred compensation. The deferred compensation will be amortized on an accelerated method over the remaining vesting periods of the options. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)   3. Pro forma adjustments   The unaudited pro forma condensed combined consolidated financial statements give effect to the transaction described in Note 2 as if it had occurred on March 31, 20042005 for purposes of the pro forma condensed combined consolidated balance sheet and on January 1, 20032004 for purposes of the pro forma condensed combined consolidated statements of operations. The pro forma consolidated statements of operations do not include any material non-recurring charges that will arise as a result of the transaction described in Note 2 (see (g) below).2. Adjustments in the pro forma condensed combined consolidated financial statements are as follows:     (a) Adjustment to write off Sorrento’s acquisition related intangible assets.eliminate sale of products to Paradyne by Zhone.     (b) Adjustment to record estimated transaction costs of Zhone, including severance costs of $1.2 million.eliminate Paradyne’s historical intangibles.     (c) Adjustment to eliminate Sorrento’s historical stockholders’ equity.record estimated transaction costs of Zhone in the Paradyne merger.     (d) Adjustment to reflect the fair value of the common stock issued and options assumed in the merger.eliminate Paradyne’s historical stockholders’ equity.     (e) Adjustment to record estimated amortization of acquired intangibles assuming consummation of the Sorrento merger on January 1, 2004. (f) Adjustment to weight shares issued in the Sorrento merger to reflect consummation of the merger on January 1, 2004. (g) Adjustment to eliminate Sorrento weighted average shares. (h) Adjustment to eliminate Paradyne weighted average shares. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (i) Adjustment to record incremental shares issued in the Paradyne merger. (j) Adjustment to record estimated goodwill and other intangible assets relating to the Paradyne merger. (k) Adjustment to reflect fair value of common stock issued for Paradyne. (l) Adjustment to reflect fair value of options and warrants assumed. (m) Adjustment to record deferred compensation on Sorrento’sParadyne’s outstanding options based upon the unvested portion of the intrinsic value of the options for which future services are required.     (f) Adjustment to record estimated goodwill and other intangible assets relating to the merger. (g) Adjustment to record estimated purchased in-process research and development relating to the merger. (h) Adjustment to reclassify other operating expenses to amortization and impairment of intangibles. (i) Adjustment to record estimated amortization of deferred stock-based compensation. (j)(n) Adjustment to record estimated amortization of acquired intangibles assuming consummation of the merger on January 1, 20032004 and a three-year useful life. (k) Adjustmentlives of four to reverse accretion on preferred stock. (l) Adjustment to reverse Sorrento EPS shares. (m) Adjustment to record incremental shares issued in the merger. (n) Adjustment to reflect the post-Tellium merger capital structure for the entire period presented.seven years, net of amortization recorded by Paradyne.     (o) Adjustment to reverserecord estimated amortization of deferred stock-based compensation recognized by Tellium under the fair value provisionscompensation. (p) Adjustment to record estimated amortization of Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, in order to conform to Zhone’s accounting policy.restrictive non-compete covenants. COMPARISON OF STOCKHOLDER RIGHTS AND CORPORATE GOVERNANCE MATTERS   Both Zhone and SorrentoParadyne are incorporated under Delaware law and are subject to the Delaware General Corporation Law. The following sectionlaws of this joint proxy statement/prospectus comparesthe State of Delaware. Any differences in the rights of holders of Zhone common stock with the rights of holders of Sorrento commonParadyne capital stock and describes anyZhone capital stock arise primarily from differences in their respective certificates of incorporation and bylaws. Upon completion of the merger, Paradyne’s capital stock will automatically convert into the right to receive shares of capital stock of Zhone, which will be governed by the Zhone certificate of incorporation and the Zhone bylaws. The following is a summary of material differences between them.the current rights of Zhone stockholders and the current rights of Paradyne stockholders. While we believe that this descriptionsummary covers the material differences between the two, this summary may not contain all of the information that is important to you. Additionally, thisThis summary is not intended to be a complete discussion of the respective certificates of incorporation and bylawsrights of Zhone and SorrentoParadyne stockholders and it is qualified in its entirety by reference to the applicable Delaware lawGeneral Corporation Law, which we refer to as well as by reference to the respective certificates of incorporationDGCL, and bylawsthe various documents of Zhone and Sorrento. Upon completionParadyne to which we refer in this summary. In addition, the identification of some of the merger, the stockholders of Sorrento will become stockholders of Zhone, and the certificate of incorporation and bylaws of Zhone will governdifferences in the rights of former Sorrento stockholders. You shouldthese stockholders as material is not intended to indicate that other differences that are equally important do not exist. We urge you to carefully read this entire joint proxy statement/prospectus, the relevant provisions of the DGCL and the other documents to which we refer to in this joint proxy statement/prospectus for a more complete understanding of the differences between the rightsbeing a stockholder of Zhone stockholders and Sorrento stockholders.being a stockholder of Paradyne. For more information on how you can obtain copies of these documents, see “Where You Can Find More Information” on page 87.   Zhone    SorrentoParadyne AUTHORIZED CAPITAL STOCK Common Stock. Zhone’s certificate of incorporation authorizes Zhone to issue 900,000,000 shares of common stock, par value $0.001 per share.    Common Stock.Sorrento’s Paradyne’s certificate of incorporation authorizes SorrentoParadyne to issue 150,000,00080,000,000 shares of common stock, par value $0.001 per share. Preferred Stock. Zhone’s certificate of incorporation authorizes Zhone to issue 25,000,000 shares of preferred stock, par value $0.001 per share. The Zhone certificate of incorporation also authorizes Zhone’s board of directors to provide for the issuance of shares of Zhone preferred stock in one or more series, and to fix the voting powers (if any), designations, powers, preferences and rights of the shares of each series and any qualifications, limitation or restrictions thereof. As of the date of this joint proxy statement/prospectus, there are no shares of Zhone preferred stock issued and outstanding.    Preferred Stock. Sorrento’sParadyne’s certificate of incorporation authorizes SorrentoParadyne to issue 2,000,0005,000,000 shares of preferred stock, par value $0.001 per share, including 3,000 shares of Series D convertible preferred stock.share. The SorrentoParadyne certificate of incorporation also authorizes Sorrento’sParadyne’s board of directors to provide for the issuance of shares of SorrentoParadyne preferred stock in one or more series, and to fix or alter the voting powers (if any), designations, powers, preferences and rights of the shares of each series and any qualifications, limitation or restrictions thereof. As of the date of this joint proxy statement/prospectus, there are no shares of SorrentoParadyne preferred stock issued and outstanding. VOTING RIGHTS Holders of Zhone common stock are each entitled to one vote for each share held. Holders of Sorrento common stock are each entitled to one vote for each share held. BOARD OF DIRECTORS Number of Directors   Under the Delaware General Corporation Law,DGCL, the board of directors of a corporation must consist of one or more members, each of whom must be a natural person. Although the Zhone bylaws initially set the authorized number of directors at seven, the Zhone board of directors or stockholders can change the authorized number of directors, provided that the number of directors must not be fewer than three or greater than eleven. The authorized number of directors is presently nine.eight.    The SorrentoParadyne certificate of incorporation does not fixprovides that the number of directors and its bylaws provide that itsof Paradyne will be fixed exclusively by one or more resolutions adopted by the board of directors. The board of directors will consist of not less than one and not more thanParadyne currently has seven directors. The authorized number of directors is presently seven.members. Classification of Directors   The Delaware General Corporation LawDGCL permits classification of a Delaware corporation’s board of directors if the corporation’s certificate of incorporation so provides. The Zhone certificate of incorporation provides for the division of the Zhone board of directors into three classes with staggered three year terms.    The Sorrento certificateParadyne board of incorporation and bylaws do not provide for the classificationdirectors is divided into three classes with one class being elected each year. Members of the Paradyne board of directors.directors are elected to serve a term of three years, and until their successors are elected and qualified or until their death, resignation or removal. Removal of Directors   UnderThe DGCL provides that, in the Delaware General Corporation Law,absence of cumulative voting or a classified board, unless otherwise restricted by thea corporation’s certificate of incorporation provides that any director or the entire board of directors may be removed only for cause, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote atin an election of directors; provided, however, that so long as stockholders of the corporation are entitled to cumulative voting, no individual director may be removed without cause, unless the entire board of directors is removed, if the number of votes cast against such removal would be sufficient to elect the director if then cumulatively voted at an election of the class of directors of which the director is a part. Whenever the holders of any class or series are entitled to elect one or more directors by the certificate of incorporation, the director or directors may be removed without cause only if there are sufficient votes by the holders of the outstanding shares of that class or series. A vacancy created by the removal of a director may be filled only by the approval of the stockholders. No reduction of the authorized number of directors will have the effect of removing any director prior to the expiration of the director’s term of office.directors. The Zhone certificate of incorporation provides that, subject to the rights of the holders of Zhone preferred stock then outstanding, any director may be removed from office at any time, but only for cause, at a meeting called for that purpose, and only by the affirmative vote of holders of at least 66 2/3% of the voting power of all shares of Zhone common stock entitled to vote generally in the election of directors. The Zhone certificate of incorporation further provides that whenever the holders of one or more series of Zhone preferred stock has the right, voting separately or together by series, to elect directors at an annual or special meeting of stockholders, the features of such directorship will be governed by the rights of the Zhone preferred stock as set forth in the certificate of designation governing the series.    In accordance withParadyne’s certificate of incorporation and bylaws provide that neither the Delaware General Corporation Law, Sorrento’sboard of directors nor any individual director may be removed without cause. Any individual director or directors may be removed from officewith cause by the affirmative vote of the holders of a majority stockholder vote.of the shares then entitled to vote in the election of directors. Filling Vacancies on the Board of Directors   The DGCL provides that, unless the certificate of incorporation or bylaws provide otherwise, whenever the holders of any class or classes are entitled to elect directors, vacancies and newly created directorships of such class or classes may be filled by a majority of the directors elected by such class or classes then in office or by a sole remaining director so elected. The Zhone certificate of incorporation provides that, subject to the rights of the holders of any class of Zhone common stock or series of Zhone preferred stock then The Sorrento bylaws provide that any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining outstanding, vacancies in the Zhone board of directors resulting from death, resignation, retirement, disqualification, removal from office or any other cause and newly created directorships resulting from any increase in the number of directors may be filled by the Zhone board of directors, provided that a quorum is then in office and present, by a majority of the directors then Vacancies on the board of directors of Paradyne, including vacancies resulting from an increase in the authorized number of directors or from the death, resignation or removal of a director, may be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, unless the directors determine by resolution that any such vacancies shall be filled by the stockholders. Pursuant to the Paradyne certificate of incorporation and Delaware law, directors elected to fill any in office, if less than a quorum is then in office, or by the sole remaining director. The Zhone certificate of incorporation further provides that whenever the holders of one or more series of Zhone preferred stock has the right, voting separately or together by series, to elect directors at an annual or special meeting of stockholders, the filling of vacancies and other features of such directorship will be governed by the rights of such Zhone preferred stock as set forth in the certificate of designation governing such series.    directors, whether or not they constitute a quorumvacancy shall serve for the remainder of the board of directors. A director elected to fill a vacancy is elected for the unexpired term of histhe director for which the vacancy was created or her predecessor in office, if any. Any directorship to be filled by reason of an increase in the number of directors may be filled by the board of directors for a term of office continuing only until the next election of directors,occurred and until his or her successor is elected. Ability to Call Special Meetings of the Board of Directors The Zhone bylaws provide that special meetings of the board of directors may be called by the Chairman of the Board, the Chief Executive Officer or any two directors. The Sorrento bylaws provide that special meetings of the board of directors may be called by or at the request of the Chairman of the Board, the President or any two directors.their successors are elected and qualified. STOCKHOLDER MEETINGS Action by Written Consent of Stockholders The DGCL provides that unless a corporation otherwise provides in its certificate of incorporation, any action required or permitted to be taken at an annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having at least the minimum number of votes necessary to authorize or take such action at a meeting at which all shares entitled to vote on the matter are present. The Zhone certificate of incorporation provides that Zhone’s stockholders may not take any action by written consent.    The Sorrento bylaws provideParadyne certificate of incorporation provides that no action may be taken by the stockholders are entitled to consent to corporate action in writing without a meeting.by written consent. Ability to Call Special Meetings of the Stockholders Under the Delaware General Corporation Law, The DGCL provides that a special stockholder meetings of a corporation may be called by the corporation’s board of directors, or by any person or persons authorized to do so by the corporation’s certificate of incorporation or bylaws. The Zhone bylaws provide that special meetings of the stockholders may be called only by the Zhone board of directors, the Chairmanchairman of the Boardboard or the Chief Executive Officer.chief executive officer.    The Sorrento bylaws provide that specialSpecial meetings of Paradyne stockholders may be called by the Chief Executive Officer or theParadyne’s board of directors for any purpose.(pursuant to a resolution adopted by a majority of the total number of authorized directors), the chairman of the board, the chief executive officer or holders of the shares entitled to cast not less than 50% of the votes at the meeting. Limitation on Business Transacted at Special Meetings The Zhone bylaws provide that business to be transacted at a special meeting of stockholders must be specified in the notice of meeting, and that business transacted at any special meeting of stockholders be confined to the purpose or purposes stated in the notice of such meeting. The Sorrento bylaws provide that at any special meeting of the stockholders, only such business as is specified in the notice of such special meeting given by or at the direction of the person or persons calling such meeting shall come before such meeting. The chairman of the meeting may refuse to acknowledge any proposal that is not made in compliance with the foregoing procedures. Advance Notice Provision for Stockholder Proposals The Zhone bylaws allow stockholders to propose business to be brought before an annual meeting of stockholders. In addition, the Zhone bylaws allow stockholders who are entitled to vote in the election of directors to nominate candidates for election to Zhone’s board of directors at an annual meeting or at a special meeting of stockholders called for the purpose of electing directors. However, proposals and nominations may only be made by a stockholder who has given proper, timely notice in writing to the Secretary of Zhone before the stockholder meeting. Under Paradyne’s bylaws, in order for a stockholder to nominate candidates for election to Paradyne’s board of directors at any annual meeting of stockholders at which directors will be elected, timely written notice must be given to the Secretary of Paradyne before the annual meeting. Similarly, in order for a stockholder to propose business to be brought before any annual stockholders meeting, timely written notice must be given to the Secretary of Paradyne before the annual meeting. Under Zhone’s bylaws, to be timely, notice of stockholder proposals or nominations to be brought before an annual meeting of stockholders must be received by the Secretary of Zhone not less than 90 calendar days prior to the date of the anniversary of the previous year’s annual meeting. If the annual meeting is scheduled to be held on a date more than 30 days prior to or delayed by more than 60 days after the anniversary of the previous year’s annual meeting, notice will also be timely if received by Zhone if it is received by the later of the close of business 90 days prior to the annual meeting or the tenth day following the day on which notice of the date of the annual meeting was mailed or publicly disclosed. Under Zhone’s bylaws, to be timely, notice of stockholder nominations to be brought before a special meeting of stockholders called for the purpose of electing directors must be received by the Secretary of Zhone by the close of business on the tenth day following the earlier of the day on which notice of the date of the special meeting was mailed or publicly disclosed.   Stockholder nominations and proposals may not be brought before any Zhone stockholder meeting unless the nomination or proposal was brought before the meeting in accordance with Zhone’s stockholder advance notice procedures.    Sorrento’s Under Paradyne’s bylaws, provide that for a stockholder proposal to be properly brought beforetimely, notice of stockholder nominations or proposals to be made at an annual meeting such proposal must be receiveddelivered to the Secretary of Paradyne at the principal executive offices of Paradyne no later than 90 days nor earlier than 120 days prior to the first anniversary of the preceding year’s annual meeting. In the event that the annual meeting is advanced more than 30 days prior to or delayed by Sorrento’s Secretarymore than 30 days after the anniversary of the preceding year’s annual meeting, notice by the stockholder to be timely must be delivered not fewerearlier than 120 days prior to such annual meeting and not later than the later of 90 days prior to the date of the annual meeting (or if less than 90 days’ notice or if prior10 days following the day on which public disclosureannouncement of the date of the annual meeting is given or madefirst made. Under Paradyne’s bylaws, special meetings may be called by persons other than the Paradyne board of directors, provided that a written request, specifying the general nature of the business proposed to be transacted, is delivered to the stockholders,chairman of the Paradyne board of directors, the chief executive officer or the Secretary of Paradyne. In the case of a special meeting involving board elections, notice of a stockholder nomination must be delivered to the Secretary of Paradyne at the principal executive offices of Paradyne not earlier than 120 days prior to the special meeting and not later than the seventh daylater of 90 days prior to such meeting or 10 days following the day on which the noticepublic announcement is first made of the date of the annual meeting was mailed or such public disclosure was made). Any such proposal must comply with the requirements of Rule 14a-8 under the Exchange Act and must be given, either by personal delivery or by registered or certified mail, postage prepaid, to Sorrento’s Secretary at 9990 Mesa Rim Road, San Diego, California 92121.special meeting. AMENDMENT OF CERTIFICATE OF INCORPORATION   Under the Delaware General Corporation Law,DGCL, a corporation may amend its certificate of incorporation upon the submission of a proposed amendment to stockholders by the board of directors and the subsequent receipt of the affirmative vote of a majority of its outstanding voting shares and the affirmative vote of a majority of the outstanding shares of each class entitled to vote thereon as a class. The Zhone certificate of incorporation provides that Zhone may amend or repeal any provision contained in the certificate of incorporation in a manner consistent with Delaware law. However, the Zhone certificate of incorporation provides that 66 2/3% of the voting power of all shares of Zhone entitled to vote generally in the election of directors is required to adopt any provision inconsistent with, to amend or repeal any provision of, or to adopt a bylaw inconsistent with the provisions of Zhone’s certificate of incorporation regarding its board of directors (Article V), the liability of its directors (Article VI), indemnification of its directors and officers (Article VII), actions taken by its stockholders (Article VIII) and amendments to its certificate of incorporation and bylaws (Article IX).    In accordance with theNotwithstanding any provision of Delaware General Corporation Law, the Sorrentolaw which might otherwise permit a lesser vote or no vote, Paradyne’s certificate of incorporation may be amended byrequires the affirmative vote of the holders of a majorityat least 66 2/3% of the voting rightspower of all classesthen-outstanding shares of the voting stock entitledof Paradyne, voting together as a single class, in order to vote.alter, amend or repeal any provision of the certificate of incorporation. AMENDMENT OF BYLAWS   Under the Delaware General Corporation Law,DGCL, bylaws may be adopted, amended or repealed by the stockholders entitled to vote, and by the board of directors if the corporation’s certificate of incorporation confers the power to adopt, amend or repeal the corporation’s bylaws upon the directors. The Zhone bylaws may be amended only in accordance with Zhone’s certificate of incorporation, which provides that the Zhone bylaws may be adopted, amended or repealed by Zhone’s board of directors or stockholders, provided that any such action by Zhone’s stockholders must be approved by the affirmative vote of the holders of 66 2/3% of the voting power of all shares of Zhone entitled to vote generally in the election of directors.    The SorrentoParadyne’s certificate of incorporation providesauthorizes the Paradyne board of directors to adopt, amend or repeal any provision of Paradyne’s bylaws. Paradyne’s certificate of incorporation and bylaws further provide that theany provision of Paradyne’s bylaws may be adopted,altered or amended or repealed by a majority of the board of directors, but that anynew bylaws adopted by the boardaffirmative vote of directors may be amended or repealed byat least 66 2/3% of the stockholdersvoting power of all of the then-outstanding shares of the voting stock of Paradyne entitled to vote thereon. The Sorrento bylaws provide that the board of directors may not repeal or amend any bylaw that the stockholders have expressly provided may not be amended or repealed by the board of directors.vote. LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS   The Delaware General Corporation LawDGCL permits a corporation to include a provision in its certificate of incorporation eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for damages for a breach of the director’s fiduciary duty, subject to certain limitations. The Zhone certificate of incorporation includes a provision limiting the personal liability of its director and officers to the fullest extent permitted by law.    The Sorrento bylaws provideParadyne certificate of incorporation provides that the liability of the directors of Paradyne for the indemnification of its directorsmonetary damages shall be eliminated to the fullest extent permitted byunder Delaware law. INDEMNIFICATION OF DIRECTORS AND OFFICERS   The Delaware General Corporation LawDGCL permits a corporation to indemnify directors and officers for actions taken in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the corporation, and with respect to any criminal action, which they had no reasonable cause to believe was unlawful. Zhone’s certificate of incorporation provides that any person who was or is a party or is threatened to be a party to or is involved in any action, suit, or proceeding, The Sorrento bylaws provide for the indemnification of its directors to the fullest extent permitted by Delaware law. whether civil, criminal, administrative or investigative, because that person is or was a director or officer, or is or was serving at the request of Zhone as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, will be indemnified against expenses reasonably incurred or suffered by such person in connection therewith, including attorney’s fees, judgments, fines and amounts paid in settlement, and held harmless by Zhone to the fullest extent permitted by the Delaware General Corporation Law.DGCL. The indemnification rights conferred by Zhone are not exclusive of any other right to which persons seeking indemnification may be entitled under any statute, Zhone’s certificate of incorporation or bylaws, any agreement, vote of stockholders or disinterested directors or otherwise. In addition, Zhone is authorized to purchase and maintain insurance on behalf of its directors and officers. The Paradyne bylaws provide that Paradyne must indemnify each director of Paradyne to the fullest extent permitted by Delaware law, provided that in certain circumstances, Paradyne is not required to indemnify directors in connection with any proceeding initiated by such director. The Paradyne bylaws further provide that Paradyne may modify the extent of its indemnification by individual contracts with its directors. The indemnification rights conferred by Paradyne are not exclusive of any other right which persons seeking indemnification may be entitled under any statute, Paradyne’s certificate of incorporation or bylaws, any agreement, vote of stockholders or disinterested directors or otherwise. Paradyne’s bylaws permit, but do not require, Paradyne to indemnify its employees, including its officers, and other agents as set forth under Delaware law. Paradyne is authorized, upon approval by the board of directors, to purchase and maintain insurance on behalf of any person or persons required or permitted to be indemnified. Additionally, Zhone will pay expenses incurred by its directors or officers in defending a civil or criminal action, suit or proceeding because that person is a director or officer, in advance of the final disposition of that action, suit or proceeding. However, such payment will be made only if Zhone receives an undertaking by or on behalf of that director or officer to repay all amounts advanced if it is ultimately determined that he is not entitled to be indemnified by Zhone, as authorized by the respective bylaws of Zhone.    In addition, Paradyne may advance expenses incurred by any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal administrative or investigative, because that person is or was a director, or is or was serving at the request of Paradyne as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, in advance of the final disposition of the proceeding. The advance of expenses will be made only if Paradyne receives an undertaking by or on behalf of a director to repay all amounts advanced if it is ultimately determined that the director is not entitled to be indemnified by Paradyne, as authorized by Paradyne’s certificate of incorporation and bylaws. Paradyne shall not advance the expenses of any officer if a determination is made by the majority of disinterested directors that there is clear and convincing evidence that the person acted in bad faith and in a manner that the person did not believe to be in the best interests of Paradyne. STOCKHOLDER RIGHTS PLAN Under Delaware law, every corporation may create and issue rights entitling the holders of such rights to purchase from the corporation shares of its capital stock of any class or classes, subject to any provisions in its certificate of incorporation. The price and terms of such shares must be stated in the certificate of incorporation or in a resolution adopted by the board of directors for the creation or issuance of such rights. Zhone currently does not have a stockholder rights plan in effect.    SorrentoParadyne currently does not have a stockholder rights plan in effect. STATE ANTI-TAKEOVER STATUTES   Section 203 of the DGCL protects publicly-traded Delaware General Corporation Law, which under certain circumstances may make it more difficult forcorporations from hostile takeovers, and from actions following the takeover, by prohibiting some transactions once an acquiror has gained a person who would be an “Interested Stockholder,” as defined in Section 203,significant holding in the respective companies, to effect various business combinations with either company for a three-year period.corporation. Under Delaware law, a corporation’s certificate of incorporation or bylaws may exclude a corporation from the restrictions imposed by Section 203. Zhone’s certificate of incorporation and bylaws do not contain any provisions whichthat exclude Zhone from the restrictions prescribed by Section 203 of the Delaware General Corporation Law.DGCL.    Sorrento’sParadyne’s certificate of incorporation and bylaws do not contain any provisions whichthat exclude SorrentoParadyne from the restrictions prescribed by Section 203 of the Delaware General Corporation Law.DGCL. THE ZHONE SPECIAL MEETING This joint proxy statement/prospectus is being provided to Zhone stockholders as part of a solicitation of proxies by the Zhone board of directors for use at a special meeting of Zhone stockholders. This joint proxy statement/prospectus provides Zhone stockholders with the information they need to know to be able to vote or instruct their vote to be cast at the special meeting of Zhone stockholders.   Date, Time and Place   The special meeting of Zhone stockholders will be held on September 1, 2005 at 8:00 a.m., local time, at Zhone’s principal offices at 7001 Oakport Street, Oakland, California 94621, on June 30, 2004 at 9:00 a.m. (local time).94621.   Matters for Consideration   The purposes of the Zhone special meeting are:is being held for the following purposes:   to approve the issuance of Zhone common stock pursuant to the Agreement and Plan of Merger, dated as of April 22, 2004,July 7, 2005, by and among Zhone, SeleneParrot Acquisition Corp., a wholly owned subsidiary of Zhone, and Sorrento;Paradyne; to grant discretionary authority to adjourn the special meeting, if necessary, to solicit additional proxies with respect to the proposed issuance of Zhone common stock pursuant to the merger agreement; and   to transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting, including, if submitted to a vote of Zhone’s stockholders, a motion to adjourn or postpone the meeting to another time or place for the purpose of soliciting additional proxies or satisfying the conditions to closing the merger.meeting.   The approval of the issuance of Zhone common stock pursuant to the merger agreement is required in order for Zhone to consummate the merger. Proxies voting against Recommendation of the Zhone Board of Directors The Zhone board of directors has unanimously approved the merger agreement and unanimously recommends that Zhone stockholders vote “FOR” the proposal to approve the issuance ofissue Zhone common stock pursuant to the merger agreement will not be voted“FOR”agreement. adjournment in order to continue to solicit proxies.See “The Merger—Zhone’s Reasons for the Merger” and “The Merger—Recommendation of the Zhone Board of Directors” on pages 27 and 29, respectively, for a more detailed discussion of the recommendation of the Zhone board of directors.   Voting Procedures and Revocation of Proxies   A proxy cardYour vote is enclosed for your use.important. Whether or not you expect to attend the Zhone asks that youspecial meeting in person, please complete, sign, date and return the enclosed proxy card as soon as possible to ensure that your shares are represented at the special meeting. Returning the proxy card does not deprive you of your right to attend the Zhone special meeting and to vote your shares in person. Voting in Person If you plan to attend the accompanying envelope,Zhone special meeting and wish to vote in person, you will be given a ballot at the special meeting. Please note, however, that if your shares are held in “street name,” which is postage prepaid ifmeans your shares are held of record by a broker, bank or other nominee, and you mailwish to vote at the Zhone special meeting, you must bring to the special meeting a proxy from the record holder authorizing you to vote at the Zhone special meeting. Voting by Proxy The method of voting by proxy differs for shares held as a record holder and shares held in “street name.” If you hold your shares of Zhone common stock as a record holder, you may vote by signing and dating the enclosed proxy card and promptly returning it in the United States. Unless there are different instructionsenclosed envelope. If, on the other hand, you hold your shares of Zhone common stock in “street name,” then you will receive instructions from your broker, bank or other nominee that you must follow in order to vote your shares. Your broker, bank or other nominee may allow you to deliver your voting instructions over the internet or by telephone. Please see the voting instruction card from your broker, bank or other nominee that accompanies this joint proxy all shares represented by validstatement/prospectus. All properly signed proxies (andthat are received prior to the special meeting and that are not revoked before they are voted) will be voted at the special meeting according to the instructions indicated on the proxies or, if no direction is indicated, they will be voted“FOR” the approval of the issuance ofproposal to issue Zhone common stock pursuant to the merger agreement. With respect to any other business that may properly come before the special meeting and be submitted to a vote of stockholders, proxies will be voted in accordance with the best judgment of the designated proxy holders.   Stockholders of record may vote by either completing and returning the enclosed proxy card prior to the special meeting, voting in person at the special meeting, or submitting a signed proxy card at the special meeting. Your vote is important. Accordingly, please sign, date and return the accompanying proxy card whether or not you plan to attend the special meeting in person.Revocation   You may revoke your proxy at any time before ityour proxy is actually voted at the Zhone special meeting by:by taking any of the following actions: submitting another proxy card bearing a later date;   delivering written notice of revocation to Zhone’s Corporate Secretary at 7001 Oakport Street, Oakland, California 94621, submitting a later dated proxy,94621; or   attending the Zhone special meeting and voting in person. Yourperson, although attendance at the special meeting will not, by itself, constitute revocation of yourrevoke a proxy. You may also be represented by another person present at the special meeting by executing a form of proxy designating that person to act on your behalf. Shares may only be voted by or on behalf of the record holder of shares as indicated in Zhone’s stock transfer records. If you are a beneficial owner but your shares are held of recordin “street name,” you may change your vote by another person, such as a stock brokerage firmsubmitting new voting instructions to your broker, bank or aother nominee. You must contact your broker, bank that person must vote the shares as the record holder in accordance with the beneficial holder’s instructions. All votes cast at the special meeting will be tabulated by the persons appointed by Zhoneor other nominee to act as inspectors of election for the special meeting. find out how to do so. Record Date and Shares Entitled to Vote   Only holders of record of Zhone common stock at the close of business on the record date, May 25, 2004,July 29, 2005, are entitled to notice of and to vote at the special meeting. As of the record date, there were approximately 78,142,000 shares of Zhone common stock outstanding and entitled to vote at the special meeting. These stockholders are entitled to cast one vote for each share of common stock held as of the record date on all matters properly submitted for the vote of stockholders at the special meeting. As of the record date, there were approximately 94,662,950 shares of Zhone common stock outstanding and entitled to vote at the special meeting.   Quorum and Vote Required   A quorum of stockholders is necessary to hold a valid special meeting. The presence, in person or by proxy, of the holders of a majority of the shares of Zhone common stock issued and outstanding and entitled to be voted at the special meeting is necessary to constitute a quorum at the Zhone special meeting. The approval of the issuance of common stock in the merger requires the affirmative vote of a majority of the votes cast at the special meeting (a quorum being present).meeting. On the record date, the directors and executive officers of Zhone and their affiliates directly and indirectly owned and were entitled to vote approximately 36,950,972 shares of Zhone common stock, which represent approximately 39.0% of the outstanding shares of Zhone common stock.   Abstentions and Broker Non-Votes   Abstentions and broker non-votes will be counted for the purpose of determining whether a quorum is present, but they will not be votedcounted as votes cast on at the Zhone special meeting.any matter. Broker non-votes refer to unvoted proxies submitted by brokers who are not able to vote on a proposal absent instructions from the applicable beneficial owner. Because abstentions and broker non-votes will not be considered votes cast, they will have no effect on the outcome of the proposal.   Solicitation of Proxies and Expenses   This solicitationZhone is made on behalf ofsoliciting proxies for the Zhone board of directors andspecial meeting from Zhone stockholders. Zhone will paybear the costsentire cost of soliciting and obtaining the proxies including the cost of reimbursing banks and brokers for forwarding proxy materials to their principals,from Zhone stockholders, except that Zhone and SorrentoParadyne have each agreed to pay one-half share equally all expenses incurred in connection with the filing with the SEC of the costsregistration statement of filing,which this joint proxy statement/prospectus forms a part, and the printing and mailing of this joint proxy statement/prospectus and related proxy materials. In addition to the solicitation of proxies by mail, Zhone will request that brokers, banks and other nominees send proxies and proxy materials to the beneficial owners of Zhone common stock held by them and secure their voting instructions, if necessary. Zhone will reimburse those record holders for their reasonable expenses. Zhone has also made arrangements with Georgeson Shareholder Communications Inc. has been engaged to assist it in the distribution and solicitation ofsoliciting proxies, and will be paid reasonable fees andhas agreed to pay a fee of approximately $7,500 plus expenses for those services. Zhone also may use several of its services. Proxies may be solicited, without extra compensation, by Zhone’s directors, officers andregular employees, by mail, telephone, fax, personal interviews or other methods of communication. Zhonewho will not pay any additional compensationbe specially compensated, to directors, officerssolicit proxies from Zhone stockholders, either personally or other employees for such services, but may reimburse them for reasonable out-of-pocket expenses in connection with such solicitation.by telephone, internet, telegram, facsimile or special delivery letter.   Admission to the Special Meeting   OnlyAll Zhone stockholders, asincluding stockholders of the close of business on May 25, 2004,record and other persons holding valid proxies for the special meetingstockholders who hold their shares in “street name” are entitledinvited to attend the Zhone special meeting. Zhone stockholders and their proxies shouldIf you plan to attend the special meeting, you must bring a form of personal photo identification with you in order to be prepared to present valid government issued photo identification.admitted. Zhone stockholders who are not record holders but hold shares through a broker or nominee (i.e., in street name)“street name” should provide proof of beneficial ownership on the record date for the Zhone special meeting, such as their most recent account statement prior to May 25, 2004, or other similar evidence of ownership. Anyone who does not provide valid government issued photo identification or comply with the other procedures outlined above upon request may not be admitted to the special meeting.   Other Business   As of the date of this joint proxy statement/prospectus, the Zhone board of directors does not know of any matter that will be presented for consideration at the special meeting other than as described in this joint proxy statement/prospectus. However, if any matters are properly presented at the special meeting or any adjournment or postponement of the special meeting, including, if submitted to a vote of Zhone stockholders, a motion to adjourn or postpone the meeting to another time or place for the purpose of soliciting additional proxies or satisfying the conditions to closing the merger, the persons named as proxies will be granted discretionary authority with respect to any such matter. Assistance If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact: Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 (510) 777-7013 Attn: Investor Relations Recommendation of the Zhone Board of Directors After careful consideration, the Zhone board of directors believes that the merger is consistent with, and in furtherance of, Zhone’s long-term business strategy and that the merger is fair, advisable and in the best interests of Zhone and its stockholders.The Zhone board of directors unanimously recommends that the Zhone stockholders vote “FOR” the proposal to issue shares of Zhone common stock in the merger. YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD. THE SORRENTO SPECIAL MEETING Date, Time and Place The special meeting of Sorrento stockholders will be held at Sorrento’s principal offices at 9990 Mesa Rim Road, San Diego, California 92121, on June 30, 2004 at 10:00 a.m. (local time). Matters for Consideration The purposes of the Sorrento special meeting are: to adopt the Agreement and Plan of Merger, dated as of April 22, 2004, by and among Zhone, Selene Acquisition Corp., a wholly owned subsidiary of Zhone, and Sorrento; and to transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting, including, if submitted to a vote of Sorrento’s stockholders, a motion to adjourn or postpone the meeting to another time or place for the purpose of soliciting additional proxies or satisfying the conditions to closing the merger. Adoption of the merger agreement will constitute approval of the merger and the other transactions contemplated by the merger agreement. Proxies voting against the proposal to adopt the merger agreement will not be voted“FOR” adjournment in order to continue to solicit proxies. Voting Procedures and Revocation of Proxies A proxy card is enclosed for your use. Sorrento asks that you sign, date and return the proxy card in the accompanying envelope, which is postage prepaid if you mail it in the United States. Unless there are different instructions on the proxy, all shares represented by valid proxies (and not revoked before they are voted) will be voted at the special meeting“FOR” the adoption of the merger agreement. With respect to any other business that may properly come before the special meeting and be submitted to a vote of stockholders, proxies will be voted in accordance with the best judgment of the designated proxy holders. Stockholders of record may vote by either completing and returning the enclosed proxy card prior to the special meeting, voting in person at the special meeting, or submitting a signed proxy card at the special meeting. Your vote is important. Accordingly, please sign, date and return the accompanying proxy card whether or not you plan to attend the special meeting in person. You may revoke your proxy at any time before it is actually voted at the meeting by: delivering written notice of revocation to Sorrento’s Secretary at 9990 Mesa Rim Road, San Diego, California 92121, submitting a later dated proxy, or attending the special meeting and voting in person. Your attendance at the special meeting will not, by itself, constitute revocation of your proxy. You may also be represented by another person present at the special meeting by executing a form of proxy designating that person to act on your behalf. Shares may only be voted by or on behalf of the record holder of shares as indicated in Sorrento’s stock transfer records. If you are a beneficial owner but your shares are held of record by another person, such as a stock brokerage firm or a bank, that person must vote the shares as the record holder in accordance with the beneficial holder’s instructions. All votes cast at the special meeting will be tabulated by the persons appointed by Sorrento to act as inspectors of election for the special meeting. Record Date and Shares Entitled to Vote Only holders of record of Sorrento common stock at the close of business on the record date, May 25, 2004, are entitled to notice of and to vote at the special meeting. As of the record date, there were approximately 17,239,475 shares of Sorrento common stock outstanding and entitled to vote at the special meeting. Each share of Sorrento common stock is entitled to one vote. Quorum and Vote Required A quorum of stockholders is necessary to hold a valid special meeting. The presence, in person or by proxy, of a majority of the outstanding shares of Sorrento common stock entitled to vote is necessary to constitute a quorum at the Sorrento special meeting. The affirmative vote of a majority of the outstanding shares of Sorrento common stock is required to adopt the merger agreement. Abstentions and Broker Non-Votes Abstentions and broker non-votes will be counted for the purpose of determining whether a quorum is present, but they will not be voted on at the Sorrento special meeting. Broker non-votes refer to unvoted proxies submitted by brokers who are not able to vote on a proposal absent instructions from the applicable beneficial owner. Because the affirmative vote of a majority of the outstanding shares of Sorrento common stock is required to adopt the merger agreement, abstentions and broker non-votes will have the effect of a vote against the adoption of the merger agreement. Solicitation of Proxies and Expenses This solicitation is made on behalf of the Sorrento board of directors and Sorrento will pay the costs of soliciting and obtaining the proxies, including the cost of reimbursing banks and brokers for forwarding proxy materials to their principals, except that Zhone and Sorrento have each agreed to pay one-half of the costs of filing, printing and mailing this joint proxy statement/prospectus and related proxy materials. Georgeson Shareholder Communications Inc. has been engaged to assist in the distribution and solicitation of proxies, and will be paid reasonable fees and expenses for its services. Sorrento’s directors, officers and employees may also solicit proxies by mail, telephone, fax, personal interviews or other methods of communication. Sorrento will not pay any additional compensation to directors, officers or other employees for such services, but may reimburse them for reasonable out-of-pocket expenses in connection with such solicitation. Admission to the Special Meeting Only Sorrento stockholders, as of the close of business on May 25, 2004, and other persons holding valid proxies for the special meeting are entitled to attend the Sorrento special meeting. Sorrento stockholders and their proxies should be prepared to present valid government issued photo identification. Sorrento stockholders who are not record holders but hold shares through a broker or nominee (i.e., in street name) should provide proof of beneficial ownership on the record date for the Sorrento special meeting, such as their most recent account statement prior to May 25, 2004, or other similar evidence of ownership. Anyone who does not provide valid government issued photo identification or comply with the other procedures outlined above upon request may not be admitted to the special meeting. Other Business As of the date of this joint proxy statement/prospectus, the Sorrento board of directors does not know of any matter that will be presented for consideration at the special meeting other than as described in this joint proxy statement/prospectus. However, if any matters are properly presented at the special meeting or any adjournment or postponement of the special meeting, including, if submitted to a vote of Sorrento stockholders, a motion to adjourn or postpone the meeting to another time or place for the purpose of soliciting additional proxies or satisfying the conditions to closing the merger, the persons named as proxies will be granted discretionary authority with respect to any such matter. Assistance If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact: Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 (858) 558-3960 Attn: Investor Relations Recommendation of the Sorrento Board of Directors After careful consideration, the Sorrento board of directors believes that the merger is consistent with, and in furtherance of, Sorrento’s long-term business strategy and that the merger is fair, advisable and in the best interests of Sorrento and its stockholders.The Sorrento board of directors unanimously recommends that the Sorrento stockholders vote “FOR” the proposal to adopt the merger agreement. YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD. SORRENTO STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF SORRENTO STOCK CERTIFICATES WILL BE MAILED TO SORRENTO STOCKHOLDERS PROMPTLY FOLLOWING COMPLETION OF THE MERGER. INFORMATION ABOUT ZHONE Business Zhone designs, develops and markets telecommunications hardware and software that simplify today’s telecommunications networks. Zhone’s products, which address the connection between network service providers and their subscribers, or the wireline access network, allow network service providers to combine voice, data, video, entertainment and management services over their existing copper wire infrastructure while supporting migration to fiber networks. Zhone’s products also enable network service providers to transition to more cost-competitive VoIP and packet-based services without compromising their current ATM and circuit-based revenue streams. In addition, Zhone’s products allow network service providers to add rich new subscriber services more quickly than is possible with conventional solutions. Zhone is the first company dedicated solely to developing the full spectrum of next-generation wireline network solutions. Zhone’s flagship products are based upon its Single Line Multi Service, or SLMS, architecture. This new approach was specifically developed to address the unmet challenges of managing the complex transition from legacy service delivery to packet-based voice, data and video solutions. Zhone has designed its products to interoperate with different types of wiring and equipment already deployed in service providers’ networks and in subscribers’ homes. Zhone’s products enable network service providers to elegantly migrate their existing networks to deliver voice, data, video and entertainment services to their customers. Zhone’s strategy is to develop products through a combination of internal development and acquisitions of companies with applicable technology or market presence. This strategy has allowed Zhone to rapidly advance its flagship products by incorporating key acquired technologies into its SLMS product architecture. Additional Information A detailed description of Zhone’s business and other matters related to Zhone is incorporated by reference in this joint proxy statement/prospectus. For additional information, see “Where You Can Find More Information.” INFORMATION ABOUT SORRENTO Business Introduction Sorrento is a leading supplier of intelligent optical networking solutions for access, metropolitan and regional applications worldwide. Sorrento’s solutions enable communications carriers and service providers to offer broadband networking services over their existing optical fiber infrastructure. Sorrento’s technologies permit telecommunications service providers to increase fiber capacity and fiber bandwidth utilization, reduce network costs and complexity over scalable and efficient networking platforms. Sorrento’s optical networking systems support a wide variety of protocols, mixed speeds of traffic and accommodate changing traffic patterns directly over optical networks. Sorrento’s product solutions include optical access, optical transport, and network management solutions optimized for access, metro and regional markets, and combine to create powerful, cost-effective, and easy-to-manage optical networks. Sorrento’s dense wavelength division multiplexing, or DWDM, and coarse wavelength division multiplexing, or CWDM, platforms can be used in enterprise, access, metropolitan and regional network applications. WDM technology allows many optical signals to be transmitted simultaneously on the same optical fiber by using different wavelengths of light to distinguish the signals. This technology increases optical network capacity and flexibility. Sorrento’s comprehensive suite of optical networking interfaces and optical access multiplexers allow it to also address video on demand, storage area networking, data center fail-over recovery, and internet connectivity applications. Sorrento’s CWDM products provide a low cost, entry-level solution that can be used for enterprise and carrier access applications and that complement its DWDM product line. Multiplexing is a process that combines a number of lower speed data streams into one high-speed data stream. Sorrento also has two powerful network management solutions for its CWDM and DWDM product line. Addressing all key management aspects—fault, configuration, performance and security—these systems conform to North American and international standards and are simple to learn and use. Sorrento has a robust, carrier-class management system that offers broad functionality, including equipment/facilities management, fault management, performance monitoring, security control, alarm filtering and remote download. Sorrento also has an enterprise network management solution that provides an intuitive graphical interface and covers operations, administration, maintenance and provisioning functionality for its DWDM networks. Sorrento currently has an installed base with over 20 communications service providers and system integrators worldwide, including AT&T Broadband, now Comcast Corporation, Deutsche Telekom, Cox Communications, Time Warner Telecom, United Pan-Europe Communications, El Paso Global Networks and Edison Carrier Solutions. Understanding Sorrento’s Market Rapid Growth in Bandwidth Demand Fueled by the growth of the Internet, the volume of data traffic transmitted across telecommunications networks now exceeds voice traffic. The growth of data traffic is attributable to increased Internet usage, increased access speeds and greater use of bandwidth intensive applications. Bandwidth means the capacity to move information down a communications channel. Bandwidth is defined by the highest data rates that can be transmitted by that channel and is commonly measured in bits per second. Migration of Network Infrastructure Traditional copper-based and SONET/SDH based telecommunications infrastructures, as described below, were originally designed for voice traffic. These infrastructures do not scale effectively to provide the bandwidth needed to support the growth in high-speed data traffic. In addition, these infrastructures need network-wide upgrades in order to accommodate growing traffic thus resulting in long delays for provisioning new services. DWDM and CWDM technologies are more flexible, more efficient and more scalable networking alternatives for meeting the growing demand for bandwidth and new broadband services. Broadband means technologies or networks that have the ability to transmit high data rates. DWDM is a sophisticated opto-electronics technology that uses multiple wavelengths of light very efficiently to greatly increase the number of video, data or voice channels of information that can be sent on a single optical fiber. Synchronous Optical Network, SONET, is a telecom transmission protocol for high-speed transmission over fiber optic cable, which was introduced by Bell Communications in 1984 and quickly accepted by American National Standards Institute. SDH stands for Synchronous Digital Hierarchy, which is transmission protocol for high-speed transmission over fiber optic cable published in 1988 by the Consultative Committee for International Telegraph and Telephony. It is a transmission protocol used outside the United States, mostly in Europe, that is similar to SONET. DWDM networks were first deployed in long-haul applications. However, optical solutions specifically designed to address the challenges faced by access and metropolitan markets have significantly lagged in deployment. Accordingly, access and metro networks are considered to be traffic bottlenecks in the fast and efficient transmission of data. Enhanced Competition in the Service Provider Market Worldwide deregulation in the telecommunications industry has led to an increase in the number of service providers seeking to address the growing demand for bandwidth. In the U.S. and internationally, traditional service providers such as incumbent local exchange carriers (ILECs), inter-exchange carriers (IXCs) and post, telephone and telegraph companies (PTTs) are seeing new entrants in the broadband networking market seeking to capitalize on the growing demand for bandwidth. A number of competitors to these incumbents are building new data-centric networks to address the present bandwidth bottlenecks in the metropolitan markets, including utilities and cable television companies which are upgrading their current networks and are leveraging existing investments in fiber optic infrastructure to deliver high-speed data services in both the local and regional markets. This enhanced competition in the carrier and service provider markets is driving increased capital expenditures on network infrastructure that is focused on delivering scalable high-speed data services in a cost efficient manner. Network Topography The following describes each of the network segments within the optical network hierarchy: Long-haul networks are high capacity networks that connect service providers and carry voice and data across large geographic regions, typically spanning distances up to 4,000 kilometers. Long-haul networks are relatively simple networks, built around SONET/SDH technology and are primarily designed only to satisfy service provider long haul network capacity requirements. Metropolitan core (metro-core) networks connect the central offices of service providers in a metropolitan area and facilitate the transport and switching of traffic within extended metropolitan areas and between the network edge and long-haul networks. Metropolitan core networks are typically implemented in ring configurations and reach ring circumferences up to 300 kilometers. In order to efficiently use the optical network, sub-rate multiplexing devices aggregate traffic into wavelengths carrying higher speed aggregate bit rates across telecommunications networks. Regional networks typically transport voice and data traffic between cities across distances of 200 to 600 kilometers or more. Access networks connect enterprises or traffic aggregation nodes, in multiple locations throughout metropolitan areas, to service providers’ central offices or connect different end-user locations to each other. In order to efficiently use the optical network, optical access devices aggregate traffic from end users into wavelengths or wavelength bands for transport across telecommunications networks. Because access networks must support the varying demands of end users, these networks tend to be very complex. Metropolitan Area Optical Network Opportunity Although optical technologies are being deployed in long-haul networks to relieve capacity constraints, these solutions are not specifically designed to address the issues inherent in metropolitan and regional optical networks. Data is normally mapped into the voice multiplexing hierarchy for transport over the long-haul network. Metropolitan optical networks are characterized by varying traffic patterns and protocols as well as varied topologies and end-user requirements, making them more complex and difficult to manage than long haul networks. As a result, service providers have only recently begun to exploit the benefits of optical technologies in metropolitan optical networks. The optical networking market has seen a substantial downturn. The metro WDM market, which was expected to increase, has also experienced a slowdown as capital spending has declined throughout the telecommunications industry. Although Sorrento believes that the metro WDM world-wide market will grow significantly in the years to come, such growth is not likely to occur until capital spending resumes in the markets Sorrento serves, and Sorrento is unable to assess at present when this might take place. Regional Optical Network Opportunity In addition to the metropolitan market, recent engineering enhancements have permitted the use of DWDM networking platforms for regional optical networking applications. This development opens up the opportunity to address a portion of the substantial long haul market. In some regions, e.g., Europe, regional solutions apply to the majority of the networks installed. Industry researchers recently started looking at reclassifying the regional market opportunity, although statistical data for this market are not available. Specific Challenges Facing Metropolitan and Regional Optical Networks Service providers face numerous specific challenges in addressing metropolitan and regional optical networks: • Scalability Limitations. Originally constructed for voice traffic, the current network infrastructure based on SONET/SDH technology does not allow for the network efficiencies necessary to address the shift to a predominantly data-driven network. Due to its inherent lack of scalability, the current network infrastructure may require service providers to undertake the expensive and tedious process of replacing network equipment or adding new layers of similar equipment in response to changes or increases in bandwidth demand. Alternative approaches to WDM are being developed by other vendors to address the scalability of the SONET/SDH networks. These nonstandard solutions are called next generation SONET/SDH and can minimize the wasted bandwidth of legacy SONET/SDH. While these solutions allow carriers to combine voice and data on the same network, such solutions do not, however, expand the amount of bandwidth available and are, therefore, unable to accommodate the need for large amounts of bandwidth. • Need to Support Multiple Protocols. Metropolitan optical networks are characterized by a wide variety of protocols. The inability to support multiple protocols and services from a single platform further increases the cost and complexity of the metropolitan networks. Alternative approaches to WDM are being developed by other vendors to address the requirement for support of multiple services. These nonstandard solutions are called multi-service provisioning platforms (MSPP). These solutions generally carry out protocol conversions and are much more complex than WDM solutions. • Market Downturn. Virtually all telecom related market segments have suffered a decline in demand in the current economic downturn. What was once viewed as only a long-haul decline in market demand has now affected the regional and metropolitan networks as both enterprise and carrier business have cut back capital spending. Although Sorrento expects that demand in the regional and metropolitan markets will be strong in future periods, there are no assurances that capital spending will resume within this sector in the near term. • Several Stages of Conversion. Present solutions require several conversions to transport data through a metropolitan network. In the access networks, aggregation of traffic often requires protocol conversions into a common protocol before optical transmission. In the central office, data is often demultiplexed and converted into electrical signals for regeneration, switching or further aggregation into higher capacity links and then reconverted into optical signals for transmission in the metro-core network. • Inefficient Bandwidth Utilization. Within metropolitan optical networks, service providers must cater to end-users with varying access speeds. Current optical access solutions do not make efficient use of scarce wavelength resources. Service providers must assign a full wavelength to each signal, whether or not the end-user requires the full bandwidth potential of each wavelength. • Difficulty of Network Management. Multiple protocols and services, coupled with the lack of standards that exist in metropolitan optical networks, make network management functions, such as performance monitoring and configuration, exceedingly difficult. Lack of a robust network management platform further adds to the cost and complexity of metropolitan optical networks. • Need for New, Enhanced Service Offerings to Generate New Revenue Opportunities. Service providers are searching for next-generation solutions that will enable them to generate additional sources of revenue from offering new or enhanced services to their customers. Current solutions typically require the service provider to deploy equipment that is specifically designed for a particular service and transmission rate. Next-generation solutions must be able to offer enhanced features, wavelength provisioning and bandwidth-on-demand, that end-users will increasingly request from service providers. Sorrento’s Solution Sorrento’s solutions feature products designed to specifically address the shortcomings of legacy SONET/SDH networks and to facilitate offering new services throughout metropolitan and regional optical networks. Sorrento enables its customers to meet the rapidly growing demand for bandwidth by offering end-to-end access, metropolitan and regional optical networking solutions for the aggregation, transport and management of traffic. Sorrento’s current products, including its GigaMux® 6400 DWDM transport system, its EPC™ sub-rate multiplexing modules, its GigaMux® 3200 and 1600 DWDM and CWDM transport systems, as well as the network management product line that includes GigaView™, TeraManager™ and TeraConfigurator™, are specifically designed to meet the unique requirements of access metropolitan and regional markets. Sorrento’s optical networking solutions offer numerous benefits including: • Cost Effective Entry-Level Access Solution. Sorrento’s GigaMux® 3200 and 1600 DWDM and CWDM platforms allow low cost multiplexing of up to sixteen wavelengths carrying a mix of protocols and signals for access applications. The 3200 and 1600 products enable customers to seamlessly and cost effectively mix CWDM and DWDM on the same platform and on the same fiber. • Cost effective and feature rich in wavelength management capabilities. The 3200 and 1600 products also reduce customer operating costs by enabling the same modules to be used across every platform, thereby reducing sparing costs. • Scalable Architecture. Sorrento has created an optical networking solution that simultaneously transmits voice, data, and video over optimized fiber channels. The modular architecture of Sorrento’s solution enables service providers to incrementally expand capacity as their bandwidth needs increase. This simple, scaleable, and functional solution solves short and long-term service provider problems, which enhances their ability to reduce costs and offer value-added services. For example, a service provider can begin deployment with a single channel and later expand up to 64 channels, providing up to 640 gigabits per second, or Gbps, of transmission capacity without interrupting existing traffic. A fiber channel is a serial data transfer architecture standard conceived for new mass storage devices and other peripheral devices that require very high bandwidth connections. Bit rates for fiber channels are either 1.06 Gbps or 2.1 Gbps. • Protocol and Signal Transparency. Sorrento’s suite of solutions transports a mix of protocols and signals, including SONET/SDH, Asynchronous Transfer Mode (ATM) over SONET, Internet Protocol (IP) over SONET, Gigabit Ethernet, Fibre Channel and Enterprise System Connectivity in their native formats over numerous wavelengths in the same fiber. This transparency provides operational simplicity in that the service provider can offer networking connectivity without having to worry about protocol conversions. This is particularly important in metropolitan areas where multiple protocols are utilized and data transmission rates change often. The transparency of Sorrento’s solution eliminates the unnecessary conversions from optical to electrical and back to optical, as well as eliminates several layers of equipment that would otherwise be required in the transport and switching of traffic, thus reducing network complexity and signal latency. • Protocol Aggregation. Sorrento’s EPC™ optical access multiplexer aggregates traffic, of varied rates utilizing a wavelength per direction of transmission, from businesses and network points of presence for transport throughout optical networks. This aggregation allows better utilization of wavelengths and lowers capital expenditures of telecom service providers by reducing investments in excess network capacity. • Manageability. The design of Sorrento’s end-to-end optical networking solution will allow service providers to perform network management from a single platform with Sorrento’s TeraManager™ product. This intelligent optical network element management software platform provides fault, configuration, performance and security management utilizing an easy-to-use graphical user interface that allows point and click network provisioning and monitoring. • Regional Optical Transport. Sorrento’s solution permits service providers to expand beyond the confines of metropolitan networks using the same platform for metropolitan and regional applications. Regional networks can now be built using the lower cost solutions developed for the metropolitan environment. Sorrento’s Strategy Sorrento’s objective is to become a leading supplier of intelligent optical networking solutions for metro and regional applications worldwide. The key elements of Sorrento’s strategy are to: Enhance Sorrento’s optical networking solutions Sorrento intends to continue to enhance its existing family of optical networking products and to introduce new products that increase the functionality of its end-to-end optical solution. Sorrento introduced TeraManager™ and TeraConfigurator™ in its management solution portfolio in fiscal 2002. Sorrento introduced a new 10-port Gigabit Ethernet multiplexer in December 2003 for video on demand and large commercial applications. The combination of Sorrento’s GigaMux® optical transport products, with the EPC™ sub-rate multiplexers and TeraManager™, its carrier class network management product, creates an intelligent all-optical transport solution. Leverage Sorrento’s engineering expertise Sorrento intends to leverage its engineering expertise in the areas of optical, mechanical, electrical and network management design to continue to provide leading end-to-end metropolitan and regional optical networking systems and to expand its market share. Sorrento believes it was the first company to commercially ship a metropolitan optical networking product using DWDM technology. As of January 31, 2004, Sorrento had a skilled team of 49 engineers that continually focus on developing products for the metropolitan and regional optical transport market. Sorrento believes that its technological expertise has been the key to its success and will enable it to rapidly develop new product offerings and end-to-end optical solutions for the metropolitan and regional markets. Allow Sorrento’s customers to leverage their fiber assets by offering revenue-generating services The majority of Sorrento’s existing customers and targeted customers have a large amount of fiber assets in the metropolitan and regional network infrastructure. Sorrento intends to continue to develop and provide solutions that will enable its customers to leverage their existing fiber infrastructure to deliver revenue-generating services, while reducing their overall network costs. In addition, Sorrento believes its existing customer base provides it with an advantage when competing for new customers. Sorrento intends to continue to work closely with its customers and invest in sales and marketing resources to maintain its high level of customer service and remain responsive to its customers’ changing needs. Aggressively pursue expense reduction initiatives Sorrento continues to aggressively pursue cost reduction initiatives to bring its expenses in line with current and future anticipated revenues. Such reductions may affect the size of Sorrento’s workforce, and may require decreasing its operating expenses and capital spending. During the past two fiscal years, Sorrento has concentrated on implementing initiatives that have lowered its operating costs and anticipate the need for continued cost reductions if sales volume does not increase in the near future. Maintain Sorrento’s sales, service and support organizations worldwide Sorrento intends to continue to market its products worldwide. Sorrento currently has sales, service and support teams in North America, Europe and Asia. Sorrento believes that sales, service and support efforts on a customer-by-customer basis are most effective due to the technical evaluation and significant investments that are made by its customers. Expand Sorrento’s product and customer base through careful acquisitions Sorrento intends to expand its addressable market by adding “best-of-breed” optical access products to its metro/regional portfolio and enhance its edge-to-core network offerings. The recent acquisition of LuxN, Inc., is a prime example of such expansion. LuxN supplies optical access equipment for the network edge using CWDM and DWDM technology. LuxN’s Operations Systems Modification of Intelligent Network Elements (OSMINE) certified products enable delivery of high-bandwidth data, storage, video and voice services for service providers, cable Multiple Service Operators, or MSOs, and enterprises. Sorrento’s union with LuxN broadens its 30-plus blue-chip customer base by adding over 20 new customers including Time Warner Telecom, Hawaii I-Net, Yipes Enterprise Services, and numerous universities. Products Sorrento’s family of optical networking systems is designed to provide its customers with end-to-end solutions for the metropolitan and regional optical networking markets. Sorrento’s transport, access, switching and network management systems include the following products, some of which are still in development. GigaMux® 6400—DWDM Optical Transport Sorrento’s GigaMux® 6400 optical transport product utilizes DWDM technology to expand the capacity of new and existing fibers and enable traffic to travel throughout metropolitan optical networks without optical to electrical to optical conversions at each intermediate node. Sorrento’s GigaMux® 6400 features wavelength translation, wavelength multiplexing, optical amplification, optical add-drop multiplexing, protection switching and performance monitoring. The scalable and modular architecture of Sorrento’s GigaMux® 6400 product enables service providers to easily and cost-effectively expand their existing networks as bandwidth requirements increase. The GigaMux® 6400 can simultaneously transport multiple protocols bi-directionally over one or more fibers, which reduces the cost and complexity of the network. As part of Sorrento’s focus on video-on-demand transport, it recently introduced a 10-port Gigabit Ethernet multiplexer for GigaMux® 6400 metro/regional DWDM system targeted at the cable multi-system operator community. Sorrento’s GigaMux® 6400 product is Network Equipment Building Standards, or NEBS, level III certified. As of January 31, 2004, Sorrento has shipped its GigaMux® product to over 20 direct carrier customers or resellers worldwide. Sorrento’s GigaMux® product includes the following key features: • Scalability. The system can grow from 1 to 64 protected channels (640 Gbps/fiber) without a major upgrade or service interruption. • Protocol transparency. The system can aggregate and transport SONET/SDH (OC-3/STM-1 through OC-192/STM-64 carrying voice, IP or ATM traffic), ESCON, Fibre Channel, Fast Ethernet, Gigabit Ethernet and video. • Modular protection. The system’s modular protection system allows redundancy to be implemented at any point in the network. • Add/drop channels. The system is equipped with add/drop modules that allow specific channels to be added or dropped while all other channels pass through. Sorrento’s filter subsystem can add or drop from single channels to larger wavelength bands. • Reach. Up to 600 kilometers with optical amplifiers and up to 1,000 km with the addition of dispersion compensation. EPC™—Sub-Rate Access Multiplexers Electric Photonic Concentrator, or EPC™, is Sorrento’s sub-rate access multiplexer product that aggregates a wide variety of traffic from businesses and network points of presence for high-speed transport throughout optical networks. The traffic is aggregated for transmission on a single wavelength over the GigaMux® 6400. EPC™ is designed to lower the cost and increase the efficiency of bandwidth delivery within optical networks. Sorrento’s EPC™ products aggregate the following protocols: Ten one Gigabit Ethernet channels onto one 10 Gigabit wavelength; 16 OC-3 channels or 4 OC-12 channels, or a combination thereof, over a single OC-48 wavelength; Two one Gigabit Ethernet channels, or four fractional Gigabit Ethernet channels, over a single OC-48 wavelength; and Eight ESCON channels over a single OC-48 wavelength. GigaMux® 3200 and 1600—DWDM and CWDM Optical Transport Sorrento’s GigaMux® 3200 and 1600 platforms feature the flexibility and value needed for optical access and metro applications. The GigaMux® 3200 and 1600 can scale up to 16 protected wavelengths of DWDM or 8 protected wavelengths of CWDM, respectively, optimizing the cost of ownership for differing application needs. The system features wavelength translation, wavelength multiplexing, optical amplification, optical add-drop multiplexing, protection switching, and comprehensive management and performance monitoring. The GigaMux® 3200 and 1600 modules are supported in four different chassis options (GM 3234, GM 3217, GM 1608 and GMX 128), ranging from 1 to 64 wavelengths in capacity. All modules are common across multiple chassis allowing ease and simplicity of sparing and flexible provisioning. Whether the CWDM/DWDM equipment is positioned at the central office or customer premise, Sorrento utilizes an industry leading form factor to keep rack space to a minimum. The operational flexibility is extended to multi-rate software provisioning, varying methods of protection, with DC and AC power support across all chassis. The GigaMux® 3200 and 1600 design is focused on providing simple intelligent optical access solutions at a low cost of ownership to the carrier providing a quick return on investment with ease of implementing new revenue services. Sorrento’s GigaMux® 3200 and 1600 products are NEBS level III certified. As of January 31, 2004, Sorrento has shipped its GigaMux® 3200 and 1600 products to over 20 customers worldwide. Sorrento’s GigaMux® 3200 and 1600 products include the following key features: Affordable pay-as-you-grow architecture featuring a low entry price, modular design, and the ability to add more services without interrupting the existing traffic. Multi-rate, multi-protocol on the same hardware, supporting GbE, 1G & 2G Fibre Channel, ESCON, FICON, OC-3 through OC-192, digital video, 10 GbE LAN/WAN PHY and more. Support for all access and metro topologies (including point-to-point, linear add/drop, ring, and mesh) over single or dual fibers with distances over 250 km. Four different chassis options starting at 2RU in height (3.5”) and scaling from 1 to 64 wavelengths in capacity. Cost effective in-wavelength management, eliminating the need for a separate optical supervisory channel. Support for both CWDM and DWDM in the same chassis and on the same fiber, utilizing the same form factor for all modules, maximizing service flexibility and greatly reducing sparing and inventory costs. TeraManager™—Element Management System TeraManager™ is Sorrento’s TL1-based intelligent element management software platform that provides fault, configuration, performance and security management for all of the Sorrento products and for networks built with such products. Service providers can operate Sorrento’s network management platform through an easy-to-use graphical user interface, which gives users a complete network view and enables point and click provisioning and monitoring. Sorrento’s TeraManager™ product includes the following features: Fault, configuration, security and performance management; Carrier class performance; and Interface with higher layer operation support systems. Meret Optical Communications Sorrento’s optical networking subsidiary, Meret Communications, Inc., doing business as Meret Optical Communications, also markets Sorrento’s new CWDM product, as well as feature-rich video transport and switching, radio frequency, or RF, transmission, and RF synthesis products. Customers Sorrento’s target customer base includes wholesale and retail broadband service providers, such as inter-exchange carriers, local and foreign telephone companies, the telecom affiliates of utility companies (utilicoms), cable television service providers, system integrators and distributors. Sorrento’s customers generally fit the following customer profiles: • Wholesale Network Providers.These customers provide wavelength and broadband services to communication service providers and include telecommunication carriers, cable companies and utilicoms. • Managed Services Providers. These customers provide wavelength and broadband services to enterprises and include telecommunication carriers, cable companies, utilicoms and internet service providers. • System Integrators. Companies that specialize in providing turnkey networking solutions for enterprise networks and applications such as data-center connectivity and storage area networks. • Large Enterprises. Large enterprise customers are generally large organizations with complex networking needs, usually spanning multiple locations and difficult types of network requirements. Enterprise customers include industrial corporations, government agencies and utilities. • Small and Medium Businesses.These customers have a need for networks as well as connections to the Internet or to their business partners. However, they generally have limited resources. Therefore, Sorrento provides its products through systems integrators or value added resellers. Sorrento’s customer base is highly concentrated. In its fiscal year ended January 31, 2004, five customers accounted for 48% of Sorrento’s net sales. In its fiscal year ended January 31, 2003, five customers accounted for 84% of net sales, and in its fiscal year ended January 31, 2002, five customers accounted for 62% of net sales. Sorrento expects this customer concentration to continue for the foreseeable future. For its fiscal year ended January 31, 2004, Sorrento shipped its optical networking products to a total of 23 customers worldwide. Three customers, AT&T Broadband, now Comcast Corporation, Cox Communications and Looking Glass Networks each represented more than 10% of Sorrento’s net sales for fiscal 2004 and AT&T Broadband, now Comcast Corporation, Cox Communications and Deutsche Telekom each represented more than 10% of Sorrento’s net sales for fiscal 2003. Key Relationships Three customers, AT&T Broadband, Cox Communications and Deutsche Telekom, each represented more than 10% of Sorrento’s net sales for fiscal 2002. Sorrento has entered into long-term agreements with some of its customers, including: AT&T Broadband Network Solutions (now Comcast Business Communications) In February 2000, Sorrento entered into a strategic alliance agreement with AT&T Broadband Network Solutions (now Comcast Business Communications), or AT&T Broadband. Under the terms of this agreement, AT&T Broadband and Sorrento agreed to negotiate in good faith concerning the implementation of a number of joint sales and marketing initiatives. AT&T Broadband also agreed to help introduce Sorrento’s technology to individuals at other AT&T divisions and to provide feedback concerning its products’ performance. The initial term of this agreement expired in February 2002 and was automatically renewed for an additional one-year term in February 2002, February 2003 and February 2004. Similar automatic renewals will occur in each succeeding February. Either AT&T Broadband or Sorrento may terminate the agreement for any reason upon 90 days’ notice. In addition, Sorrento concurrently entered into an equipment purchase agreement. The equipment purchase agreement expired in February 2002 and was automatically renewed for an additional one-year term in February 2002, February 2003 and February 2004. Similar automatic renewals will occur in each succeeding February. Either AT&T Broadband or Sorrento may terminate the agreement for any reason upon 90 days’ notice. Sorrento started shipping its products to AT&T Broadband in the second quarter of fiscal year 2001. In November 2002, Sorrento entered into a separate exclusive supplier agreement with AT&T Broadband. Under this agreement, Sorrento became AT&T Broadband’s exclusive supplier, subject to certain exceptions, of DWDM and CWDM equipment that AT&T Broadband uses to provide UFO Communications, Inc., a private service provider, with certain services on certain AT&T Broadband networks. The initial term of this agreement is five years and continues after the initial term until either party gives 90 days’ written notice terminating the agreement. Looking Glass Networks In August 2001, Sorrento entered into an equipment purchase agreement with Looking Glass Networks, or LGN. Under the terms of this agreement, LGN agreed to purchase metro DWDM optical networking equipment from Sorrento as its primary supplier. LGN also agreed to receive early adopter access to new and emerging Sorrento technologies, and to serve as a beta tester for new and emerging equipment and to provide feedback concerning Sorrento’s products’ performance. The initial term of this agreement expires in August 2004 and will be automatically renewed for additional one-year terms. Either LGN or Sorrento may terminate the agreement at the end of the initial or any renewal term upon 90 days’ notice. Sorrento started shipping its products to LGN in the third quarter of fiscal year 2002. Time Warner Telecom In April 2001, Sorrento entered into an equipment purchase agreement with Time Warner Telecom, or TWT. Under the terms of this agreement, TWT agreed to purchase CWDM and DWDM optical networking equipment from Sorrento. The initial term of this agreement expired in April 2003 and was automatically renewed for an additional one-year term in April 2004. Similar automatic renewals will occur in each succeeding April. TWT may terminate the agreement for any reason upon 30 days’ notice. Sales and Marketing Sorrento’s sales effort is currently focused on North America, Europe and Asia. As of January 31, 2004, Sorrento’s sales and marketing organization included 36 employees, including account managers, sales engineers, support personnel, product managers and marketing personnel. In North America and Europe, Sorrento sells its products through its direct sales force as well as through system integrators. Sorrento’s international direct sales force is located in the United Kingdom, France and Germany. In Asia, Sorrento sells its products though system integrators. In support of Sorrento’s worldwide selling efforts, Sorrento’s marketing team targets potential customers through in-depth market analysis. Sorrento’s marketing objectives include building market awareness and acceptance of its products as well as expanding its customer base. Sorrento’s customer acquisition strategy has focused on targeting customers who are aggressively building network infrastructure and are looking to leverage existing fiber assets to generate additional revenue from broadband services. This focus has led to strategic supply agreements with several MSOs, utilities, and CLECs. Sorrento also plans to target incumbent carriers as they expand the development of their metropolitan and regional fiber networks. Marketing personnel coordinate Sorrento’s participation in trade shows, seminars and industry events and conduct media relations activities with trade and general business publications. Sorrento participates in many industry organizations responsible for developing standards that are used in optical networks. Customer Service and Support Sorrento’s customer service and support team provides a critical component of its customer satisfaction initiative. This team provides support to Sorrento’s customers by allowing them to successfully design and implement their optical networks. All services can be customized to meet the needs of Sorrento’s customers. Sorrento’s staff is experienced, and has the equipment necessary to support both installation and problem resolution. A variety of installation service packages support the implementation from start up to upgrades and maintenance. Specialists are available 7 days a week, 24 hours a day. Sorrento offers a Technical Assistance Center including field services support. Multiple technical support service agreements allow Sorrento’s customers to define the level of support they require. Sorrento’s customer service and support team provides installation, maintenance and training programs addressing the product installation and maintenance processes and can be delivered at the customer location or at Sorrento’s training facility. Sorrento currently provides service and support to its international customers on a direct basis and is establishing service and support agreements throughout the world. To date, revenues from service and support agreements have not been material. Sorrento intends to continue to develop its internal team to meet the needs of its customers and will utilize strategic partners to allow it to provide greater value when appropriate. Sorrento provides a total service solution. Sorrento’s hardware products are warranted against defects for a period of 12 to 36 months depending on purchase agreements, including technical support and parts repair/replacement. Sorrento also offers support contracts for a fee to its customer base, thereby allowing its customers to select a service plan tailored to their own particular needs. Engineering, Research and Development Sorrento has assembled a team of highly skilled engineers with extensive experience in the fields of optical, mechanical, electrical and network management design. Sorrento believes that its success in introducing DWDM optical technology for use in the metropolitan and regional markets was a result of its strength in research and development. As of January 31, 2004, 49 employees were engaged in engineering, research and development efforts. Sorrento’s research and development efforts are focused on new product development as well as enhancing performance and reliability of its existing products. Sorrento believes that its research and development efforts are key in maintaining technical competitiveness, delivering innovative products, and addressing the needs of the regional and metropolitan market. Sorrento’s engineering, research and development expenses were $8.0 million, $9.0 million and $13.7 million for the years ended January 31, 2004, 2003 and 2002, respectively. The decrease in Sorrento’s engineering, research and development expenses was primarily due to headcount and expense reduction programs initiated by Sorrento as a result of decreased capital spending levels from its major telecom customers during these periods. Manufacturing and Quality Sorrento outsources the manufacturing of its products. Sorrento designs its products and performs system integration, quality control, final testing and configuration at its San Diego, California and Sunnyvale, California locations. Sorrento’s Sunnyvale facility is ISO 9001:2000 certified and it has begun the process of upgrading its San Diego facility from ISO 9002:1994 to ISO 9001:2000. By meeting such standards, Sorrento assures its customers that it meets internationally recognized standards for quality, customer care and sound management practices. Sorrento believes that outsourcing its manufacturing allows it to conserve working capital, flexibly respond to changes in market demand and quickly deliver products to its customers. Sorrento currently purchases products from its contract manufacturers and other suppliers on a purchase order basis. Sorrento generally does not enter long-term contracts with its contract manufacturers or suppliers, and they are not obligated to perform services for Sorrento for any specific period or at any specified price, except as may be provided in a particular purchase order. Sorrento purchases a limited number of key components used in the manufacturing of its products from a limited number of suppliers and some of its components are purchased exclusively from a single supplier on a purchase order basis. Management believes that other suppliers could be identified to provide similar components on comparable terms. A change of suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. Patent, Trademarks and Licenses Sorrento currently holds approximately 39 patents and has several patent applications pending. Although Sorrento attempts to protect its intellectual property rights through patents, trademarks, and copyrights, maintaining certain technology as trade secrets and other measures, Sorrento cannot assure that any patent, trademark, copyright or other intellectual property rights owned by it will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to Sorrento or that any of its pending or future patent applications will be issued with the scope of the claims sought by Sorrento, if at all. Sorrento cannot assure that others will not develop technologies that are similar or superior to its technology, duplicate its technology or design around the patents that Sorrento owns. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which Sorrento does business or intends to do business in the future. Sorrento also has licensed and may in the future license technologies from other companies on a non-exclusive basis. For example, one of Sorrento’s CWDM products incorporates technology purchased from Entrada Networks, Inc., its former affiliate, that Sorrento then enhanced to complete a commercially feasible product. Sorrento believes that the future success of its business will depend on its ability to translate the technological expertise and innovation of its personnel into new and enhanced products. Sorrento cannot assure that the steps taken by it will prevent misappropriation of its technology. In the future, Sorrento may take legal action to enforce its patents and other intellectual property rights, to protect its trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could harm Sorrento’s business and operating results. As is common in Sorrento’s industry, Sorrento has from time to time received notification from other companies of intellectual property rights held by those companies upon which Sorrento’s products may infringe. Any claim or litigation, with or without merit, could be costly, time consuming and could result in a diversion of management’s attention, which could harm Sorrento’s business. If Sorrento was found to be infringing on the intellectual property rights of any third party, it could be subject to liabilities for such infringement, which could be material, and could be required to seek licenses from other companies or to refrain from using, manufacturing or selling certain products or using certain processes. Although holders of patents and other intellectual property rights often offer licenses to their patent or other intellectual property rights, no assurance can be given that licenses would be offered, that the terms of any offered license would be acceptable to Sorrento or that failure to obtain a license would not cause its operating results to suffer. Working Capital Practices Sorrento has historically maintained high levels of inventories to meet output requirements of its customers and to ensure an uninterrupted flow of inputs from suppliers. Sorrento has, however, initiated active and aggressive programs to reduce its inventories and conserve working capital resources on an ongoing basis. It is not Sorrento’s standard policy to grant customers the right to return merchandise that performs according to specifications. Typical payment terms require payment within 30 to 60 days from the date of shipment. Sorrento performs ongoing credit evaluations of each customer’s financial condition and extends unsecured credit related to the sales of various products. From time to time Sorrento receives financial instruments such as letters of credit for payments for international customers. At January 31, 2004, accounts receivable due from Cox Communications, KLA Tencor, CNT and Time Warner Telecom accounted for 16%, 12%, 12% and 11%, respectively, of net receivables. At January 31, 2003, accounts receivable due from AT&T Broadband, Cox Communications, DeltaNet and Inoc accounted for 31%, 16%, 19% and 30%, respectively, of net receivables. Sorrento’s Backlog At January 31, 2004, Sorrento had backlog that totaled $2.1 million compared to $5.0 million at January 31, 2003. Sorrento’s backlog consists of orders confirmed with a purchase order for products to be shipped within 12 months to customers with approved credit status. Sorrento does not believe that backlog, as of any particular date, should be used as an indication of sales for any future period for two reasons. First, orders are increasingly being booked and shipped in a short period of time and therefore may never be calculated in the backlog amount at the end of any particular quarter. Second, customers have and can change delivery schedules or cancel orders without a significant penalty. Competition The market for optical networking equipment is extremely competitive and subject to rapid technological change. Sorrento expects competition to continue to be significant in the future. Sorrento’s primary competitors in the DWDM market include vendors of optical networking and infrastructure equipment such as ADVA AG Optical Networking, CIENA Corporation, Cisco Systems, Lucent Technologies, Fujitsu and Nortel Networks, as well as private companies that have been or will be focusing on its target markets. Sorrento’s primary competitors for its CWDM products include ADVA AG Optical Networking and CIENA Corporation, as well as private companies that have been or will be focusing on its target markets. Many of Sorrento’s competitors have significantly greater financial resources and are able to devote these greater resources to the development, promotion, sales and support of their products. In addition, many of Sorrento’s competitors have more extensive customer relationships than Sorrento does, including relationships with its potential customers. Sorrento believes each of its competitors has optical networking products in various stages of development. Sorrento believes the principal competitive factors in the optical networking market are: product performance, features, functionality and reliability; price/performance characteristics; timeliness of new product introductions; relationships with existing customers; service, support and financing; and financial stability and strength of the company. Sorrento believes its products compete favorably with its competition within its marketplace. The competitors for Meret’s legacy products include Pesa, Artel, RGB Spectrum, Utah Scientific, and many other companies. Increased competition may result in further price reductions, reduced gross margins and loss of market share, any of which could materially and adversely affect Sorrento’s business, operating results and financial condition. There can be no assurance that Sorrento will be able to compete successfully against current and future competitors, or that competitive factors will not have a material adverse effect on its business, operating results and financial condition. Environmental Compliance Sorrento is required to file environmental compliance reports with the Federal Food and Drug Administration regarding the emissions levels of its laser-based products, which are used in fiber optics communications. All of Sorrento’s products comply with these required safety level standards. Employees As of January 31, 2004, Sorrento had 132 employees, of which 49 were in engineering, research and development, 36 in sales and marketing, and the remainder in manufacturing and in general and administrative functions. Of the 49 employees in engineering, research and development, 20 have masters degrees and 14 have doctorate degrees. Sorrento also employs a number of part-time and temporary personnel from time to time in various departments. Sorrento’s future success will depend in part on its ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. None of Sorrento’s employees are covered by a collective bargaining agreement and Sorrento believes that its relations with its employees are good. Definitions As used in this joint proxy statement / prospectus, the following terms have the meanings indicated: “ATM” means Asynchronous Transfer Mode, which is a type of networking technology based on transferring data in cells or packets of a fixed size. The small, constant cell size allows ATM equipment to transmit video, audio, and data over the same network, and assure that no single type of data overtakes the line. Current implementations of ATM support data transfer rates of 25 Mbps to 2.48 Gbps. “Backbone” means a main segment of a network carrying large amounts of traffic. Individual metro and interoffice rings are attached to the backbone. “Bandwidth” means the capacity to move information down a communications channel. Bandwidth is defined by the highest data rates that can be transmitted by that channel and is commonly measured in bits per second (bps). For example, Ethernet has a 10 Mbps bandwidth and OC-192 has 10 gigabits per second bandwidth. “Bridge” means a device that connects two or more networks of the same access method (Ethernet to Ethernet or Token Ring to Token Ring) by making simple forward/don’t forward decisions on each data packet received from any of the networks to which it is connected. “Broadband” means technologies or networks that have the ability to transmit high data rates. “CLEC” means a Competitive Local Exchange Carrier. “Concentrator” means the connection point, more sophisticated than a hub, incorporating different types of cable connections, back-up power supply, data-gathering capability for management purposes and possibly even bridge and router features as well. “CWDM” means Coarse Wavelength Division Multiplexing, which is a sophisticated opto-electronics technology that uses multiple wavelengths of light spaced at least 400 Ghz apart to increase the number of video, data or voice channels of information that can be sent on a single optical fiber in a transmission system. “DWDM” means Dense Wavelength Division Multiplexing, which is a sophisticated opto-electronics technology that uses multiple wavelengths of light very efficiently to greatly increase the number of video, data or voice channels of information that can be sent on a single optical fiber in a transmission system. “ESCON” means Enterprise System Connectivity, which is a protocol for 200 Mbps signal transmission speed over fiber optic cable. “Ethernet” means a 10 Mbps speed network that runs over thick coaxial cable (10BASE5), thin coaxial cable (10BASE2), twisted-pair (10BASE-T), and fiber-optic cable. It is the most widely used LAN technology and the most popular form of Ethernet is 10BASE-T. Ethernet is a network specification that was developed at Xerox Corp’s Palo Alto Research Center, and made into a network standard by Digital, Intel, and Xerox. “Fast Ethernet” means a 100 Mbps speed network that runs over thick coaxial, twisted-pair, and fiber-optic cable. Fast Ethernet is 10 times faster than Ethernet. “FDDI” means a Fiber Distributed Data Interface and is a fiber optic network that supports transmission speeds up to 100 Mbps. “Fibre Channel” means a serial data transfer architecture standard conceived for new mass storage devices and other peripheral devices that require very high bandwidth connections. Bit rates for Fibre channel are either 1.06 Gbps or 2.1 Gbps. “Gigabit Ethernet” means a 1000 Mbps speed network that runs fiber-optic cable for wide area network connections. “HDTV” means high definition television, which is a new type of television that provides much better resolution than current television. HDTV is slowly being implemented into the broadcast networks. “Hub” means a central connection device to which many network tributaries are connected. “ILEC” means Incumbent Local Exchange Carrier and is a telephone company that provides local services and does not offer long distance services. All the regional operating companies after the break-up of AT&T became ILECs. “ISDN” means an Integrated Services Digital Network and is an all-digital communications network that provides a wide range of services on a switched basis. Voice, data and video can be simultaneously transmitted on one line from a source. “ISO” means International Standards Organization. Founded in 1946, ISO is an international organization composed of national standards bodies from over 75 countries. ISO has defined a number of important computer standards; the most significant of which is perhaps is OSI (Open Systems Interconnection), a standardized architecture for designing networks. “ISP” means an Internet Service Provider. “ITU” means International Telecommunications Union, which is an intergovernmental organization through which private and public organizations develop telecommunications. The ITU was founded in 1865 and became a United Nations agency in 1947 and it is responsible for adopting international tax treaties, regulations and standards governing telecommunications. “IXC” means an inter-exchange carrier, a long distance telephone company or a carrier that specializes in connecting central offices of local service providers. This carrier typically does not offer services to end users. AT&T, MCI and Sprint are IXCs. A carrier that provides the backbone of competitive local exchange carriers can also be considered as an IXC. Therefore, an IXC can provide service in both metropolitan and in long haul networks. “LAN” means a Local Area Network and is a high-speed communications system designed to link computers for the purpose of sharing files, programs and various devices such as printers and high-speed modems within a small geographic area such as a workgroup, department or single floor of a multi-story building. LANs may include dedicated computers or file servers that provide a centralized source of shared files and programs. “MSO” means a Multiple Service Operator, which is typically a cable TV operator that offers multiple services such as video, voice and data. “Multiplexing” means a process that combines a number of lower speed data transmissions into one high-speed data transmission by splitting that total available bandwidth into narrower bands (frequency division) or by allotting a common channel to several different transmitting devices one at a time in sequence (time division). The opposite function of separating the data channels into their original format is called demultiplexing. “OC-1, OC-3, OC-12, OC-48, OC-192” means the SONET bit rates of 51.85Mbps, 155 Mbps, 622 Mbps, 2.5 Gbps and 10Gbps transmission speeds for signals over fiber optic cables. The number in the end of the term corresponds to the equivalent multiple of OC-1 capacity (e.g., OC-192 means equivalent to 192 times OC-1) “OEMs” means original equipment manufacturers. “Opto-Electro-Optical” means Optical-Electrical-Optical which describes the conversion of optical signals to electric and back to optical. Typically, devices performing this function in the electrical domain and the signals need to be converted back to optical for transmission over optical fibers. “Packet” means the “envelope” in which the network software places a message being sent from one station to another station in a network. One of the key features of a packet is that it contains the destination address in addition to the data. “POTS” means “plain old telephone service” which refers to the standard telephone service over copper lines that most homes use. In contrast, telephone services based on high-speed, digital communications lines, such as ISDN and FDDI, are not POTS. The main distinction between POTS and non-POTS services is speed and bandwidth. POTS is generally restricted to about 52Kbps. “Protocol” means a standard developed by international standards bodies, individual equipment vendors, and ad hoc groups of interested parties to define how to implement a group of services in one or more layers of the OSI model. The Open Systems Interconnect (“OSI”) reference model was developed by the ISO to define all the services a LAN should provide. Ethernet and Token Ring, for example, are both protocols that define different ways to provide the services called for in the Physical and Data Link Layers of the OSI model. “PTT” means Postal, Telephone and Telegraph, and refers to a generic telephone company outside the United States. Typically, a PTT is state owned and can operate both local and long distance services. “RBOC” means a Regional Bell Operating Company. “Router” means a network translator that reads network-addressing information within packets to provide greater selectivity in directing traffic over multiple network segments. It is a more complex inter-networking device. “SDH” means Synchronous Digital Hierarchy, which is transmission protocol for high speed transmission over fiber optic cable published in 1988 by the Consultative Committee for International Telegraph and Telephony. It a hierarchy similar to SONET but in this case the lowest bit rate channel is STM-1 (155 Mbps). “SONET” means a transmission protocol for high-speed transmission over fiber optic cable, which was introduced by Bell Communications in 1984 and quickly accepted by American National Standards Institute. “Switch” means a device that allows the network operator to vary and select connections between network nodes at very high speeds. “T-1” means a dedicated phone connection supporting data rates of 1.544 Mbps. A T-1 line actually consists of 24 individual channels, each of which supports 64Kbps and can be configured to carry voice or data traffic. T-1 lines are sometimes referred to as DS-1 lines. “TCP/IP” means Transmission Control Protocol/Internet Protocol, which is a suite of protocols used for communications between two or more devices. “TDM” means time division multiplexing which is a multiplexing process that combines a number of lower speed data transmissions into one high-speed data transmission by allotting a common channel to several different transmitting devices one at a time in sequence. “Token Ring” means a 4 Mbps or 16 Mbps speed network that uses different technology than Ethernet to co-ordinate the transmission of data among nodes. “WAN” means a Wide Area Network and is a communications network that connects geographically dispersed users. Typically, a WAN consists of two or more LANs. The largest WAN in existence is the Internet. Properties Sorrento is headquartered in its San Diego, California facility that it owns consisting of approximately 36,000 square feet used for offices, research and development and manufacturing. Sorrento also owns a 47,000 square foot facility in San Diego, California adjacent to its headquarters that is used for offices, manufacturing and customer support. For the fiscal year 2004, Sorrento occupied an additional 40,668 square feet used for office, research and development and manufacturing activities under leases as detailed below: Location Square Footage Facility Type Expiration Date Sunnyvale, California 35,288 Office/Manufacturing December 31, 2004 Stuttgart, Germany 5,380 Office December 31, 2005 Sorrento believes its facilities are suitable and adequate to meet its current needs. See Note E to the consolidated financial statements for terms and amounts of mortgages on the facility Sorrento owns. Legal Proceedings On June 4, 2003, Sorrento consummated an exchange transaction and cancelled all outstanding Series A convertible preferred stock and 9.75% senior convertible debentures. The exchange agreement provides that the litigation instituted by the former holders of Series A stock be dismissed with prejudice against Sorrento, its subsidiaries, its current officers and directors, and other defendants who execute an appropriate release, and without prejudice against all other defendants. This dismissal will require court approval, which is in the process of being obtained by counsel for all parties. In addition, claims in arbitration were filed by two of Sorrento’s former financial officers and employees who worked in Sorrento’s former Santa Monica office, which has since been closed, alleging that their resignations in May 2002 were for “good reason” as defined in their employment agreements, all of which were to expire on May 22, 2002. One of the claims was settled in May 2003 for $45,000, approximately the value of legal fees incurred by the plaintiff. The other claim was resolved in August 2003 by an arbitrator who ruled in Sorrento’s favor. As part of the arbitration ruling, both parties were responsible for their own legal fees. A former officer of SNI brought suit alleging breach of a consulting agreement Sorrento entered into with him in March 2002, following his resignation for “good reason” as defined in his employment agreement. He was seeking acceleration of consulting fees due to him under his consulting agreement in the amount of $229,000. This suit was settled in January 2004 for approximately $150,000 in full settlement and a mutual release of claims from both parties. From time to time, Sorrento is involved in various other legal proceedings and claims incidental to the conduct of its business. Although it is impossible to predict the outcome of any outstanding legal proceedings, Sorrento believes that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material effect on its financial position, results of operations, or cash flows. Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain statements contained in this joint proxy statement/prospectus, including, without limitation, statements containing the words “believes,” “anticipates,” “estimates,” “expects,” and words of similar import constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are referred to the “Risk Factors” section of this joint proxy statement/prospectus, which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. The results of operations reflect Sorrento’s activities and those of its wholly-owned subsidiaries; this consolidated group is referred to individually and collectively as “Sorrento.” Critical Accounting Policies and Estimates Sorrento’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Sorrento to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, Sorrento evaluates its estimates, including those related to its valuation of inventory and its allowance for uncollectible accounts receivable. Sorrento bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Sorrento believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: • Revenue recognition. Revenue is generally recognized when the products are shipped, all substantial contractual obligations, if any, have been satisfied, and the collections of the resulting receivable is reasonably assured. When title does not pass to the customer at time of shipment, revenue is not recognized until all contractual requirements are met and title has transferred. During this transition period, the amount of the sale and/or installation is shown in deferred revenue. • Revenue from installation is recognized as the services are performed to the extent of the direct costs incurred. To date, installation revenue has not been material. Revenue from service obligations, if any, is deferred and recognized over the life of the contract. Inventory or demonstration equipment shipped to potential customers for field trials is not recorded as revenue. Sorrento accrues for warranty costs, sales returns and other allowances at the time of shipment. Although Sorrento’s products contain a software component, the software is not sold separately and Sorrento is not contractually obligated to provide software upgrades to its customers. • Inventory. Inventory is evaluated on a continual basis and management must make estimates about the future customer demand for Sorrento’s products, taking into account both the economic conditions and growth potential of Sorrento’s customers. Reserve adjustments are made based on management’s estimate of future sales value, if any, of specific inventory items. Reserve adjustments are made for the difference between the cost of the inventory and the estimated market value and charged to operations in the period in which the facts that give rise to the adjustments become known. A misinterpretation or misunderstanding of these conditions or uncertainty in the future outlook of Sorrento’s industry or the economy, or the failure to estimate correctly, could result in inventory losses in excess of the provisions determined to be appropriate at the time of the balance sheet. • Accounts receivable. Accounts receivable balances are evaluated on a continual basis and management regularly reviews the financial stability of individual customers. This analysis involves a judgment of the customer’s current and projected financial condition and the positive or negative effects of the current and projected industry outlook, as well as that of the economy in general. Allowances are provided for potentially uncollectible accounts based on management’s estimate of the collectability and the probability of default of customer accounts. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance may be required. Allowance adjustments are charged to operations in the period in which the facts that give rise to the adjustments become known. • Intangible assets. Sorrento currently has intangible assets that include assets with finite lives, such as its purchased technology. The determination of related estimated useful lives and whether these assets are impaired involves judgments based upon short and long-term projections of future performance. Sorrento has no goodwill or indefinite life intangible assets. Other intangible assets with finite lives continue to be amortized over their useful lives. • Legal contingencies. Sorrento is subject to proceedings, lawsuits and other claims, including proceedings under laws and government regulations related to securities, environmental, labor, product and other matters. Sorrento is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for the contingencies is based on a careful analysis of each individual issue with the assistance of outside legal counsel. Sorrento’s reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. For more information, see Note H to the consolidated financial statements. • Income taxes. Sorrento currently has no provisions for income taxes. Sorrento has carry forward domestic federal net operating losses, which may be available, in part, to reduce future taxable income in the United States. However, due to potential adjustments to the net operating loss carry forwards as provided by the Internal Revenue Code with respect to future ownership changes, future availability of the tax benefits is not assured. In addition, Sorrento provided a valuation allowance in full for its deferred tax assets, as it is Sorrento’s opinion that it is more likely than not that some portion or all of the deferred tax assets will not be realized. LuxN, Inc. On August 8, 2003, Sorrento completed its acquisition of LuxN, Inc. in which Sorrento paid $14.8 million in cash, 1,879,347 shares of its common stock and 400,000 warrants to purchase its common stock at an exercise price of $3.05 per share. At the effective time of the merger, Sorrento’s wholly-owned subsidiary, Lambda Acquisition Corp., was merged with and into LuxN, with LuxN being the surviving corporation in the merger. From the date of the acquisition to January 31, 2004, the results of LuxN’s operations have been combined with the company in its discussion below unless separately addressed. Overview Sorrento was originally incorporated in New Jersey under the name of Osicom Technologies, Inc. In fiscal 2003, Sorrento changed its name to Sorrento Networks Corporation to better reflect the name of its primary subsidiary, Sorrento Networks, Inc. Sorrento reincorporated in Delaware during fiscal 2004. Presently headquartered in San Diego, California, Sorrento is a developer and manufacturer of intelligent optical networking solutions for metropolitan and regional applications worldwide. Beginning in fiscal 2002, the global telecommunications market deteriorated, reflecting a significant reduction in capital spending by established service providers. This trend intensified during fiscal 2003 and continued through fiscal 2004. Reasons for this reduction include the general economic slowdown, network overcapacity, customer bankruptcies, network build-out delays and limited capital availability. As a result, Sorrento’s sales and results of operations have been and may continue to be adversely affected. The significant slowdown in capital spending has created uncertainty as to the level of demand in Sorrento’s target markets. In addition, the level of demand can change quickly and can vary over short periods of time. As a result of the uncertainty and variations in Sorrento’s markets, accurately forecasting future results, earnings and cash flow is increasingly difficult. As discussed in more detail throughout Sorrento’s MD&A: Sorrento’s consolidated results of operations during the past three years were adversely affected by the rapid and sustained deterioration of the telecommunications market. After several years of significant growth, Sorrento’s revenues declined during fiscal 2003 and 2002 by 38% and 9%, respectively, as compared to the respective prior year. The significant reduction in capital spending by service providers, among other factors, contributed to this decline. There was no significant change in fiscal 2004, which includes $3.9 million in revenue from Sorrento’s newly acquired subsidiary LuxN, Inc., when compared to the prior year. If the revenue from LuxN is excluded for comparison purposes, Sorrento’s revenue declined 14% for fiscal 2004 when compared to the prior year. Sorrento’s gross margin rates, which historically had exceeded 40%, fell precipitously beginning in fiscal 2002. The rapid decline in revenue from decreased market demand led to significant inventory charges and high-unabsorbed fixed cost, which, among other factors, adversely affected Sorrento’s gross margin rates. Management implemented a cost reduction program during fiscal 2002. As a result, total operating expenses have declined from $63.6 million in fiscal 2001 to $23.3 million in fiscal 2004, a reduction of over $40 million. These were the key factors that resulted in losses from continuing operations of $17.6 million, $31.3 million and $37.2 million, respectively, for fiscal 2004, 2003 and 2002, respectively. During 2004, Sorrento took several steps to improve its balance sheet and strengthen its ability to compete in the marketplace, including: On March 6, 2003, Sorrento and its wholly-owned subsidiary, Sorrento Networks, Inc., entered into an exchange agreement with the holders of its 9.75% senior convertible debentures, or the old debentures, and the Series A convertible preferred stock, or the preferred stock, of Sorrento Networks, Inc. The exchange agreement and associated documents contemplated an exchange of the old debentures and the preferred stock at closing into shares of common stock and $12.5 million of Sorrento’s new 7.5% secured convertible debentures. Certain holders of the preferred stock would also receive additional new debentures of approximately $600,000 to pay certain legal fees. The exchange agreement was approved by stockholders on May 29, 2003 and was completed and became effective on June 4, 2003, pursuant to which Sorrento exchanged current outstanding debentures and Series A preferred stock for common stock and an issuance of a smaller principal amount of new debentures. Sorrento’s acquisition of LuxN, Inc was completed on August 8, 2003. At the effective time of the merger, Sorrento’s wholly-owned subsidiary, Lambda Acquisition Corp., was merged with and into LuxN, with LuxN being the surviving corporation in the merger. Pursuant to the Agreement and Plan of Merger, each share of LuxN common stock outstanding at the effective time of the merger was cancelled. As consideration for the transaction, holders of LuxN’s Series A-1 preferred stock with an aggregate pro-rata portion of $14.8 million of LuxN’s net cash elected to receive cash at closing, and the holders of LuxN’s Series A-1 preferred stock with an aggregate pro-rata portion of $3.8 million of LuxN’s net cash elected to receive Sorrento’s common stock at closing. Sorrento issued 1,374,194 shares of its common stock to the holders of LuxN’s Series A-1 preferred stock at the closing and issued an additional 505,153 shares upon receipt of its stockholders’ approval. In addition, Sorrento issued warrants to purchase 400,000 of its shares of common stock at an exercise price of $3.05 per share to the holders of LuxN’s Series A-1 preferred stock. Sorrento did not assume or exchange any outstanding options or warrants to purchase shares of LuxN stock. The first of two private placements Sorrento completed in fiscal 2004 closed on December 31, 2003. In exchange for $6.35 million in gross proceeds, Sorrento issued 2,140,101 new shares of Sorrento common stock, and warrants to purchase 1,070,051 new shares of Sorrento’s common stock. The effective price in the private placement was $2.97 for each unit consisting of one share of common stock and a warrant to purchase one-half of a share of common stock. The warrants have an exercise period of five years with an exercise price of $2.97 per share. The warrants are exercisable in cash, representing a potential $2.17 million in additional proceeds, bringing the total gross proceeds of this offering to approximately $9.5 million upon full exercise of the warrants. On January 26, 2004, the second private placement was completed raising $10 million in gross proceeds. In connection with the financing, Sorrento issued 2,921,512 new shares of Sorrento common stock and warrants to purchase 1,460,756 new shares of Sorrento’s common stock. The effective price in the private placement was $3.44 for each unit. Each unit consists of one share of common stock and a warrant to purchase one-half of a share of common stock. The warrants have an exercise period of five years and an exercise price of $3.44 per share. The warrants are callable after one year under certain circumstances. The warrants are exercisable in cash, representing a potential $5 million in additional proceeds, bringing the total gross proceeds of this offering to approximately $15 million assuming the warrants are fully exercised in cash. The warrants provide for a cashless exercise under certain circumstances. As Sorrento looks forward to fiscal 2005, it believes that the general economic recovery that began in 2004 will gradually take hold within the telecommunications marketplace. Although Sorrento’s backlog entering fiscal 2005 remains low at slightly over $2 million, the increased level of inquiries and quote activity from both current and potential new customers leads Sorrento to believe industry overcapacity has, to a large extent, been absorbed and, as such, Sorrento anticipates gradual improvement in its business commencing in mid-fiscal 2005. Results of Operations: Comparison of the Years Ended January 31, 2004 and January 31, 2003 Net sales Total revenues in 2004 were flat. Revenue in the United States increased reflecting the acquisition of LuxN. Revenues in Europe declined 42%, as the economic downturn, which was initially felt in the United States, more severely impacted European sales in 2004. In addition, 2004 saw a revenue increase in Asia of over 81% due to increased sales activity in Japan. Product revenues decreased 5% while service revenues increased 111%. Service revenues were higher due to increased product deployments, offset by competitive pricing pressure. The contribution to revenue from the LuxN acquisition was $3.8 million in product and service revenue from August 8, 2003 to fiscal year end January 31, 2003. Geographic Revenues      For the years ended January 31,    2004 vs 2003     2003 vs 2002        2004    2003    2002    Change $     Change %     Change $     Change %   United States    $ 18,445    $ 14,803    $ 28,341    $ 3,642     25     $ (13,538 )   (48 ) Europe      5,455      9,469      10,130      (4,014 )   (42 )     (661 )   (7 ) Asia      1,562      865      2,356      697     81       (1,491 )   (63 )                     Consolidated    $ 25,462    $ 25,137    $ 40,827    $ 325     1     $ (15,690 )   (38 )                     Revenues by geographic regions are based on the location of the customer. Gross Profit      For the years ended January 31,    2004 vs 2003    2003 vs 2002        2004    2003     2002    Change $     Change %    Change $     Change %   United States    $ 3,725    $ 3,751     $ 5,996    $ (26 )   —      $ (2,245 )   (37 ) Europe      1,507      (487 )     2,618      1,994     409      (3,105 )   (119 ) Asia      461      —         708      461     100      (708 )   (100 )                     Consolidated    $ 5,693    $ 3,264     $ 9,322    $ 2,429     74    $ (6,058 )   (65 )                     Gross Profit by geographic region is based on the location of the customer. Gross profits.Improvement in fiscal 2004 reflects improvements in U.S. production and overhead related costs combined with the non-recurrence of obsolescence and inventory valuation reserves taken in fiscal 2003. Selling and marketing. Selling and marketing expenses consist primarily of employee compensation and related costs, commissions to sales representatives, tradeshow expenses and travel expenses. Sorrento’s consolidated selling and marketing expenses decreased to $8.4 million, or 33% of net sales, for fiscal 2004 from $12 million, or 48% or net sales, for fiscal 2003. The decline was primarily the result of continued cost reduction efforts and a reduction in both its U.S. and foreign sales offices. Engineering, research and development. Engineering, research and development expenses consist primarily of compensation related costs for engineering personnel, facilities costs, and materials used in the design, development and support of Sorrento’s technologies. All research and development costs are expensed as incurred. Sorrento continues to manage its research and development costs in relation to the changes in its sales volume and available capital resources in its development efforts to enhance existing products and introduce new products to its product offering. Sorrento’s consolidated engineering, research and development expenses decreased to $8.0 million, or 32% of net sales, for fiscal 2004 from $9.0 million, or 36% of net sales, for fiscal 2003. The decline can primarily be attributed to decreases in product development material and personnel related costs. General and administrative. General and administrative expenses consist primarily of employee compensation and related costs, legal and accounting fees, public company costs, and allocable occupancy costs. Consolidated general and administrative expenses decreased to $6.5 million, or 26% of net sales, for fiscal 2004 compared to $12.8 million, or 51% of net sales, for fiscal 2003. The decrease in general and administrative expenses can be attributed to a decrease in professional fees including reduced legal fees and lower facility related expenses. Other operating expenses. Other operating expenses for both fiscal 2004 and 2003 included approximately $320,000 and $400,000, respectively, of purchased technology amortization expense related to acquisitions. Other income (expenses). Other income (expenses) from continuing operations increased to $11.4 million in income for fiscal 2004 from $5.1 million in fiscal 2003. This increase reflects a net gain on the capital restructuring of $17.6 million, combined with reduced interest expense reflecting the capital restructuring in fiscal 2004. Partially offsetting these improvements were the write-off of Sorrento’s investment in UFO Communications of approximately $5 million together with a lower gain from the sales of Digi International Inc. stock in fiscal 2004 versus fiscal 2003. Sorrento acquired LuxN Inc. on August 8, 2003, whereby it paid $14.8 million in cash and issued 1,879,347 shares of its common stock and 400,000 warrants to purchase its common stock at an exercise price of $3.05 per share. Upon valuing the purchase price and allocating the price to the assets and liabilities acquired, it was determined that net assets acquired exceeded the purchase price by $87,000. This excess of net asset acquired over the amount paid for the acquisition is reflected as a reduction to long lived assets. Income taxes. There was no provision for income taxes for fiscal years 2004 and 2003. Sorrento has carry forwards of domestic federal net operating losses, which may be available, in part, to reduce future taxable income in the United States. However, due to potential adjustments to the net operating loss carry forwards as provided by the Internal Revenue Code with respect to future ownership changes, future availability of the tax benefits is not assured. In addition, Sorrento provided a valuation allowance in full for its deferred tax assets, as it is Sorrento’s opinion that it is more likely than not that some portion or all of the assets will not be realized. Sorrento’s prior management did not file Sorrento’s tax returns for over six years. Sorrento had losses during each of these years and does not believe there is tax liability for any of them, other than a nominal penalty for failure to file a return. Sorrento has filed its federal and state tax returns. As with any purchase it is possible that the net operating loss carry-forward for taxes may be limited or possibly reduced to zero. Sorrento Net sales. Net sales decreased to $18.7 million, or 17%, for fiscal 2004 from $22.4 million for fiscal 2003. In fiscal 2004, Sorrento’s top five customers accounted for 67% of its net sales, compared to 69% of net sales contributed from its top five customers in 2003. Sorrento expects to continue experiencing significant fluctuations in its annual revenues as a result of its long and variable sales cycle as well as its highly concentrated customer base. Revenue was negatively impacted by weak telecommunication industry volumes and management’s determination to not pursue low gross margin projects. Gross profit. Gross profit was $4.2 million for fiscal 2004, an increase of 35% from $3.1 million for fiscal 2003. Gross margin increased to 22% of net sales for fiscal 2003 from 14% for fiscal 2003. The increase was due primarily to the cost reduction efforts started in fiscal year 2003 as well as increases to Sorrento’s obsolescence and inventory value reserves in fiscal 2003. Selling and marketing. Sales and marketing expenses declined to $7.4 million, or 39% of net sales, for fiscal 2004 from $11.7 million, or 52% of net sales, for fiscal 2003. The decrease in sales and marketing expenses resulted primarily from a reduction in personnel and related costs, decreased travel expenses, trade show participation, and advertising expenses. Engineering, research and development. Engineering, research and development expenses decreased to $5.7 million, or 30% of net sales, for fiscal 2004 from $8.5 million, or 38% of net sales, for fiscal 2003. The decline in engineering, research and development expenses was the result of decreased expenditures associated with fewer engineering personnel combined with a reduction in material related development expenses. General and administrative. General and administrative expenses decreased to $3.4 million, or 18% of net sales, for fiscal 2004 from $7.6 million, or 34% of net sales, for fiscal 2003. The decline in general and administrative expenses reflects the reduction of executive and administrative personnel and reduced expense levels reflecting Sorrento’s continuing cost reduction program. Deferred and other stock compensation. Deferred and other stock compensation for the fiscal year ended January 31, 2004 includes $51,000 of amortization of deferred stock compensation resulting from the value of stock options granted to consultants compared to $433,000 for the prior fiscal year. In connection with the grants of stock options with exercise prices determined to be below the fair value of Sorrento’s common stock on the date of grant, SNI recorded deferred stock compensation of $2.6 million, which was fully amortized in 2004. Meret Optical Communications Net sales. Net sales decreased to $2.8 million, or 10%, for fiscal 2004, from $3.1 million for fiscal 2003. The reduction in sales volume reflects the continued weakness in the telecommunications industry. Gross profit. Gross profit increased to $471,000, or 131%, for fiscal 2004 from $204,000 for fiscal 2003. Gross margin as a percentage of net sales increased to 16% for fiscal 2004 compared to 7% for the comparable period last year. The improvement was due primarily to non-recurrence of fiscal 2003 additions to Sorrento’s obsolescence reserves. Selling and marketing. Sales and marketing expenses decreased to $113,000, or 4% of net sales, for fiscal 2004, compared to $315,000, or 10% of net sales, for fiscal 2003. This decline was a direct result of fewer sales employees and reduced commissions reflecting changes in the commission structure during 2004. General and administrative. General and administrative expenses were eliminated due to consolidation of operations per the exchange agreement dated June 4, 2003, which requires Sorrento subsidiaries to be consolidated into a single entity. In preparation for combining Sorrento subsidiaries into a single entity, general and administrative, engineering and research and development for Meret were combined with Sorrento Networks, Inc. Other operation expenses. Other operating expenses increased to $320,000, or 11% of net sales for fiscal 2004 from $421,000, or 14% of net sales, for fiscal 2003. These costs represent the amortization of purchased technology related to prior acquisitions. Results of Operations: Comparison of the Years Ended January 31, 2003 and January 31, 2002 Net sales. Sorrento’s consolidated net sales decreased $15.7 million, or 38%, to $25.1 million for fiscal 2003 when compared to net sales of $40.8 million for fiscal 2002. Net sales for SNI decreased $13.6 million, or 38%, to $22.4 million for fiscal 2003 as compared to net sales of $36.0 million in fiscal 2002. Net sales for Sorrento’s Meret Optical segment decreased $1.7 million, or 35%, in fiscal 2003 to $3.1 million, of which $296,000 was inter-company sales as compared to net sales of $4.8 million in fiscal year 2002. Gross profit. Cost of sales consists principally of the costs of components, subcontract assembly from outside manufacturers, and in-house system integration, quality control, final testing and configuration costs. Gross margin percent on a consolidated basis decreased to 13% for fiscal 2003 from 23% in fiscal 2002. Consolidated gross profit was $3.3 million, a decrease of 65%, for fiscal 2003 from $9.3 million for fiscal 2002. Gross margin percent and gross profit were impacted negatively by increases in inventory reserves and sales that were made at lower gross profit margins than the prior year. Gross profit for Sorrento’s SNI subsidiary decreased to $3.1 million in fiscal 2003, as compared to $7.7 million in fiscal 2002, a decrease of 60%. An increase in Sorrento’s inventory reserves taken in the second quarter accounted for $3.0 million of the decrease in gross profit for SNI. The gross profit of Sorrento’s Meret Optical segment decreased to $204,000 in fiscal 2003, as compared to $1.7 million in fiscal 2002, a decrease of 88%. This decline was primarily the result of an increase in Sorrento’s inventory reserve of $1.0 million taken in the second quarter and a decrease in revenue volume. Selling and marketing. Selling and marketing expenses consist primarily of employee compensation and related costs, commissions to sales representatives, tradeshow expenses and travel expenses. Sorrento’s consolidated selling and marketing expenses decreased to $12.0 million, or 48% of net sales, for fiscal 2003 from $16.2 million, or 40% or net sales, for fiscal 2002. The decline was primarily the result of cost reduction efforts implemented, a reduction in both Sorrento’s U.S. and foreign sales offices and lower revenue volume for the year. Engineering, research and development. Engineering, research and development expenses consist primarily of compensation related costs for engineering personnel, facilities costs, and materials used in the design, development and support of Sorrento’s technologies. All research and development costs are expensed as incurred. Sorrento continues to manage its research and development costs in relation to the changes in its sales volume and available capital resources in its development efforts to enhance existing products and introduce new products to its product offering. Sorrento’s consolidated engineering, research and development expenses decreased to $9.0 million, or 36% of net sales, for fiscal 2003 from $13.7 million, or 34% of net sales, for fiscal 2002. The decrease can primarily be attributed to decreases in product development material and personnel related costs. General and administrative. General and administrative expenses consist primarily of employee compensation and related costs, legal and accounting fees, public company costs, and allocable occupancy costs. Consolidated general and administrative expenses remained consistent at $12.8 million, or 51% of net sales, for fiscal 2003 compared to 31% of net sales for fiscal 2002. The increase in general and administrative expenses as a percentage of net sales can be attributed to an increase in professional fees associated with the capital restructuring partially offset by a decrease in personnel related costs. Other operating expenses. Other operating expenses for both fiscal 2003 and 2002 included approximately $400,000 of amortization of purchased technology related to acquisitions included in Meret. During the fiscal year ended January 31, 2002, Sorrento recorded a $2.7 million valuation allowance against option receivables from its former Chief Executive Officer and Chairman. Other income (expenses). Other income (expenses) from continuing operations increased to $5.1 million in income for fiscal 2003 from $6.0 million in expense for fiscal 2002. Investment income increased by $1.6 million during the fiscal year ended January 31, 2003 from the comparable period last year due to increased investments of Sorrento’s cash surplus in short-term investments. The increase of $6.3 million in interest expense for the fiscal year ended January 31, 2003 from the prior fiscal year is primarily due to the interest incurred on Sorrento’s convertible debentures and an adjustment relating to the amortization of both the beneficial conversion feature of the value allocated to the issuance of warrants on Sorrento’s senior convertible debentures. The $5.5 million of interest on these debentures includes the stated 9.75% interest of $2.3 million of which $2.0 million was paid in common stock and $292,000 was paid in cash, amortization of issuance costs of $259,000, and amortization of the fair value of the warrants issued to the purchasers and placement agent and the deemed beneficial conversion feature of $2.9 million. Other income increased by $313,000 during the fiscal year ended January 31, 2003 from the prior fiscal year resulting primarily from favorable gains on foreign currency exchanges. Gains on marketable securities increased by $15.5 million for the fiscal year ended January 31, 2003 from the prior fiscal year. $11.7 million of this increase relates to the realized gain on Sorrento’s sale of 3,396,221 shares of NETsilicon, Inc. common stock to Digi for $13.6 million in cash. The remaining shares of NETsilicon common stock were exchanged for Digi common stock and are accounted for under marketable securities. Sorrento obtained 2,324,683 shares of Digi common stock on the exchange, of which 1,162,342 shares were later sold back to Digi for $3.6 million in cash and a gain of $2.6 million. The remaining $1.2 million increase results from an impairment allowance taken on Sorrento’s available for sale investment in Entrada and $1.0 million in realized losses on the sale of 1,051,000 shares of Entrada in the prior fiscal year. Income taxes. There was no provision for income taxes for fiscal years 2003 and 2002. Sorrento has carry forwards of domestic federal net operating losses, which may be available, in part, to reduce future taxable income in the United States. However, due to potential adjustments to the net operating loss carry forwards as provided by the Internal Revenue Code with respect to future ownership changes, future availability of the tax benefits is not assured. In addition, Sorrento provided a valuation allowance in full for its deferred tax assets, as it is its opinion that it is more likely than not that some portion or all of the assets will not be realized. Sorrento’s prior management did not file Sorrento’s tax returns for over six years. Sorrento had losses during each of these years and does not believe there is tax liability for any of them, other than a nominal penalty for failure to file a return. Sorrento has filed its federal and state tax returns. Sorrento Net sales. Net sales decreased to $22.4 million, or 38%, for fiscal 2003 from $36.0 million for fiscal 2002. In fiscal 2003, 18 customers accounted for 92% of Sorrento’s net sales, compared with 11 customers who accounted for 94% of Sorrento’s net sales in fiscal 2002. Sorrento expects to continue experiencing significant fluctuations in its annual revenues as a result of its long and variable sales cycle as well as its highly concentrated customer base. Revenue continues to be negatively impacted by weak telecommunication industry volumes and management determination to not pursue low gross margin projects. Gross profit. Gross profit was $3.1 million for fiscal 2003, a decrease of 59% from $7.7 million for fiscal 2002. Gross margin decreased to 14% of net sales for fiscal 2003 from 21% for fiscal 2002. The declines were due primarily to the increases in Sorrento’s obsolescence and inventory value reserves taken in the second quarter and of a significantly higher fixed manufacturing overhead in its cost of shipments for the year as a result of the lower revenue volume. Sorrento has initiated cost cutting actions in production due to the lower revenue volume and a continued slowdown in the capital expenditure spending throughout the telecom industry. Selling and marketing. Sales and marketing expenses decreased to $11.7 million, or 52% of net sales, for fiscal 2003 from $15.7 million, or 44% of net sales, for fiscal 2002. The decrease in sales and marketing expenses resulted primarily from a reduction in personnel and related costs, decreased travel expenses, trade show participation, and advertising expenses. The number of sales and marketing personnel decreased to 36 at January 31, 2003 from 38 at January 31, 2002. Engineering, research and development. Engineering, research and development expenses decreased to $8.5 million, or 38% of net sales, for fiscal 2003 from $13.2 million, or 37% of net sales, for fiscal 2002. The decrease in engineering, research and development expenses was the result of decreased expenditures associated with the decrease in engineering personnel and related costs and a reduction in material related development expenses. The number of engineering personnel decreased to 29 at January 31, 2003 from 67 at January 31, 2002. General and administrative. General and administrative expenses decreased to $7.6 million, or 34% of net sales, for fiscal 2003 from $6.9 million, or 19% of net sales, for fiscal 2002. The decrease in general and administrative expenses reflects the reduction of executive and administrative personnel and lower operating expenses. The number of general and administrative personnel decreased to 11 at January 31, 2003 from 15 at January 31, 2002. Deferred and other stock compensation. Deferred and other stock compensation for the fiscal year ended January 31, 2003 includes $433,000 of amortization of deferred stock compensation resulting from the value of stock options granted to consultants compared to $812,000 for the prior fiscal year. In connection with the grants of stock options with exercise prices determined to be below the fair value of Sorrento’s common stock on the date of grant, SNI recorded deferred stock compensation of $2.6 million, which is being amortized on an accelerated basis over the vesting period of the options. Meret Optical Communications Net sales. Net sales decreased to $3.1 million, or 36%, for fiscal 2003, of which $296,000 was inter-company sales, from $4.8 million for fiscal 2002. The reduction in sales volume reflects the continued weak industry volumes. Gross profit. Gross profit decreased to $204,000, or 88%, for fiscal 2003 from $1.7 million for fiscal 2002. Gross margin as a percentage of net sales decreased to 7% for fiscal 2003 compared to 35% for the comparable period last year. These declines were due primarily to the increases in Sorrento’s obsolescence reserves taken in the second quarter and a higher fixed manufacturing overhead in its cost of shipments for the quarter as a result of the lower revenue volume. Selling and marketing. Sales and marketing expenses decreased to $315,000, or 10% of net sales, for fiscal 2003, compared to $435,000, or 9% of net sales, for fiscal 2002. This decrease was a direct result of reduced internal commissions, due primarily to lower revenue volume and changes in the commission structure, resulting in lower commission expense for the year. Engineering, research and development. Engineering, research and development expenses increased to $514,000, or 17% of net sales compared to $417,000, or 9% of net sales, for fiscal 2002. This increase results from the addition of four engineers to support the development of new products and the enhancement of existing products. General and administrative. General and administrative expenses increased to $283,000, or 9% of net sales, during fiscal 2003 from $200,000, or 4% of net sales, for fiscal 2002. The increase in general and administrative expenses during fiscal 2003 resulted primarily from additions in the administration staff, costs associated with upgrades in Sorrento’s business application software and costs incurred to move the facilities to a new location. Other operation expenses. Other operating expenses increased to $421,000, or 14% of net sales, for fiscal 2003 from $372,000, or 8% of net sales, for fiscal 2002. These costs represent the amortization of purchased technology related to prior acquisitions. The increase represents and adjustment made to record amortization not previously recorded on purchased technology. Liquidity and Capital Resources Sorrento finances its operations through a combination of internal funds, investments and debt and equity financing. At January 31, 2004, Sorrento’s working capital was $25.9 million including $17.6 million in cash and cash equivalents and $504,000 of investments in marketable securities. Sorrento believes that its available cash combined with cash anticipated to be available from future operations, will be sufficient for its working capital requirement for the next 12 months. Cash Flow for the Years Ended January 31, 2004, 2003 and 2002 Continuing Operations Sorrento’s operations used $15.6 million during fiscal 2004 as compared to $14.2 million in fiscal 2003. Significant items impacting the change in cash flows used by operations are: the lower net loss in fiscal 2004, the fiscal 2004 gain on restructuring, the realized loss on non-marketable securities, the reduced year-to-year gain on sale of marketable securities, and decreases in accounts payable, deferred revenue and accrued expenses. Sorrento does not anticipate the recurrence of significant cash flow impacts due to restructuring or the marketable/non-marketable security items in fiscal 2005. Sorrento has incurred significant losses and negative cash flows from operations for the past two years. Sorrento Networks, Inc., Sorrento’s principal operating subsidiary, has primarily been the operating entity responsible for these high losses and negative cash flows. The losses have been generated as SNI continues to develop its technology, marketing and sales and operations in its effort to become a major supplier of metro and regional optical networks world-wide. In addition, Sorrento incurred significant restructuring costs of approximately $2.8 million in 2003 associated with restructuring of its obligations under its senior convertible debentures and Series A holders obligations. Sorrento’s standard payment terms range from net 30 to net 60 days. Receivables from international customers have frequently taken longer to collect. In addition, the downturn in the telecom market has impacted many of the telecom carriers’ ability to purchase or pay for outstanding commitments within standard payment terms. There can be no assurance that this continued economic environment will not impact either current or future receivables negatively. Investing Activities In fiscal 2004, Sorrento’s investing activities provided cash flows of $9.8 million. Sorrento received $6.4 million on the sale of marketable securities and other investments. In addition, Sorrento disposed of $1.3 million in property and equipment related to disposals and returns of demo equipment. Sorrento’s investing activities during fiscal 2003 provided cash flows of $9.1 million. Sorrento received $17.2 million from the sale of Digi stock. Partially offsetting were the $5 million cash investment in UFO Communications and $3.3 million of property and equipment purchases. In fiscal 2002, Sorrento’s investing activities used $4.0 million. Cash used in investing activities during fiscal 2002 included purchases of property and equipment of $3.2 million and $900,000 in other assets. Financing Activities Sorrento’s financing activities provided net cash of $15.7 million reflecting $15.9 million in net cash received in the private placement sales of common stock in December 2003 and January 2004. In fiscal 2003, Sorrento’s financing activities used cash of $1.4 million and consisted primarily of repayment of its line of credit and long-term debt. Sorrento’s financing activities during fiscal 2002 provided it $40.1 million and consisted primarily of financing activities from the sale of common stock in March 2001 which generated proceeds of $9.6 million and a convertible debenture financing in August 2001 which raised $29.7 million. Contractual Cash Obligations The following tables quantify Sorrento’s future contractual obligations and commercial commitments as of January 31, 2004 (dollars in thousands): Contractual Obligations      Payments due in fiscal years      Total    2005    2006    2007    2008    2009    Thereafter Long-term debt    $ 3,585    $ 47    $ 54    $ 58    $ 63    $ 68    $ 3,295 Capital leases      54      54      —        —        —        —        —   Purchase orders      1,755      1,655      100                             Employment contracts (a)      783      783                                    Operating leases      824      551      152      46      41      34      —   7.5% convertible debentures (b)      12,998      —        —        12,998      —        —        —                          Total    $ 19,216    $ 2,307    $ 306    $ 13,102    $ 104    $ 102    $ 3,295                        (a) Reflects payments due under change of control provisions under certain employment contracts that may be triggered by the sale of the company in 2005. (b) Maturity date, August 2, 2007. Contingent Liabilities See Note G to the consolidated financial statements. Effects of Inflation and Currency Exchange Rates Sorrento believes that the relatively moderate rate of inflation in the United States over the past few years has not had a significant impact on its sales or operating results or on the prices of raw materials. There can be no assurance, however, that inflation will not have a material adverse effect on Sorrento’s operating results in the future. The majority of Sorrento’s sales and expenses are currently denominated in U.S. dollars and to date its business has not been significantly affected by currency fluctuations. However, Sorrento conducts business in several different countries and thus fluctuations in currency exchange rates could cause its products to become relatively more expensive in particular countries, leading to a reduction in sales in that country. In addition, inflation in such countries could increase Sorrento’s expenses. In the future, Sorrento may engage in foreign currency denominated sales or pay material amounts of expenses in foreign currencies and, in such event, may experience gains and losses due to currency fluctuations. Sorrento’s operating results could be adversely affected by such fluctuations. Impact of Recent Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation, or FIN, No. 46, “Consolidation of Variable Interest Entities,” and interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN No. 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that is acquired before February 1, 2003. Sorrento adopted FIN No. 46 with no material effect on its financial position or results of operations. In November 2002, the FASB issued FIN No. 45, which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN No. 45 requires Sorrento to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not materially affect Sorrento’s consolidated financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This Statement is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 provides accounting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under the Statement, the asset retirement obligation is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value in each subsequent period and the capitalized cost is depreciated over the useful life of the related asset. The adoption of SFAS No. 143 did not have a material effect on Sorrento’s financial position or results of operations. In November 2002, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 applied to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. In December 2003, the SEC issued SAB 104, which supersedes SAB 101, “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21. Sorrento adopted EITF 00-21 and SAB 104 with no material impact on its financial statements. Quantitative and Qualitative Disclosures About Market Risk Sorrento is exposed to financial market risks, including changes in interest rates and foreign currency rates. Sorrento’s exposure to interest rate risk is the result of its need for periodic additional financing for its large operating losses and capital expenditures associated with establishing and expanding its operations. The interest rate that Sorrento will be able to obtain on debt financing will depend on market conditions at that time, and may differ from the rates it has secured on its current debt. Almost all of Sorrento’s sales have been denominated in U.S. dollars. A portion of Sorrento’s expenses are denominated in currencies other than the U.S. dollar and in the future a larger portion of its sales could also be denominated in non-U.S. currencies. As a result, currency fluctuations between the U.S. dollar and the currencies in which Sorrento does business could cause foreign currency translation gains or losses that it would recognize in the period incurred. Sorrento cannot predict the effect of exchange rate fluctuations on its future operating results because of the number of currencies involved, the variability of currency exposure and the potential volatility of currency exchange rates. Sorrento attempts to minimize its currency exposure risk through working capital management and does not hedge its exposure to translation gains and losses related to foreign currency net asset exposures. Sorrento does not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes. Investments held for other than trading purposes do not impose a material market risk. Sorrento believes that the relatively moderate rate of inflation in the United States over the past few years and the relatively stable interest rates incurred on short-term financing have not had a significant impact on its sales, operating results or prices of raw materials. There can be no assurance, however, that inflation or an upward trend in short-term interest rates will not have a material adverse effect on Sorrento’s operating results in the future should Sorrento require debt financing in the future. A 100 basis point change in the variable interest rate would not result in a significant change in interest expense during fiscal 2005. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information, as of May 21, 2004, regarding the ownership of Sorrento’s common stock by (i) each of Sorrento’s directors; (ii) each of Sorrento’s present executive officers; (iii) each person known to Sorrento to beneficially own 5% or more of Sorrento’s common stock; and (iv) all of Sorrento’s directors and executive officers as a group. Except as indicated, all persons named as beneficial owners of Sorrento’s common stock have sole voting and investment power with respect to the shares indicated as beneficially owned by them. All persons named have an address at c/o Sorrento Networks Corporation, 9990 Mesa Rim Road, San Diego, California 92121, unless otherwise indicated.      Common Stock   Name of Beneficial Owner (A)    Number of Shares    Percentage of Outstanding (J)   Phillip W. Arneson (B)    514,799    2.9 % Donne F. Fisher (C)    53,075    *   Robert L. Hibbard (D)    80,550    *   Gary M. Parsons (E)    53,083    *   Larry J. Matthews (F)    51,750    *   Don Herzog (G)    41,667    *   Tom Schilling (H)    41,667    *   Joe Armstrong (I)    302,568    1.7 % All Directors, and Executive Officers as a Group    1,139,159    6.5 % Kingdon Capital Management, LLC (J)    872,093    5.06 % 152 West 57th Street             New York NY 10019             Belmarken Holdings, BV (K)    2,094,379    12.15 % Boeing Avenue 53             1119 PE Schiphol Rijk             The Netherlands, PF             * Less than 1% (A) All information with respect to beneficial ownership of the shares is based upon filings made by the respective beneficial owners with the SEC or information provided by such beneficial owners to Sorrento. (B) Includes exercisable options held by Mr. Arneson to acquire 514,549 shares of common stock, and 250 shares of common stock purchased in June 2002. (C) Includes exercisable options to acquire 53,000 shares of common stock held by Mr. Fisher and 75 shares of common stock. Mr. Fisher is a director of Liberty Media Corporation, which owns an approximate 74% economic interest representing an approximate 94% voting interest in UnitedGlobalCom, Inc., or UGC. Belmarken Holding, B.V., an indirect subsidiary of UGC, holds 2,094,379 shares of Sorrento’s common stock. Liberty Media also holds convertible debt of United Pan-Europe Communications, N.V., a subsidiary of UGC, which it has agreed to exchange for additional shares in UGC. Mr. Fisher meets all of the current requirements for an independent director. (D) Includes exercisable options to acquire 80,500 shares of common stock held by Mr. Hibbard and 50 shares of common stock purchased in July 2002. (E) Represents options to acquire shares of Sorrento’s common stock, which were granted to Mr. Parsons consistent with, and upon the same terms, conditions and vesting schedules as, option grants made to other members of Sorrento’s board of directors. (F) Represents options to acquire shares of Sorrento’s common stock, which were granted to Mr. Matthews consistent with, and upon the same terms, conditions and vesting schedules as, option grants made to other members of Sorrento’s board of directors. (G) Represents options to acquire shares of Sorrento’s common stock, which were granted to Mr. Herzog consistent with, and upon the same terms, conditions and vesting schedules as, option grants made to other members of Sorrento’s board of directors. (H) Represents options to acquire shares of Sorrento’s common stock, which were granted to Mr. Schilling consistent with, and upon the same terms, conditions and vesting schedules as, option grants made to other members of Sorrento’s board of directors. (I) Includes exercisable options to acquire 302,418 shares of common stock held by Mr. Armstrong and 150 shares of common stock purchased in June 2002. (J) Represents holdings reported by Kingdon Capital Management, LLC on April 2, 2004 on Schedule 13G. (K) Represents holdings reported by Belmarken Holdings, BV on June 16, 2003 on Schedule 13D. Includes 1,601,723 shares of common stock and 492,656 shares underlying convertible debentures held by the reporting person. VALIDITY OF THE SECURITIES Latham & Watkins LLP, San Diego, California, will pass upon the validity of the Zhone common stock to be issued in connection with the merger. EXPERTS Zhone’s consolidated balance sheets as of December 31, 2003 and 2002, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2003 have been incorporated by reference in this joint proxy statement/prospectus in reliance upon the report of KPMG LLP, independent auditors, incorporated by reference herein, and upon the authority of said firm as experts in auditing and accounting. The audit report dated February 3, 2004 contains an explanatory paragraph describing Zhone’s restatement of the financial statements for the year ended December 31, 2002 and an explanatory paragraph describing Zhone’s change in accounting for goodwill and other intangible assets on January 1, 2002. The consolidated financial statements of Sorrento and its subsidiaries as of January 31, 2004 and 2003 and for each of the years in the three-year period ended January 31, 2004 included in this joint proxy statement/prospectus have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their report included herein, and are included herein in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. STOCKHOLDER PROPOSALS As of the date of this joint proxy statement/prospectus, neither the Zhone board of directors nor the Sorrento board of directors knows of any matters that will be presented for consideration at eitherthe Zhone special meeting other than as described in this joint proxy statement/prospectus. If any other matters come before either ofare properly presented for voting at the special meetingsmeeting or any adjournments or postponements of the special meetings and are voted upon,meeting, the enclosed proxies will confer discretionary authority on the individuals named as proxies to vote the shares represented by the proxies as to any other matters. The individuals named as proxies intend to vote in accordance with their best judgment as to any other matters.   Householding The rules promulgated by the SEC permit companies, brokers, banks or other intermediaries to deliver a single copy of a proxy statement to households at which two or more stockholders reside. This practice, known as “householding,” is designed to reduce duplicate mailings and save significant printing and postage costs as well as natural resources. Stockholders sharing an address who have been previously notified by their broker, bank or other intermediary and have consented to householding, either affirmatively or implicitly by not objecting to householding, will receive only one copy of this joint proxy statement/prospectus. If you would like to opt out of this practice for future mailings and receive separate proxy statements for each stockholder sharing the same address, please contact your broker, bank or other intermediary. You may also obtain a separate joint proxy statement/prospectus without charge by sending a written request to Zhone Technologies, Inc., Attention: Investor Relations, 7001 Oakport Street, Oakland, California 94621, or by calling Zhone at (510) 777-7013. Zhone will promptly send additional copies of this joint proxy statement/prospectus upon receipt of such request. Householding does not apply to stockholders with shares registered directly in their name. Assistance If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact: Zhone Technologies, Inc. Georgeson Shareholder Communications Attn: Investors Relations or Banks and Brokers Call: (212) 440-9800 (510) 777-7013 All Others Call Toll Free: (866) 391-7002 THE PARADYNE SPECIAL MEETING This joint proxy statement/prospectus is being provided to Paradyne stockholders as part of a solicitation of proxies by the Paradyne board of directors for use at a special meeting of Paradyne stockholders. This joint proxy statement/prospectus provides Paradyne stockholders with the information they need to know to be able to vote or instruct their vote to be cast at the special meeting of Paradyne stockholders. Date, Time and Place The special meeting of Paradyne stockholders will be held on September 1, 2005 at 10:00 a.m., local time, at Paradyne’s principal offices at 8545 126th Avenue North, Largo, Florida 33773. Matters for Consideration The Paradyne special meeting is being held for the following purposes: to adopt the Agreement and Plan of Merger, dated as of July 7, 2005, by and among Paradyne, Zhone and Parrot Acquisition Corp., a wholly owned subsidiary of Zhone; to grant discretionary authority to adjourn the special meeting, if necessary, to solicit additional proxies with respect to the adoption of the merger agreement; and to transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting. Adoption of the merger agreement will constitute approval of the merger and the other transactions contemplated by the merger agreement. Recommendation of the Paradyne Board of Directors The Paradyne board of directors has unanimously approved the merger agreement and unanimously recommends that Paradyne stockholders vote “FOR” the proposal to adopt the merger agreement. See “The Merger—Paradyne’s Reasons for the Merger” and “The Merger—Recommendation of the Paradyne Board of Directors” on pages 29 and 32, respectively, for a more detailed discussion of the recommendation of the Paradyne board of directors. Voting Procedures and Revocation of Proxies Your vote is important. Whether or not you expect to attend the Paradyne special meeting in person, please complete, sign, date and return the enclosed proxy card as soon as possible to ensure that your shares are represented at the special meeting. Returning the proxy card does not deprive you of your right to attend the Paradyne special meeting and to vote your shares in person. Voting in Person If you plan to attend the Paradyne special meeting and wish to vote in person, you will be given a ballot at the special meeting. Please note, however, that if your shares are held in “street name,” which means your shares are held of record by a broker, bank or other nominee, and you wish to vote at the Paradyne special meeting, you must bring to the special meeting a proxy from the record holder authorizing you to vote at the Paradyne special meeting. Voting by Proxy The method of voting by proxy differs for shares held as a record holder and shares held in “street name.” If you hold your shares of Paradyne common stock as a record holder, you may vote by signing and dating the enclosed proxy card and promptly returning it in the enclosed envelope. If, on the other hand, you hold your shares of Paradyne common stock in “street name,” then you will receive instructions from your broker, bank or other nominee that you must follow in order to vote your shares. Your broker, bank or other nominee may allow you to deliver your voting instructions over the internet or by telephone. Please see the voting instruction card from your broker, bank or other nominee that accompanies this joint proxy statement/prospectus. All properly signed proxies that are received prior to the special meeting and that are not revoked will be voted at the special meeting according to the instructions indicated on the proxies or, if no direction is indicated, they will be voted“FOR” the proposal to adopt the merger agreement. Revocation You may revoke your proxy at any time before your proxy is voted at the Paradyne special meeting by taking any of the following actions: submitting another proxy card bearing a later date; delivering written notice of revocation to Paradyne’s Corporate Secretary at 8545 126th Avenue North, Largo, Florida 33773; or attending the Paradyne special meeting and voting in person, although attendance at the special meeting will not, by itself, revoke a proxy. If your shares are held in “street name,” you may change your vote by submitting new voting instructions to your broker, bank or other nominee. You must contact your broker, bank or other nominee to find out how to do so. Record Date and Shares Entitled to Vote Only holders of record of Paradyne common stock at the close of business on the record date, July 29, 2005, are entitled to notice of and to vote at the special meeting. These stockholders are entitled to cast one vote for each share of common stock held as of the record date on all matters properly submitted for the vote of stockholders at the special meeting. As of the record date, there were approximately 47,211,477 shares of Paradyne common stock outstanding and entitled to vote at the special meeting. Quorum and Vote Required A quorum of stockholders is necessary to hold a valid special meeting. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Paradyne common stock entitled to vote at the special meeting is necessary to constitute a quorum at the Paradyne special meeting. The adoption of the merger agreement requires the affirmative vote of a majority of the outstanding shares of Paradyne common stock. On the record date, the directors and executive officers of Paradyne and their affiliates directly and indirectly owned and were entitled to vote approximately 647,975 shares of Paradyne common stock, which represent approximately 1.4% of the outstanding shares of Paradyne common stock. Abstentions and Broker Non-Votes Abstentions and broker non-votes will be counted for the purpose of determining whether a quorum is present, but they will not be counted as votes cast on any matter. Broker non-votes refer to unvoted proxies submitted by brokers who are not able to vote on a proposal absent instructions from the beneficial owner. Because the affirmative vote of a majority of the outstanding shares of Paradyne common stock is required to adopt the merger agreement, abstentions and broker non-votes will have the effect of a vote against the adoption of the merger agreement. Solicitation of Proxies and Expenses Paradyne is soliciting proxies for the Paradyne special meeting from Paradyne stockholders. Paradyne will bear the entire cost of soliciting proxies from Paradyne stockholders, except that Zhone and Paradyne have each agreed to share equally all expenses incurred in connection with the filing with the SEC of the registration statement of which this joint proxy statement/prospectus forms a part, and the printing and mailing of this joint proxy statement/prospectus and related proxy materials. In addition to the solicitation of proxies by mail, Paradyne will request that brokers, banks and other nominees send proxies and proxy materials to the beneficial owners of Paradyne common stock held by them and secure their voting instructions, if necessary. Paradyne will reimburse those record holders for their reasonable expenses. Paradyne has also made arrangements with Georgeson Shareholder Communications to assist it in soliciting proxies, and has agreed to pay a fee of approximately $10,000 plus expenses for those services. Paradyne also may use several of its regular employees, who will not be specially compensated, to solicit proxies from Paradyne stockholders, either personally or by telephone, internet, telegram, facsimile or special delivery letter. Admission to the Special Meeting All Paradyne stockholders, including stockholders of record and stockholders who hold their shares in “street name” are invited to attend the Paradyne special meeting. If you plan to attend the special meeting, you must bring a form of personal photo identification with you in order to be admitted. Paradyne stockholders who are not record holders but hold shares in “street name” should provide proof of beneficial ownership on the record date for the Paradyne special meeting, such as their most recent account statement or other similar evidence of ownership. Anyone who does not provide valid photo identification or comply with the other procedures outlined above upon request may not be admitted to the special meeting. Other Business As of the date of this joint proxy statement/prospectus, Paradyne does not know of any matters that will be presented for consideration at the Paradyne special meeting other than as described in this joint proxy statement/prospectus. If any other matters are properly presented for voting at the special meeting or any adjournments or postponements of the special meeting, the enclosed proxies will confer discretionary authority on the individuals named as proxies to vote the shares represented by the proxies as to any other matters. The individuals named as proxies intend to vote in accordance with their best judgment as to any other matters. Householding The SEC rules permit Paradyne, with your permission, to send a single set of proxy statements to any household at which two or more stockholders reside if Paradyne believes that they are members of the same family. Each stockholder will continue to receive a separate proxy card. This procedure, known as householding, reduces the volume of the duplicate information you receive and helps to reduce Paradyne’s expenses. In order to take advantage of this opportunity, Paradyne has delivered only one joint proxy statement/prospectus to multiple stockholders who share an address, unless Paradyne received contrary instructions from the impacted stockholders prior to the mailing date. Paradyne will deliver a separate copy of the joint proxy statement/prospectus, as requested, to any stockholder at a shared address to which a single copy of that document was delivered. If you prefer to receive separate copies of a proxy statement, either now or in the future, you can request a separate copy of the proxy statement by calling Paradyne at (727) 530-2000 or by writing to Paradyne at any time at the following address: Paradyne Networks, Inc., 8545 126th Avenue North, Largo, Florida 33773, Attn: Secretary. Assistance If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact: Paradyne Networks, Inc. Attention: Investor Relations (727) 530-2000 or Georgeson Shareholder Communications Banks and Brokers Call: (212) 440-9800 All Others Call Toll Free: (866) 391-7002 INFORMATION ABOUT ZHONE Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 (510) 777-7000 www.zhone.com Zhone designs, develops and manufactures communications equipment for telephone companies and cable operators worldwide. Zhone’s Single Line Multi-Service, or SLMS, architecture can deliver IP video, voice over internet protocol and high-speed internet service offerings, all on a single platform that permits a seamless migration from legacy technologies to a converged packet-based architecture. By providing this “triple play” of voice, data and video services on a single platform, Zhone believes that service providers can generate additional revenue sources from these multiple service offerings, and simultaneously lower their operating costs by integrating the functionality that was being provided by separate voice, data and video platforms into a single platform. Zhone was established to develop the full spectrum of next-generation solutions to alleviate the bandwidth “bottleneck” in the access network. Most of Zhone’s products are based primarily upon its flagship SLMS architecture. From its inception, this new SLMS architecture was specifically designed for the delivery of multiple classes of subscriber services (such as the triple play of voice, data and video), rather than being based on a particular protocol (circuit or packet) or media (copper wire or fiber optic cable). As a result of this interoperability among multiple protocols, media and subscriber services, service providers can seamlessly migrate from traditional circuit to packet technologies, and from copper to fiber technologies without abandoning the investments they have made in their existing infrastructures. This flexibility also allows Zhone’s products to adapt to future technologies while allowing service providers to focus on service delivery. With this SLMS architecture, service providers can leverage their existing networks to deliver the converged triple play offering of voice, data and video services today, while they migrate, either simultaneously or at a future date, from legacy equipment to newer broadband equipment with minimal interruption. Zhone’s SLMS solutions provide an evolutionary path for service providers from their existing infrastructures, as well as give newer service providers the capability to deploy cost-effective, multi-service networks. In addition to the SLMS product family, Zhone’s product offerings also encompass its optical transport products, and legacy products and services. Zhone’s customer base includes regional, national and international telephone companies, as well as cable service providers. To date, Zhone’s products are deployed by over 300 network service providers on six continents worldwide, including two of the top three cable operators by number of subscribers in North America. Additional information about Zhone is included in documents incorporated by reference in this joint proxy statement/prospectus. See “Where You Can Find More Information” on page 87. INFORMATION ABOUT PARADYNE Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 (727) 530-2000 www.paradyne.com Paradyne is a leading developer, manufacturer and distributor of broadband network access products for network service providers and business customers. Paradyne offers solutions for network service providers that utilize existing telephone lines and enable them to offer high speed, cost-effective voice, data and video solutions. Network service providers use Paradyne’s broadband products to enable high-speed connections from the central office to the customer premise. Moreover, Paradyne’s broadband products enable network service providers to more efficiently provide network access services by allowing a high level of management, monitoring and control over network access equipment and circuits. Business customers use Paradyne’s broadband products for high-speed connection of voice and data communications to connect their employees to corporate wide area networks and to the internet using both public and private services provided by network service providers. Paradyne’s products are designed for easy installation by network service providers and end users, significantly reducing the need for installation by an onsite service technician, thereby reducing costs for network access. As of the end of 2004, Paradyne held more than 205 U. S. patents, more than 90 of which were DSL specific. Paradyne estimates that it sells into more than 400 independent operator companies, or IOCs, which are independent telephone companies. In addition, Paradyne estimates that it shipped to 28 of the top 50 IOCs in 2004. Additional information about Paradyne is included in documents incorporated by reference in this joint proxy statement/prospectus. See “Where You Can Find More Information” on page 87. LEGAL MATTERS The validity of the Zhone common stock to be issued pursuant to the merger will be passed upon for Zhone by Latham & Watkins LLP, San Diego, California. Certain U.S. federal income tax consequences of the merger will be passed on for Paradyne by Alston & Bird LLP. EXPERTS The consolidated financial statements of Zhone as of December 31, 2004 and 2003, and for each of the years in the three-year period ended December 31, 2004, and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 have been incorporated by reference herein in reliance upon the reports of KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements and management’s assessment of the effectiveness of the internal control over financial reporting (which is included in Management’s Report on Internal Control over Financial Reporting) incorporated in this joint proxy statement/prospectus by reference to the annual report on Form 10-K of Paradyne for the year ended December 31, 2004 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, given on the authority of said firm as experts in auditing and accounting. STOCKHOLDER PROPOSALS Zhone Stockholder Proposals   Stockholders of Zhone may submit proposals on matters appropriate for considerationstockholder action at future stockholder meetings including director nominations. The timeof Zhone’s stockholders in accordance with Rule 14a-8 promulgated under the Exchange Act. To be eligible for Zhone stockholders to submit proposals for Zhone’s 2004 annual meeting of stockholders has passed. However, with respectinclusion in the proxy statement relating to Zhone’s 20052006 annual meeting of stockholders, proposals of stockholders of Zhone, including director nominations, that such stockholders desire to have included in Zhone’s proxy statement relating to such meeting must be received by the Secretary of Zhoneat Zhone’s principal executive offices no later than December 13, 20045, 2005 (120 calendar days prior to the anniversary of the mailing date of the proxy statement for Zhone’s 20042005 annual meeting) in orderand must otherwise satisfy the conditions established by the SEC for stockholder proposals to be considered for possible inclusionincluded in Zhone’sthe proxy statement relatingfor that meeting. Such proposals should be delivered to Zhone’s 2005 annual meeting.Zhone Technologies, Inc., Attention: Corporate Secretary, 7001 Oakport Street, Oakland, California 94621.   If a stockholder wishes to present a proposal, including a director nomination, at Zhone’s 20052006 annual meeting of stockholders and the proposal is not intended to be included in Zhone’s proxy statement relating to that meeting, the stockholder must give advance notice in writing to the Corporate Secretary of Zhone prior to the deadline for such meeting determined in accordance with Zhone’s bylaws. Zhone’s bylaw notice deadline with respect to its 20052006 annual meeting of stockholders is February 18, 200511, 2006 (90 calendar days prior to the anniversary of Zhone’s 20042005 annual meeting). If a stockholder gives notice of a proposal outside of the bylaw notice deadline, the stockholder will not be permitted to present the proposal to the stockholders for a vote at Zhone’s 2006 annual meeting. However, in the event that the 2006 annual meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary of the 2005 annual meeting. Sorrento Stockholder Proposals Sorrento’s bylaws provide that for a stockholder proposalmeeting, to be properly brought before an annual meeting, such proposaltimely, notice by the stockholder must be received by Sorrento’s Secretary not fewer thanthe later of (1) the close of business 90 days prior to the date of the2006 annual meeting (or if less than 90 days’ notice or if prior public disclosure of(2) the date of the annual meeting is given or made to the stockholders, not later than the seventh10th day following the day on which the noticepublic announcement of the date of the 2006 annual meeting was mailed oris first made. A stockholder’s notice must set forth the information required by Zhone’s bylaws with respect to each matter the stockholder proposes to bring before the annual meeting. To make such public disclosure was made). Any sucha proposal, mustnotice should be delivered to Zhone Technologies, Inc., Attention: Corporate Secretary, 7001 Oakport Street, Oakland, California 94621. If the stockholder does not also comply with the requirements of Rule 14a-814a-4(c)(2) under the Exchange Act, Zhone may exercise discretionary voting authority under proxies it solicits to vote in accordance with its best judgment on any such stockholder proposal or nomination. Paradyne Stockholder Proposals In the event that Paradyne holds a 2006 annual meeting (which will not occur if the merger is completed), under SEC rules, proposals of Paradyne stockholders that are intended to be presented by such stockholders at Paradyne’s 2006 annual meeting and that stockholders desire to have included in Paradyne’s proxy statement and form of proxy for the 2006 annual meeting must be submitted to Paradyne in writing no later than December 10, 2005, and must be given, either by personal delivery or by registered or certified mail, postage prepaid,in compliance with applicable laws and regulations in order to Sorrento’s Secretary at 9990 Mesa Rim Road, San Diego, California 92121. The notice must include:be considered for possible inclusion in the proxy materials.   If a stockholder wishes to present a proposal at Paradyne’s 2006 annual meeting, and the name and address ofproposal is not intended to be included in Paradyne’s proxy statement relating to that meeting, the stockholder proposing such business; a representation that the stockholder is entitled to vote at such meeting and a statement of the number of shares of the corporation beneficially owned by the stockholder; a representation that the stockholder intends to appear in person or by proxy at the meeting to propose such business; and as to each matter desired to be brought before the meeting, the reasons for conducting such business at the meeting, the languagemust deliver written notice of the proposal (if appropriate) and any material interestto Paradyne not less than 90 days nor more than 120 days before the first anniversary of the prior year’s meeting. Assuming that Paradyne’s 2006 annual meeting is held on schedule, Paradyne must receive this notice no earlier than January 11, 2006 and no later than February 10, 2006. If a stockholder gives notice of a proposal after this deadline, the stockholder will not be permitted to present the proposal to the stockholders for a vote at the meeting. The requirements for submitting such proposals are set forth in such business. our bylaws.   Sorrento’s bylaws provide that at any specialAll director nominations and other proposals of stockholders with regard to the 2006 annual meeting should be submitted not less than 90 days nor more than 120 days before the first anniversary of the stockholders, only such business as is specified in the notice of such specialprior year’s meeting given by or at the direction of the person or persons calling such meeting will come before such meeting. The chairman of the meeting may refusecertified mail, return receipt requested, to acknowledge any proposal that is not made in compliance with the foregoing procedures.Paradyne Networks, Inc., 8545 126th Avenue North, Largo, Florida 33773, Attention: Nominating Committee c/o Secretary. WHERE YOU CAN FIND MORE INFORMATION   Zhone has filedand Paradyne file annual, quarterly and special reports, proxy statements and other information with the SEC a registration statement of which this joint proxy statement/prospectus forms a part. The registration statement registers the distribution of the shares of Zhone common stock to be issued to Sorrento stockholders in connection with the merger. The registration statement, including the attached annexes, contains additional relevant information about Zhone and Zhone stock. The rules and regulations of the SEC allow Zhone to omit certain information included in the registration statement from this joint proxy statement/prospectus.SEC. You may read and copy this information at the Public Reference Room of the SECSEC’s public reference room at 450 Fifth100 F Street, N.W.N.E., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet web sitewebsite that contains reports, proxy statements and other information about issuers, including Zhone and Sorrento,Paradyne, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by Zhone with the SEC are also available at Zhone’s website at www.zhone.com. The reports and other information filed by Paradyne with the SEC are also available at Paradyne’s website at www.paradyne.com. All website addresses given in this document are for information only and are not intended to be an active link or to incorporate any website information into this joint proxy statement/prospectus.   Zhone has filed a registration statement on Form S-4 to register with the SEC the Zhone common stock to be issued to Paradyne stockholders in the merger. This joint proxy statement/prospectus is a part of that registration statement. The SEC allows Zhone and Paradyne to incorporate“incorporate by referencereference” information ininto this document. Thisjoint proxy statement/prospectus, which means that Zhone and Paradyne can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considereddeemed to be a part of this document,joint proxy statement/prospectus, except for any information that is superseded by information that is includedcontained directly in this document.joint proxy statement/prospectus or in a later-filed document incorporated by reference in this joint proxy statement/prospectus. This documentjoint proxy statement/prospectus incorporates by reference the documents listedset forth below that Zhone hasand Paradyne have previously filed with the SEC. TheyThese documents contain important information about Zhone and itsParadyne and their financial condition.   Zhone SEC Filings (File No. 0-32743): Zhone SEC Filings (File No. 000-32743) Period Annual Report on Form 10-K Year ended December 31, 2004 Quarterly Report on Form 10-Q Quarter ended March 31, 2005 Current Reports on Form 8-K Filed February 16, 2005, May 13, 2005, July 8, 2005 and July 21, 2005 Description of Zhone common stock set forth in Zhone’s Registration Statement on Form 8-A, as amended, and any amendment or report filed with the SEC for the purpose of updating such description Filed May 11, 2001 Paradyne SEC Filings (File No. 000-26485) Period Annual Report on Form 10-K Year ended December 31, 2004 Quarterly Report on Form 10-Q Quarter ended March 31, 2005 Current Reports on Form 8-K Filed July 8, 2005 and July 11, 2005 Description of Paradyne common stock set forth in Paradyne’s Registration Statement on Form 8-A, as amended, and any amendment or report filed with the SEC for the purpose of updating such description Filed June 24, 1999   Annual Report on Form 10-K for To the fiscal year ended December 31, 2003. Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004. Current Reportsextent that any information contained in any current report on Form 8-K, filed on February 6, 2004 and April 23, 2004. All documentsor any exhibit thereto, was furnished to, rather than filed with, the SEC, such information or exhibit is specifically not incorporated by reference in this document. Zhone under Sectionsand Paradyne also incorporate by reference additional documents that either company may file with the SEC pursuant to Section 13(a), 13(c), 14 andor 15(d) of the Exchange Act afterbetween the datefiling of this joint proxy statement/prospectus and prior to the date of the Zhone special meeting are considered to be a part of this joint proxy statement/prospectus, effectiveor the date of the Paradyne special meeting. These documents include periodic reports, such documents are filed. The description of Zhone common stock set forth in the Registration Statementas annual reports on Form S-1 (No. 333-46362) filed with the SEC10-K, quarterly reports on September 22, 2000,Form 10-Q, and current reports on Form 8-K as amended, and any amendment or report filed with the SEC for the purpose of updating such description. well as proxy statements.   Documents incorporated by reference are available from Zhone and Paradyne without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference as an exhibit in this document. You can obtain documents incorporated by reference in this document by requesting them in writing or by telephone from Zhonethe appropriate company at the following address:addresses:   Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 Attention: Investor Relations (510) 777-7013 Attention: Investor Relations Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 (727) 530-2000 Attention: Investor Relations   Zhone and SorrentoParadyne stockholders requesting documents should do so by June 23, 2004August 25, 2005 to receive them before the special meetings. You will not be charged for any of these documents that you request. If you request any incorporated documents from Zhone the companyor Paradyne, such documents will mail thembe mailed to you by first class mail, or another equally prompt means, within one business day after it receivesthe date your request.request is received.   Neither Zhone nor SorrentoParadyne has authorized anyone to give any information or make any representation about the merger or Zhone or Sorrento that is different from, or in addition to, thatthe information contained in this joint proxy statement/prospectus or in any of the materials that have been incorporated into this document. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this document or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this document does not extend to you. The information contained in this document speaks only as of the date of this document unless the information specifically indicates that another date applies. SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets as of January 31, 2004 and 2003 F-3 Consolidated Statements of Operations and Comprehensive Loss for the years ended January 31, 2004, 2003 and 2002 F-4 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended January 31, 2004, 2003 and 2002 F-5 to F-7 Consolidated Statements of Cash Flows for the years ended January 31, 2004, 2003 and 2002 F-8 Notes to Consolidated Financial Statements F-9 to F-31 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Shareholders of Sorrento Networks Corporation San Diego, California We have audited the accompanying consolidated balance sheets of Sorrento Networks Corporation (a Delaware corporation) and subsidiaries (collectively the “Company”) as of January 31, 2004 and 2003 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended January 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of January 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004 in conformity with accounting principles generally accepted in the United States of America. /s/    BDO SEIDMAN, LLP          BDO Seidman, LLP Los Angeles, California April 9, 2004, except for Note Q which is as of April 22, 2004 SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)      January 31, 2004     January 31, 2003   ASSETS                  CURRENT ASSETS                  Cash and cash equivalents    $ 17,617     $ 7,747   Accounts receivable, net (Notes P and S)      3,754       5,576   Inventory, net (Notes B and T)      13,893       13,934   Prepaid expenses and other current assets (Note N)      972       741   Investment in marketable securities (Note B)      504       3,959   Notes receivable      242       —            TOTAL CURRENT ASSETS      36,982       31,957          PROPERTY AND EQUIPMENT, NET (Notes C and E)      12,267       17,103          OTHER ASSETS                  Purchased technology, net (Note B)      110       430   Investment in non-marketable securities (Note B)      —         5,025   Other assets (Notes A and B)      654       1,290   Notes receivable      83       —            TOTAL OTHER ASSETS      847       6,745          TOTAL ASSETS    $ 50,096     $ 55,805          LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                  CURRENT LIABILITIES                  Current maturities of long term debt (Note E)    $ 101     $ 222   Accounts payable      2,887       5,135   Deferred revenue      878       3,700   Accrued professional fees      832       4,324   Other accrued liabilities and current liabilities (Note G)      6,478       6,236   Due on redemption of preferred security of subsidiary (Note J)      —         48,800          TOTAL CURRENT LIABILITIES      11,176       68,417          Long-term debt and capital lease obligations (Note E, S and G)      3,538       3,644   Debentures payable (Note F)      12,388       18,121   Dividends payable (Note A)      —         99          TOTAL LIABILITIES      27,102       90,281          COMMITMENTS AND CONTINGENCIES (Note G)                  STOCKHOLDERS’ EQUITY (DEFICIT) (Note I and J)                  Preferred stock, $.01 par value; liquidation preference $1,353      1       1   Common stock,$0.001 par value; 150,000,000 shares authorized; 16,315,361 shares issued 16,314,917 shares outstanding at January 31, 2004; 886,494 shares issued 886,050 shares outstanding at January 31, 2003      16       5,318   Additional paid-in capital      216,434       144,887   Deferred stock compensation      —         (5 ) Accumulated deficit      (193,769 )     (187,536 ) Accumulated other comprehensive loss      381       2,928   Treasury stock, at cost; 444 shares at January 31, 2004 and January 31, 2003, respectively      (69 )     (69 )        TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)      22,994       (34,476 )        TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY    $ 50,096     $ 55,805          See accompanying notes to consolidated financial statements. SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In Thousands, except per share amounts)      Twelve Months Ended January 31        2004     2003     2002   NET SALES (Notes B and S)    $ 25,462     $ 25,137     $ 40,827   COST OF SALES      19,769       21,817       31,507            GROSS PROFIT      5,693       3,320       9,320            OPERATING EXPENSES                          Selling and marketing      8,406       12,021       16,165   Engineering, research and development      8,025       8,990       13,656   General and administrative      6,525       12,779       12,770   Deferred compensation      51       433       812   Other operating expenses      320       426       3,071            TOTAL OPERATING EXPENSES      23,327       34,649       46,474            LOSS FROM OPERATIONS      (17,634 )     (31,329 )     (37,154 )          OTHER INCOME (EXPENSES)                          Investment income (loss) (Note B)      (5,860 )     275       (1,368 ) Interest expense      (4,396 )     (9,619 )     (3,311 ) Other income (expenses) (Note J)      17,631       214       (99 ) Gain (loss) on sale of marketable securities (Note B)      4,026       14,249       (1,204 )          TOTAL OTHER INCOME (EXPENSES)      11,401       5,119       (5,982            NET LOSS    $ (6,233 )   $ (26,210 )   $ (43,136 )          LOSS PER COMMON SHARE (Note M)                          BASIC                          WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN THOUSANDS)      7,205       787       698            NET LOSS PER COMMON SHARE:                          BASIC NET LOSS PER COMMON SHARE      (0.87 )   $ (33.29 )   $ (62.00 )          DILUTED                          WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN THOUSANDS)      7,205       787       698            NET LOSS PER COMMON SHARE:                          DILUTED NET LOSS PER COMMON SHARE      (0.87 )   $ (33.29 )   $ (62.00 )          COMPREHENSIVE LOSS AND ITS COMPONENTS CONSIST OF THE FOLLOWING:                          Net loss    $ (6,233 )   $ (26,210 )   $ (43,136 ) Components of other comprehensive loss                          Foreign currency translation      208       —         —     Unrealized holding gains (losses) arising during the period      1,173       (6,983 )     (21,993 ) Reclassification adjustment for gains (losses) included in net loss      (4,026 )     (14,249 )     1,204            NET COMPREHENSIVE LOSS    $ (8,878 )   $ (47,442 )   $ (63,925 )          See accompanying notes to consolidated financial statements. SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES For the Year Ended January 31, 2004 CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) (In Thousands)     Common Stock     Preferred Stock   Additional Paid-In Capital   Deferred Stock Compensation     Accumulated Deficit     Treasury Stock     Accumulated Other Comprehensive Loss     Stockholders Equity/ Deficit       Shares   Amount     Shares   Amount         Shares   Amount       Balance at January 31, 2003   886   $ 5,318     2   $ 1   $ 144,887   $ (5 )   $ (187,536 )   1   $ (69 )   $ 2,928     $ (34,476 ) Common stock par value revaluation         (5,317 )               5,317                                         —     Warrants issued in connection with Restructuring                           436                                         436   Common stock issuance                                                                         Common stock issued in connection with capital restructuring   8,030     8                 43,512                                         43,520   Common stock issued in connection with debenture principal and interest payment   377     —                   1,215                                         1,215   Common stock issued in connection with LuxN acquisition   1,879     2                 4,935                                         4,937   Common stock issued in connection with legal settlement   54     —                   162                                         162   Common stock issued in connection with Pipe 1 financing   2,140     2                 5,836                                         5,838   Common stock issued in connection with Pipe 2 financing   2,922     3                 9,139                                         9,142   Unrealized (losses) on available for sale securities                                                             (2,854 )     (2,854 ) Warrants issued in connection with the LuxN acquisition                           878                                         878   Reclassification adjustment for (gains) losses realized in net loss                                                             99       99   foreign currency translation adjustments                                                             208       208   Deferred stock compensation of subsidiary                           46     (46 )                                     Expenses paid with stock issuances   27                       71                                         71   Amortization of deferred stock compensation                                 51                                   51   Net loss                                         (6,233 )                         (6,233 ) Balance at January 31, 2004   16,315   $ 16     2   $ 1   $ 216,434           $ (193,769 )   1   $ (69 )   $ 381     $ 22,994                                                                       See accompanying notes to consolidated financial statements. SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES For the Year Ended January 31, 2003 CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) (In Thousands)     Common Stock   Preferred Stock   Additional Paid In Capital     Notes Receivable Options   Deferred Stock Compensation     Accumulated Deficit     Treasury Stock     Accumulated Other Comprehensive Loss     Total Stockholders’ Equity(deficit)       Shares   Amount   Shares   Amount           Shares   Amount       Balance at January 31, 2002   710   $ 4,263   2   $ 1   $ 143,705     $ —   $ (255 )   $ (161,326 )   1   $ (69 )   $ 24,160     $ 10,479   Stock option and warrant exercises (Notes I, J and M)   1     9               (9 )                                               0   Unrealized losses on available for sale securities (Note B)                                                                   (21,232 )     (21,232 ) Deferred stock compensation of subsidiary (Note B)                         183             (183 )                                 0   Expenses paid with stock issuances (Note I)   175     1,046               1,008                                                 2,054   Amortization of deferred stock compensation (Note B)                                       433                                   433   Net loss                                               (26,210 )                         (26,210 )                           BALANCE AT JANUARY 31, 2003   886   $ 5,318   2   $ 1   $ 144,887     $ —   $ (5 )   $ (187,536 )   1   $ (69 )   $ 2,928     $ (34,476 )                           See accompanying notes to consolidated financial statements. SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES For the Year Ended January 31, 2002 (Restated) CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) (In Thousands)     Common Stock   Preferred Stock   Additional Paid In Capital     Notes Receivable Options     Deferred Stock Compensation     Accumulated Deficit     Treasury Stock     Accumulated Other Comprehensive Loss     Total Stockholders’ Equity(deficit)       Shares     Amount   Shares   Amount           Shares   Amount       Balance at January 31, 2001   630     $ 3,782   2   $ 1   $ 114,994     $ (5,034 )   $ (880 )   $ (118,010 )   1   $ (69 )   $ 44,949     $ (39,773 ) Debentures private placement (Notes F)   24                       20,676                                                   20,676   Stock option and warrant exercises (Notes I, J and M)   (20 )     23               (1,321 )     5,034                                           3,736   Unrealized losses on available for sale securities (Note B)                                                                       (20,789 )     (20,789 ) Deferred stock compensation of subsidiary (Note B)                           187               (187 )                                     Expenses paid with stock issuances (Note I)                           (18 )                                                 (18 ) Amortization of deferred stock compensation (Note B)                                           812                                   812   Private placement subsidiary (Note J)   76       458               9,187                                                   9,645   Deemed dividend (Note I)                                                   (180 )                         (180 ) Net loss                                                   (43,136 )                         (43,136 )                           BALANCE AT JANUARY 31, 2002   710     $ 4,263   2   $ 1   $ 143,705     $ —       $ (255 )   $ (161,326 )   1   $ (69 )   $ 24,160     $ 10,479                             See accompanying notes to consolidated financial statements. SORRENTO NETWORKS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)      Year Ended January 31,        2004     2003     2002   CASH FLOWS FROM OPERATING ACTIVITIES:                          Net loss    $ (6,233 )   $ (26,210 )   $ (43,136 )          Adjustments to reconcile net loss to net cash used in operating activities:                          Depreciation and amortization      3,673       4,063       2,794   Realized loss on investment in non-marketable securities      5,025       —         —     Accounts receivable and inventory reserves      (530 )     (1,020 )     9,309   Expenses paid through issuances of securities      233       2,054       1,309   (Gain) loss on sale of marketable securities      (4,026 )     (14,249 )     1,204   Non-cash interest on debentures (Note F)      2,726       6,894       994   Gain on capital restructuring      (13,629 )     —         —     Deferred and other stock compensation (Note B)      51       433       812   Other non-cash      (43 )     —         794   Changes in assets and liabilities net of effects of business entity divestitures:                          (Increase) decrease in accounts receivable      1,891       3,020       6,360   (Increase) decrease in inventories      4,719       5,381       (8,247 ) (Increase) decrease in other current assets      186       511       (438 ) (Increase) decrease in notes receivable      (325 )     —         —     Increase (decrease) in accounts payable      (2,689 )     (440 )     (2,729 ) Increase (decrease) in deferred revenue      (3,111 )     3,637       —     Increase (decrease) in accrued expenses      (3,304 )     1,681       (751 ) Increase (decrease) in other current liabilities      (189 )     55       (63 )          NET CASH USED IN OPERATING ACTIVITIES      (15,575 )     (14,190 )     (31,788 ) CASH FLOWS FROM INVESTING ACTIVITIES:                          Acquisition of business, net of cash acquired      1,506       —         —     Purchase of property and equipment      1,604       (3,333 )     (3,235 ) Proceeds from sale of marketable securities and other investments      6,360       17,178       144   Purchase of non-marketable securities      —         (5,025 )     —     Purchase of other assets      316       280       (895 )          NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES      9,786       9,100       (3,986 )          CASH FLOWS FROM FINANCING ACTIVITIES:                          Proceeds from short-term debt, net of repayments      —         (1,043 )     (172 ) Proceeds from long-term debt (Note E)      —         —         26   Repayment of short-term debt      (36 )     —         —     Repayment of long-term debt (Note E)      (192 )     (363 )     (39 ) Proceeds from debentures (Note F)      —         —         29,749   Proceeds from common stock (Note J)      15,887       —         9,645   Proceeds from stock option and warrant exercises (Note K )      —         —         861   Other      —         —         (18 )          NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES      15,659       (1,406 )     40,052            INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS      9,870       (6,496 )     4,278   CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD      7,747       14,243       9,965            CASH AND CASH EQUIVALENTS – END OF PERIOD    $ 17,617     $ 7,747     $ 14,243            See accompanying notes to consolidated financial statements. Sorrento Networks Corporation (formerly Osicom Technologies, Inc.) (the “Company,” “We,” “Our,” or “Us”) through its subsidiaries designs, manufactures and markets integrated networking and bandwidth aggregation products for enhancing the performance of data and telecommunications networks. Our products are deployed in telephone companies, Internet Service Providers, governmental bodies and the corporate/campus networks that make up the “enterprise” segment of the networking marketplace. We have facilities in San Diego, California and Sunnyvale, California. In addition, we have various sales offices located in the United States and Europe. We market and sell our products and services through a broad array of channels including worldwide distributors, value added resellers, local and long distance carriers and governmental agencies. A. THE COMPANY AND BASIS OF PRESENTATION The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities. Actual results could materially differ from these estimates. We have incurred significant losses and negative cash flows from operations for the past several years. Sorrento Networks, Inc. (“SNI”), the Company’s principal operating subsidiary has primarily been the operating entity responsible for these high losses and negative cash flows. The losses have been generated as SNI continues to develop its technology, marketing and sales and operations in its effort to become a major supplier of metro and regional optical networks worldwide B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation—The balance sheets and the consolidated statement of operations for the years ended January 31, 2004, 2003 and the consolidated statement of operations for the year ended January 31, 2002 reflect our accounts and all subsidiaries controlled by us after the elimination of significant intercompany transactions and balances. On August 8, 2003, we complete the acquisition of LuxN, Inc. the results of which are reflected in consolidation from that date forward. The consolidated group is referred to individually and collectively as the “Company,” “We,” “Our,” or “Us.” Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities. Actual results could materially differ from these estimates. In the opinion of Management, all adjustments (which include normal recurring adjustments and charges described in the notes to the financial statements) necessary to present fairly the financial position, results of operations and cash flows for the years ended January 31, 2004, 2003 and 2002 have been made. Cash and Cash Equivalents—All cash on hand and in banks, certificates of deposit and other liquid investments with original maturities of three months or less, when purchased are considered to be cash equivalents. All such investments are recorded at market value using the specific identification method; unrealized gains and losses are reflected in other comprehensive income. Accounts Receivable—In the normal course of business, we extend unsecured credit to our customers related to the sales of various products. Typically credit terms require payment within thirty days from the date of shipment or upon customer acceptance for installation sales. Allowance for Doubtful Accounts—We provide an allowance for doubtful accounts based on our continuing evaluation of our customers’ credit risk and on specifically identified amounts that we believe to be un-collectable. We also record additional allowance based on certain percentages of our aged receivables, which are determined based on historical experience and our assessment of the general financial conditions affecting our customer base. If our actual collections experience changes, revisions to our allowance may be required. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customer’s credit worthiness or other matters affecting the collectability of amounts due from such customers, could have a material affect on our results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Sources of Supply—The Company currently purchases important components of its products, from a limited selection of suppliers. Although there are a limited number of manufacturers of these components, management believes that the other suppliers could provide similar components on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which could affect operating results adversely. Inventory—Inventory, comprised of raw materials, work in process, finished goods and spare parts, is stated at the lower of cost (weighted average method) or market. We periodically evaluate our on-hand stock and make appropriate disposition of any stock deemed excess or obsolete. Inventories at January 31, 2004 and 2003 consist of:      2004     2003   Raw material    $ 20,744     $ 10,767   Work in process      3,133       2,804   Finished goods      5,416       6,326                 29,293       19,897   Less: Valuation reserve      (15,400 )     (5,963 )             $ 13,893     $ 13,934          Marketable Securities—Marketable securities at January 31, 2004 consist of investments in Entrada Networks, Inc (“ENI”). Our investment in ENI is classified as available for sale and is carried at fair value, based upon quoted market prices, with net unrealized gains reported as a separate component of stockholders’ equity until realized. Unrealized losses are recorded against other comprehensive income when a decline in fair value is determined to be other than temporary. At January 31, 2004, and 2003 marketable securities were as follows:      Cost    Unrealized Gains    Market Value January 31, 2004:                      Entrada    $ 31    $ 56    $ 87 Certificate of Deposit      416      1      417                 $ 447    $ 57    $ 504            January 31, 2003:                      DIGI    $ 1,009    $ 2,884    $ 3,893 Entrada      22      44      66                 $ 1,031    $ 2,928    $ 3,959            On August 31, 2000, we completed a merger of our then subsidiary Entrada Networks with Sync Research, Inc. (“Sync”), a NASDAQ listed company in which we received 4,244,155 shares of the merged entity, which changed its name to Entrada Networks, Inc. (“ENI”). We purchased 93,900 shares of Sync in the open market during June and July 2000 for $388 and on August 31, 2000 purchased an additional 1,001,818 shares directly from ENI for $3.3 million. After these transactions and ENI’s issuance of additional shares to outside investors in connection with the merger we owned 49% of ENI. Accordingly, our financial statements reflected the results of operations of ENI through August 31, 2000. On December 9, 2002, we sold one-half of our holdings in DIGI for $3.10 per share. The purchaser of the stock was DIGI, itself. The proceeds from this sale, in the amount of $3.6 million, were deposited on December 13, 2002. The remaining 1,162,341 DIGI shares were sold on May 2, 2003 for $4.26 per share. The purchaser of the stock was again DIGI. The proceeds from this sale in the amount of approximately $5 million, were deposited on May 7, 2003. In accordance with a settlement agreement reached between Sorrento Networks and our former Chairman and Founder, Par Chadha, 566,000 shares of ENI stock were transferred to Mr. Chadha in exchange for mutual releases by the Company and Mr. Chadha and certain of his affiliates. The stock transfer was complete on July 1, 2003 and had a value of $88 thousand. In addition, we transferred 128,214 shares of ENI stock to settle a dispute between a former employee and the Company. The value of the transfer was $20 thousand and was complete on July 16, 2003. The remaining 458,286 ENI shares owned by us are accounted for as an “available for sale security”. Under this accounting, these shares are marked-to-market at the end of each reporting period. The difference between our basis and the fair maker value, as reported on NASDAQ, is a separate element of stockholders’ equity and is included in the computation of comprehensive income. Fair Value of Financial Instruments—The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. We believe that there are no material differences between the recorded book values of our financial instruments and their estimated fair value. Property and Equipment—Property and equipment are recorded at historical cost. Depreciation and amortization are provided over the estimated useful lives of the individual assets or the terms of the leases if shorter using accelerated and straight-line methods. Property and equipment are reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. We measure impairment loss by comparing the fair market value, calculated as the present value of expected future cash flows, to its net book value. Impairment losses, if any, are recorded currently. Capitalized Leases—Capitalized leases are initially recorded at the present value of the minimum payments at the inception of the contracts, with an equivalent liability categorized as appropriate under current or non-current liabilities. Such assets are depreciated on the same basis as described above. Interest expense, which represents the difference between the minimum payments and the present value of the minimum payments at the inception of the lease, is allocated to accounting periods using a constant rate of interest over the lease. Purchased Technology—Technology assets were acquired in connection with historical acquisition. These assets were analyzed during and after the close of the acquisition. The undiscounted projected future cash flows from the purchased technology are compared to its carrying value to indicate any impairment. No impairment has been identified. The carrying value is $110 thousand and is amortized over its remaining estimated economic life (7 years) using the straight-line method. Accumulated amortization was $2.7 million and $2.4 million at January 31, 2004 and 2003, respectively. We assess the recoverability of purchased technology primarily by determining whether the amortization of the net book value of purchased technology over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of the impairment, if any, of the net book value of the excess cost over net assets acquired is measured by determining the fair value of these assets primarily based on projected discounted future operating cash flows from the purchased technologies using a discount rate commensurate with our cost of capital. Research and Development—We expense research and development costs as incurred in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 2, “Accounting for Research and Development Costs.” Research and development costs are costs associated with products or processes for which technological feasibility has not been proven and future benefits are uncertain. In-process research and development purchased by us includes the value of products and processes in the development stage and have not reached technological feasibility; this amount is expensed at the date of purchase. Other investments—Other investments in fiscal 2004, included in other assets, include non-marketable securities held in other companies including a privately held competitive local exchange carrier, and a broadband services carrier, UFO Communications, Inc. (“UFO”). The investment in UFO, $5.03 million, was written down to zero value in fiscal 2004, when a secondary round of financing was concluded in which we chose not to participate. Revenue Recognition—We generally recognize product revenue when the products are shipped, all substantial contractual obligations, if any, have been satisfied, and the collection of the resulting receivable is reasonably assured. When title does not pass to the customer at time of shipment, revenue is not recognized until all contractual requirements are met and title has transferred. During this transition period, the amount of the sale and/or installation is shown in deferred revenue. To date, installation revenue has not been material. Revenue from service obligations, if any, is deferred and recognized over the life of the contract. Inventory or demonstration equipment shipped to potential customers for field trials is not recorded as revenue. We accrue for warranty costs, sales returns and other allowances at the time of shipment. Although our products contain a software component, the software is not sold separately and we are not contractually obligated to provide software upgrades to our customers. Warranty and Customer Support—We typically warrant our products against defects in materials and workmanship for a period of one to five years from the date of sale and a provision for estimated future warranty and customer support costs is recorded when revenue is recognized. To date, warranty and customer support costs have not been material. Income Taxes—Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes.” The statement employs an asset and liability approach for financial accounting and reporting of deferred income taxes generally allowing for recognition of deferred tax assets in the current period for future benefit of net operating loss and research credit carry forwards as well as items for which expenses have been recognized for financial statement purposes but will be deductible in future periods. A valuation allowance is recognized, if on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized. (See Note L) Advertising—We expense advertising expenditures as incurred. Loss Per Common Share—We compute earnings per share based on the provision of SFAS No. 128, “Earnings Per Share.” Basic income and loss per common share is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding during each period presented. Diluted EPS is based on the weighted average number of common shares outstanding as well as dilutive potential common shares, which in our case consist of convertible securities outstanding, shares issuable under stock benefit plans, and shares issuable pursuant to warrants. In computing diluted EPS, net income or loss available to common shareholders is adjusted for the after-tax amount of interest expense recognized in the period associated with convertible debt. Potential common shares are not included in the diluted loss per share computation for the years ended January 31, 2004, 2003 and 2002 as they would be anti-dilutive. All references in the financial statements of common shares and per share data give effect to the 1-for-20 stock split effective October 28, 2002. (See Note M) Foreign Currency Translation—Our foreign operations have been translated into U.S. dollars in accordance with the principles prescribed in SFAS No. 52, “Foreign Currency Translation.” For the periods presented the current rate method was used whereby all assets and liabilities are translated at period end exchange rates, and the resultant translation adjustments would have been included as a separate component of stockholders’ equity had such adjustments been material. Revenues and expenses are translated at the average rates of exchange prevailing throughout the period, and the resultant gains and losses are included in net earnings. Stock-Based Compensation—We account for employee-based stock compensation utilizing the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the fair market price of our common stock at the date of grant over the amount an employee must pay to acquire the stock. The amount of deferred stock compensation appears as a separate component of stockholders’ equity and is being amortized on an accelerated basis by charges to operations over the vesting period of the options in accordance with the method described in Financial Accounting Standards Board Interpretation No. 28. All such amounts relate to options to acquire common stock of our Sorrento subsidiary granted by it to its employees; during the fiscal years ended January 31, 2004, 2003 and 2002, we amortized $51 thousand, $250 thousand and $625 thousand of the total $2.6 million initially recorded for deferred stock compensation. For non-employees, we compute the fair value of stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for stock-Based Compensation,” and Emerging Issues Task Force (EITF) 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” All such amounts relate to options to acquire common stock of our Sorrento Networks subsidiary granted by it to its consultants; during the fiscal years ended January 31, 2004, 2003 and 2002, we recorded $46 thousand, $183 thousand and $187 thousand for options granted to consultants. Computer Software for Internal Use—Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” is effective for financial statements with fiscal years beginning after December 15, 1998. The SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. The SOP requires that we continue to capitalize certain costs of software developed for internal use once certain criteria are met. The adoption of SOP 98-1 had no effect on our financial position or results of operations. In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities”, and interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, FIN No. 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that is acquired before February 1, 2003. We adopted FIN No. 46 with no material effect on our financial position or results of operations. In November 2002, the FASB issued FIN 45, which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires us to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not materially affect our consolidated financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement is effective for fiscal years beginning after June 15, 2002. SFAS 143 provides accounting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under the Statement, the asset retirement obligation is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value in each subsequent period and the capitalized cost is depreciated over the useful life of the related asset. The adoption of SFAS 143 did not have a material effect on our financial position or results of operations. In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 applied to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. In December 2003, the SEC issued SAB 104, which supersedes SAB 101, Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21. We adopted EITF 00-21 and SAB 104 with no material impact on our financial statements. C. PROPERTY AND EQUIPMENT Property and equipment of the Company consisted of the following components as of January 31, 2004 and 2003:      2004     2003   Manufacturing, engineering and plant equipment and software    $ 17,397     $ 19,822   Office furniture and fixtures      3,192       3,154   Land and building      6,721       6,721   Leasehold and building improvements      1,294       1,294          Total property and equipment      28,604       30,991   Less: Accumulated depreciation and amortization      (16,337 )     (13,888 )        Net book value    $ 12,267     $ 17,103          Depreciation expense for fiscal 2004, 2003 and 2002 was $ 3.3 million, $3.6 million, and $2.4 million respectively. D. SHORT TERM DEBT The Company has no short-term debt other than the current portion of long-term debt. E. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations at January 31, 2004 and 2003 consisted of the following:      2004    2003 Variable rate 30 year mortgage note payable (5.5% over LIBOR rate); interest rate at January 31, 2004 and 2003 was 6.71% and 8.95% respectively    $ 1,253    $ 1,269 Fixed rate 30 year mortgage note payable; interest rate at January 31, 2004 was 7.6%      2,332      2,361 Obligations under capital leases (See Note G)      54      237                3,639      3,866 Less: Current portion      101      222              $ 3,538    $ 3,644         On March 25, 1996, Meret completed the purchase of a 35,000 square foot facility in San Diego, California for $1,779 in cash. On April 24, 1996, Meret entered into a mortgage agreement with a lender in the amount of $1,331 amortized over 30 years with an adjustable interest rate of 5.5% over the LIBOR rate, adjusted bi-annually. Monthly principal and interest payments are $11 thousand. The interest rate at January 31, 2004 was 6.71%. In October 2000, we completed our purchase of a 41,000 square foot facility immediately adjacent to our existing San Diego, California facility. The purchase price was $4,805 including the assumption of existing indebtedness of $2,417. Monthly principal and interest payments are $18 and at the end of the 30-year term on January 1, 2010 the remaining balance of $2,109 is due. The loan has a fixed interest rate of 7.6%. Long-term and capital lease obligations at January 31, 2004 are payable by year as follows: 2005    $ 101 2006      54 2007      58 2008      63 2009      68 2010 and later      3,295           $ 3,639      F. DEBENTURES Debentures—During August 2001, we completed a private placement of our 9.75% convertible debentures receiving net proceeds of $29.8 million. The debentures, due August 2, 2004 had a face value of $32.2 million, which was convertible into our common stock at $144.20 per share. At maturity, we could have elected to redeem the debentures for cash and we had the option of paying the interest on these debentures in shares of our common stock. In addition, the purchasers received four year warrants to acquire an additional 167,592 shares of our common stock at $144.20 per share and the placement agent received five year warrants to acquire 5,583 shares of our common stock, equity securities, options or warrants at a price less than $144.20 per share or at a discount to the then market price. The conversion price and warrant exercise were subject to adjustment. In accordance with Emerging Issues Task Force (“EITF”) No. 00-27 we accounted for the fair value of warrants issued to the purchasers and placement agent and the fair value of the deemed beneficial conversion feature, which resulted solely as a result of the required accounting, of the debenture as a reduction to the face value of the debentures with an offsetting increase to additional paid in capital. These amounts, as well as the issuance costs paid in cash, were amortized as additional interest expense over the period the debentures were outstanding. On March 6, 2003, we and our wholly-owned subsidiary Sorrento Networks, Inc. entered into an Exchange Agreement with the holders of our 9.75% Senior Convertible Debentures (the “9.75% Debentures”) and the Series A Convertible Preferred Stock (the “Preferred Stock”) of Sorrento Networks, Inc. The Exchange Agreement and associated documents contemplated an exchange (the “Exchange”) of the 9.75% Debentures and the Preferred Stock at closing into shares of common stock and $12.5 million of our new 7.5% Secured Convertible Debentures (the “7.5% Debentures”). Certain holders of the Preferred Stock would also receive additional 7.5% Debentures of approximately $600 thousand to pay certain legal fees. With the elimination of liability from the preferred stock conversion and the reduction in total debt relating to the debentures, offset by the value of the common stock issuance associated with the transaction there was a net gain on the restructuring of $13.7 million. The Exchange Agreement was approved by shareholders on May 29, 2003 and was completed and became effective on June 4, 2003 pursuant to which we exchanged current outstanding debentures and Series A Preferred Stock for common stock and an issuance of a $13.1 million principal amount of 7.5% Debentures. Interest expense for fiscal year 2004 on the 9.75% debentures, through the June 4, 2003 exchange date, of $3.5 million included the stated 9.75% interest rate of $1.1 million, amortization of issuance costs of $275 thousand and amortization of the fair value of the warrants issued to the purchasers and placement agent and deemed beneficial conversion feature of $2.2 million. Interest expense on the 7.5% debentures during fiscal year 2004 was $561 thousand. The 7.5% debentures are convertible at any time at the option of the holders into shares of common stock at a conversion price of $5.42, the fair value on the date of the exchange. The debentures mature on August 2, 2007 and are secured by substantially all of our assets and those of our subsidiaries (with certain exceptions). At January 31, 2004 and January 31, 2003 debentures payable for the 7.5% debentures consisted of:      (thousands)      January 31, 2004    January 31, 2003 Face value of 7.5% convertible debentures    $ 11,788    $ —   Face value of new debentures for legal fees      600      —           Book value of debentures at issuance    $ 12,388    $ —           G. LEASES, OTHER COMMITMENTS AND CONTINGENCIES Rental expense under operating leases was $763 thousand, $1.6 million, and $1.3 million for the years ended January 31, 2004, 2003 and 2002, respectively. The table below sets forth minimum payments under capital and operating leases with remaining terms in excess of one year at January 31, 2004:      Capital Leases     Operating Leases 2005    $ 55     $ 551 2006      —         152 2007      —         46 2008      —         41 2009      —         34 2010 and thereafter      —         —                   55     $ 824              Less: Amount representing interest      (1 )                  Present value of minimum annual rentals.    $ 54                    The net book value of equipment under capital leases was $495 thousand and $657 thousand at January 31, 2004 and 2003, respectively. Other Commitments In March 2001, our Meret subsidiary entered into a $2.7 million supplier agreement. The agreement requires a minimum monthly cash outlay of $50 thousand extending over a period of fifty-four months. The remaining balance at January 31, 2004 of $853 thousand is expected to end in March 2005. The product being acquired is a component used in a product for one of Meret’s customers for which there is a five-year sales contract. Employment contract payments due under change of control provisions under certain employment contracts that may be triggered by the sale of the Company in 2005 is expected to be valued at $783 thousand. Contingent Liabilities In the merger agreement among our predecessor corporation (Osicom Technologies, Inc.), Entrada, and Sync Research, Inc., Osicom agreed to indemnify and hold our former subsidiary harmless against liability arising from the termination of a certain pension plan if the subsidiary’s losses exceeded $250 thousand, but only for such losses that exceeded $250 thousand. The pension plan was acquired as a result of the purchase of a division of Cray Communications in 1996 which later became Entrada. Upon the acquisition of this former subsidiary, the seller had the right to terminate the plan for five years following the acquisition and was responsible for funding the plan. If the pension plan was not terminated in the five years following the acquisition, the agreement called for the parties to agree as to a mutually satisfactory arrangement for the termination or continuation of the plan. In the third quarter, we were advised by the successor corporation that the termination cost of the pension plan could total approximately $2.9 million if the plan was terminated. Continued funding of the pension plan also remains an unresolved issue and if funding is not kept current with regard to legal requirements the pension plan could default. We currently hold in escrow approximately $500 thousand in Series D Preferred Stock as a security against possible losses resulting from this pension plan. As of this date, the parties have not agreed to a resolution regarding the pension plan in future periods. While we do not believe that we are liable for the continued costs associated with future funding or a cost associated upon termination, it is possible the pension plan could result in litigation among the parties if they cannot agree to an acceptable resolution. The Company has reserved approximately $1 million for possible contingencies which we believe is adequate to cover potential claims regarding the plan. LITIGATION On June 4, 2003, we consummated the exchange transaction and cancelled all outstanding Series A Convertible Preferred Stock and 9.75% Senior Convertible Debentures. The Exchange Agreement provides that the litigation instituted by the former holders of Series A stock be dismissed without prejudice against the Company, its subsidiaries, its current officers and directors, and other defendants who execute an appropriate release, and without prejudice against all other defendants. This dismissal will require court approval, which is in the process of being obtained by counsel for all parties. In accordance with a settlement agreement reached between us and our former Chairman and Founder, Par Chadha, 566,000 shares of ENI stock were transferred to Mr. Chadha in exchange for mutual releases by the Company and Mr. Chadha and certain of his affiliates. The stock transfer was complete on July 1, 2003 and had a value of $88 thousand. In addition, claims in arbitration were filed by two of our former financial officers and employees who worked in our Santa Monica office, which has since been closed, alleging that their resignations in May 2002 were for “good reason” as defined in their employment agreements, all of which were to expire on May 22, 2002. One of the claims was settled in May 2003 for $45 thousand. While the other claim was resolved by an arbitrator in August 2003 who ruled in our favor. A former officer of our SNI subsidiary brought suit alleging breach of a consulting agreement we entered into with him in March 2002, following his resignation “for good reason” as defined in his employment agreement. He was seeking acceleration of consulting fees due to him under his consulting agreement in the amount of $229 thousand. This suit was settled on December 1, 2003 for $15 thousand and $150 thousand of Sorrento common stock that was distributed to him June 4, 2003. From time to time, we are involved in various other legal proceedings and claims incidental to the conduct of our business. Although it is impossible to predict the outcome of any outstanding legal proceedings, we believe that such legal proceeding and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial position, results of operations, or cash flows. I. STOCKHOLDERS’ EQUITY Effective as of October 28, 2002, we implemented a one-for-twenty reverse split of our outstanding shares of common stock. No fractional shares were issued in connection with the reverse stock split. In lieu of fractional shares, stockholders will receive a cash payment based on the market price, after adjustment for the effect of the stock combination. The par value of the common stock changed to $6.00 per share and the number of authorized shares decreased from 150 million to 7.5 million shares of common stock. The reverse stock split also affects options, warrants and other securities convertible into or exchangeable for shares of the Company’s common stock that were issued and outstanding immediately prior to the effective time of the stock combination. Preferred stock was not affected. We are authorized to issue the following shares of stock: 150,000,000 shares of Common Stock ($0.001 par value) 2,000,000 shares of Preferred Stock ($.01 par value) of which the following series have been designated: 3,000 shares of Preferred Stock, Series D 1,000,000 shares of Preferred Stock, Series F We have outstanding the following shares of preferred stock:      Shares Outstanding    Par Value    Liquidation Preference Series D.    1,353    $ 0.01    $ 1,353                 1,353    $ 0.01    $ 1,353            During January 2001, we issued 86,464 shares of our common stock in conversion of 1,500 shares of our Series D preferred stock. The remaining 1,353 shares of our non-voting, non-dividend bearing Series D preferred stock are being held in escrow pending resolution of acquisition contingencies including liabilities related to funding deficits related to a terminated defined benefit pension plan of Entrada. Payments by the seller towards these liabilities will have no effect on our financial results and payments, if any, by us will reduce the face value of the preferred stock. Each share of Series D preferred stock is convertible into common stock at the market value at the date of conversion and we have the right to redeem the shares prior to conversion for 100% of their conversion value. J. OTHER CAPITAL STOCK TRANSACTIONS AND BUSINESS ACQUISITIONS Stock Split—In October 2002, approval was granted for a one-for-twenty reverse stock split effective October 28, 2002. The effect of this stock split was reflected in the financial statements retroactively as if the stock split occurred at the beginning of the earliest period reported. On June 4, 2003, we consummated the Exchange Agreement and cancelled all outstanding Series A Convertible Preferred Stock. In connection to our capital and corporate restructuring plan, we issued 8,029,578 shares of common stock to the holders of the 9.75% debentures and the Series A Convertible Preferred Stock upon consummation of the Exchange. The Company’s $32.2 million in convertible debentures were converted into common shares of the Company and a portion of $12.5 million in secured convertible 7.5% debentures that mature in August 2007. In addition, all Series A Convertible Preferred Stock were converted into common shares of the Company and a portion of the $12.5 million in secured convertible debentures. The outstanding Series A Convertible Preferred Stock “put” of $48.8 million against SNI was withdrawn. Certain Series A Convertible Preferred stockholders also received a total of $600 thousand in additional secured convertible 7.5% debentures to pay certain legal fees. There was an aggregate gain, net of tax, on the capital restructuring transaction of $13.6 million. The conversion of the SNI Series A Convertible Preferred Stock into common stock and a portion of the $12.5 million 7.50% convertible debenture resulted in a net gain of $48.8 million. The gain was off-set by the loss on the value of the warrants and beneficial conversion feature on the $32.2 million, 9.75% convertible debentures, converted to common stock and a portion of the 7.50% convertible debenture. The consolidated net gain on the capital restructuring transaction was $13.8 million for the quarter ending July 31, 2003. On August 8, 2003, we acquired LuxN Inc. for a combination of stock, warrants, and cash. Stockholders of LuxN were given the option of exchanging shares of LuxN stock for either their pro-rata portion of LuxN’s net cash or shares of Sorrento’s common stock. In addition to the cash or Sorrento common stock, stockholders of LuxN have the right to receive warrants to purchase an aggregate of 400 thousand shares of Sorrento common stock, with an exercise price of $3.05 per share, the fair market value on the date of the acquisition. The warrants will be held in escrow for a period of six months to satisfy any successful indemnification claims. At closing, Sorrento issued 1,374,194 million shares of common stock with an additional 505,146 shares of common stock issued after shareholder approval was received in January 2004. Private Placements—The first of two private placements’ the Company completed in fiscal 2004, closed on December 31, 2003. In exchange for $6.35 million in gross proceeds, Sorrento issued 2,140,101 new shares of Sorrento common stock, and warrants to purchase 1,070,051 new shares of Sorrento’s common stock. The effective price in the private placement was $2.97 for each unit consisting of one share of common stock and a warrant to purchase one-half of a share of common stock. The warrants have an exercise period of five-years with an exercise price of $2.97 per share. On January 26, 2004, the second private placement was completed raising $10 million in gross proceeds. In connection with the financing, Sorrento issued 2,921,512 new shares of Sorrento common stock and warrants to purchase 1,460,756 new shares of Sorrento’s common stock. The effective price in the private placement was $3.44 for each unit. Each unit consists of one share of common stock and a warrant to purchase one-half of a share of common stock. The warrants have an exercise period of five-years and an exercise price of $3.44 per share. The warrants are callable after one year under certain circumstances. The warrants provide for a cashless exercise under certain circumstances. Business Acquisitions—The Company acquired LuxN Inc. on August 8, 2003. The results of LuxN’s operations have been included in the consolidated financial statements since that date. LuxN’s product line supplies optical access equipment to the network edge using coarse and dense wavelength division multiplexing (CWDM and DWDM) technology. LuxN’s OSMINE-certified products enable delivery of high-bandwidth data, storage, video and voice services for service providers, cable MSOs and enterprises. See the acquisition footnote R. K. STOCK OPTION PLANS We have five stock option plans in effect: The 2003 Equity Incentive Plan, the 2000 Stock Incentive Plan, the 1988 Stock Option Plan, the 1997 Incentive and Non-Qualified Stock Option Plan and the 1997 Director Stock Option Plan. The stock options have been made available to certain employees and consultants. All options are granted at not less than fair value at the date of grant and have terms varying from 3 to 10 years. The purpose of these plans is to attract, retain, motivate and reward our officers, directors, employees and consultants to maximize their contribution towards our success. We account for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table summarizes the activity in the plans: Sorrento Networks Corporation (FIBR)      Number of Shares     Weighted Average Exercise Price Shares under option at January 31, 2001    253,361     $ 618.60 Granted    43,685     $ 150.40 Exercised    (4,913 )   $ 163.40 Canceled    (61,606 )   $ 519.60        Shares under option at January 31, 2002    230,527     $ 566.00 Granted    112,555     $ 25.31 Canceled    (48,805 )   $ 406.62        Shares under option at January 31, 2003    294,277     $ 387.53 Granted    1,953,734     $ 2.93 Canceled    (133,242 )   $ 581.73            Shares under option at January 31, 2004    2,114,769     $ 19.77            Additional information relating to stock options outstanding and exercisable at January 31, 2004 summarized by exercise price are as follows: Exercise Price Per Share    Shares    Outstanding Weighted Average    Exercisable       Life (Years)    Exercise Price    Shares    Weighted Average Exercise Price $    2.88 — $     19.99    1,998,542    9.44    3.21    870,917    3.47 $  20.00 — $     49.99    10,671    8.33    31.58    10,666    31.57 $  50.00 — $     99.99    36,868    8.10    56.57    35,067    56.85 $100.00 — $   199.99    15,998    5.60    140.23    15,563    140.78 $200.00 — $   299.99    4,837    3.62    255.93    4,837    255.93 $300.00 — $   399.99    3,078    645    350.79    3,078    350.79 $400.00 — $   499.99    13,755    6.29    448.53    13,755    448.53 $500.00 — $   599.99    417    2.84    569.20    417    569.20 $600.00 — $   699.99    —      —      —      ���      —   $700.00 — $   799.99    30,503    6.29    718.37    30,503    718.37 $800.00 — $   899.99    —      —      —      —      —   $900.00 — $1,382.40    100    6.00    985.00    100    985.00                        $    2.88 — $1,382.40    2,114,769    9.30    19.77    984,903    38.86                        At January 31, 2004, the Company has five stock-based employee compensation plans. In order to provide more prominent and frequent disclosures about the effects of stock-based compensation as required under SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, the following table summarizes the pro forma effect of stock-based compensation on net income and earnings (loss) per share as if the optional expense recognition provisions of SFAS 123 had been adopted. We account for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.      Years Ended January 31,        2004     2003     2002   Net loss:                          As reported    $ (6,233 )   $ (26,210 )   $ (43,136 ) Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects      (3,689 )     (5,581 )     (3,842 )          Pro forma      (9,922 )     (31,791 )     (46,978 )          Loss per share:                          Basic EPS as reported    $ (0.87 )   $ (33.29 )   $ (62.00 )          Pro forma basic EPS      (1.38 )     (40.37 )     (67.60 )          Diluted EPS as reported      (0.87 )     (33.29 )     (76.32 )          Pro forma diluted EPS      (1.38 )     (40.37 )     (91.80 )          BLACK-SCHOLES ASSUMPTIONS      For the Fiscal Year ending January 31,        2004     2003     2002   Expected Life      3 years       3 years       3 years   Volatility      46 %     180 %     140 % Risk Free Interest Rate Range      1.29–2.39  %     2.15–4.50 %     2.91–4.50 % Dividend yield      0 %     0 %     0 % Fair Value Weighted Average of options issued    $ 2.78     $ 22.19     $ 83.60   The fair value of stock options used to compute pro forma net loss and pro forma loss per share disclosures is estimated using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, this model requires the input of subjective assumptions, including the expected price volatility of the underlying stock. Projected data for expected volatility and expected life of stock options is based upon historical and other data. Changes in these subjective assumptions can materially affect the fair value estimate, and therefore the existing valuation models may not provide a reliable single measure of the fair value of the Company’s employee stock options. Sorrento Networks Inc. In addition SNI adopted its 2000 Stock Option/Stock Issuance Plan in February 2000 under which it has granted options to certain of its employees, directors and consultants. All options are generally granted at prices not less than fair value at the date of grant and generally vest over four years. Eligible individuals may be issued shares of common stock directly, either through immediate purchase of the shares at fair value or as a bonus tied to performance of services or the attainment of prescribed milestones. No milestones were attained and, no stock has been issued under the stock issuance program. The option activity for this plan for the year ended January 31, 2004 is summarized as follows:      Number of Shares     Weighted Average Exercise Price Shares under option at January 31, 2001    18,735,904     $ 5.34 Granted    1,193,064     $ 5.45 Exercised    (22,300 )   $ 2.60 Canceled    (4,592,236 )   $ 5.52            Shares under option at January 31, 2002    15,314,432     $ 5.30 Canceled    (12,018,429 )   $ 5.39            Shares under option at January 31, 2003    3,296,003     $ 4.93 Canceled    (1,409,003 )   $ 4.40            Shares under option at January 31, 2004    1,887,000     $ 5.34            Additional information relating to the stock options of SNI outstanding and exercisable at January 31, 2004 summarized by exercise price are as follows: Exercise Price Per Share    Shares    Outstanding Weighted Average    Exercisable       Life (Years)    Exercise Price    Shares    Weighted Average Exercise Price $2.00    55,000    6.05    $ 2.00    55,000    $ 2.00 $5.45    1,832,000    6.23    $ 5.45    1,829,750    $ 5.45                            $2.00—$5.45    1,887,000    6.22    $ 5.34    1,844,750    $ 5.34                            The holders of the options of our Sorrento subsidiary may elect to convert all or a portion of their options into options to acquire our stock at a ratio of 78 for one. During the year ended January 31, 2004, no shares were exchanged for FIBR options, during 2003, 2,340,585 shares were exchanged for FIBR options and during January 31, 2002, no options were converted. Tender Offer In May 2002, our Board of Directors approved an employees’ stock option exchange program. Under the program, employees holding options to purchase Sorrento Networks Corp. common stock were given the opportunity to exchange certain shares of their existing options, those with exercise prices above $150.00 per share, for new options to purchase an equal number of shares of Sorrento common stock. The new options were granted six months and one day after the cancellation of the old options. The exercise price of the new options was $109.00, the market price on the last reported trading price of Sorrento common stock on their grant date. Options for 34,960 shares of Sorrento Networks Corp. common stock were exchanged in the program. (Adjusted for 1-20 reverse split). Options held by the company’s executives and officers were not included in the exchange program. L. INCOME TAXES Our provision for taxes on income for the years ended January 31, 2004, 2003 and 2002 consists of: Year ended January 31, 2004: Current $ —   Deferred —   Total $ —   Year ended January 31, 2003: Current $ —   Deferred —   Total $ —   Year ended January 31, 2002: Current $ —   Deferred —   Total $ —   Our domestic operations generate permanent and temporary differences for depreciation, amortization, valuation allowances and tax attributes arising from acquisitions. We have recorded a 100% valuation allowance against our deferred tax assets, including net operating loss and research credit carry forwards, in accordance with the provisions of Statement of Financial Accounting Standards No. 109. Such allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.      2004     2003   Deferred tax assets:                  Research and development credits    $ 63     $ 63   Tax loss carry forwards      56,023       65,754   Purchase accounting      1,269       2,057   Depreciable assets      379       583   Other liabilities and reserves      8,633       5,613   Reserve for loss on investment      2,010                  Gross deferred tax assets      68,377       74,070   Less: valuation allowance      (68,377 )     (74,070 )        Deferred tax asset    $ —       $ —            At January 31, 2004, we had federal net operating losses which may be available to reduce future taxable income. Among potential adjustments which may reduce available loss carry forwards, the Internal Revenue Code of 1986, as amended, (IRC), reduces the extent to which net operating loss carry forwards may be utilized in the event there has been an “ownership change” of a company as defined by applicable IRC provisions. We believe that the issuances of its equity securities and transfers of ownership of outstanding equity securities may have resulted in one or more such ownership changes and intends to analyze the impact of such transfers on the continued availability, for tax purposes, of the net operating losses incurred through January 31, 2004. Further ownership changes, as defined by the IRC, may reduce the extent to which any net operating losses may be utilized. The NOLs were reduced under IRC section 108 by $48,804,000 in connection with the capital restructuring. The NOL carry forwards expire as follows: 2020    $ 39,483 2021      36,780 2022      32,508 2023      19,480 2024      24,367           $ 152,618      The reconciliation between income tax expense and a theoretical United States tax computed by applying a rate of 35% for the years ended January 31, 2004, 2003 and 2002, is as follows:      2004     2003     2002   Income (loss) before income taxes    $ (6,233 )   $ (22,610 )   $ (43,136 )          Theoretical tax (benefit) at 35%      (2,181 )     (7,914 )     (15,098 ) Impact of non-qualified stock options      —         —         (434 ) Change in Valuation Allowance      (5,693 )     10,750       16,862   Other individually immaterial items      1,896       (2,836 )     (1,330 ) Impact of acquisition      (5,978 )             —                   $ —       $ —       $ —              M. EARNINGS PER SHARE CALCULATION The following data show the amounts used in computing basic earnings per share. The number of shares used in the calculations for the years ended January 31, 2004, 2003 and 2002 reflect a 1-for-20 reverse stock split effective October 28, 2002.      2004     2003     2002   Net loss    $ (6,233 )   $ (26,210 )   $ (43,136 ) Less: deemed dividend      —         —         (180 )          Net loss available to common shareholders used in basic EPS    $ (6,233 )   $ (26,210 )   $ (43,316 ) Average number of common shares used in basic EPS      7,205,033       787,407       698,303   We incurred a net loss for the years ending January 31, 2004, 2003 and 2002. Accordingly, the effect of dilutive securities including convertible debentures, convertible preferred stock, vested and non-vested stock options and warrants to acquire common stock are not included in the calculation of EPS because their effect would be antidilutive. The following data shows the effect on income and the weighted average number of shares of dilutive potential common stock.      2004     2003     2002   Net loss available to common shareholders used in basic EPS    $ (6,233 )   $ (26,210 )   $ (43,316 ) Interest on convertible debt (net of tax)      (639 )     (4,826 )     (18,405 ) Net loss available to common shareholders after assumed conversions of dilutive securities    $ (5,594 )   $ (31,036 )   $ (61,721 ) Average number of common shares used in dilutive EPS      7,205,033       787,407       808,740   The shares issuable upon exercise of options and warrants represents the quarterly average of the shares issuable at exercise net of the shares assumed to have been purchased, at the average market price for the period, with the assumed exercise proceeds. Accordingly, options and warrants with exercise prices in excess of the average market price for the period are excluded because their effect would be antidilutive. N. OTHER RELATED PARTY TRANSACTIONS Summarized below are all material related party transactions entered into by us and our subsidiaries during the periods presented not otherwise disclosed in these notes. In February 2003, we entered into a consulting agreement with Mr. Robert Hibbard, a member of the Board of Directors, to provide services to the company at a consulting rate of $175 per hour plus a retainer of $20 thousand per month for six months. Mr. Hibbard agrees to make himself available to the Company for not less than 20 hours per week. This agreement supersedes his August 2002 consulting agreement and terminated in February 2004. Nearly all of Mr. Hibbard’s consulting work for us has involved matters being considered or reviewed by the board or by committees of the board. His work has included structuring and implementing our 2003 Equity Incentive Plan for employees, participation in settlement negotiations for pending litigation, assistance in our capital restructuring and improving our intellectual property policies and procedures, among other matters. In fiscal years 2004 and 2003 Mr. Hibbard was paid $205 thousand and $92 thousand respectively, in consulting fees. During fiscal 2002, we paid a total of $55 thousand to Phillip W. Arneson as a Director of the Company. The amounts paid included $24 thousand for consulting work performed for a special Committee of the Board, $21 thousand for various other consulting services including outsourcing advice and organizational matters, attendance fees of $6 thousand for Board and Committee meetings and $5 thousand in reimbursable expenses. Consulting fees were paid at a rate equal to normal fees for attendance at Board meetings. During July 2000, we agreed to loan $300 thousand for three years at the applicable federal rate provided for in Internal Revenue Code Section 1274 to our Senior Vice President, Legal, an officer of the company, associated with his relocation and initial employment. This is a full recourse loan and the officer has pledged his options to acquire our common stock and any options he may receive from any of our subsidiaries as collateral. The officer received $300 thousand in advances under this loan agreement for which the interest rate is 6.6%. On July 3, 2002 a new note covering the $300 thousand was incorporated in his employment contract. The term remained the same as the July 2000 note, with all unpaid, accrued interest and principal due and payable on August 30, 2003. In December 2002, the officer paid $39 thousand on his loan that included payment of all prior interest due and the remainder applied to his principal balance. In August 2003, the officer left the employment of the company. As part of his departure, the officer signed filing documents that if were to not repay the loan, these documents could be used to obtain a default judgment in favor of the company. As of January 31, 2004 the former officer’s loan outstanding to the Company totaled $298. Subsequent to our fiscal year end the former officer has made, payments against the loan to keep it in good standing. During June 2000, we entered into various agreements with Par Chadha, our former CEO and Chairman, which, among other matters, provides for payments of $250 thousand per year for three years of consulting services and loans by us for the exercise of previously granted options to acquire 58,925 options at prices varying from $140.60 to $985.00 per share. As the members of our Board of Directors at the time of his resignation ceased to represent more than 50% of the Board in October 2000, all payments for consulting services were accelerated and no future consulting services are required. During October 2000, Mr. Chadha exercised 3,556 options, applying the $500 thousand accelerated payment to the exercise. In addition, he exercised 25,369 options for which we are contractually obligated to loan the $5.0 million due on the exercise. During September 2001, Mr. Chadha notified us that he does not have any obligations under the agreements. We have notified him that we do not agree with his interpretation of his repayment obligations under the terms of the agreements. During December 2001, we entered into an agreement whereby the 25,369 option exercise was rescinded. Mr. Chadha returned the 25,369 shares to us for cancellation and we cancelled the receivable due from him and restored the original option agreements. The required non-cash expense as a result of the rescission equal to the difference between the amount of the loan receivable and the market value of the returned shares was recorded as a reserve of $2.7 million against the receivable during the year ended January 31, 2002 and is included in other operating expenses in the accompanying income statement. This rescission agreement did not resolve any underlying dispute as to the option loan repayment obligations. In accordance with a settlement agreement reached between us and our former Chairman and Founder, Par Chadha, 566,000 shares of ENI stock were transferred to Mr. Chadha in exchange for mutual releases by the Company and Mr. Chadha and certain of his affiliates. The stock transfer was complete on July 1, 2003 and had a value of $88 thousand. On September 30, 2001, our then Chairman and CEO executed a two year consulting agreement with a senior officer of the company, whereby he was to be paid a salary at $250 thousand per year plus benefits and the vesting of all his options to acquire our common stock. In July 2002, a dispute arose in the agreement whereby the company stopped payment of the monthly consulting fees. In August 2003, the dispute was resolved by the company paying $197 thousand in full settlement and a mutual release of claims. The settlement included $15 thousand in legal costs incurred by the officer. Upon settlement, the Company received notice from an attorney that stated he represented the officer and the officer had refused to pay his legal fees and was notifying us that an attorney’s lien was being placed on the settlement proceeds for his portion. As a result of the notice, $70 thousand was placed in escrow with our legal firm pending release upon resolution with the officer and his attorney. O. SUPPLEMENTAL CASH FLOW DISCLOSURES Interest expense for the years ended January 31, 2004, 2003 and 2002 was $4.4 million, $9.7 million and $3.3 million, respectively. During fiscal 2004, $248 thousand was paid in cash and the remaining $4.4 million neither provided for nor used cash. For fiscal years 2003 and 2002, $9.3 million and $2.6 million of the interest expense neither provided nor used cash. P. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject us to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. As regards the former, we place our temporary cash investments with high credit financial institutions and limits. At times such amounts may exceed the F.D.I.C. limits. We limit the amount of exposure with any one financial institution and believe that no significant concentration of credit risk exists with respect to cash investments. No accounts at a single bank accounted for more than 10% of current assets. Although we are directly affected by the economic well being of significant customers listed in the following tables, we do not believe that significant credit risk exists at January 31, 2004. We perform ongoing evaluations of our customers and require letters of credit or other collateral arrangements as appropriate. Accordingly, trade receivable credit losses have not been significant. The following data shows the customers accounting for more than 10% of net receivables at January 31 2004 and 2003:      2004     2003   Customer A    —   %   29.6 % Customer B    —       18.7   Customer C    10.3     —     Customer D    10.7     15.9   Customer E    1.1     31.2   The following data shows the customers accounting for more than 10% of net sales during the years ended January 31, 2004, 2003 and 2002:      2004     2003     2002   Customer A    10.7  %   23.0  %   14.9  % Customer B    13.6     19.0     23.9   Customer C    0.4     12.2     16.3   Customer D    0.2     1.3     7.8   Customer E    6.6     0.6     6.9   Customer F    0.7     —       5.6   Customer G    12.2     —       0.5   As of January 31, 2004 we had the following Notes Receivable from one of our customers: Notes Receivable      Payments due in fiscal years      Total    2005    2006    2007    2008    2009    Thereafter Long-term Notes Receivable 5%    $ 325    $ 242    $   83    $   —      $   —      $   —      $   —   The company holds a single note maturing April 2005. Q. SUBSEQUENT EVENTS On April 22, 2004, Sorrento Networks Corporation, a Delaware corporation (“Sorrento”), entered into an Agreement and Plan of Merger, dated as of April 22, 2004, with Zhone Technologies, Inc., a Delaware corporation (“Zhone”) and Selene Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Zhone (“Merger Sub”). Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, Merger Sub will merge with and into Sorrento, with Sorrento surviving as a wholly-owned subsidiary of Zhone (the “Merger”). At the effective date of the Merger, each outstanding share of Sorrento common stock will be exchanged for 0.9 shares of Zhone common stock, and each option, warrant and other securities exercisable or convertible into shares subject to the approval of the stockholders of both Zhone and Sorrento and other customary closing conditions. On March 8, 2004 the warrants and cash were distributed thereby resolving all purchase price contingencies associated with the purchase of LuxN, Inc. As part of the LuxN, Inc. purchase consideration, the Company had placed 400,000 warrants and cash into escrow pending the expiration of an indemnification period for the Company. The Company has reflected the resolution of these purchase price contingencies as of January 31, 2004. R. BUSINESS ACQUISITION On August 8, 2003, we completed our acquisition of LuxN, Inc., pursuant to an Agreement and Plan of Merger, dated as of June 25, 2003, between Sorrento and LuxN. At the effective time of the merger, our wholly-owned subsidiary, Lambda Acquisition Corp., was merged with and into LuxN, with LuxN being the surviving corporation in the merger. As consideration for the transaction, holders of LuxN’s Series A-1 Preferred Stock with an aggregate pro-rata portion of $14.8 million of LuxN’s net cash held elected to receive cash at closing, and holders of LuxN’s Series A-1 Preferred Stock with an aggregate pro-rata portion of $3.8 million of LuxN’s net cash held elected to receive our common stock at closing. We issued 1,374,194 shares of our common stock to the holders of LuxN’s Series A-1 Preferred Stock at the closing, and issued an additional 505,153 shares upon receipt of our shareholders’ approval. In addition, we issued warrants to purchase 400,000 of our shares of common stock at an exercise price of $3.05 per share to the holders of LuxN’s Series A-1 Preferred Stock The aggregate purchase price was $20.9 million including $14.8 million in cash, $4.9 million of common stock, $878 thousand of warrants and $414 of related costs. The Company issued 1,879,347 shares of common stock valued at the date of issuance and 400,000 warrants with an exercise price of $3.05 valued on the date of issuance. Upon valuing the purchase price and allocating the purchase price to the assets acquired and liabilities assumed, it was determined that the net assets exceeded the purchase price by $87 thousand. This excess of net assets acquired over the amount paid for the acquisition is reflected as a reduction to long lived assets. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.      At August 8, 2003        (in thousands)   Current assets    $ 25,901   Property, plant and equipment      —     Intangible assets      —          Total assets acquired      25,901        Current liabilities      (4,918 )      Total liabilities assumed      (4,918 )      Net assets acquired    $ 20,983        Consolidated Pro Forma Statement of Operations as of January 31, 2004 (in thousands)      Sorrento Networks Consolidated     LuxN, Inc     Total   Revenue    $ 21,611     $ 5,313     $ 26,924   Net (Loss)      (3,674 )     (7,579 )     (11,253 ) Earnings per Share      (0.51 )     (1.05 )     (1.56 ) Consolidated Pro Forma Statement of Operations as of January 31, 2003 (in thousands)      Sorrento Networks Consolidated     LuxN, Inc     Total   Revenue    $ 25,137     $ 3,958     $ 29,095   Net (Loss)      (26,210 )     (27,325 )     (53,535 ) Earnings per Share      (12.13 )     (12.64 )     (24.77 ) S. SEGMENT INFORMATION Information for the years ended January 31, 2004, 2003 and 2002 in the table below is presented on the same basis utilized by the Company to manage its business. The segments according to product lines are as follows: Sorrento Networks, and LuxN are “Optical Networking”, Meret, and other. Export sales and certain income and expense items are reported in the geographic area where the final sale to customers is made, rather than where the transaction originates. We have no material long-term assets outside the United States. The accounting policies of the segments are the same as the policies described in the “Summary of Significant Accounting Policies.” Each segment operates independent of one another. The company evaluates the performance of each segment and distributes resources to them based on earnings before income taxes, excluding corporate charges (“Segment income (loss) from operations”). Any corporate charges that are allocated to the segments are allocated as a percentage of revenue. These charges, if any, are recorded under “other income (expenses)” and are eliminated in the consolidation process. “Other income (expenses) is not shown in the supplemental segment information contained below. Geographical Information The table below presents external revenues based on the locations of the customer:      2004    2003    2002 Net sales:                      United States    $ 18,445    $ 14,803    $ 28,341 Asia      1,562      865      1,340 Europe      5,455      9,469      10,130 Other      —        —        1,016            Total net sales    $ 25,462    $ 25,137    $ 40,827            Products and Service Revenue The table below presents external revenues for groups of similar products and services:      2004    2003    2002 Net sales:                      Optical networking    $ 22,592    $ 22,373    $ 36,034 Switching and access      2,870      2,764      4,793            Total net sales    $ 25,462    $ 25,137    $ 40,827            Supplemental Segment Information:      Optical Networking     Meret     Other     Consolidated   As of January 31, 2004:                                  Revenues from external customers    $ 22,592     $ 2,870     $ —       $ 25,462   Cost of goods sold      17,370       2,399       —         19,769   Gross profit      5,222       471       —         5,693   Segment income/(loss) from operations      (14,862 )     235       (3,007 )     (17,634 ) Depreciation and amortization expense      3,168       410       95       3,673   Valuation allowance additions (reductions):                                  Receivables and inventory      (4,931 )     (1,822 )     —         (6,753 ) Capital asset additions, net      (1,611 )     7       —         (1,604 ) Total assets      35,045       4,512       20,539       50,096        Optical Networking     Meret     Other     Consolidated   As of January 31, 2003:                                  Revenues from external customers    $ 22,373     $ 2,764     $ —       $ 25,137   Cost of goods sold      19,257       2,560       —         21,817   Gross profit      3,116       204       —         3,320   Segment income/(loss) from operations      (25,017 )     (1,329 )     (4,929 )     (31,329 ) Depreciation and amortization expense      3,257       702       103       4,063   Valuation allowance additions:                                  Receivables and inventory      (704 )     (316 )     —         (1,020 ) Capital asset additions, net      3,201       62       70       3,333   Total assets      31,497       5,375       18,933       55,805        Optical Networking     Meret    Other     Consolidated   As of January 31, 2002:                                 Revenues from external customers    $ 36,034     $ 4,793    $ —       $ 40,827   Cost of goods sold      28,384       3,123      —         31,507   Gross profit      7,650       1,670      —         9,320   Segment income/(loss) from operations      (28,993 )     246      (8,407 )     (37,154 ) Depreciation and amortization expense      2,039       543      212       2,794   Valuation allowance additions:                                 Receivables and inventory      5,328       269      987       5,597   Other      812       —        1,788       2,600   Capital asset additions, net      3,116       67      52       3,235   Total assets      36,089       7,282      46,968       90,339   T. VALUATION AND QUALIFYING ACCOUNTS Changes in the inventory valuation reserve were as follows: Balance at January 31, 2001    $ 2,792   Additions charged to costs and expenses      4,038   Amounts used during year      (362 )      Balance at January 31, 2002      6,468   Additions charged to costs and expenses      4,152   Amounts used during year      (4,657 )      Balance at January 31, 2003      5,963   Balance of LuxN at August 8, 2003      14,134   Additions charged to costs and expenses      692   Amounts used during year      (5,389 )      Balance at January 31, 2004    $ 15,400        Changes in the accounts receivable valuation reserve were as follows: Balance at January 31, 2001    $ 1,002   Additions charged to costs and expenses      1,558   Amounts used during year      (821 )      Balance at January 31, 2002      1,739   Additions charged to costs and expenses      1,531   Amounts used during year      (2,046 )      Balance at January 31, 2003      1,224   Balance of LuxN at August 8, 2004      57   Additions charged to costs and expenses      333   Amounts used during year      (1,090 )      Balance at January 31, 2004    $ 524        U. UNAUDITED QUARTERLY FINANCIAL DATA (Unaudited) Amounts in thousands, except per share amounts.      First Quarter     Second Quarter     Third Quarter     Fourth Quarter     Year   Year ended January 31, 2004:                                          Net sales    $ 7,861     $ 4,476     $ 6,726     $ 6,399     $ 25,462   Gross profit (loss)      1,954       1,363       1,835       541       5,693   Income (loss) from operations      (3,618 )     (4,093 )     (4,544 )     (5,379 )     (17,634 ) Net income (loss)      (6,222 )     12,514       (4,817 )     (7,708 )     (6,233 ) Net income (loss) per share:                                          Basic      (7.02 )     2.13       (0.47 )     (0.66 )     (0.87 ) Diluted      (14.33 )     1.72       (0.47 )     (0.66 )     (0.87 ) Year ended January 31, 2003:                                          Net sales    $ 6,003     $ 5,199     $ 5,525     $ 8,410     $ 25,137   Gross profit      1,488       (2,300 )     962       3,170       3,320   Loss from operations      3,976       (15,806 )     (6,922 )     (7,458 )     (26,210 ) Net loss      3,976       (15,806 )     (6,922 )     (7,458 )     (26,210 ) Net loss per share:                                          Basic      5.60       (21.40 )     (8.86 )     (8.42 )     (33.29 ) Diluted      (25.20 )     (45.20 )     (34.54 )     (32.64 )     (33.29 ) ANNEX A   AGREEMENT AND PLAN OF MERGER   BY AND AMONG   ZHONE TECHNOLOGIES, INC.,   SELENEPARROT ACQUISITION CORP.   AND   SORRENTOPARADYNE NETWORKS, CORPORATIONINC.   DATEDASOF AJPRILULY 22, 20047, 2005 TABLE OF CONTENTS               Page Article I The Merger    A-1 Section 1.1      The Merger    A-1 Section 1.2      Closing    A-1 Section 1.3      Effect of the Merger    A-2 Section 1.4      Certificate of Incorporation; Bylaws    A-2 Section 1.5      Directors and Officers of Surviving Corporation    A-2 Article II Conversion of Securities; Exchange of Certificates    A-2 Section 2.1      Conversion of Securities.Securities    A-2 Section 2.2      Exchange of Certificates    A-3 Section 2.3      Appraisal Rights    A-4A-5 Section 2.4      Stock Options    A-4A-5 Section 2.5 Employee Stock Purchase Plan A-5 Section 2.6      Warrants    A-5 Section 2.62.7      Restricted Stock    A-5 Section 2.7 Debentures A-5A-6 Article III Representations and Warranties of the Company    A-6 Section 3.1      Organization and Qualification; Subsidiaries    A-6 Section 3.2      Certificate of Incorporation and Bylaws; Corporate Books and Records    A-6 Section 3.3      Capitalization    A-6A-7 Section 3.4      Authority.Authority    A-7A-8 Section 3.5      No Conflict; Required Filings and Consents.Consents    A-8 Section 3.6      Permits; Compliance With Law    A-8A-9 Section 3.7      SEC Filings; Financial Statements.Statements    A-8A-9 Section 3.8      Brokers    A-9A-10 Section 3.9      Absence of Certain Changes or Events    A-9A-10 Section 3.10      Employee Benefit Plans.Plans    A-10 Section 3.11      Labor and Other Employment Matters.Matters    A-12 Section 3.12      Tax Treatment    A-12A-13 Section 3.13      Contracts    A-12A-13 Section 3.14      Litigation    A-13 Section 3.15      Environmental Matters    A-13 Section 3.16      Intellectual Property    A-14 Section 3.17      Taxes.Taxes    A-14 Section 3.18      Insurance    A-15A-16 Section 3.19      Opinion of Financial Advisor    A-15A-16 Section 3.20      Vote Required    A-16 Section 3.21      Properties    A-16 Section 3.22      Customers    A-16 Section 3.23      Customer RevenuesTransactions With Interested Persons    A-16 Section 3.24      Transactions with Interested Persons A-16 Section 3.25 No Other Agreements    A-16 Article IV Representations and Warranties of Parent and Merger Sub A-17 Section 4.1 Organization and Qualification; Subsidiaries A-17 Section 4.2 Certificate of Incorporation and Bylaws A-17   i             Page Article IV Representations and Warranties of Parent and Merger Sub A-16 Section 4.1 Organization and Qualification; Subsidiaries A-16 Section 4.2 Certificate of Incorporation and Bylaws A-17 Section 4.3      Capitalization    A-17 Section 4.4      Authority.Authority    A-17A-18 Section 4.5      No Conflict; Required Filings and Consents.Consents    A-18 Section 4.6      Permits; Compliance With Law    A-18A-19 Section 4.7      SEC Filings; Financial Statements.Statements    A-19 Section 4.8      Brokers    A-19A-20 Section 4.9      Absence of Certain Changes or Events    A-20 Section 4.10      Tax Treatment    A-20 Section 4.11      Litigation    A-20 Section 4.12      Opinion of Financial AdvisorIntellectual Property    A-20 Section 4.13      Taxes A-21 Section 4.14 Opinion of Financial Advisor A-22 Section 4.15 Vote Required    A-20A-22 Section 4.144.16      Ownership of Merger Sub; No Prior Activities    A-20A-22 Article V Covenants    A-20A-22 Section 5.1      Conduct of Business by the Company Pending the Closing    A-20A-22 Section 5.2      Registration Statement; Proxy Statement.Statement    A-22A-25 Section 5.3      Stockholders’ Meetings.Meetings    A-23A-26 Section 5.4      Access to Information; Confidentiality    A-23A-26 Section 5.5      No Solicitation of Transactions.Transactions    A-24A-27 Section 5.6      Appropriate Action; Consents; Filings.Filings    A-25A-28 Section 5.7 Cash Expenditures A-26 Section 5.8      Certain Notices    A-26A-29 Section 5.95.8      Public Announcements    A-26A-29 Section 5.105.9      Exchange Listing    A-26A-29 Section 5.115.10      Employee Benefit Matters    A-26A-29 Section 5.125.11      Indemnification of Directors and Officers.Officers    A-27A-30 Section 5.135.12      Tax-Free Reorganization Treatment    A-28A-31 Section 5.13 Affiliates A-31 Section 5.14      AffiliatesResignation of Officers and Directors    A-28A-31 Section 5.15      ResaleS-8 Registration StatementsStatement    A-28A-31 Section 5.16 Stockholder Litigation A-31 Article VI Closing Conditions    A-29A-32 Section 6.1      Conditions to Obligations of Each Party Under This Agreement    A-29A-32 Section 6.2      Additional Conditions to Obligations of Parent and Merger Sub    A-29A-32 Section 6.3      Additional Conditions to Obligations of the Company    A-30A-33 Article VII Termination, Amendment and Waiver    A-30A-34 Section 7.1      Termination    A-30A-34 Section 7.2      Effect of Termination.Termination    A-32A-35 Section 7.3      Amendment    A-33A-36 Section 7.4      Waiver    A-33A-36 Section 7.5      Fees and Expenses    A-33A-36 Article VIII General Provisions A-36 Section 8.1 Non-Survival of Representations and Warranties A-36 Section 8.2 Notices A-36   ii             Page Article VIII General Provisions A-34 Section 8.1 Non-Survival of Representations and Warranties A-34 Section 8.2 Notices A-34 Section 8.3      Certain Definitions    A-34A-37 Section 8.4      Terms Defined Elsewhere    A-38A-40 Section 8.5      Headings    A-39A-42 Section 8.6      Severability    A-39A-42 Section 8.7      Entire Agreement    A-39A-42 Section 8.8      Assignment    A-39A-42 Section 8.9      Parties in Interest    A-40A-42 Section 8.10      Mutual Drafting    A-40A-42 Section 8.11      Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury.Jury    A-40A-42 Section 8.12      Counterparts    A-40A-43 Section 8.13      Specific Performance    A-40A-43   Exhibits Exhibits A    Form of Company Voting Agreement B    Form of Parent Voting Agreement C    Form of Consulting Agreement D Form of Restrictive Covenant Agreement E-1 Form of Tax Certificate of the Company E-2 Form of Tax Certificate of Parent and Merger Sub   iii AGREEMENT AND PLAN OF MERGER, dated as of April 22, 2004July 7, 2005 (this “Agreement”), by and among Zhone Technologies, Inc., a Delaware corporation (“Parent”), SeleneParrot Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), and SorrentoParadyne Networks, Corporation,Inc., a Delaware corporation (the “Company”).   WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have approved and declared advisable the merger of Merger Sub with and into the Company (the “Merger”) upon the terms and subject to the conditions of this Agreement and in accordance with the General Corporation Law of the State of Delaware (the “DGCL”);   WHEREAS, the respective Boards of Directors of Parent and the Company have determined that the Merger is in furtherance of and consistent with their respective business strategies and is in the best interest of their respective stockholders, and Parent has approved this Agreement and the Merger as the sole stockholder of Merger Sub;   WHEREAS, for federal income tax purposes, Parent, Merger Sub and the Company intend that the Merger qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”);   WHEREAS, certain stockholders of the Company have executed and delivered to Parent an irrevocable proxy and voting agreement (the “Company Voting Agreement”), in substantially the form ofattached hereto asExhibit A hereto (with such stockholders listed on Schedule A to the Company Voting Agreement), as an inducement to Parent to enter into this Agreement; and   WHEREAS, certain stockholders of Parent have executed and delivered to the Company an irrevocable proxy and voting agreement (the “Parent Voting Agreement”), in substantially the form ofattached hereto asExhibit B hereto (with such stockholders listed on Schedule A to the Parent Voting Agreement), as an inducement to the Company to enter into this Agreement; and WHEREAS, certain executives of the Company have executed and delivered to Parent a Consulting Agreement and Restrictive Covenant Agreement in substantially the forms attached hereto asExhibits C andD, respectively, as a further inducement to Parent to enter into this Agreement.   NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement and intending to be legally bound hereby, the parties hereto agree as follows:   Article I   The Merger   Section 1.1The Merger. Upon the terms and subject to satisfaction or waiver of the conditions set forth in this Agreement, and in accordance with the DGCL, Merger Sub, at the Effective Time, shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation of the Merger (the “Surviving Corporation”) and shall be a wholly owned subsidiary of Parent.   Section 1.2Closing. The closing of the Merger (the “Closing”) shall take place onas promptly as practicable, but in no event later than the first business day after the satisfaction or waiver of the conditions (excluding conditions that, by their nature, cannot be satisfied until the Closing Date) set forth in Article VI, unless this Agreement has been theretofore terminated pursuant to its terms or unless another time or date is agreed to in writing by the parties hereto (the actual date of the Closing being referred to herein as the “Closing Date”). The Closing shall be held at the offices of Latham & Watkins LLP, 12636 High Bluff Drive, Suite 400, San Diego, California 92130, unless another place is agreed to in writing by the parties hereto. As soon as practicable on or after the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger relating to the Merger (the “Certificate of Merger”) with the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, the DGCL (the date and time of such filing, or if another date and time is agreed to in writing by the parties hereto and is specified in such filing, such specified date and time, being the “Effective Time”). Section 1.3Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the DGCL. Without limiting the generality of the foregoing, at the Effective Time, except as otherwise provided herein, all the property, rights, privileges, powers and franchises of Merger Sub and the Company shall vest in the Surviving Corporation, and all debts, liabilities and duties of Merger Sub and the Company shall become the debts, liabilities and duties of the Surviving Corporation.   Section 1.4Certificate of Incorporation; Bylaws. At the Effective Time, (a) the Certificate of Incorporation of the Surviving Corporation shall be amended in its entirety to contain the provisions set forth in the Certificate of Incorporation of Merger Sub and (b) the Bylaws of the Surviving Corporation shall be amended in their entirety to contain the provisions set forth in the Bylaws of Merger Sub, each as in effect immediately prior to the Effective Time, and in each case until thereafter changed or amended as provided therein or pursuant to applicable Law.   Section 1.5Directors and Officers of Surviving Corporation. At the Effective Time, the initial directors of the Surviving Corporation shall be the directors of Merger Sub, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. The initial officers of the Surviving Corporation shall be the officers of Merger Sub, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation.   Article II   Conversion of Securities; Exchange of Certificates   Section 2.1Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or the holders of any of the following securities:   (a)Conversion Generally. Each share of common stock, par value $.001 per share, of the Company (“Company Common Stock”) issued and outstanding immediately prior to the Effective Time (other than any shares of Company Common Stock to be canceled pursuant to Section 2.1(b)), shall be converted, subject to Section 2.2(e), into the right to receive 0.90 of a share1.0972 shares (the “Exchange Ratio”) of common stock, par value $.001 per share, of Parent (“Parent Common Stock”). All such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each certificate previously representing any such shares shall thereafter represent the right to receive a certificate representing the shares of Parent Common Stock into which such Company Common Stock was converted in the Merger. Certificates previously representing shares of Company Common Stock shall be exchanged for certificates representing whole shares of Parent Common Stock issued in consideration therefor upon the surrender of such certificates in accordance with the provisions of Section 2.2, without interest. No fractional share of Parent Common Stock shall be issued, and in lieu thereof, a cash payment shall be made pursuant to Section 2.2(e) hereof.   (b)Cancellation of Certain Shares. Each share of Company Common Stock held by Parent, Merger Sub, any wholly-owned subsidiary of Parent or Merger Sub, in the treasury of the Company or by any wholly-owned subsidiary of the Company immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof and no payment shall be made with respect thereto.   (c)Merger Sub. Each share of common stock, par value $.001 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and be exchanged for one newly and validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. (d)Change in Shares. If between the date of this Agreement and the Effective Time, the outstanding shares of Company Common Stock or Parent Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination, or exchange of a class of shares or other similar event or transaction, the Exchange Ratio shall be correspondinglyequitably adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination, or exchange of shares.shares or other similar event or transaction. Section 2.2Exchange of Certificates.   (a)Exchange Agent. As of the Effective Time, Parent shall irrevocably deposit, or shall cause to be deposited, with Computershare Trust Company or another bank or trust company mutually agreed byagreeable to Parent and the Company (the “Exchange Agent”), for the benefit of the holders of shares of Company Common Stock, for exchange in accordance with this Article II through the Exchange Agent, certificates representing the shares of Parent Common Stock issuable pursuant to Section 2.1 and cash in an amount sufficient to permit payment of cash in lieu of fractional shares pursuant to Section 2.2(e) (such certificates for shares of Parent Common Stock, together with cash in lieu of fractional shares and any dividends or distributions with respect thereto, being hereinafter referred to as the “Exchange Fund”) in exchange for outstanding shares of Company Common Stock. The Exchange Agent shall, pursuant to irrevocable instructions, deliver the Parent Common Stock contemplated to be issued pursuant to Section 2.1 and the cash contemplated to be issued pursuant to Section 2.2(e) out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose.   (b)Exchange Procedures. Promptly after the Effective Time, Parent shall instruct the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the “Certificates”) (i) a letter of transmittal reasonably acceptable to the Company (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in reasonable and customary form) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, properly completed and duly executed, and such other documents as may be reasonably required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Parent Common Stock which such holder has the right to receive in respect of the shares of Company Common Stock formerly represented by such Certificate (after taking into account all shares of Company Common Stock then held by such holder), cash in lieu of fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 2.2(e) and any dividends or other distributions to which such holder is entitled pursuant to Section 2.2(c), and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on any cash in lieu of fractional shares or on any unpaid dividends and distributions payable to holders of Certificates. In the event of a transfer of ownership of shares of Company Common Stock which is not registered in the transfer records of the Company, a certificate representing the proper number of shares of Parent Common Stock may be issued to a transferee if the Certificate representing such shares of Company Common Stock is presented to the Exchange Agent, accompanied by all documents reasonably required to evidence and effect such transfer and by evidence reasonably satisfactory that any applicable stock transfer taxes, if any, have been paid. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the certificate representing shares of Parent Common Stock, cash in lieu of any fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 2.2(e) and any dividends or other distributions to which such holder is entitled pursuant to Section 2.2(c).   (c)Distributions with Respect to Unexchanged Shares of Parent Common Stock. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby, and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.2(e), unless and until the holder of such Certificate shall surrender such Certificate. Subject to the effect of escheat, tax or other applicable Laws, following surrender of any such Certificate, there shall be paid to the holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, (i) promptly, the amount of any cash payable with respect to a fractional share of Parent Common Stock to which such holder is entitled pursuant to Section 2.2(e) and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock and (ii) at the appropriate payment date, the amount of dividends or other distributions, with a record date after the Effective Time but prior to surrender and a payment date occurring after surrender, payable with respect to such whole shares of Parent Common Stock. (d)Further Rights in Company Common Stock. All shares of Parent Common Stock issued upon conversion of the shares of Company Common Stock in accordance with the terms hereof (including any cash paid pursuant to Section 2.2(c) or Section 2.2(e)) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock.   (e)Fractional Shares. No certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Certificates, no dividend or distribution with respect to Parent Common Stock shall be payable on or with respect to any fractional share and such fractional share interests will not entitle the owner thereof to any rights of a stockholder of Parent. In lieu of any fractional shares of Parent Common Stock that would otherwise be issued, each stockholder that would have been entitled to receive a fractional share of Parent Common Stock shall, upon proper surrender of the Certificates, receive a cash payment equal to such fraction multiplied by the average closing price of one share of Parent Common Stock as reported on the Exchange for the five (5) trading days ending on and including the second trading day preceding the Effective Time.   (f)Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of Company Common Stock for six (6)nine (9) months after the Effective Time shall be delivered to Parent upon demand, and any holders of Company Common Stock who have not theretofore complied with this Article II shall thereafter look only to Parent for the shares of Parent Common Stock, any cash in lieu of fractional shares of Parent Common Stock to which they are entitled pursuant to Section 2.2(e) and any dividends or other distributions with respect to Parent Common Stock to which they are entitled pursuant to Section 2.2(c), in each case, without any interest thereon.   (g)No Liability. None of Parent, the Surviving Corporation or the Company shall be liable to any holder of shares of Company Common Stock for any such shares of Parent Common Stock (or dividends or distributions with respect thereto) or cash from the Exchange Fund delivered to a public official pursuant to any abandoned property, escheat or similar Law.   (h)Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if reasonably required by Parent, the posting by such person of a bond, in such reasonable amount as Parent may direct, as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock, any cash in lieu of fractional shares of Parent Common Stock to which the holders thereof are entitled pursuant to Section 2.2(e) and any dividends or other distributions to which the holders thereof are entitled pursuant to Section 2.2(c), in each case, without any interest thereon.   (i)Withholding. Parent or the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Company Common Stock such amounts as Parent or the Exchange Agent is required to deduct and withhold under applicable Law with respect to the making of such payment. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of Company Common Stock in respect of whom such deduction and withholding was made by Parent or the Exchange Agent. Section 2.3Appraisal Rights. Pursuant to Section 262(b) of the DGCL, the holders of shares of Company Common Stock shall not be entitled to appraisal rights as a result of the Merger.   Section 2.4Stock Options. Prior to the Effective Time, the Board of Directors of the Company (the “Company Board”) (or, if appropriate, any committee thereof) shall take all actions necessary and appropriate to provide that, at the Effective Time, all unexercised and unexpired options to purchase Company Common Stock (“Company Options”) then outstanding, under any stock option plan of the Company or any other plan, agreement or arrangement (the “Company Stock Option Plans”), whether or not then exercisable, willshall be assumed by Parent and, as so assumed, willshall continue to have, and be subject to, the same terms and conditions (including vesting schedule) as set forth in the Company Stock Option Plan and any agreements thereunder immediately prior to the Effective Time, except that (a) each Company Option willshall be exercisable (or willshall become exercisable in accordance with its terms) for that number of whole shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock that were issuable upon exercise of such Company Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of Parent Common Stock, (b) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such assumed Company Option willshall be equal to the quotient determined by dividing the exercise price per share of Company Common Stock at which such Company Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent, and (c) such assumed Company Option will be eligible to participate in any “cashless exercise” or “same day sale” program to the extent made available to the holders of Parent Options and to the extent consistent with the terms of the Company Option agreements. The conversion of any Company Options which are incentive stock options within the meaning of Section 422 of the Code, into options to purchase Parent Common Stock shall be made so as not to constitute a “modification” of such Company Options within the meaning of SectionSections 409A and 424 of the Code. As of the Effective Time, Parent shall amend the Company Stock Option Plans to allow Parent to grant awards under the terms of the Company Stock Option Plans (including the right to grant incentive stock options) with respect to Parent Common Stock after the Effective Time equal to the product of (i) the sum of (A) the number of shares of Company Common Stock authorized for issuance under the Company Stock Option Plans less (B) shares of Company Common Stock issued under the Company Stock Option Plans prior to the Effective Time, less (C) shares of Company Common Stock subject to outstanding Company Options, multiplied by (ii) the Exchange Ratio;provided,however, such awards shall be made solely to employees of the Company.   Section 2.5WarrantsEmployee Stock Purchase Plan. AtPrior to the Effective Time, the Company Board shall take all actions with respect to the Company Employee Stock Purchase Plan (the “ESPP”), including, if appropriate, amending the terms of the ESPP, that are necessary to (a) cause the ending date of the Offering under the ESPP (as such term is defined therein) that is in effect as of the date of this Agreement to occur on or before the last trading day prior to the Effective Time, if the Effective Time is prior to the end of such Offering, (b) cause all existing Offerings under the ESPP to terminate immediately following the purchase on the earlier of the last trading day prior to the Effective Time or the ending date of the Offering that is in effect as of the date of this Agreement (such earlier date, the “Final Purchase Date”), (c) suspend all future Offerings that would otherwise commence under the ESPP following the Final Purchase Date and (d) cease all further payroll deductions under the ESPP effective as of the Final Purchase Date. On the Final Purchase Date, the Company shall apply the funds credited as of such date under the ESPP within each participant’s payroll withholding account to the purchase of whole shares of Company Common Stock in accordance with the terms of the ESPP, which shares shall be treated in the manner described in Section 2.1. Section 2.6Warrants. Prior to the Effective Time, the Company Board (or, if appropriate, any committee thereof) shall take all actions necessary and appropriate to provide that, at the Effective Time, each warrant to purchase shares of Company Common Stock (a “Company Warrant”) which isthen outstanding immediately prior thereto shall, in accordance with the terms thereof, cease to represent a right to acquire shares of Company Common Stock and automatically shall be converted, at the Effective Time, without any action on the part of the holder thereof, into a warrant to purchase shares of Parent Common Stock (as so converted, a “Company Converted Warrant”), and, each Company Converted Warrantas so converted, shall continue to have, and be subject to, the same terms and conditions as set forth in any agreements thereunder immediately prior to the Effective Time, except that, as of the Effective Time, (a) each Company Converted Warrant shall be exercisable (or shall become exercisable in accordance with its terms) for that number of whole shares of Parent Common Stock equal to the product of the number of shares that were issuable upon exercise of such Company Warrant immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of Parent Common Stock, and (b) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such Company Converted Warrant shall be equal to the quotient determined by dividing the exercise price per share of Company Common Stock at which such Company Warrant was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded to the nearest whole cent.   Section 2.62.7Restricted Stock. Prior to the Effective Time, the Company Board (or, if appropriate, any committee thereof) shall take all actions necessary and appropriate to provide that, if any shares of Company Common Stock that are outstanding immediately prior to the Effective Time are unvested or are subject to a repurchase option, risk of forfeiture or other condition providing that such shares may be forfeited or repurchased upon any termination of the stockholders’ employment, directorship or other relationship with the Company (and/or any Subsidiary of the Company), under the terms of any agreement with the Company (and/or any Subsidiary of the Company) that does not by its terms provide that such repurchase option, risk of forfeiture or other condition lapses upon consummation of the Merger, then the shares of Parent Common Stock issued upon the conversion of such shares in the Merger willshall continue to be unvested and subject to the same repurchase options, risks of forfeiture or other conditions following the Effective Time, and the certificates representing such shares of Parent Common Stock may accordingly be marked with appropriate legends noting such repurchase options, risks of forfeiture or other conditions.   Section 2.7Debentures. Prior to the Effective Time, the Company Board (or, if appropriate, any committee thereof) shall take all actions necessary and appropriate to provide that, at the Effective Time, each 7.5% Senior Convertible Debenture due August 2, 2007 of the Company (a “Company Debenture”) which is outstanding immediately prior thereto shall be assumed by Parent and shall thereafter remain outstanding and continue to represent a Debenture of the Surviving Corporation;provided, that the Company Debentures shall be convertible into shares of Parent Common Stock in accordance with their terms and as appropriately adjusted to give effect to the Merger. Article III   Representations and Warranties of the Company   Except as set forth in a disclosure schedulememorandum delivered by the Company to Parent prior to the execution of this Agreement (the “Company Disclosure Schedule”Memorandum”), which identifies exceptions by specific Section references (provided, that any matter disclosed in any section of the Company Disclosure Memorandum shall be considered disclosed for other sections of the Company Disclosure Memorandum, but only to the extent such matter on its face would be reasonably expected to be pertinent to a particular section of the Company Disclosure Memorandum in light of the disclosure made in such section), the Company hereby represents and warrants to Parent as follows:   Section 3.1Organization and Qualification; Subsidiaries. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each Subsidiary of the Company has been duly organized, and is validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as the case may be. The Company and each of its Subsidiaries has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted.conducted, except for such powers, authorities and approvals that would not, individually or in the aggregate, have a Material Adverse Effect. The Company and each of its Subsidiaries is duly qualified or licensed to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification, licensing or good standing necessary, except for such failures to be so qualified, licensed or in good standing that would not, individually or in the aggregate, have a Material Adverse Effect. Section 3.1 of the Company Disclosure ScheduleMemorandum sets forth a true and complete list of all of the Subsidiaries of the Company. Except as set forth in Section 3.1 of the Company Disclosure Schedule,Memorandum and shares of other Subsidiaries, none of the Company or any of its Subsidiaries holds an Equity Interest in any other person.   Section 3.2Certificate of Incorporation and Bylaws; Corporate Books and Records. The copies of the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Company Certificate”), and Amended and Restated Bylaws, as amended (the “Company Bylaws”), that are listed as exhibits to the Company’s Form 1010-K filed with the SEC on July 1, 2003 for the fiscal year ended December 31, 2004 (the “2004 Form 10-K”) are complete and correct copies thereof as in effect on the date hereof. The Company is not in violation of any of the provisions of the Company Certificate or the Company Bylaws. True and complete copies of all minute books of the Company have been made available by the Company to Parent.   Section 3.3Capitalization.   (a) The authorized capital stock of the Company consists of 150,000,00080,000,000 shares of Company Common Stock and 2,000,0005,000,000 shares of preferred stock, par value $.01$.001 per share, of the Company (“Company Preferred Stock”). As of the date hereof,July 5, 2005, (i) 16,743,32046,876,088 shares of Company Common Stock (other than treasury shares) arewere issued and outstanding, all of which arewere validly issued and fully paid, nonassessable and free of preemptive rights, (ii) 444no shares of Company Common Stock arewere held in the treasury of the Company or by its Subsidiaries, (iii) 2,149,75814,058,641 shares of Company Common Stock arewere issuable (and such number iswas reserved for issuance) upon exercise of Company Options outstanding as of thesuch date, hereof,and (iv) 3,827,6321,008,065 shares of Company Common Stock arewere issuable (and such number iswas reserved for issuance) upon exercise of Company Warrants outstanding as of the date hereof, and (v) 2,274,479 shares of Company Common Stock are issuable (and such number is reserved for issuance) upon exercise of Company Debentures outstanding as of the date hereof.date. As of thesuch date, hereof, no shares of Company Preferred Stock arewere issued or outstanding. All capital stock or other equity securities of the Company have been issued in compliance with applicable federal and state securities laws.   (b) Except for Company Options to purchase not more than 2,149,75814,058,641 shares of Company Common Stock, Company Warrants to purchase not more than 3,827,632 shares of Company Common Stock, Company Debentures to purchase not more than 2,274,4791,008,065 shares of Company Common Stock and arrangements and agreements set forth in Section 3.3 of the Company Disclosure Schedule,Memorandum, there are no options, warrants or other rights, agreements, arrangements or commitments of any character to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound relating to the issued or unissued capital stock or other Equity Interests of the Company or any of its Subsidiaries, or securities convertible into or exchangeable for such capital stock or other Equity Interests, or obligating the Company or any of its Subsidiaries to issue or sell any shares of its capital stock or other Equity Interests, or securities convertible into or exchangeable for such capital stock of, or other Equity Interests in, the Company or any of its Subsidiaries. Since JanuaryDecember 31, 2004, the Company has not issued any shares of its capital stock, or securities convertible into or exchangeable for such capital stock or other Equity Interests, other than those shares of capital stock reserved for issuance as set forth in this Section 3.3 or Section 3.3 of the Company Disclosure Schedule.Memorandum. The Company has provided Parent with a true and complete list, as of the date hereof, of the prices at which outstanding Company Options may be exercised under the Company Stock Option Plans, the number of Company Options outstanding at each such price and the vesting schedule of the Company Options. All shares of Company Common Stock subject to issuance under the Company Options the Company Warrants and the Company Debentures,Warrants, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights.   (c) Except for the Company Voting Agreement and as set forth in Section 3.3 of the Company Disclosure Schedule,Memorandum, there are no outstanding contractual obligations of the Company or any of its Subsidiaries (i) restricting the transfer of, (ii) affecting the voting rights of, (iii) requiring the repurchase, redemption or disposition of, or containing any right of first refusal with respect to, (iv) requiring the registration for sale of, or (v) granting any preemptive or antidilutive right with respect to, any shares of Company Common Stock or any capital stock of, or other Equity Interests in, the Company or any of its Subsidiaries. Except as set forth in Section 3.3 of the Company Disclosure Schedule,Memorandum, each outstanding share of capital stock of each Subsidiary of the Company is duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and is owned, beneficially and of record, by the Company or another of its Subsidiaries, free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Company’s or such other of its Subsidiary’s voting rights, charges and other encumbrances of any nature whatsoever. There are no outstanding contractual obligations of the Company or any of its Subsidiaries to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any of its Subsidiaries or any other person, other than guarantees by the Company of any indebtedness or other obligations of any wholly-owned Subsidiary. (d) Except for the Company Debentures, theThe Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. The Company has not adopted a stockholder rights plan.   (e) Except as set forth in Section 3.3 of the Company Disclosure Schedule,Memorandum, none of the Merger or other transactions contemplated hereby will result in an acceleration of vesting, or modification of vesting terms, with respect to any Company Options.   Section 3.4Authority.   (a) The Company has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company and no stockholder votes are necessary to authorize this Agreement or to consummate the transactions contemplated hereby other than as provided in Section 3.20. This Agreement has been duly authorized and validly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.   (b) The Company Board, by resolutions duly adopted by unanimous vote of the directors present at a meeting duly called and held and not subsequently rescinded or modified in any way (the “Company Board Approval”), has duly (i) declared that this Agreement and the transactions contemplated hereby (including the Merger) are advisable, and fair to and in the best interests of the Company and its stockholders, (ii) approved and adopted this Agreement and the transactions contemplated hereby (including the Merger) and (iii) resolved to recommend (subject to Section 5.3(a)) that the stockholders of the Company adopt this Agreement and vote for the approval of the Merger and directed that this Agreement and the transactions contemplated hereby be submitted for consideration by the Company’s stockholders in accordance with this Agreement. The Company Board Approval constitutes approval of this Agreement and the Merger as required under any applicable state takeover Law and no such state takeover Law is applicable to the Merger or the other transactions contemplated hereby, including, without limitation, the restrictions on business combinations contained in Section 203 of the DGCL.   Section 3.5No Conflict; Required Filings and Consents.   (a) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, (i) (assuming the Company Stockholder Approval is obtained) conflict with or violate any provision of the Company Certificate or Company Bylaws or any equivalent organizational documents of any of its Subsidiaries, (ii) (assuming that all consents, approvals, authorizations and permits described in Section 3.5(b) have been obtained and all filings and notifications described in Section 3.5(b) have been made and any waiting periods thereunder have terminated or expired) conflict with or violate any Law applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected or (iii) require any consent or approval under, result in any breach of or any loss of any benefit under, constitute a change of control or default (or an event which with notice or lapse of time or both would become a default) under or give to others any right of termination, vesting, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any of its Subsidiaries pursuant to, any Contract, Company Permit or other instrument or obligation, except, with respect to clauses (ii) and (iii), for any such conflicts, violations, consents, approvals, breaches, losses, defaults or other occurrences which would not, individually or in the aggregate, have a Material Adverse Effect.   (b) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity or any other person, except (i) under the Exchange Act, the Securities Act, applicable Blue Sky Law, the HSR Act, the rules and regulations of the Exchange and the filing and recordation of the Certificate of Merger as required by the DGCL and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, have a Material Adverse Effect.   Section 3.6Permits; Compliance With Law. The Company and each of its Subsidiaries is in possession of all authorizations, licenses, permits, certificates, approvals and clearances of any Governmental Entity necessary for the Company and each of its Subsidiaries to own, lease and operate its properties or to carry on its respective businesses substantially in the manner described in the Company SEC Filings filed prior to the date hereof and substantially as it is being conducted as of the date hereof (the “Company Permits”), and all such Company Permits are valid, and in full force and effect, except where the failure to have, or the suspension or cancellation of, or failure to be valid or in full force and effect of, any of the Company Permits would not, individually or in the aggregate, have a Material Adverse Effect. None of the Company or any of its Subsidiaries is in conflict with, or in default or violation of, (a) any Law applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected or (b) any Company Permits, except in each case for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Material Adverse Effect.   Section 3.7SEC Filings; Financial Statements.   (a) The Company has timely filed all registration statements, prospectuses, forms, reports, definitive proxy statements, schedules and documents required to be filed by it under the Securities Act or the Exchange Act, as the case may be, since JanuaryDecember 31, 20002001 (collectively, the “Company SEC Filings”). Each Company SEC Filing (i) as of the time it was filed, complied or, if filed subsequent to the date hereof, will comply, in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not, at the time it was filed, or, if filed subsequent to the date hereof, will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were or will be made, not misleading.   (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Company SEC Filings as well as the consolidated financial statements (including any notes thereto) for the fiscal year ended January 31, 2004 included in Section 3.7 of the Company Disclosure Schedule, was, or will be, prepared in accordance with GAAP applied (except as may be indicated in the notes thereto and, in the case of unaudited quarterly financial statements, as permitted by Form 10-Q under the Exchange Act) on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto), and each presented, or will present, fairly the consolidated financial position, results of operations and cash flows of the Company and the consolidated Subsidiaries of the Company as of the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal year-end adjustments which did not and would not, individually or in the aggregate, have a Material Adverse Effect). The books and records of the Company and each of its Subsidiaries have been, and are being, maintained in accordance with applicable material legal and accounting requirements.requirements, except for such failures as would not, individually or in the aggregate, have a Material Adverse Effect.   (c) Except as and to the extent set forth on the consolidated balance sheet of the Company and its consolidated Subsidiaries as of JanuaryDecember 31, 2004 included in Section 3.7 of the Company Disclosure Schedule2004 Form 10-K (the “Company Balance Sheet”), none of the Company or any of its consolidated Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on a balance sheet or in notes thereto prepared in accordance with GAAP, except for liabilities or obligations incurred in the ordinary course of business since JanuaryDecember 31, 2004 that would not, individually or in the aggregate, have a Material Adverse Effect.   (d) Each required form, report and document containing financial statements that the Company has filed with or furnished to the SEC since July 31, 2002 was accompanied by the certifications required to be filed or furnished by the Company’s chief executive officerChief Executive Officer and chief financial officerChief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated under such actAct or the Exchange Act (collectively, the “Sarbanes-Oxley Act”), and at the time of filing or submission of each such certification, such certification (i) was true and accurate and complied with the Sarbanes-Oxley Act, (ii) did not contain any qualifications or exceptions to the matters certified therein, except as otherwise permitted under the Sarbanes-Oxley Act, and (iii) has not been modified or withdrawn. NeitherAs of the date of this Agreement, neither the Company nor any of its officers has received notice from any Governmental Entity questioning or challenging the accuracy, completeness, content, form or manner of filing or furnishing of such certifications. The Company’s disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Exchange Act) effectively enable the Company to comply with, and the appropriate officers of the Company to make all certifications required under, the Sarbanes-Oxley Act. (e) The Company had asis in compliance in all material respects with the applicable listing and corporate governance rules and regulations of March 31, 2004, a balance of cash, cash equivalents, short-term and long-term investments, calculated in accordance with GAAP, totaling not less than $13,768,000.The Nasdaq Stock Market.   Section 3.8Brokers. No broker, finder or investment banker (other than the Company Financial Advisor) is entitled to any brokerage, finder’s or other fee or commission in connection with the Merger based upon arrangements made by or on behalf of the Company or any of its Subsidiaries. The Company has heretofore made available to Parent a true and complete copy of all agreements between the Company and the Company Financial Advisor pursuant to which such firm would be entitled to any payment relating to the Merger or any other transaction contemplated by this Agreement.   Section 3.9Absence of Certain Changes or Events. Since JanuaryDecember 31, 2004, except as specifically contemplated by, or as disclosed in, this Agreement or Section 3.9 of the Company Disclosure Schedule,Memorandum, the Company and each of its Subsidiaries has conducted its businesses in the ordinary course consistent with past practice and, since such date, there has not been (a) any Material Adverse Effect or an event or development that would, individually or in the aggregate, have a Material Adverse Effect or (b) any action taken by the Company or any of its Subsidiaries during the period from January 31, 2004 through the date of this Agreement that, if taken during the period from the date of this Agreement through the Effective Time, would constitute a breach of Section 5.1.Effect.   Section 3.10Employee Benefit Plans.   (a) Section 3.10(a) of the Company Disclosure ScheduleMemorandum sets forth a true and complete list of each material “employee benefit plan” as defined in Section 3(3) of ERISA and any other known plan, policy, program, practice, agreement, understanding or arrangement (whether written or oral) providing material compensation or other material benefits to any current or former director, officer, employee or consultant (or to any dependent or beneficiary thereof of the Company or any ERISA Affiliate)Company), which are now, or were within the past three (3) years, maintained, sponsored or contributed to by the Company or any ERISA Affiliate,of its Subsidiaries, or under which the Company or any ERISA Affiliateof its Subsidiaries has any material obligation or liability, whether actual or contingent, including, without limitation, all incentive, bonus, deferred compensation, vacation, holiday, cafeteria, medical, disability, stock purchase, stock option, stock appreciation, phantom stock, restricted stock or other stock-based compensation plans, policies, programs, practices or arrangements (each a “Company Benefit Plan”). Neither the Company, nor to the knowledge of the Company, or any other person or entity, has any express or implied commitment whether legally enforceable or not, to establish, modify, change or terminate any Company Benefit Plan, other than with respect to a modification, change or termination required by ERISA or the Code. With respect to each currently effective Company Benefit Plan, except as set forth in Section 3.10 of the Company Disclosure Memorandum, the Company has delivered to Parent true, correct and complete copies of (i) each Company Benefit Plan (or, if not written a written summary of its material terms), including without limitation all plan documents, adoption agreements, trust agreements, insurance contracts or other funding vehicles and all amendments thereto, (ii) all summaries andcurrent summary plan descriptions, including any current summary of material modifications, (iii) the annual reports (Form 5500 series) for the three most recent yearsyear filed or required to be filed with the IRS with respect to such Company Benefit Plan, (and, if any such annual report is a Form 5500R, the Form 5500C filed with respect to such Company Benefit Plan), (iv) the most recent actuarial report or other financial statement relating to such Company Benefit Plan, (v) the most recent determination or opinion letter, if any, issued by the IRS with respect to any Company Benefit Plan and any pending request for such a determination letter, (vi) the most recent nondiscrimination tests performed under the Code (including 401(k) and 401(m) tests) for each Company Benefit Plan, and (vii) all filings made with any Governmental Entity, including but not limited any filings under the Voluntary Compliance Resolution or Closing Agreement Program or the Department of Labor Delinquent Filer Program.Program, within the current or prior two calendar years. (b) Each Company Benefit Plan has been administered in all material respects in accordance with its terms and all applicable Laws, including ERISA and the Code, and contributions required to be made under the terms of any of the Company Benefit Plans as of the date of this Agreement have been timely made or, if not yet due, have been properly reflected on the most recent consolidated balance sheet filed or incorporated by reference in the Company SEC Filings prior to the date of this Agreement. With respect to the Company Benefit Plans, no event has occurred and, to the knowledge of the Company, there exists no condition or set of circumstances in connection with which the Company could be subject to any material liability (other than for routine benefit liabilities) under the terms of, or with respect to, such Company Benefit Plans, ERISA, the Code or any other applicable Law.   (c) Except as set forth in Section 3.10(c) of the Company Disclosure Schedule:Memorandum: (i) each Company Benefit Plan which is intended to qualify under Section 401(a), Section 401(k), Section 401(m) or Section 4975(e)(6) of the Code has either received a favorable determination letter from the IRS as to its qualified status or the remedial amendment period for such Company Benefit Plan has not yet expired, and each trust established in connection with any Company Benefit Plan which is intended to be exempt from federal income taxation under Section 501(a) of the Code is so exempt, and to the Company’s knowledge no fact or event has occurred that has adversely affected or could adversely affect the qualified status of any such Company Benefit Plan or the exempt status of any such trust, (ii) to the Company’s knowledge there has been no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code and other than a transaction that is exempt under a statutory or administrative exemption) with respect to any Company Benefit Plan that could result in liability to the Company or any of its Subsidiaries, (iii) each Company Benefit Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms, without liability (other than (A) liability for ordinary administrative expenses typically incurred in a termination event or (B) if the Company Benefit Plan is a pension benefit plan subject to Part 2 of Title I of ERISA, liability for the accrued benefits as of the date of such termination (if and to the extent required by ERISA) to the extent that either there are sufficient assets set aside in a trust or insurance contract to satisfy such liability or such liability is reflected on the most recent consolidated balance sheet filed or incorporated by reference in the Company SEC Filings prior to the date of this Agreement), (iv) no suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of the Company is threatened, against or with respect to any such Company Benefit Plan, including any audit or inquiry by the IRS or United States Department of Labor (other than routine benefits claims), (v) no Company Benefit Plan is a multiemployer pension plan (as defined in Section 3(37) of ERISA) (“Multiemployer Plan”) or other pension plan subject to Title IV of ERISA and none of the Company or any ERISA Affiliate has sponsored or contributed to or been required to contribute to a Multiemployer Plan or other pension plan subject to Title IV of ERISA, (vi) no material liability under Title IV of ERISA has been incurred by the Company or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to the Company or any ERISA Affiliate of incurring or being subject (whether primarily, jointly or secondarily) to a material liability thereunder, (vii) none of the assets of the Company or any ERISA Affiliate is, or may reasonably be expected to become, the subject of any lien arising under ERISA or Section 412(n) of the Code, (viii) neither the Company nor any ERISA Affiliate has any liability under ERISA Section 502, (ix) all tax, annual reporting and other governmental filings required by ERISA and the Code have been timely filed with the appropriate Governmental Entity and all notices and disclosures have been timely provided to participants, (x) all contributions and payments to such Company Benefit Plan are deductible under Code sections 162 or 404, (xi) no amount is subject to Tax as unrelated business taxable income under Section 511 of the Code, and (xii) no excise tax could be imposed upon the Company under Chapter 43 of the Code, except, in the case of clauses (iii)(ii), (vii)(iii), (viii), (ix), (x), (xi) and (xii), which would not, individually or in the aggregate, have a Material Adverse Effect.   (d) Except as set forth in Section 3.10(d) of the Company Disclosure Schedule, noNo amount that could be received (whether in cash or property or the vesting of property), as a result of the consummation of the transactions contemplated by this Agreement, by any employee, officer or director of the Company or any of its Subsidiaries who is a “disqualified individual” (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any Company Benefit Plan could be characterized as an “excess parachute payment” (as defined in Section 280G(b)(1) of the Code). Set forth in Section 3.10(d) of the Company Disclosure Schedule is (i) the estimated maximum amount that could be paid to any disqualified individual as a result of the transactions contemplated by this Agreement under all employment, severance and termination agreements, other compensation arrangements and Company Benefit Plans currently in effect, and (ii) the “base amount” (as defined in Section 280G(b)(e) of the Code) for each such individual as of the date of this Agreement.   (e) Except as required by Law, no Company Benefit Plan provides any of the following retiree or post-employment benefits to any person medical, disability or life insurance benefits. No Company Benefit Plan is a voluntary employee benefit association under Section 501(a)(9) of the Code. The Company and each ERISA Affiliate are in material compliance with (i) the requirements of the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the regulations (including proposed regulations) thereunder and any similar state law and (ii) the applicable requirements of the Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations (including the proposed regulations) thereunder, except where the failure to so comply would not, individually or in the aggregate, have a Material Adverse Effect.thereunder.   (f) None of the Company or any of its Subsidiaries maintains, sponsors, contributes or has any liability with respect to any employee benefit plan, program or arrangement that provides benefits to non-resident aliens with no U.S. source income outside of the United States. Section 3.11Labor and Other Employment Matters.   (a) The Company and each of its Subsidiaries is in material compliance with all applicable Laws respecting labor, employment, fair employment practices, terms and conditions of employment, workers’ compensation, occupational safety, plant closings, and wages and hours, except where the failure to so comply would not, individually or in the aggregate, have a Material Adverse Effect. Except as set forth in Section 3.11(a) of the Company Disclosure Schedule,Memorandum, none of the Company or any of its Subsidiaries is a party to any collective bargainingcollective-bargaining agreement or other labor union contract applicable to persons employed by the Company or any of its Subsidiaries, and no collective bargainingcollective-bargaining agreement or other labor union contract is being negotiated by the Company or any of its Subsidiaries. There is no labor dispute, strike, slowdown or work stoppage against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened whichthat may interfere in any respect that would have a Material Adverse Effect.Effect with the respective business activities of the Company or any of its Subsidiaries. The Company has not engaged in any unfair labor practices within the meaning of the National Labor Relations Act or the Railway Labor Act. To the Company’s knowledge, no employee of the Company or any of its Subsidiaries is in any material respect in violation of any term of any employment contract, non-disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by the Company or such Subsidiary because of the nature of the business conducted or presently proposed to be conducted by it or to the use of trade secrets or proprietary information of others.   (b) The Company has identified in Section 3.11(b) of the Company Disclosure ScheduleMemorandum and, if written, has made available to Parent true and complete copies of (i) all severance and employment agreements with directors, officers or employees of or consultants to the Company or any of its Subsidiaries, (ii) all severance programs and policies of the Company and each of its Subsidiaries with or relating to its employees, and (iii) all plans, programs, agreements and other arrangements of the Company and each of its Subsidiaries with or relating to its directors, officers, employees or consultants whichthat contain change in controlchange-in-control provisions. Except as set forth in Section 3.11(b) of the Company Disclosure Schedule,Memorandum, none of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event, such as termination of employment) (A) result in any material payment (including, without limitation, severance, unemployment compensation, parachute or otherwise) becoming due to any director or any employee of the Company or any of its Subsidiaries or affiliates from the Company or any of its Subsidiaries or affiliates under any Company Benefit Plan or otherwise (except, however, that identified severance obligations to foreign employees are estimates and may vary based upon foreign regulations), (B) significantly increase any benefits otherwise payable under any Company Benefit Plan or (C) result in any acceleration of the time of payment or vesting of any material benefits. NoAs of the date of this Agreement, no individual who is a party to an employment agreement listed in Section 3.11(b) of the Company Disclosure ScheduleMemorandum or any agreement incorporating change in controlchange-in-control provisions with the Company has terminated employment or been terminated, nor has any event occurred that could give rise to a termination event, in either case under circumstances that has given, or could give, rise to a material severance obligation on the part of the Company under such agreement.agreement (except, however, that foreign law may require certain severance obligations). Section 3.11(b) of the Company Disclosure ScheduleMemorandum sets forth all the amounts payable to the executives listed therein, as a result of the transactions contemplated by this Agreement and/or any subsequent employment termination (including any cash-out or acceleration of options and restricted stock and any “gross-up” payments with respect to any of the foregoing), based on compensation data applicable as of the date of the Company Disclosure ScheduleMemorandum and the assumptions stated therein.   Section 3.12Tax Treatment. None of the Company, any of its Subsidiaries or any of its affiliates has taken or agreed to take any action that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. The Company is not aware of any agreement, plan or other circumstance that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.   Section 3.13Contracts. Except as filed as exhibits to the Company SEC Filings filed prior to the date of this Agreement, or as disclosed in Section 3.13 of the Company Disclosure Schedule,Memorandum, none of the Company or any of its Subsidiaries is a party to or bound by any Contract that (a) is a “material contract” (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC), (b) involves aggregate expenditures after the date hereof in excess of $1,000,000,$500,000, (c) involves annual expenditures in excess of $200,000$500,000 and is not cancelable within one year, (d) contains any non-compete or exclusivity provisions with respect to any line of business or geographic area with respect to the Company or any of its Subsidiaries, or which restricts the conduct of any line of business by the Company or any of its Subsidiaries or any geographic area in which the Company or any of its Subsidiaries may conduct business, in each case in any material respect or (e) which would prohibit or materially delay the consummation of the Merger or any of the transactions contemplated by this Agreement. Each Contract of the type described in this Section 3.13, whether or not set forth in Section 3.13 of the Company Disclosure Schedule,Memorandum, is referred to herein as a “Company Material Contract.” EachExcept as set forth in Section 3.13 of the Company Disclosure Memorandum and except as would not, individually or in the aggregate, have a Material Adverse Effect, each Company Material Contract is valid and binding on the Company and each of its Subsidiaries party thereto and, to the Company’s knowledge, each other party thereto, and in full force and effect, and the Company and each of its Subsidiaries has in all respects performed all obligations required to be performed by it to the date hereof under each Company Material Contract and, to the Company’s knowledge, each other party to each Company Material Contract has in all respects performed all obligations required to be performed by it under such Company Material Contract, except as would not, individually or in the aggregate, have a Material Adverse Effect.Contract. None of the Company or any of its Subsidiaries has received any written notice of any violation or default under (or any condition which with the passage of time or the giving of notice would cause such a violation of or default under) any Company Material Contract.   Section 3.14Litigation. Except as and to the extent disclosed in the Company SEC Filings, including the notes thereto, filed prior to the date of this Agreement or as would not, individually or in the aggregate, have a Material Adverse Effect, (a) there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries or for which the Company or any of its Subsidiaries is obligated to indemnify a third party and (b) neither the Company nor any of its Subsidiaries is subject to any outstanding and unsatisfied order, writ, injunction, decree or arbitration ruling, award or other finding. There is no suit, claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries that, as of the date hereof, challenges the validity or propriety, or seeks to prevent consummation of, the Merger or any other transaction contemplated by this Agreement.   Section 3.15Environmental Matters. Except as would not, individually or in the aggregate, have a Material Adverse Effect:   (a) The Company and each of its Subsidiaries (i) is in compliance with all, and is not subject to any liability with respect to any, applicable Environmental Laws, (ii) holds or has applied for all Environmental Permits necessary to conduct their current operations, and (iii) is in compliance with their respective Environmental Permits.   (b) None of the Company or any of its Subsidiaries has received any written notice, demand, letter, claim or request for information alleging that the Company or any of its Subsidiaries may be in violation of, or liable under, any Environmental Law.   (c) None of the Company or any of its Subsidiaries (i) has entered into or agreed to any consent decree or order or is subject to any judgment, decree or judicial order relating to (A) compliance with Environmental Laws or Environmental Permits or (B) the investigation, sampling, monitoring, treatment, remediation, removal or cleanup of Hazardous Materials and no investigation, litigation or other proceeding is pending or, to the knowledge of the Company, threatened with respect thereto, or (ii) is an indemnitor in connection with any claim threatened or asserted in writing by any third-party indemnitee for any liability under any Environmental Law or relating to any Hazardous Materials.   (d) None of the real property owned or leased by the Company or any of its Subsidiaries is listed or, to the knowledge of the Company, proposed for listing on the “National Priorities List” under CERCLA, as updated through the date hereof, or any similar state or foreign list of sites requiring investigation or cleanup.   (e) To the knowledge of the Company, there are no past or present conditions, circumstances, or facts that may (i) interfere with or prevent continued compliance by the Company or any of its Subsidiaries with Environmental Laws and the requirements of Environmental Permits, (ii) give rise to any liability or other obligation under any Environmental Laws, or (iii) form the basis of any claim, action, suit, proceeding, or investigation against or involving the Company or any of its Subsidiaries based on or related to any Environmental Law.   Section 3.16Intellectual Property. Except as would not, individually or in the aggregate, have a Material Adverse Effect, the Company owns or has the right to use, whether through ownership, licensing or otherwise, all Intellectual Property significant to the businesses of the Company and each of its Subsidiaries in substantially the same manner as such businesses are conducted on the date hereof (“Company Material Intellectual Property”). Except as set forth in Section 3.16 of the Company Disclosure ScheduleMemorandum or except as would not, individually or in the aggregate, have a Material Adverse Effect: (a) since July 31, 1996, no written claim challenging the ownership, legality, use, validity or enforceability of any Company Material Intellectual Property has been made by a third party and no such Company Material Intellectual Property is currently the subject of any pending or, to the Company’s knowledge, threatened action, suit, claim, investigation, arbitration or other proceeding; (b) since July 31, 1996, no person has given notice to the Company or any of its Subsidiaries that the use of any Company Material Intellectual Property by the Company, any of its Subsidiaries or any licensee is infringing or has infringed any domestic or foreign patent, trademark, service mark, trade name, or copyright or design right, or that the Company, any of its Subsidiaries or any licensee has misappropriated or improperly used or disclosed any trade secret, confidential information or know-how; (c) the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not breach, violate or conflict with any instrument or agreement concerning any Company Material Intellectual Property and will not cause the forfeiture or termination or give rise to a right of forfeiture or termination of any Company Material Intellectual Property; (d) the Company has the right to require the inventor or author of any Company Material Intellectual Property which constitutes an application for registration, including, but not limited to, all patent applications, trademark applications, service mark applications, copyright applications and mask work applications, to transfer ownership, including all right, title and interest in and to (including any moral rights), to the Company of the application and of the registration once it issues; (e) since July 31, 1996, to the Company hasCompany’s knowledge, no knowledge of any third party interferinghas interfered with, infringinginfringed upon, misappropriating,misappropriated, or usingused without authorization any Company Material Intellectual Property, and has no knowledge that any employee or former employee of the Company has interfered with, infringed upon, misappropriated, used without authorization, or otherwise come into conflict with any Company Material Intellectual Property; (f) the Company has taken all reasonable action to maintain and protect each item of Company Material Intellectual Property; and (g) to its knowledge, the Company has the right to use all of the Company Material Intellectual Property in all jurisdictions in which the Company currently conducts business.   Section 3.17Taxes.   (a) The Company and each of its Subsidiaries have duly and timely filed with the appropriate Tax authorities or other Governmental Entities all material Tax Returns required to be filed. All such Tax Returns are complete and accurate in all respects, except as would not, individually or in the aggregate, have a Material Adverse Effect. All Taxes shown as due on such Tax Returns have been timely paid. (b) Subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect, the unpaid Taxes of the Company and its Subsidiaries (i) did not, as of the dates of the most recent financial statements (in each case, determining such liability for unpaid Taxes as of the date of such financial statements) contained in the Company SEC Filings, exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the balance sheets contained in such financial statements, and (ii) will not exceed that reserve as adjusted for operations and transactions through the Closing Date in accordance with the past custom and practice of the Company and its Subsidiaries in filing their Tax Returns.   (c) Subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect or as set forth in Section 3.17 of the Company Disclosure Memorandum, (i) no deficiencies for Taxes with respect to the Company or any of its Subsidiaries have been claimed, proposed or assessed by a Tax authority or other Governmental Entity in writing, to the Company, any of its Subsidiaries or any of their respective affiliates, (ii) no audit or other proceeding for or relating to any liability in respect of Taxes of the Company or any of its Subsidiaries is being conducted by any Tax authority or Governmental Entity, and neither the Company nor any of its Subsidiaries has received notification in writing that any such audit or other proceeding is pending, and (iii) neither the Company nor any of its Subsidiaries nor any predecessor has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.   (d) ThereSubject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect, there are no Tax liens upon any property or assets of the Company or any of its Subsidiaries except (i) liens for current Taxes not yet due and payable, and (ii) liens for Taxes that are being contested in good faith by appropriate proceedings and for which adequate reserves are being maintained in accordance with GAAP.   (e) The Company and each of its Subsidiaries have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.   (f) NoneSubject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect or as set forth in Section 3.17 of the Company orDisclosure Memorandum, neither the Company nor any of its Subsidiaries currently is the beneficiary of any extension of time within which to file any Tax Return.   (g) No written claim has ever been made in writing to the Company, any of its Subsidiaries or any of their respective affiliates by an authority in a jurisdiction where the Company or any of its Subsidiaries does not file Tax Returns that it is or may be subject to taxation by that jurisdiction and where such taxation would, individually or in the aggregate, have a Material Adverse Effect.jurisdiction.   (h) None ofNeither the Company ornor any of its Subsidiaries has any liability for the Taxes of any person (other than members of the consolidated group of which the Company is the common parent) (i) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign Law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise, except in each case where such liability for Taxes would not, individually or in the aggregate, have a Material Adverse Effect.   (i) None ofNeither the Company ornor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period described in Section 897(c)(1)(A)(ii) of the Code.   (j) None ofNeither the Company ornor any of its Subsidiaries has been a party to any distribution occurring during the two (2) years preceding the date of this Agreement in which the parties to such distribution treated the distribution as one to which Section 355 or 361 of the Code is applicable, in whole or in part.   (k) The Company and its Subsidiaries have made available to Parent correct and complete copies of all federal Tax Returns for Tax periods ending on or after Januarysince December 31, 2000.1999.   (l) Neither the Company nor any of its Subsidiaries is a party to, is bound by or has any obligation under any Tax sharing or Tax indemnity agreement or similar contract or arrangement. (m) Neither the Company nor any of its Subsidiaries has entered into any transaction identified as a “listed transaction” for purposes of Treasury Regulations Section 1.6011-4(b)(2) or 301.6111-2(b)(2). If the Company or any Subsidiary has entered into any transaction such that, if the treatment claimed by it were to be disallowed, the transaction would constitute a substantial understatement of federal income tax within the meaning of Code Section 6662, then it believes that it has either (i) substantial authority for the tax treatment of such transaction or (ii) disclosed on its Tax Return the relevant facts affecting the tax treatment of such transaction.   Section 3.18Insurance. Section 3.18 of the Company Disclosure ScheduleMemorandum lists material policies of liability, property, casualty and other forms of insurance owned or held by the Company and each of its Subsidiaries, copies of which have previously been made available to Parent. All such policies are in full force and effect, all premiums due and payable have been paid, and no written notice of cancellation or termination has been received with respect to any such policy. No insurer has advised the Company or any of its Subsidiaries that it intends to reduce coverage or materially increase any premium under any such policy, or that coverage is not available (or that it will contest coverage) for any material claim made against the Company or any of its Subsidiaries.   Section 3.19Opinion of Financial Advisor. NeedhamRaymond James & Company,Associates, Inc. (the “Company Financial Advisor”) has delivered to the Company Board its written opinion to the effect that the Exchange Ratio is fair, from a financial point of view, to the stockholdersholders of the Company.Company Common Stock. The Company has been authorized by the Company Financial Advisor to permit, subject to prior review and consent by the Company Financial Advisor, the inclusion of such opinion in its entirety, and references thereto, in the Joint Proxy/Prospectus.   Section 3.20Vote Required. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock is the only vote of the holders of any class or series of capital stock or other Equity SecuritiesInterests of the Company necessary to approve this Agreement and the transactions contemplated hereby, including the Merger (the “Company Stockholder Approval”).   Section 3.21Properties. Each of the Company and its Subsidiaries has good and valid title to or a valid leasehold interest in all of its properties and assets reflected on the Company Balance Sheet or acquired after the date thereof, except for (a) properties and assets sold or otherwise disposed of in the ordinary course of business since the date of such balance sheet and (b) properties and assets the loss of which would not, individually or in the aggregate, have a Material Adverse Effect.   Section 3.22Customers. Section 3.22 of the Company Disclosure ScheduleMemorandum sets forth any client or customer which accounted for more than $1,000,000$2,000,000 in revenue for the Company for the fiscal year ended JanuaryDecember 31, 2004 (collectively, the “Customers”). TheTo the knowledge of the Company, the relationships of the Company with its Customers and suppliers are good commercial working relationships. ToExcept as set forth in Section 3.22 of the Company Disclosure Memorandum, to the knowledge of the Company, as of the date of this Agreement, no Customer intends to terminate or materially reduce its business relationship with the Company for any reason, including as a result of the consummation of the transactions contemplated hereby.   Section 3.23Customer Revenues. Section 3.23 of the Company Disclosure Schedule sets forth, as of the date hereof, a list of the Customers from which the Company has a contract for the provision of products or services and the dollar amount of such obligations and remaining fees on each such contract. Section 3.24Transactions withWith Interested Persons. Except as set forth in the Company SEC Filings filed prior to the date of this Agreement, or as disclosed in Section 3.243.23 of the Company Disclosure Schedule,Memorandum, no officer director or employeedirector of the Company or any of its Subsidiaries nor any member of any such officer’s director’s or employee’sdirector’s immediate family is presently a party to any agreement with the Company or any of its Subsidiaries.Subsidiaries that would be required to be disclosed in the Company SEC Filings.   Section 3.253.24No Other Agreements. The Company does not have any legal obligation,binding commitment, absolute or contingent, to any other person to sell, directly or indirectly, the Company ofor any of its Subsidiaries or to effect any merger, share exchange, consolidation, business combination, recapitalization, liquidation or other reorganization of the Company or any of its Subsidiaries or to enter into any agreement with respect thereto. Article IV   Representations and Warranties of Parent and Merger Sub   Except as set forth in thea disclosure schedulememorandum delivered by Parent to the Company prior to the execution of this Agreement (the “Parent Disclosure Schedule”Memorandum”), which identifies exceptions by specific Section references (provided, that any matter disclosed in any section of the Parent Disclosure Memorandum shall be considered disclosed for other sections of the Parent Disclosure Memorandum, but only to the extent such matter on its face would be reasonably expected to be pertinent to a particular section of the Parent Disclosure Memorandum in light of the disclosure made in such section), Parent and Merger Sub hereby jointly and severally represent and warrant to the Company as follows:   Section 4.1Organization and Qualification; Subsidiaries. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each Subsidiary of Parent has been duly organized, and is validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as the case may be. Parent and each of its Subsidiaries has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted.conducted, except for such powers, authorities and approvals that would not, individually or in the aggregate, have a Material Adverse Effect. Parent and each of its Subsidiaries is duly qualified or licensed to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification, licensing or good standing necessary, except for such failures to be so qualified, licensed or in good standing that would not, individually or in the aggregate, have a Material Adverse Effect. Section 4.2Certificate of Incorporation and Bylaws. The copies of Parent’s Amended and Restated Certificate of Incorporation (the “Parent Certificate”) and Amended and Restated Bylaws (the “Parent Bylaws”) that are listed as exhibits to Parent’s Registration Statement on Form S-310-K filed with the SEC on March 5,for the fiscal year ended December 31, 2004 are complete and correct copies thereof as in effect on the date hereof, except that such copies do not reflect the one-for-four reverse split of the Parent Common Stock or the name change from Tellium, Inc. to Parent that occurred in connection with the merger of Tellium and Parent in November 2003.hereof. Parent is not in violation of any of the provisions of the Parent Certificate or the Parent Bylaws.   Section 4.3Capitalization   (a) The authorized capital stock of Parent consists of 900,000,000 shares of Parent Common Stock and 25,000,000 shares of preferred stock, par value $.001 per share, of Parent (“Parent Preferred Stock”). As of the date hereof,July 5, 2005, (i) 78,113,37594,590,740 shares of Parent Common Stock (other than treasury shares) arewere issued and outstanding, all of which arewere validly issued and fully paid, nonassessable and free of preemptive rights, (ii) no shares of Parent Common Stock arewere held in the treasury of Parent or by its Subsidiaries, (iii) 4,654,9348,911,240 shares of Parent Common Stock arewere issuable (and such number iswas reserved for issuance) upon exercise of options to purchase Parent Common Stock (“Parent Options”) outstanding as of thesuch date, hereof, and (iv) 336,7213,030,424 shares of Parent Common Stock arewere issuable (and such number iswas reserved for issuance) upon exercise of warrants to purchase Parent Common Stock (“Parent Warrants”) outstanding as of the date hereof.such date. As of thesuch date, hereof, no shares of Parent Preferred Stock arewere issued or outstanding. All capital stock or other equity securities of Parent have been issued in compliance with applicable federal and state securities laws.   (b) Except for Parent Options to purchase not more than 4,654,9348,911,240 shares of Parent Common Stock, Parent Warrants to purchase not more than 336,7213,030,424 shares of Parent Common Stock and arrangements and agreements set forth in this Section 4.3 or Section 4.3 of the Parent Disclosure Schedule,Memorandum, there are no options, warrants or other rights, agreements, arrangements or commitments of any character to which Parent or any of its Subsidiaries is a party or by which Parent or any of its Subsidiaries is bound relating to the issued or unissued capital stock or other Equity Interests of Parent or any of its Subsidiaries, or securities convertible into or exchangeable for such capital stock or other Equity Interests, or obligating Parent or any of its Subsidiaries to issue or sell any shares of its capital stock or other Equity Interests, or securities convertible into or exchangeable for such capital stock of, or other Equity Interests in, Parent or any of its Subsidiaries. (c) Except for the Parent Voting Agreement and as set forth in Section 4.3 of the Parent Disclosure Schedule,Memorandum, there are no outstanding contractual obligations of Parent (i) restricting the transfer of, (ii) affecting the voting rights of, (iii) requiring the repurchase, redemption or disposition of, or containing any right of first refusal with respect to, (iv) requiring the registration for sale of, or (v) granting any preemptive or antidilutive right with respect to, any shares of Parent Common Stock or any capital stock of, or other Equity Interests in, Parent. There are no outstanding contractual obligations of Parent or any of its Subsidiaries to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any of its Subsidiaries or any other person, other than guarantees by Parent of any indebtedness or other obligations of any wholly-owned Subsidiary.   (d) Parent does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of Parent on any matter. Parent has not adopted a stockholder rights plan.   (e) None of the Merger or other transactions contemplated hereby will result in an acceleration of vesting, or modification of vesting terms, with respect to any Parent Options.   (f) Neither Parent nor Merger Sub beneficially owns any shares of Company Common Stock. Section 4.4Authority.   (a) Each of Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of Parent or Merger Sub and no stockholder votes are necessary to authorize this Agreement or to consummate the transactions contemplated hereby other than as provided in Section 4.13.4.15. This Agreement has been duly authorized and validly executed and delivered by each of Parent and Merger Sub and constitutes a legal, valid and binding obligation of each of Parent and Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.   (b) The Board of Directors of Parent (the “Parent Board”), by resolutions duly adopted by unanimous vote at a meeting duly called and held and not subsequently rescinded or modified in any way (the “Parent Board Approval”), has duly (i) determineddeclared that this Agreement and the transactions contemplated hereby (including the Merger) are advisable, and fair to and in the best interests of Parent and its stockholders, (ii) approved and adopted this Agreement and the transactions contemplated hereby (including the Merger), and (iii) resolved to recommend (subject to Section 5.3(b)) that the stockholders of Parent vote for approval of the issuance of Parent Common Stock to be issued pursuant to the Merger as required by NASD Rule 4350(i). The Parent Board Approval constitutes approval of this Agreement and the Merger as required under any applicable state takeover Law and no such state takeover Law is applicable to the Merger or the other transactions contemplated hereby, including, without limitation, the restrictions on business combinations contained in Section 203 of the DGCL.   Section 4.5No Conflict; Required Filings and Consents.   (a) The execution and delivery of this Agreement by each of Parent and Merger Sub does not, and the performance of this Agreement by each of Parent and Merger Sub will not, (i) (assuming the Parent Stockholder Approval is obtained) conflict with or violate any provision of the Parent Certificate or Parent Bylaws or any equivalent organizational documents of any of its Subsidiaries (including Merger Sub), (ii) (assuming that all consents, approvals, authorizations and permits described in Section 4.5(b) have been obtained and all filings and notifications described in Section 4.5(b) have been made and any waiting periods thereunder have terminated or expired) conflict with or violate any Law applicable to Parent or any of its Subsidiaries or by which any property or asset of Parent or any of its Subsidiaries is bound or affected or (iii) require any consent or approval under, result in any breach of or any loss of any benefit under, constitute a change of control or default (or an event which with notice or lapse of time or both would become a default) under or give to others any right of termination, vesting, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of Parent or any of its Subsidiaries pursuant to, any Contract, permit or other instrument or obligation, except, with respect to clauses (ii) and (iii), for any such conflicts, violations, consents, approvals, breaches, losses, defaults or other occurrences which would not, individually or in the aggregate, have a Material Adverse Effect.   (b) The execution and delivery of this Agreement by Parent does not, and the performance of this Agreement by Parent will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity or any other person, except (i) under the Exchange Act, the Securities Act, applicable Blue Sky Law, the HSR Act, the rules and regulations of the Exchange and the filing and recordation of the Certificate of Merger as required by the DGCL and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, have a Material Adverse Effect.   Section 4.6Permits; Compliance With Law. Parent and each of its Subsidiaries is in possession of all authorizations, licenses, permits, certificates, approvals and clearances of any Governmental Entity necessary for Parent and each of its Subsidiaries to own, lease and operate its properties or to carry on its respective businesses substantially in the manner described in the Parent SEC Filings filed prior to the date hereof and substantially as it is being conducted as of the date hereof (the “Parent Permits”), and all such Parent Permits are valid, and in full force and effect, except where the failure to have, or the suspension or cancellation of, or failure to be valid or in full force and effect of, any of the Parent Permits would not, individually or in the aggregate, have a Material Adverse Effect. None of Parent nor any of its Subsidiaries is in conflict with, or in default or violation of, (a) any Law applicable to Parent or any of its Subsidiaries or by which any property or asset of Parent or any of its Subsidiaries is bound or affected or (b) any Parent Permits, except in each case for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Material Adverse Effect.   Section 4.7SEC Filings; Financial Statements.   (a) Parent has timely filed all registration statements, prospectuses, forms, reports, definitive proxy statements, schedules and documents required to be filed by it under the Securities Act or the Exchange Act, as the case may be, since December 31, 2003 (collectively, the “Parent SEC Filings”). Each Parent SEC Filing (i) as of the time it was filed, complied or, if filed subsequent to the date hereof, will comply, in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not, at the time it was filed, or, if filed subsequent to the date hereof, will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were or will be made, not misleading.   (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Parent SEC Filings was, or will be, prepared in accordance with GAAP applied (except as may be indicated in the notes thereto and, in the case of unaudited quarterly financial statements, as permitted by Form 10-Q under the Exchange Act) on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto), and each presented, or will present, fairly the consolidated financial position, results of operations and cash flows of Parent and the consolidated Subsidiaries of Parent as of the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal year-end adjustments which did not and would not, individually or in the aggregate, have a Material Adverse Effect). The books and records of Parent and each of its Subsidiaries have been, and are being, maintained in accordance with applicable material legal and accounting requirements.requirements, except for such failures as would not, individually or in the aggregate, have a Material Adverse Effect.   (c) Except as and to the extent set forth on the consolidated balance sheet of Parent and its consolidated Subsidiaries as of December 31, 20032004 (the “Parent Balance Sheet”), none of Parent nor any of its consolidated Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on a balance sheet or in notes thereto prepared in accordance with GAAP, except for liabilities or obligations incurred in the ordinary course of business since December 31, 20032004 that would not, individually or in the aggregate, have a Material Adverse Effect.   (d) Each required form, report and document containing financial statements that Parent has filed with or furnished to the SEC since December 31, 2003 was accompanied by the certifications required to be filed or furnished by Parent’s chief executive officerChief Executive Officer and chief financial officerChief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 and at the time of filing or submission of each such certification, such certification (i) was true and accurate and complied with the Sarbanes-Oxley Act, (ii) did not contain any qualifications or exceptions to the matters certified therein, except as otherwise permitted under the Sarbanes-Oxley Act, and (iii) has not been modified or withdrawn. NeitherAs of the date of this Agreement, neither Parent nor any of its officers has received notice from any Governmental Entity questioning or challenging the accuracy, completeness, content, form or manner of filing or furnishing of such certifications. Parent’s disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Exchange Act) effectively enable Parent to comply with, and the appropriate officers of Parent to make all certifications required under, the Sarbanes-Oxley Act. Parent is in compliance in all material respects with the applicable listing and corporate governance rules and regulations of The Nasdaq Stock Market.   Section 4.8Brokers. No broker, finder or investment banker (other than the Parent Financial Advisor) is entitled to any brokerage, finder’s or other fee or commission in connection with the Merger based upon arrangements made by or on behalf of Parent or any of its Subsidiaries. Section 4.9Absence of Certain Changes or Events. Since December 31, 2003,2004, except as specifically contemplated by, or as disclosed in, this Agreement or Section 4.9 of the Parent Disclosure Schedule,Memorandum, Parent and each of its Subsidiaries has conducted its businesses in the ordinary course consistent with past practice and, since such date, there has not been any Material Adverse Effect or an event or development that would, individually or in the aggregate, have a Material Adverse Effect.   Section 4.10Tax Treatment. None of Parent, any of its Subsidiaries or any of its affiliates has taken or agreed to take any action that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. Parent is not aware of any agreement, plan or other circumstance that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.   Section 4.11Litigation. Except as and to the extent disclosed in the Parent SEC Filings, including the notes thereto, filed prior to the date of this Agreement or as would not, individually or in the aggregate, have a Material Adverse Effect, (a) there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of Parent, threatened against Parent or any of its Subsidiaries or for which Parent or any of its Subsidiaries is obligated to indemnify a third party and (b) neither Parent nor any of its Subsidiaries is subject to any outstanding and unsatisfied order, writ, injunction, decree or arbitration ruling, award or other finding. There Section 4.12Intellectual Property. Except as would not, individually or in the aggregate, have a Material Adverse Effect, Parent owns or has the right to use, whether through ownership, licensing or otherwise, all Intellectual Property significant to the businesses of Parent and each of its Subsidiaries in substantially the same manner as such businesses are conducted on the date hereof (“Parent Material Intellectual Property”). Except as set forth in Section 4.12 of the Parent Disclosure Memorandum or except as would not, individually or in the aggregate, have a Material Adverse Effect: (a) since December 31, 2003, no written claim challenging the ownership, legality, use, validity or enforceability of any Parent Material Intellectual Property has been made by a third party and no such Parent Material Intellectual Property is no suit, claim, action, proceeding or investigationcurrently the subject of any pending or, to theParent’s knowledge, of Parent, threatened againstaction, suit, claim, investigation, arbitration or other proceeding; (b) since December 31, 2003, no person has given notice to Parent or any of its Subsidiaries that asthe use of any Parent Material Intellectual Property by Parent, any of its Subsidiaries or any licensee is infringing or has infringed any domestic or foreign patent, trademark, service mark, trade name, or copyright or design right, or that Parent, any of its Subsidiaries or any licensee has misappropriated or improperly used or disclosed any trade secret, confidential information or know-how; (c) the date hereof, challengesexecution, delivery and performance of this Agreement by Parent and the validity or propriety, or seeks to prevent consummation of the Mergertransactions contemplated hereby will not breach, violate or conflict with any other transaction contemplated by this Agreement.instrument or agreement concerning any Parent Material Intellectual Property and will not cause the forfeiture or termination or give rise to a right of forfeiture or termination of any Parent Material Intellectual Property; (d) Parent has the right to require the inventor or author of any Parent Material Intellectual Property which constitutes an application for registration, including, but not limited to, all patent applications, trademark applications, service mark applications, copyright applications and mask work applications, to transfer ownership, including all right, title and interest in and to (including any moral rights), to Parent of the application and of the registration once it issues; (e) since December 31, 2003, to Parent’s knowledge, no third party has interfered with, infringed upon, misappropriated, or used without authorization any Parent Material Intellectual Property, and no employee or former employee of Parent has interfered with, infringed upon, misappropriated, used without authorization, or otherwise come into conflict with any Parent Material Intellectual Property; (f) Parent has taken all reasonable action to maintain and protect each item of Parent Material Intellectual Property; and (g) to its knowledge, Parent has the right to use all of the Parent Material Intellectual Property in all jurisdictions in which Parent currently conducts business.   Section 4.124.13Taxes. (a) Parent and each of its Subsidiaries have duly and timely filed with the appropriate Tax authorities or other Governmental Entities all material Tax Returns required to be filed. All such Tax Returns are complete and accurate in all respects, except as would not, individually or in the aggregate, have a Material Adverse Effect. All Taxes shown as due on such Tax Returns have been timely paid. (b) Subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect, the unpaid Taxes of Parent and its Subsidiaries (i) did not, as of the dates of the most recent financial statements (in each case, determining such liability for unpaid Taxes as of the date of such financial statements) contained in the Parent SEC Filings, exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the balance sheets contained in such financial statements, and (ii) will not exceed that reserve as adjusted for operations and transactions through the Closing Date in accordance with the past custom and practice of Parent and its Subsidiaries in filing their Tax Returns. (c) Subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect or as set forth in Section 4.13 of the Parent Disclosure Memorandum, (i) no deficiencies for Taxes with respect to Parent or any of its Subsidiaries have been claimed, proposed or assessed by a Tax authority or other Governmental Entity in writing, (ii) no audit or other proceeding for or relating to any liability in respect of Taxes of Parent or any of its Subsidiaries is being conducted by any Tax authority or Governmental Entity, and neither Parent nor any of its Subsidiaries has received notification in writing that any such audit or other proceeding is pending, and (iii) neither Parent nor any of its Subsidiaries nor any predecessor has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (d) Subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect, there are no Tax liens upon any property or assets of Parent or any of its Subsidiaries except (i) liens for current Taxes not yet due and payable, and (ii) liens for Taxes that are being contested in good faith by appropriate proceedings and for which adequate reserves are being maintained in accordance with GAAP. (e) Parent and each of its Subsidiaries have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect. (f) Subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect or as set forth in Section 4.13 of the Parent Disclosure Memorandum, neither Parent nor any of its Subsidiaries currently is the beneficiary of any extension of time within which to file any Tax Return. (g) No written claim has been made by an authority in a jurisdiction where Parent or any of its Subsidiaries does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. (h) Neither Parent nor any of its Subsidiaries has any liability for the Taxes of any person (other than members of the consolidated group of which Parent is the common parent) (i) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign Law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise, except in each case where such liability for Taxes would not, individually or in the aggregate, have a Material Adverse Effect. (i) Neither Parent nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period described in Section 897(c)(1)(A)(ii) of the Code. (j) Neither Parent nor any of its Subsidiaries has been a party to any distribution occurring during the two (2) years preceding the date of this Agreement in which the parties to such distribution treated the distribution as one to which Section 355 or 361 of the Code is applicable, in whole or in part. (k) Parent and its Subsidiaries have made available to the Company correct and complete copies of all federal Tax Returns since December 31, 1999. (l) Neither Parent nor any of its Subsidiaries is a party to, is bound by or has any obligation under any Tax sharing or Tax indemnity agreement or similar contract or arrangement. (m) Neither Parent nor any of its Subsidiaries has entered into any transaction identified as a “listed transaction” for purposes of Treasury Regulations Section 1.6011-4(b)(2) or 301.6111-2(b)(2). If Parent or any Subsidiary has entered into any transaction such that, if the treatment claimed by it were to be disallowed, the transaction would constitute a substantial understatement of federal income tax within the meaning of Code Section 6662, then it believes that it has either (i) substantial authority for the tax treatment of such transaction or (ii) disclosed on its Tax Return the relevant facts affecting the tax treatment of such transaction. Section 4.14Opinion of Financial Advisor. Thomas Weisel Partners,Needham & Company, LLC (the “Parent Financial Advisor”) has delivered to the Parent Board its written opinion to the effect that the Exchange Ratio is fair, from a financial point of view, to Parent. Parent has been authorized by the Parent Financial Advisor to permit, subject to prior review and consent by the Parent Financial Advisor, the inclusion of such opinion in its entirety, and references thereto, in the Joint Proxy/Prospectus.   Section 4.134.15Vote Required. The affirmative vote of a majority of the total votes cast by the holders of Parent Common Stock in favor of the approval of the issuance of the shares of Parent Common Stock pursuant to the Merger is the only vote of the holders of any class or series of capital stock or other Equity Interests of Parent necessary to approve this Agreement and the transactions contemplated hereby, including the Merger (collectively, the(the “Parent Stockholder Approval”).   Section 4.144.16Ownership of Merger Sub; No Prior Activities. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Merger Sub is a direct wholly-owned subsidiary of Parent. Merger Sub has not conducted any activities other than in connection with the organization of Merger Sub, the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby. Merger Sub has no Subsidiaries.   Article V   Covenants   Section 5.1Conduct of Business. (a)Conduct of Business by the Company Pending the Closing. The Company agrees that, between the date of this Agreement and the Effective Time, except as set forth in Section 5.15.1(a) of the Company Disclosure ScheduleMemorandum or as specifically permitted by any other provision of this Agreement (including, without limitation, the provisions of each of Sections 5.5 and 7.1(e)), unless Parent shall otherwise agree in writing, the Company will, and will cause each of its Subsidiaries to conduct its operations only in the ordinary and usual course of business consistent with past practice. Without limiting the foregoing, and as an extension thereof, except as set forth in Section 5.15.1(a) of the Company Disclosure ScheduleMemorandum or as specifically permitted by any other provision of this Agreement (including, without limitation, the provisions of each of Sections 5.5 and 7.1(e)), the Company shall not (unless required by applicable Law), and shall not permit any of its Subsidiaries to, between the date of this Agreement and the Effective Time, directly or indirectly, do, or agree to do, any of the following without the prior written consent of Parent:   (a)(i) amend or otherwise change its certificate of incorporation or bylaws or equivalent organizational documents; (b) (i)(ii) (A) issue, sell, pledge, dispose of, grant, transfer, encumber, or authorize the issuance, sale, pledge, disposition, grant, transfer, or encumbrance of any shares of capital stock of, or other Equity Interests in, the Company or any of its Subsidiaries of any class, or securities convertible or exchangeable or exercisable for any shares of such capital stock or other Equity Interests, or any options, warrants or other rights of any kind to acquire any shares of such capital stock or other Equity Interests or such convertible or exchangeable securities, or any other ownership interest (including, without limitation, any such interest represented by contract right), of the Company or any of its Subsidiaries, other than (x) the issuance of Company Common Stock upon the exercise or conversion of Company Options Company Warrants and Company DebenturesWarrants outstanding as of the date hereof in accordance with their terms (y)and the granting of up to 200,00050,000 options to purchase shares of Company Common Stock in the ordinary course of business consistent with past practice, or (z) the issuance of shares of Company Common Stock to the holders of Company Debentures in satisfaction of periodic interest payments due under the Company Debentures, or (ii)(B) sell, pledge, dispose of, transfer, lease, license, guarantee or encumber, or authorize the sale, pledge, disposition, transfer, lease, license, guarantee or encumbrance of, any material property or assets (including Intellectual Property) of the Company or any of its Subsidiaries, except pursuant to existing Contracts or commitments or the sale or purchase of goods in the ordinary course of business consistent with past practice, or enter into any commitment or transaction outside the ordinary course of business consistent with past practice;   (c)(iii) declare, set aside, make or pay any dividend or other distribution (whether payable in cash, stock, property or a combination thereof) with respect to any of its capital stock (other than dividends paid by a wholly-owned Subsidiary of the Company to the Company or to any other wholly-owned Subsidiary of the Company) or enter into any agreement with respect to the voting of its capital stock;   (d) except as otherwise contemplated by Section 5.15,(iv) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock, other Equity Interests or other securities;   (e) (i)(v) (A) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any interest in any person or any division thereof or any material assets, (ii)other than acquisitions of assets in the ordinary course of business consistent with past practice and any other asset acquisitions for consideration, in the aggregate, not in excess of $250,000 per calendar quarter for the Company and its Subsidiaries taken as a whole, (B) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person (other than a wholly-owned Subsidiary of the Company) for borrowed money, (iii)except for indebtedness for borrowed money incurred in the ordinary course of business consistent with past practice or other indebtedness for borrowed money in a principal amount not, in the aggregate, in excess of $200,000 for the Company and its Subsidiaries taken as a whole, (C) terminate, cancel or request any material change in, or agree to any material change in, any Company Material Contract, or (iv)(D) enter into or amend any contract, agreement, commitment or arrangement that, if fully performed, would not be permitted under this Section 5.1(e)5.1(a)(v);   (f)(vi) except as may be required by contractual commitments or corporate policies with respect to bonuses, annual salary increases, severance or termination pay in existence on the date of this Agreement as disclosed in Section 3.11(b) of the Company Disclosure Schedule: (i)Memorandum: (A) increase the compensation or benefits payable or to become payable to its directors, officers or employees; (ii)(B) grant any rights to severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company or any of its Subsidiaries, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee, except to the extent required by applicable Law; or (iii)(C) take any affirmative action to amend or waive any performance or vesting criteria or accelerate vesting, exercisability or funding under any Company Benefit Plan;   (g) (i)(vii) (A) pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, contingent or otherwise), except in the ordinary course of business consistent with past practice and in accordance with their terms, (ii)(B) accelerate or delay collection of any material notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of business consistent with past practice, or (iii)(C) delay or accelerate payment of any material account payable in advance of its due date or the date such liability would have been paid in the ordinary course of business consistent with past practice;   (h)(viii) make any material change in accounting policies or procedures, other than in the ordinary course of business consistent with past practice or except as required by GAAP or by a Governmental Entity;   (i)(ix) waive, release, assign, settle or compromise any material claims, or any material litigation or arbitration;   (j)(x) make any material tax election, settle or compromise any material liability for Taxes, amend any material Tax Return or file any refund for any material amount of Taxes;provided, that the Company shall promptly provide to Parent a copy of any such amended Tax Return or filing for any refund;   (k) take, or agree to take, any action that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code; (l)(xi) modify, amend or terminate, or waive, release or assign any material rights or claims with respect to any confidentiality or standstill agreement to which the Company is a party;   (m) take any action that is(xii) knowingly act in a manner intended or would reasonably be expected to materially delay the consummation of the Merger or result in any of the conditions to the Merger set forth in Article VI not being satisfied;satisfied, except as otherwise permitted by this Agreement or required by applicable Law or any judicial or regulatory authority; or   (n)(xiii) authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing;foregoing. (b)provided, however, that nothing in this Section 5.1 shall in any way limitConduct of Business by Parent Pending the Company from fulfilling its continuing obligations under the Exchange Agreement effective June 4, 2003, which obligations areClosing. Except as set forth in Section 5.15.1(b) of the CompanyParent Disclosure Schedule.Memorandum or as specifically permitted by any other provision of this Agreement, Parent shall not (unless required by applicable Law), and shall not permit any of its Subsidiaries to, between the date of this Agreement and the Effective Time, directly or indirectly, do, or agree to do, any of the following without the prior written consent of the Company: (i) amend or otherwise change its certificate of incorporation or bylaws in a manner that adversely affects the rights of holders of Parent Common Stock (including holders of the Parent Common Stock issuable in the Merger); (ii) declare, set aside, make or pay any dividend or other distribution (whether payable in cash, stock, property or a combination thereof) with respect to any of its capital stock, other than quarterly dividends consistent with past practice and dividends paid by a wholly-owned Subsidiary of Parent to Parent or to any other wholly-owned Subsidiary of Parent; (iii) redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock, other Equity Interests or other securities at a price above the then prevailing fair market value of such capital stock, Equity Interests or other securities; (iv) issue, sell, pledge, dispose of, grant, transfer or encumber any shares of capital stock of, or other Equity Interests in, Parent or any of its Subsidiaries of any class, or securities convertible or exchangeable or exercisable for any shares of such capital stock or other Equity Interests, or any options, warrants or other rights of any kind to acquire any shares of such capital stock or other Equity Interests or such convertible or exchangeable securities, other than (A) as may be required by any Contracts in existence on the date hereof, (B) in the ordinary course of business consistent with past practice, (C) in arm’s length transactions, the terms of which have been approved by the Parent Board and are believed by the Parent Board to reflect fair value, or (D) upon the exercise of Parent Options and Parent Warrants outstanding as of the date hereof or hereafter granted in the ordinary course of business consistent with past practice; (v) merge or consolidate Parent or Merger Sub with any other person or acquire any business (except in either case as would not reasonably be expected to materially delay the consummation of the Merger or result in any of the conditions to the Merger set forth in Article VI not being satisfied), or liquidate or dissolve Parent or Merger Sub; or (vi) authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing.   Section 5.2Registration Statement; Proxy Statement.   (a) As promptly as practicable after the execution of this Agreement, Parent and the Company shall prepare and file with the SEC a joint proxy statement relating to the Company Stockholders’ Meeting and the Parent Stockholders’ Meeting (together with any amendments thereof or supplements thereto, the “Proxy Statement”) and Parent shall prepare and file with the SEC a registration statement on Form S-4 (together with all amendments thereto, the “Registration Statement”; the prospectus contained in the Registration Statement together with the Proxy Statement, the “Joint Proxy/Prospectus”), in which the Proxy Statement shall be included, in connection with the registration under the Securities Act of the shares of Parent Common Stock to be issued to the stockholders of the Company in the Merger. Each of Parent and the Company shall use reasonable best efforts to cause the Registration Statement to become effective as promptly as practicable, and, prior to the effective date of the Registration Statement, Parent shall take all or any action reasonably required under any applicable federal or state securities Laws in connection with the issuance of shares of Parent Common Stock in the Merger. Each of Parent and the Company shall furnish all information concerning it and the holders of its capital stock as the other may reasonably request in connection with such actions and the preparation of the Registration Statement and Proxy Statement. As promptly as reasonably practicable after the Registration Statement shall have become effective and the Proxy Statement shall have been cleared by the SEC, the Company and Parent shall mail the Joint Proxy/Prospectus to their respective stockholders;provided, however, that the parties shall consult and cooperate with each other in determining the appropriate time for mailing the Joint Proxy/Prospectus in light of the date set for the Company Stockholders’ Meeting and the Parent Stockholders’ Meeting. No filing of, or amendment or supplement to, the Proxy Statement shall be made by Parent or the Company, and no filing of, or amendment or supplement to, the Registration Statement shall be made by Parent, in each case, without the prior written consent of the other party, such consent not to be unreasonably withheld. Parent and the Company each shall advise the other, promptly after it receives notice thereof, of the time when the Registration Statement has become effective or any supplement or amendment has been filed, of the issuance of any stop order, the suspension of the qualification of the Parent Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement or the Registration Statement or comments thereon and responses thereto or requests by the SEC for additional information.   (b) The information supplied by the Company and Parent for inclusion or incorporation by reference in the Registration Statement and the Proxy Statement shall not, at (i) the time the Registration Statement is declared effective, (ii) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of the Company, (iii) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to stockholders of Parent, (iv) the time of the Company Stockholders’ Meeting, and (v) the time of the Parent Stockholders’ Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. If at any time prior to the Effective Time any event or circumstance relating to the Company or Parent, or any of their respective Subsidiaries, or their respective officers or directors, is discovered by such party which should be set forth in an amendment or a supplement to the Registration Statement or Proxy Statement, such party shall promptly inform the other party. All documents that either the Company or Parent is responsible for filing with the SEC in connection with the transactions contemplated hereby will comply as to form and substance in all material respects with the applicable requirements of the Securities Act and the rules and regulations thereunder and the Exchange Act and the rules and regulations thereunder.   Section 5.3Stockholders’ Meetings.   (a) The Company shall duly call and hold a meeting of its stockholders (the “Company Stockholders’ Meeting”) as promptly as reasonably practicable in accordance with applicable Law following the date the Registration Statement becomes effective and the Joint Proxy/Prospectus is cleared by the SEC for the purpose of voting upon the matters that are subject to Company Stockholder Approval. In connection with the Company Stockholders’ Meeting and the transactions contemplated hereby, the Company will (i) subject to Section 5.5 and applicable Law, use its reasonable best efforts to obtain the approvals by its stockholders of the matters that are subject to Company Stockholder Approval, and (ii) otherwise comply with all legal requirements applicable to the Company Stockholders’ Meeting. Subject to Section 5.5, the Company Board shall recommend approval of this Agreement and the Merger by the stockholders of the Company (the “Company Recommendation”) and shall not withdraw or adversely modify (or propose to withdraw or adversely modify) such recommendation, and the Joint Proxy/Prospectus shall contain such recommendation.   (b) Parent shall duly call and hold a meeting of its stockholders (the “Parent Stockholders’ Meeting”) as promptly as reasonably practicable in accordance with applicable Law following the date the Registration Statement becomes effective and the Joint Proxy/Prospectus is cleared by the SEC for the purpose of voting upon the matters that are subject to Parent Stockholder Approval. In connection with the Parent Stockholders’ Meeting and the transactions contemplated hereby, Parent will (i) subject to applicable Law, use its reasonable best efforts to obtain the approvals by its stockholders of the matters that are subject to Parent Stockholder Approval, and (ii) otherwise comply with all legal requirements applicable to the Parent Stockholders’ Meeting. The Parent Board shall recommend approval of the issuance by Parent of the shares of Parent Common Stock issuable pursuant to this Agreement by the stockholders of Parent (the “Parent Recommendation”) and shall not withdraw or adversely modify (or propose to withdraw or adversely modify) such recommendation, and the Joint Proxy/Prospectus shall contain such recommendation.   Section 5.4Access to Information; Confidentiality. Except as required pursuant to any confidentiality agreement or similar agreement or arrangement to which the Company or Parent or any of their respective Subsidiaries is a party (which, if reasonably requested by the other party, such person shall use reasonable best efforts to cause the counterparty to waive), from the date of this Agreement to the Effective Time, the Company and Parent shall, and shall cause each of its Subsidiaries and each of their respective directors, officers, employees, accountants, consultants, legal counsel, investment bankers, advisors, and agents and other representatives (collectively, “Representatives”);provided,however, that the foregoing shall not require the Company or Parent to waive any legal privilege or disclose proprietary information relevant to the negotiation of this Agreement or the evaluation of the transactions contemplated hereby to (a) provide to the other party and its respective Representatives access at reasonable times upon reasonable prior notice to the officers, employees, agents, properties, offices and other facilities of such party and its Subsidiaries and to the books and records thereof and (b) subject to applicable Laws relating to the exchange of information, furnish promptly such information concerning the business, properties, Contracts, assets, liabilities, personnel and other aspects of itself and its Subsidiaries as the other party and its Representatives may reasonably request. No investigation conducted pursuant to this Section 5.4 shall affect or be deemed to modify or limit any representation or warranty made in this Agreement or the conditions to the obligations to consummate the Merger. With respect to the information disclosed pursuant to this Section 5.4, the parties shall comply with, and shall cause their respective Representatives to comply with, all of their respective obligations under that certain Mutual NondisclosureConfidentiality Agreement, dated January 15, 2004,October 8, 2003, as amended on June 28, 2005, previously executed by Parent and the Company (the “Confidentiality Agreement”).   Section 5.5No Solicitation of Transactions.   (a) The Company agrees that neither it nor any of its Subsidiaries shall, and that it shall use its reasonable best efforts to cause its and its Subsidiaries’ Representatives not to, directly or indirectly: (i) encourage, initiate, solicit, knowingly encourage or take any other action designed to, or which could reasonably be expected to, facilitate an Acquisition Proposal or the making, submission or announcement of, any Acquisition Proposal, (ii) participate or engage in any discussions or negotiations regarding, or furnish to any person any nonpublic information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to, any Acquisition Proposal, (iii) engage in discussions with any person with respect to any Acquisition Proposal, except to notify such person as to the existence of these provisions, (iv) approve, endorse or recommend any Acquisition Proposal with respect to it, or (v) enter into any letter of intent or similar document or any agreement, commitment or understanding contemplating or otherwise relating to any Acquisition Proposal or a transaction contemplated thereby;provided, that so long as there has been no breach of this Section 5.5(a), the Company may, in response to an Acquisition Proposal that was not solicited after the date hereof and otherwise in compliance with the obligations under Section 5.5(c), participate in discussions or negotiations with, request clarifications from, or furnish information to, any person which makes such Acquisition Proposal if (A) such action is taken subject to a confidentiality agreement containing customary terms and conditions;provided, that if such confidentiality agreement contains provisions that are less restrictive than the comparable provisions of the Confidentiality Agreement, or omits restrictive provisions contained in the Confidentiality Agreement, then the Confidentiality Agreement shall be deemed to be automatically amended to contain in substitution for such comparable provisions such less restrictive provisions, or to omit such restrictive provisions, as the case may be, and in connection with the foregoing, the Company agrees not to waive any of the provisions in any such confidentiality agreement without waiving the similar provisions in the Confidentiality Agreement to the same extent, (B) the Company Board reasonably determines in good faith, after consultation with its outside legal counsel (which may be its current outside legal counsel) and financial advisor (which may be its current outside financial advisor), that such Acquisition Proposal could reasonably be expected to lead to a Superior Proposal and (C) the Company Board reasonably determines in good faith, after consultation with its outside legal counsel (which may be its current outside legal counsel), that failure to take such actions would constitute a breach ofbe inconsistent with its fiduciary duties under applicable Law. The Company shall immediately terminate, and shall cause its Subsidiaries and use its reasonable best efforts to cause its and its Subsidiaries’ Representatives to immediately terminate, all discussions or negotiations, if any, with any third party with respect to, or any that could reasonably be expected to lead to an Acquisition Proposal. The Company shall immediatelypromptly (and in any event within two (2) business days) request that each person which has heretofore executed a confidentiality agreement with it or any of its Subsidiaries or any of its or its Subsidiaries’ Representatives with respect to such person’s consideration of a possible Acquisition Proposal to immediately return or destroy (which destruction shall be certified in writing by such person to the Company) all confidential information heretofore furnished to such person or its Representatives.   (b) Neither the Company Board nor any committee thereof shall (i) withdraw, modify or amend, or propose to withdraw, modify or amend, in a manner adverse to Parent, the Company Recommendation or (ii) resolve to do any of the foregoing;provided, that the Company Board may withdraw, modify or amend the Company Recommendation if, following receipt of a Superior Proposal (A) the Company has complied with its obligations under this Section 5.5, (B) the Company Board reasonably determines in good faith, after consultation with its outside legal counsel (which may be its current outside legal counsel), that failure to take such actions would constitute a breach ofbe inconsistent with its fiduciary duties under applicable Law and (C) prior to taking such actions, the Company Board shall have given Parent at least five (5) business days notice of its intention to take such action and the opportunity to meet with the Company and its outside counsel and financial advisor. (c) In addition to the obligations set forth in Section 5.5(a), the Company shall as promptly as practicable (and in any event within one (1) business day)48 hours) advise Parent of any request for information with respect to any Acquisition Proposal or of any Acquisition Proposal, or any inquiry, proposal, discussions or negotiation with respect to any Acquisition Proposal, the terms and conditions of such request, Acquisition Proposal, inquiry, proposal, discussion or negotiation, and the Company shall, within one (1) business day48 hours of the receipt thereof, promptly provide to Parent copies of any written materials received in connection with any of the foregoing, and the identity of the person making any such Acquisition Proposal or such request, inquiry or proposal or with whom any discussions or negotiations are taking place. The Company shall keep Parent reasonably informed of the status and material details (including material amendments or proposed amendments) with respect to the information previously provided by the Company in connection with anthe Acquisition Proposal, and shall provide to Parent within one (1) business day48 hours of receipt thereof all written materials received by it with respect thereto. The Company shall promptly provide to Parent any non-public information concerning it provided to any other person in connection with any Acquisition Proposal, which was not previously provided to Parent. With respect to any Acquisition Proposal that constitutes a Superior Proposal, for a period ofduring the five (5) business days after such determination,day period referred to in clause (C) of Section 5.5(b) above, the Company shall, if requested by Parent, provide Parent with an opportunity to negotiate inrevisions to the terms of this Agreement for the Company Board’s good faith to revise this Agreement so that Parent has the opportunity to make an offer that the Company Board may determine in its good faith judgment to be at least as favorable to the Company’s stockholders as such Superior Proposal.consideration.   (d) Nothing contained in this Agreement shall be deemed to restrict the parties from complying with RulesRule 14d-9 or 14e-2 under the Exchange Act.   Section 5.6Appropriate Action; Consents; Filings.   (a) The Company and Parent shall use their reasonable best efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable, (ii) obtain from any Governmental Entity any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by the Company or Parent or any of their respective Subsidiaries, or to avoid any action or proceeding by any Governmental Entity (including, without limitation, those in connection with the HSR Act), in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, the Merger, and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act, and any other applicable federal or state securities Laws, (B) the HSR Act, and (C) any other applicable Law;provided, that the Company and Parent shall cooperate with each other in connection with the making of all such filings, including, if requested, by providing copies of all such documents to the non-filing party and its advisors prior to filing and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith;provided, however, that nothing in this Section 5.6(a) shall require the expenditure of money by Parent or the Company to a third party in exchange for any such consent (other than nominal filing or processing fees).therewith. The Company and Parent shall furnish to each other all information required for any application or other filing under the rules and regulations of any applicable Law (including all information required to be included in the Proxy Statement and the Registration Statement) in connection with the transactions contemplated by this Agreement.   (b) The Company and Parent shall give (or shall cause their respective Subsidiaries to give) any notices to third parties, and use, and cause their respective Subsidiaries to use, reasonable best efforts to obtain any third party consents (i) necessary, proper or advisable to consummate the transactions contemplated in this Agreement, (ii) required to be disclosed in the Company Disclosure ScheduleMemorandum or the Parent Disclosure Schedule,Memorandum, as applicable, or (iii) required to prevent a Material Adverse Effect with respect to the Company or Parent from occurring prior to or after the Effective Time. In the event that either party shall fail to obtain any third party consent described in the first sentence of this Section 5.6(b), such party shall use its reasonable best efforts, and shall take any such actions reasonably requested by the other party hereto, to minimize any adverse effect upon the Company and Parent, their respective Subsidiaries, and their respective businesses resulting, or which could reasonably be expected to result after the Effective Time, from the failure to obtain such consent. Section 5.7Cash Expenditures. Notwithstanding any provision of this Agreement to the contrary, from the date of this Agreement to the Effective Time, the Company and its Subsidiaries shall not incur or make any payments that, in the aggregate, exceed the amounts contemplated by, or take any action that is inconsistent with, the statement of cash expenditures attached hereto as Schedule 5.7. Section 5.8Certain Notices. From and after the date of this Agreement until the Effective Time, each party hereto shall promptly notify the other party hereto of (a) the occurrence, or non-occurrence, of any event that would be likely to cause any condition to the obligations of any party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied, or (b) the failure of the Company or Parent, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it pursuant to this Agreement which would reasonably be expected to result in any condition to the obligations of any party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied;provided, however, that the delivery of any notice pursuant to this Section 5.8 shall not cure any breach of any representation or warranty requiring disclosure of such matter prior to the date of this Agreement or otherwise limit or affect the remedies available hereunder to the party receiving such notice.   Section 5.95.8Public Announcements. The press release announcing the execution of this Agreement, if any, shall be issued only in such form as shall be mutually agreed upon by the Company and Parent and each of the Company and Parent shall consult with, and obtain the consent of, the other party (which shall not be unreasonably withheld or delayed) before issuing any other press release or otherwise making any public statement with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to consulting with and obtaining the prior consent of the other party (which shall not be unreasonably withheld or delayed);provided, that a party may, without consulting with or obtaining the prior consent of the other party, issue such press release or make such public statement as may be required by applicable Law or by any listing agreement with a national securities exchange or automated quotation system to which it is a party, if such party has used reasonable best efforts to consult with the other party and to obtain such other party’s consent, but has been unable to do so in a timely manner.   Section 5.105.9Exchange Listing. Parent shall promptly prepare and submit to the Exchange a listing application covering the shares of Parent Common Stock to be issued in the Merger and shall use its reasonable best efforts to cause such shares to be approved for listing on such Exchange, subject to official notice of issuance, prior to the Effective Time.   Section 5.115.10Employee Benefit Matters   (a) With respect to each employee benefit plan of Parent (“Parent Benefit Plan”) in which employees of the Company and its Subsidiaries (“Company Employees”) participate after the Effective Time, for purposes of determining vesting and entitlement to benefits, including for Company Options, severance benefits and vacation entitlement, service with the Company (or predecessor employers to the extent the Company provides past service credit) shall be treated as service with Parent;provided, that such service shall not be recognized to the extent that such recognition would result in a duplication of benefits or to the extent that such service was not recognized under the applicable Company Benefit Plan. Such service also shall apply for purposes of satisfying any waiting periods, evidence of insurability requirements, or the application of any pre-existing condition limitations. (b) With respect to the Company’s Employee Stock Purchase Plan (“ESPP”), the Company shall takeThe parties hereto acknowledge and agree that all actions necessary to provide that (i) no offerings that would commence on a date following the date ofprovisions contained in this Agreement shall be permitted, (ii)Section 5.10 with respect to employees are included for the sole benefit of the respective parties hereto and shall not create any offering thereunder that isright (i) in effect immediately priorany other person, including, without limitation, any employees, former employees, any participant in any Company Benefit Plan or Parent Benefit Plan or any beneficiary thereof or (ii) to continued employment with the Company or Parent. After the Effective Time, each participant’s accumulated payroll deductionsnothing contained in this Section 5.10 shall be usedinterfere with Parent’s right to purchase sharesamend, modify or terminate any Company Benefit Plan or Parent Benefit Plan or to terminate the employment of Company Common Stock immediately prior to the Effective Time in accordance with the termsany employee of the ESPP and (iii) the ESPP shall terminate at the Effective Time.Company or Parent for any reason.   (c) The Parent Board, or a committee of non-employee directors thereof, shall adopt a resolution in advance of the Effective Time providing that the receipt by any officer or director of the Company who may become a covered person of Parent for purposes of Section 16 of the Exchange Act (together with the rules and regulations thereunder, “Section 16”) of Parent Common Stock in exchange for shares of Company Common Stock, and of options to purchase Parent Common Stock upon assumption and conversion by Parent of options to purchase Company Common Stock, in each case pursuant to the transactions contemplated hereby, is intended to be exempt from liability pursuant to Section 16. The Company Board, or a committee of non-employee directors thereof, shall adopt a resolution in advance of the Effective Time providing that the disposition by any officer or director of the Company who is a covered person of the Company for purposes of Section 16 of Company Common Stock in exchange for shares of Parent Common Stock, and options to purchase Parent Common Stock upon assumption and conversion by Parent of options to purchase Company Common Stock, in each case pursuant to the transactions contemplated hereby, is intended to be exempt from liability pursuant to Section 16.   (d) The parties hereto acknowledge and agree that all provisions contained in this Section 5.11 with respectPrior to employees are included for the sole benefit of the respective parties hereto and shall not create any right (i) in any other person, including, without limitation, any employees, former employees, any participant in any Company Benefit Plan or Parent Benefit Plan or any beneficiary thereof or (ii) to continued employment with the Company or Parent. After the Effective Time, nothing contained in this Section 5.11the Company shall interfere with Parent’s rightamend the Paradyne Corporation Involuntary Severance Benefit Plan, and use its reasonable best efforts to amend modifyall other severance plans and policies (excluding any written employment agreements), in each case in a manner reasonably acceptable to Parent to provide that any severance payable under such plans and policies shall be offset by any notice or terminateamount of damages in lieu of notice applicable under the Worker Adjustment Retraining and Notification Act or other similar applicable state law. Parent shall provide or cause the Surviving Corporation to provide that if any Company Benefit PlanEmployee is terminated on or Parent Benefit Plan orafter the Effective Time, such Company Employee shall be entitled to terminate the employment of any employee of the Company or Parent for any reason. Notwithstanding anything hereinseverance equal to the contrary, Parent shall take no actiongreater of (i) the amount of severance such Company Employee would have been entitled to amend, modify or terminate, and Parent shall take all action reasonably necessary to assume, the Company’s obligationsreceive under the employment agreementsseverance benefits and policies set forth in Section 3.11 of the Company Disclosure Schedule.Memorandum (as amended to the extent provided above) had such Company Employee been involuntarily terminated as of the Effective Time and (ii) the amount of severance such Company Employee would be entitled to receive under the applicable severance policies and practices of Parent or its subsidiaries, as applicable, assuming (for purposes of calculating their severance entitlement hereunder) that their employment with Parent commenced as of the Effective Time.   Section 5.125.11Indemnification of Directors and Officers.   (a) Parent and the Company agree that all rights to indemnification existing as in effect as of the indemnification obligations set forthdate of this Agreement in favor of any Company Indemnified Person as provided in the Company Certificate, the Company Bylaws and any Company indemnification agreements with any such Company Indemnified Persons shall survive the Merger and shall notcontinue in full force and effect and be amended, repealed or otherwise modifiedhonored by the respective parties and their successors, without any amendment thereto, for a period of six (6) years after the Effective Time in any manner that would adversely affect the rights thereunder ofTime. A “Company Indemnified Person” shall mean any individual who on or prior to the Effective Time was a director, officer, trustee, fiduciary, employee or agent of the Company or any of its Subsidiaries or who served at the request of the Company or any of its Subsidiaries as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or enterprise, unless such amendment or modification is required by applicable Law.   (b) For six (6) years from the Effective Time, Parent shall provide to the Company’s current directorsobtain a prepaid director and officers anofficer insurance and indemnification policy that provides coverage for events occurring(the “D&O Insurance”) prior to the Effective Time, (the “Dwhich D&O Insurance”)Insurance policy shall be reasonably acceptable to the Company and shall provide the Company Indemnified Persons with a $10,000,000 limit and other terms which arecoverage that is no less favorable than the Company’s existing policy (true(a true and complete copiescopy of which havehas been previously provided to Parent) for an aggregate period of six (6) years with respect to claims arising from facts or if substantially equivalent insurance coverage is unavailable,events that occurred on or before the best available coverage;provided, however, thatEffective Time, including, without limitation, in respect of the transactions contemplated by this Agreement. Parent shall not be requiredmaintain such policy in full force and effect, and continue to pay an annual premium forhonor the D&O Insurance in excess of $1,000,000.obligations thereunder.   (c) In the event Parent (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each such case, proper provisions shall be made so that such continuing or surviving corporation or entity or transferee of such assets, as the case may be, shall assume the obligations set forth in this Section 5.12.5.11.   (d) The obligations under this Section 5.125.11 shall not be terminated or modified in such a manner as to adversely affect any indemniteeCompany Indemnified Person to whom this Section 5.125.11 applies or the heirs and representatives of such Company Indemnified Person without the consent of such affected indemniteeCompany Indemnified Person or the heirs and representatives of such Company Indemnified Person (it being expressly agreed that the indemniteesCompany Indemnified Persons to whom this Section 5.125.11 applies and their respective heirs and representatives shall be third party beneficiaries of this Section 5.12)5.11).   Section 5.135.12Tax-Free Reorganization Treatment   (a) The Company and Parent shall use their reasonable best efforts, and shall cause their respective Subsidiaries to use their reasonable best efforts, to take or cause to be taken any action necessary for the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. Neither the Company nor Parent shall, nor shall they permit any of their respective Subsidiaries to, take or cause to be taken any action that could reasonably be expected to prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code and shall comply with the record keeping and filing requirements of Treasury Regulation Sections 1.368-3.Code.   (b) This Agreement is intended to constitute, and the parties hereto hereby adopt this Agreement as, a “plan of reorganization” within the meaning Treasury Regulation Sections 1.368-2(g) and 1.368-3(a). Each of the Company and Parent shall report the Merger as a reorganization within the meaning of Section 368 of the Code, unless otherwise required pursuant to a “determination” within the meaning of Section 1313(a) of the Code.   (c) The Company, Parent and Merger Sub shall cooperate and use their reasonable best efforts in order for the Company to obtain the opinion of Alston & Bird LLP described in Section 6.3(f). In connection therewith, each of the Company, Parent and Merger Sub shall deliver to Alston & Bird LLP a representation letter substantially in the form ofExhibit E-1 orE-2 hereto, as the case may be, which letter shall be dated on or before the date of such opinion and shall not be withdrawn or modified in any respect as of the Effective Time. Section 5.145.13Affiliates. As soon as practicable after the date hereof and prior to the mailing of the Joint Proxy/Prospectus, the Company shall deliver to Parent a list identifying all persons who are expected to be, at the time of the Parent Stockholders’ Meeting, “affiliates” of the Company for purposes of Rule 145 under the Securities Act. The Company shall use its reasonable best efforts to cause each person who is identified on such list to execute and deliver to Parent a letter agreement reasonably acceptable to the Company as to such person’s prospective compliance with the restrictions imposed by Rule 145 under the Securities Act on the transfer of shares of Parent Common Stock received by such person in the Merger.   Section 5.155.14Resale Registration Statements (a) PriorResignation of Officers and Directors. The Company shall deliver to Parent at or prior to the Effective Time Parent shall preparethe resignation of each officer and file with the SEC a registration statement on Form S-3 (together with all amendments thereto, the “S-3 Registration Statement”) in connection with the registration under the Securities Actdirector of the sharesCompany and each of Parent Common Stockits Subsidiaries, such resignations to be issued upon the exercise or conversion of Company Warrants or Company Debentures assumed in the Merger. Parent shall use its reasonable best efforts to cause the S-3 Registration Statement to become effective as promptly as practicable following the Closing, and, prior to the effective date of the S-3 Registration Statement, Parent shall take all or any action reasonably required under any applicable federal or state securities Laws in connection with the issuance of shares of Parent Common Stock to be issued upon the exercise or conversion of Company Warrants or Company Debentures assumed in the Merger. The Company shall cooperate in the preparation and filing of the S-3 Registration Statement, and shall pay all SEC and other regulatory filing fees incurred in connection therewith.Effective Time.   (b)Section 5.15S-8 Registration Statement. As promptly as practicable after the Effective Time, Parent shall prepare and file with the SEC a registration statement on Form S-8 (together with all amendments thereto, the “S-8 Registration Statement”) in connection with the registration under the Securities Act of the shares of Parent Common Stock to be issued upon the exercise of Company Options assumed in the Merger. Prior to the filing of the S-8 Registration Statement, Parent shall take all or any action reasonably required under any applicable federal or state securities Laws in connection with the issuance of shares of Parent Common Stock to be issued upon the exercise of Company Options assumed in the Merger. Section 5.16Stockholder Litigation (a) The Company agrees that it shall not settle or offer to settle any litigation commenced on or after the date hereof against the Company or any of its directors or officers by any stockholder of the Company relating to this Agreement, the Merger or any other transaction contemplated hereby, without the prior written consent of Parent (not to be unreasonably withheld). (b) Parent agrees that it shall not settle or offer to settle any litigation commenced on or after the date hereof against Parent or any of its directors or officers by any stockholder of Parent relating to this Agreement, the Merger or any other transaction contemplated hereby, without the prior written consent of the Company (not to be unreasonably withheld). Article VI   Closing Conditions   Section 6.1Conditions to Obligations of Each Party Under This Agreement. The respective obligations of each party to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived, in whole or in part, to the extent permitted by applicable Law:   (a)Effectiveness of the Registration Statement. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated or, to the knowledge of Parent or the Company, threatened by the SEC.   (b)Stockholder Approval. The Company Stockholder Approval and the Parent Stockholder Approval shall have been obtained.   (c)No Order. No Governmental Entity, nor any federal or state court of competent jurisdiction or arbitrator shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or arbitration award or finding or other order (whether temporary, preliminary or permanent), in any case which is in effect and which prevents or prohibits consummation of the Merger or any other transactions contemplated in this Agreement.   (d)Consents and Approvals. All material consents, approvals and authorizations of any Governmental Entity required of Parent, the Company or any of their Subsidiaries shall have been obtained. Any applicable waiting periods, together with any extensions thereof, under the HSR Act and the antitrust or competition laws of any other applicable jurisdiction shall have expired or been terminated.   (e)Exchange Listing. The shares of Parent Common Stock issuable to the Company’s stockholders in the Merger and upon exercise of the Company Options shall have been approved for listing on the Exchange, subject to official notice of issuance.   Section 6.2Additional Conditions to Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to effect the Merger and the other transactions contemplated hereby are also subject to the following conditions:   (a)Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) at and as of the Effective Time as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date), except where the failure of such representations and warranties to be true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) would not, individually or in the aggregate, have a Material Adverse Effect. Parent shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of the Company to that effect.   (b)Agreements and Covenants. The Company shall have performed or complied in all material respects with all material agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time. Parent shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of the Company to that effect.   (c)Consents and Approvals. All material consents, approvals and authorizations of any person other than a Governmental Entity required to be set forth in Section 3.53.5(b) or Section 4.5(b) or the related sections of the Company Disclosure ScheduleMemorandum or the Parent Disclosure Memorandum, as applicable, shall have been obtained.   (d)Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Material Adverse Effect with respect to the Company. (e)Minimum CashSarbanes-Oxley Certifications. AtNeither the Effective Time,Chief Executive Officer nor the Chief Financial Officer of the Company shall have cash on handfailed to provide, with respect to any Company SEC Filings after the date of not less than $5,000,000, after payment of all legal, accounting, banking, severance and bonus obligations;provided, thatthis Agreement, any necessary certification in the Company may have less than such amount toform required under the extent necessary to resolve any pension plan matters set forth in Section 3.10(a) of the Company Disclosure Schedule;provided, further, that the Company shall not resolve any such matters without Parent’s prior written consent.Sarbanes-Oxley Act.   (f)PIPE WarrantsMinimum Cash. The Company(i) In the event the Closing occurs on or before October 31, 2005, the Adjusted Cash Balance shall have obtained frombe greater than or equal to $38,000,000; (ii) in the holders of not lessevent the Closing occurs after October 31, 2005 and on or before November 30, 2005, the Adjusted Cash Balance shall be greater than 75%or equal to $37,000,000; and (iii) in the event the Closing occurs after November 30, 2005 and on or before December 31, 2005, the Adjusted Cash Balance shall be greater than or equal to $36,000,000. For purposes of the outstanding warrants to purchase sharesforegoing, the “Adjusted Cash Balance” shall mean the amount of Company Common Stock issuedcash plus the value of any cash equivalents and securities available-for-sale (in each case, determined in connectionaccordance with GAAP applied on a basis consistent with past practice) as of the Company’s December 31, 2003last day of the preceding calendar month plus the amount of all transaction expenses (including legal, accounting, financial advisory, severance, bonus and January 26, 2004 financings (including warrants issued toany other expenses) incurred through the Company’s financial advisor in connection therewith) (collectively, “PIPE Warrants”) such holders’ consent to receive warrants to purchase Parent Common Stock onlast day of the terms set forth in Section 2.5 hereof in exchange for such PIPE Warrants, with confirmation reasonably satisfactory to Parent that any associated purchase obligations on the partpreceding calendar month as a result of Parent, Merger Sub or the Company set forth in the PIPE Warrants shall not apply tothis Agreement and the transactions contemplated by this Agreement.hereby.   Section 6.3Additional Conditions to Obligations of the Company. The obligation of the Company to effect the Merger and the other transactions contemplated hereby are also subject to the following conditions:   (a)Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) at and as of the Effective Time as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date), except where the failure of such representations and warranties to be true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) would not, individually or in the aggregate, result in a Material Adverse Effect. The Company shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of Parent to that effect.   (b)Agreements and Covenants. Parent and Merger Sub shall have performed or complied in all material respects with all material agreements and covenants required by this Agreement to be performed or complied with by each of them on or prior to the Effective Time. The Company shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of Parent to that effect.   (c)Consents and Approvals.All material consents, approvals and authorizations of any person other than a Governmental Entity required to be set forth in Section 4.53.5(b) or Section 4.5(b) or the related sections of the Company Disclosure Memorandum or the Parent Disclosure ScheduleMemorandum, as applicable, shall have been obtained.   (d)Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Material Adverse Effect with respect to Parent.Parent or, with respect to Merger Sub, any change, effect or circumstance that prevents Merger Sub from consummating the Merger or other transactions contemplated by this Agreement.   (e)Sarbanes-Oxley Certifications. Neither the Chief Executive Officer nor the Chief Financial Officer of Parent shall have failed to provide, with respect to any Parent SEC Filings after the date of this Agreement, any necessary certification in the form required under the Sarbanes-Oxley Act. (f)Tax Opinion. The Company shall have received a written opinion of Alston & Bird LLP, in form and substance reasonably satisfactory to the Company (the “Tax Opinion”), to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. The issuance of such Tax Opinion shall be conditioned upon receipt by Alston & Bird LLP of representation letters from each of the Company, Parent and Merger Sub substantially in the form ofExhibit E-1 orE-2 hereto, as the case may be, and each such letter shall be dated on or before the date of such Tax Opinion and shall not have been withdrawn or modified in any respect as of the Effective Time. Article VII   Termination, Amendment and Waiver   Section 7.1Termination. This Agreement may be terminated, and the Merger contemplated hereby may be abandoned, at any time prior to the Effective Time, by action taken or authorized by the Board of Directors of the terminating party or parties, whether before or after approval of the matters presented in connection with the Merger by the stockholders of the Company or the stockholders of Parent:   (a) By mutual written consent of Parent and the Company, by action of their respective Boards of Directors;   (b) By either Parent or the Company if the Merger shall not have been consummated prior to September 30, 2004December 31, 2005 (such date, the “Outside Date”);provided, however, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement (including without limitation such party’s obligations set forth in Section 5.6) has been the cause of, or resulted in, the failure of the Effective Time to occur on or before the Outside Date;   (c) By either Parent or the Company if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable (which order, decree, ruling or other action the parties shall have used their reasonable best efforts to resist, resolve or lift, as applicable, subject to the provisions of Section 5.6);   (d) By written notice of Parent if the Company Board shall have: (i) failed to make the Company Recommendation in accordance with Section 5.3(a) or withdrawn, or adversely modified or changed (including, without limitation, any disclosure (other than a statement that the Company Board is evaluating an Acquisition Proposal) as a result of its fiduciary duty of disclosure having the effect of an adverse modification or change), resolved to withdraw or adversely modify or change (including, without limitation, any disclosure (other than a statement that the Company Board is evaluating an Acquisition Proposal) as a result of its fiduciary duty of disclosure having the effect of an adverse modification or change), the Company Recommendation; (ii) approved or recommended, or resolved to approve or recommend, to its stockholders an Acquisition Proposal other than that contemplated by this Agreement or entered into, or resolved to enter into, any agreement with respect to an Acquisition Proposal; (iii) after an Acquisition Proposal has been made, failed to affirm the Company Recommendation within five (5) business days of any request by Parent to do so;so, notwithstanding any continued evaluation of such Acquisition Proposal; or (iv) recommended that its stockholders tender their shares in any tender offer or exchange offer that is commenced (other than by Parent or an affiliate of Parent) that,which, if successful, would result in any person or group becoming a beneficial owner of 20% or more of its outstanding shares of capital stock;   (e) By the Company if it receives a Superior Proposal and the Company Board reasonably determines in good faith, after consultation with outside legal counsel (which may be its current outside legal counsel), that it is necessary to terminate this Agreement and enter into an agreement to effect the Superior Proposal in order to comply with its fiduciary duties under applicable Law;Proposal;provided, that the Company may not terminate this Agreement pursuant to this Section 7.1(e) unless it has first complied with its obligations under Section 5.5 and until (i) five (5) business days have elapsed following delivery to Parent of a written notice of such determination by the Company Board and during such five (5) business day period the Company has renegotiated in good faith with Parent and Parent has not submitted a binding offer that the Company Board has determined in its good faith judgment to be at least as favorable to the Company’s stockholders as the Superior Proposal;provided, that prior to or contemporaneously with such termination, the Company shall have made the payment of the fee to Parent required by Section 7.2(d)7.2(b)(i) by wire transfer in same day funds;   (f) By written notice of Parent (if Parent is not in material breach of its obligations or its representations and warranties under this Agreement), if there has been a breach by the Company of any representation, warranty, covenant or agreement contained in this Agreement which (i) would result in a failure of a condition set forth in Section 6.2(a) or 6.2(b) and (ii) is not cured within twenty (20) days;days (or prior to the Outside Date, if sooner);provided that Parent shall have given the Company written notice, delivered at least twenty (20) days prior to such termination, stating Parent’s intention to terminate this Agreement pursuant to this Section 7.1(f) and the basis for such termination; (g) By written notice of the Company if the Parent Board shall have failed to make the Parent Recommendation in accordance with Section 5.3(b) or withdrawn, or adversely modified or changed (including, without limitation, any disclosure as a result of its fiduciary duty of disclosure having the effect of an adverse modification or change), resolved to withdraw or adversely modify or change (including, without limitation, any disclosure as a result of its fiduciary duty of disclosure having the effect of an adverse modification or change), the Parent Recommendation;   (h) By written notice of the Company (if the Company is not in material breach of its obligations or its representations and warranties under this Agreement), if there has been a breach by Parent or Merger Sub of any representation, warranty, covenant or agreement contained in this Agreement which (i) would result in a failure of a condition set forth in Section 6.3(a) or 6.3(b) and (ii) is not cured within twenty (20) days;days (or prior to the Outside Date, if sooner);provided that the Company shall have given Parent written notice, delivered at least twenty (20) days prior to such termination, stating the Company’s intention to terminate this Agreement pursuant to this Section 7.1(h) and the basis for such termination; or   (i) By written notice of either Parent or the Company if (1) the Company Stockholder Approval shall not have been obtained at the Company Stockholders’ Meeting duly convened therefor (or at any adjournment or postponement thereof), or (2) the Parent Stockholder Approval shall not have been obtained at the Parent Stockholders’ Meeting duly convened therefor (or at any adjournment or postponement thereof);provided, however, that the right to terminate this Agreement under this Section 7.1(i) shall not be available to a party if the failure to obtain such party’s Stockholder Approval shall have been caused by the action or failure to act of such party and such action or failure to act constitutes a material breach by such party of this Agreement.   Section 7.2Effect of Termination.   (a)Limitation on Liability. In the event of termination of this Agreement by either Parent or the Company as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent or the Company or their respective Subsidiaries, officers or directors except (i) with respect to the confidentiality obligations of Section 5.4, Section 5.9, this Section 7.2 and Article VIII and (ii) with respect to any liabilities or damages incurred or suffered by a party as a result of the willful and material breach by the other party of any of its representations, warranties, covenants or other agreements set forth in this Agreement.   (b)Expenses. (i) Parent and the Company agree that if Parent shall terminate this Agreement pursuant to Section 7.1(f), or if either party shall terminate this Agreement pursuant to Section 7.1(i)(1), in addition to any other remedies that Parent, Merger Sub or their affiliates may have as a result of such termination, the Company shall pay Parent an amount equal to the sum of Parent’s Expenses up to an aggregate amount of $1,000,000. (ii) Parent and the Company agree that if the Company shall terminate this Agreement pursuant to Section 7.1(g) or 7.1(h), or if either party shall terminate this Agreement pursuant to Section 7.1(i)(2), in addition to any other remedies that the Company or its affiliates may have as a result of such termination, Parent shall pay the Company an amount equal to the sum of the Company’s Expenses up to an aggregate amount of $1,000,000. (c)Payment of Expenses. Any payment required to be made pursuant to Section 7.2(b) shall be paid not later than two (2) business days after delivery to the other party of notice of demand for payment and a documented itemization setting forth in reasonable detail all Expenses of the party entitled to receive payment (which itemization may be supplemented and updated from time to time by such party until the 90th day after such party delivers such notice of demand for payment). (d)Termination Fee. The Company shall pay Parent a termination fee of $2,000,000 (the “Termination Fee”) in immediately available funds in the event that this Agreement is terminated solely as follows: (i) if the Company shall terminate this Agreement pursuant to Section 7.1(e); (ii) if Parent shall terminate this Agreement pursuant to Section 7.1(d); or (iii) if (A) Parent shall terminate this Agreement pursuant to Section 7.1(f), or either party shall terminate this Agreement pursuant to Section 7.1(b) or 7.1(i)(1), and, at any time after the date of this Agreement and before the termination of this Agreement, an Acquisition Proposal with respect to the Company shall have been publicly made, proposed or communicated and not bona fide withdrawn and (B) within twelve (12) months following the termination of this Agreement, the Company consummates such Acquisition Proposal or enters into a binding agreement with respect to such Acquisition Proposal which is subsequently consummated;provided, however, in the event that Parent is entitled to reimbursement of its Expenses pursuant to Section 7.2(b)(i) as a result of a termination under Section 7.1(f) or 7.1(i)(1), the amount of any such reimbursement that has been paid to Parent shall be subtracted from the amount of the Termination Fee due and owing (such that the maximum amount payable by the Company in the event of a termination under Section 7.1(f) or 7.1(i)(1) shall be $2,000,000).consummated. Any Termination Fee payable under this provision shall be payable as liquidated damages to compensate Parent for the damages Parent will suffer if this Agreement is terminated under the circumstances set forth in this Section 7.2(d)7.2(b), which damages cannot be determined with reasonable certainty. It is specifically agreed that the Termination Fee represents liquidated damages and not a penalty.   (e)(c)All Payments. Any payment required to be made pursuant to Section 7.2(d)7.2(b)(i) shall be paid prior to or contemporaneously with, and shall be a pre-condition to the effectiveness of, termination of this Agreement pursuant to Section 7.1(e). Any payment required to be made pursuant to Section 7.2(d)7.2(b)(ii) shall be paid not later than two (2) business days after the date of termination. Any payment required to be made pursuant to Section 7.2(d)7.2(b)(iii) shall be paid not later than two (2) business days afterprior to or contemporaneously with, and shall be a pre-condition to the effectiveness of, consummation of the Acquisition Proposal. All payments under this Section 7.2 shall be made by wire transfer of immediately available funds to an account designated by Parent or the Company, as applicable.Parent. The Company and Parent acknowledgeacknowledges that (i) the payment of the Termination Fee shall be Parent’s sole and exclusive remedy upon termination of this Agreement under the circumstances set forth in Section 7.2(d), and (ii) the agreements contained in this Section 7.2 are an integral part of the transactions contemplated by this Agreement and that, without these agreements, neither the Company nor Parent would not enter into this Agreement. Accordingly, if either partythe Company fails promptly to pay any amount due pursuant to this Section 7.2 and, in order to obtain such payment, the other partyParent commences a suit which results in a judgment against the first partyCompany for the fee set forth in this Section 7.2, the first partyCompany shall pay to the other partyParent its costs and expenses (including reasonable attorneys’ fees and expenses) in connection with such suit, together with interest on the amount of the fee at the prime rate of Citibank, N.A. in effect on the date such payment was required to be made.   Section 7.3Amendment. To the extent permitted by applicable Law, this Agreement may be amended by the parties, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Parent and the Company;provided, that after any such approval, no amendment shall be made that by Law requires further approval by the Company’s or Parent’s stockholders, as the case may be, without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties.   Section 7.4Waiver. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document delivered pursuant hereto, and (c) waive compliance by the other parties with any of the agreements or conditions contained herein;provided, however, that after any approval of the transactions contemplated by this Agreement by the stockholders of any party, there may not be, without further approval of such stockholders, any extension or waiver of this Agreement or any portion thereof which, by Law or in accordance with the rules of the Exchange, requires further approval by such stockholders. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.   Section 7.5Fees and Expenses. Subject to SectionsSection 7.2(a) and 7.2(b) hereof, all expenses incurred by the parties hereto shall be borne solely and entirely by the party which has incurred the same (including, but not limited to, fees and expenses of counsel, accountants, investment bankers and other advisors);provided, however, that each of Parent and the Company shall pay one-half of (a) the expenses related to printing, filing and mailing the Registration Statement and the Joint Proxy/Prospectus and all SEC and other regulatory filing fees incurred in connection with the Registration Statement and the Joint Proxy/Prospectus, and (b) the filing fees related to any filings under the HSR Act. Article VIII   General Provisions   Section 8.1Non-Survival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 8.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time.   Section 8.2Notices. Any notices or other communications required or permitted under, or otherwise in connection with this Agreement, shall be in writing and shall be deemed to have been duly given when delivered in person or upon confirmation of receipt when transmitted by facsimile transmission (but only if followed by transmittal by national overnight courier or hand for delivery on the next business day) or on receipt after dispatch by registered or certified mail, postage prepaid, addressed, or on the next business day if transmitted by national overnight courier, in each case as follows:   If to Parent or Merger Sub, addressed to it at:   Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 Attention: MoryMorteza Ejabat, Chief Executive Officer Fax:Facsimile: (510) 777-7001   with a copy to:to (which shall not constitute notice):   Latham & Watkins LLP 12636 High Bluff Drive, Suite 300400 San Diego, California 92130 Attention: Craig M. Garner, Esq. Fax:Facsimile: (858) 523-5450   If to the Company, addressed to it at:   SorrentoParadyne Networks, CorporationInc. 9990 Mesa Rim Road8545 126th Avenue North San Diego, California 92121Largo, Florida 33773 Attention: Joe ArmstrongPatrick M. Murphy, Chief Financial Officer Fax: (858) 558-3977Facsimile: (727) 530-2210   with a copy to:to (which shall not constitute notice):   Stradling Yocca CarlsonAlston & RauthBird LLP 660 Newport Center Drive, Suite 16001201 West Peachtree Street Newport Beach, California 92660Atlanta, Georgia 30309-3424 Attention: K.C. Schaaf,Bryan E. Davis, Esq. Fax: (949) 725-4100Facsimile: (404) 253-8441   Section 8.3Certain Definitions. For purposes of this Agreement, the term:   “Acquisition Proposal” means any offer or proposal concerning any (a) merger, consolidation, business combination, or similar transaction involving the Company, (b) sale, lease or other disposition directly or indirectly by merger, consolidation, business combination, share exchange, joint venture, or otherwise of assets of the Company representing 20% or more of the consolidated assets of the Company and its Subsidiaries, (c) issuance, sale, or other disposition of (including by way of merger, consolidation, business combination, share exchange, joint venture, or any similar transaction) securities (or options, rights or warrants to purchase, or securities convertible into or exchangeable for such securities) representing 20% or more of the voting power of the Company, (d) transaction in which any person or group shall acquire beneficial ownership, or the right to acquire beneficial ownership or any group shall have been formed which beneficially owns or has the right to acquire beneficial ownership of 20% or more of the outstanding voting capital stock of the Company or (e) any combination of the foregoing (other than the Merger).   “affiliate” means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first-mentioned person.   “beneficial ownership” (and related terms such as “beneficially owned” or “beneficial owner”) has the meaning set forth in Rule 13d-3 under the Exchange Act.   “Blue Sky Laws” means state securities or “blue sky” laws.   “business day” means any day other than a day on which the SEC shall be closed. “CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended as of the date hereof.   “Contracts” means any of the agreements, contracts, leases, powers of attorney, notes, loans, evidence of indebtedness, purchase orders, letters of credit, settlement agreements, franchise agreements, undertakings, covenants not to compete, employment agreements, licenses, instruments, obligations, commitments, understandings, policies, purchase and sales orders, quotations and other executory commitments to which any company is a party or to which any of the assets of the companies are subject, whether oral or written, express or implied.   “control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise.   “Environmental Laws” means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, treaty, writ or order and any enforceable judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree, judgment, stipulation, injunction, permit, authorization, policy, opinion, or agency requirement, in each case having the force and effect of law, relating to pollution, contamination, protection, investigation or restoration of the environment, health and safety or natural resources, including, without limitation, noise, odor, wetlands, or the use, handling, presence, transportation, treatment, storage, disposal, release, threatened release or discharge of Hazardous Materials.   “Environmental Permits” means any permit, approval, identification number, license and other authorization required under any applicable Environmental Law.   “Equity Interest” means any share, capital stock, partnership, member or similar interest in any entity, and any option, warrant, right or security (including debt securities) convertible, exchangeable or exercisable therefor.   “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.   “ERISA Affiliate” means any entity or trade or business (whether or not incorporated) other than the Company that together with the Company, is considered under common control and treated as a single employer under Section 4.14(b), (c), (m) or (o) of the Code. “Exchange” means the Nasdaq National Market or such other exchange or trading market on which the Parent Common Stock is then listed.   “Exchange Act” shall mean Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. “Expenses” includes all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby, including the preparation, printing, filing and mailing of the Proxy Statement and the solicitation of stockholder approvals and all other matters related to the transactions contemplated hereby.   “GAAP” means generally accepted accounting principles as applied in the United States.   “Governmental Entity” means domestic or foreign governmental, administrative, judicial or regulatory authority.   “group” is defined as in the Exchange Act, except where the context otherwise requires.   “Hazardous Materials” means (a) any petroleum, petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials or polychlorinated biphenyls or (b) any chemical, material or other substance defined or regulated as toxic or hazardous or as a pollutant or contaminant or waste under any applicable Environmental Law. “HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.   “Intellectual Property” means all intellectual property or other proprietary rights of every kind, foreign or domestic, including all patents, patent applications, inventions (whether or not patentable), processes, products, technologies, discoveries, copyrightable and copyrighted works, apparatus, trade secrets, trademarks, trademark registrations and applications, domain names, service marks, service mark registrations and applications, trade names, trade secrets, know-how, trade dress, copyright registrations, customer lists, confidential marketing and customer information, licenses, confidential technical information, software, and all documentation thereof.   “IRS” means the United States Internal Revenue Service.   “knowledge” of any person which is not an individual means, with respect to any specific matter, the actual knowledge of such person’s executive officers and any other officer having primary responsibility for such matter after reasonable inquiry.   “Law” means any foreign or domestic law, statute, code, ordinance, rule, regulation, order, judgment, writ, stipulation, award, injunction, decree or arbitration award or finding.   “Material Adverse Effect” means, when used in connection with Parent or the Company, any change, effect or circumstance that (a) has or could reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of such party and its Subsidiaries taken as a whole, other than such changes, effects or circumstances reasonably attributable to: (i) economic conditions generally in the United States or foreign economies in any locations where such party has material operations or sales; (ii) conditions generally affecting the industries in which such party participates; provided, with respect to clauses (i) and (ii), the changes, effects or circumstances do not have a materially disproportionate effect (relative to other industry participants) on such party; (iii) the announcement or pendency of the Merger (including any claim, litigation, cancellation of or delay in customer orders, reduction in revenues or income, disruption of business relationships or loss of employees); (iv) legal, accounting, investment banking or other fees or expenses incurred in connection with the transactions contemplated by this Agreement (provided, in the case of the Company, such fees and expenses are consistent with the statement of cash expenditures attached hereto as Schedule 5.7);Agreement; (v) the payment of any amounts due to, or the provision of any other benefits to, any officers or employees under employment contracts, non-competition agreements, employee benefit plans, severance arrangements or other arrangements in existence on the date of this Agreement and disclosed in the Company Disclosure ScheduleMemorandum or Parent Disclosure Schedule,Memorandum, as applicable; (vi) any action taken bywith the Company with Parent’sother party’s express written consent; (v)(vii) any change in the trading price of a party’s common stock in and of itself; or (vi)(viii) any failure, in and of itself, by either party to meet internal or other estimates, predictions, projections or forecasts of revenue, net income or any other measure of financial performance (it being understood that, with respect to clauses (v)(vii) and (vi)(viii), the facts or circumstances giving rise or contributing to such change in trading price or failure to meet estimates or projections may be deemed to constitute, or be taken into account in determining whether there has been, a Material Adverse Effect); or (b) prevents Parent or the Company, as applicable, from consummating the Merger and the other transactions contemplated by this Agreement.   “person” means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d) of the Exchange Act).   “SEC” means the Securities and Exchange Commission.   “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.   “Subsidiary” of any person means any corporation, partnership, joint venture or other legal entity of which such person (either alone or through or together with any other subsidiary), owns, directly or indirectly, a majority of the stock or other equity interests the holders of which are generally entitled to vote for the election of the Board of Directors or other governing body of such corporation, partnership, joint venture or other legal entity. “Superior Proposal” means a bona fide written offer which is not solicited after the date hereof in violation of this Agreement made by any person other than Parent or Merger Sub that (a) concerns an Acquisition Proposal (except that references in the definition of Acquisition Proposal to “20%” shall be “50%”) involving the Company, (b) is on terms which the Company Board in good faith concludes (following consultation with its financial advisors and outside legal counsel) are more favorable to the Company’s stockholders (in their capacities as stockholders) than the transactions contemplated by this Agreement (including any revisions hereto), and (c) is, in the good faith judgment of the Company Board, reasonably likely to be financed and completed on the terms proposed, on or before the expected Closing Date, taking into account the various legal, financial and regulatory aspects of the proposal.   “Taxes” means any federal, state, local or foreign income, gross receipts, franchise, estimated, alternative, minimum, add-on minimum, sales, use, transfer, registration, ad valorem, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental (including taxes under Section 59A of the Code), customs duties, real property, personal property, capital stock, employment, profits, withholding, disability, intangibles, withholding, social security, unemployment, disability, payroll, license, employee or other tax or levy, of any kind whatsoever, including any interest, penalties, or additions to tax in respect of the foregoing whether disputed or not.   “Tax Returns” means any report, return (including information return), claim for refund, declaration or statement relating to Taxes, including any schedule or attachment thereto, and including any amendments thereof. Section 8.4Terms Defined Elsewhere. The following terms are defined elsewhere in this Agreement, as indicated below:   Defined Terms    Section Adjusted Cash Balance Section 6.2(f) Agreement    Preamble Certificate of Merger    Section 1.2 Certificates    Section 2.2(b) Closing    Section 1.2 Closing Date    Section 1.2 Code    Recitals Company    Preamble Company Balance Sheet    Section 3.7(c) Company Benefit Plan    Section 3.10(a) Company Board    Section 2.4 Company Board Approval    Section 3.4(b) Company Bylaws    Section 3.2 Company Certificate    Section 3.2 Company Common Stock    Section 2.1(a) Company Converted Warrant    Section 2.5 Company Debenture Section 2.7 2.6 Company Disclosure ScheduleMemorandum    Article III Company Employees    Section 5.11(a) 5.10(a) Company Financial Advisor    Section 3.19 Company Indemnified Person Section 5.11(a) Company Material Contract    Section 3.13 Company Material Intellectual Property    Section 3.16 Company Options    Section 2.4 Company Permits    Section 3.6 Company Preferred Stock    Section 3.3(a) Company Recommendation    Section 5.3(a) Company SEC Filings    Section 3.7(a) Company Stock Option Plans Section 2.4 Company Stockholder Approval Section 3.20 Company Stockholders’ Meeting Section 5.3(a) Company Voting Agreement Recitals Company Warrant Section 2.5 Confidentiality Agreement Section 5.4 Customers Section 3.22 D&O Insurance Section 5.12(b) DGCL Recitals Effective Time Section 1.2 ESPP Section 5.11(b) Exchange Agent Section 2.2(a) Exchange Ratio Section 2.1(a) Exchange Fund Section 2.2(a) Joint Proxy/Prospectus Section 5.2(a) Merger Recitals Merger Sub Preamble Multiemployer Plan Section 3.10(c) Outside Date Section 7.1(b) Parent Preamble Parent Balance Sheet Section 4.7(c) Parent Benefit Plan Section 5.11(a) Defined Terms    Section Company Stock Option Plans Section 2.4 Company Stockholder Approval Section 3.20 Company Stockholders’ Meeting Section 5.3(a) Company Voting Agreement Recitals Company Warrant Section 2.6 Confidentiality Agreement Section 5.4 Customers Section 3.22 D&O Insurance Section 5.11(b) DGCL Recitals Effective Time Section 1.2 ESPP Section 2.5 Exchange Agent Section 2.2(a) Exchange Fund Section 2.2(a) Exchange Ratio Section 2.1(a) Final Purchase Date Section 2.5 Joint Proxy/Prospectus Section 5.2(a) Merger Recitals Merger Sub Preamble Multiemployer Plan Section 3.10(c) Outside Date Section 7.1(b) Parent Preamble Parent Balance Sheet Section 4.7(c) Parent Benefit Plan Section 5.10(a) Parent Board    Section 4.4(b) Parent Board Approval    Section 4.4(b) Parent Bylaws    Section 4.2 Parent Certificate    Section 4.2 Parent Common Stock    Section 2.1(a) Parent Disclosure ScheduleMemorandum    Article IV Parent Financial Advisor    Section 4.14 Parent Material Intellectual Property Section 4.12 Parent Options    Section 4.3(a) Parent Permits    Section 4.6 Parent Preferred Stock    Section 4.3(a) Parent SEC Filings    Section 4.6(a) 4.7(a) Parent Recommendation    Section 5.3(b) Parent Stock Option Plans    Section 2.4 Parent Stockholder Approval    Section 4.9 4.15 Parent Stockholders’ Meeting    Section 5.3(b) Parent Voting Agreement    Recitals Parent Warrants    Section 4.3(a) PIPE Warrants Section 6.2(f) Proxy Statement    Section 5.2(a) Registration Statement    Section 5.2(a) Representatives    Section 5.4 S-3 Registration StatementSarbanes-Oxley Act    Section 3.7(d) Section 5.15(a)16 Section 5.10(c) Surviving Corporation Section 1.1 S-8 Registration Statement    Section 5.15(b) 5.15 Sarbanes-Oxley ActTax Opinion    Section 3.7(d) Section 16 Section 5.11(c) Surviving Corporation Section 1.1 6.3(f) Termination Fee    Section 7.2(d)7.2(b) 2004 Form 10-K Section 3.2 Section 8.5Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.   Section 8.6Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.   Section 8.7Entire Agreement. This Agreement (together with the Exhibits, Parent Disclosure ScheduleMemorandum and Company Disclosure ScheduleMemorandum and the other documents delivered pursuant hereto) and the Confidentiality Agreement (other than the disclaimer of any representations and warranties contained therein which is superseded hereby) constitute the entire agreement of the parties and supersede all prior agreements and undertakings, both written and oral, between the parties, or any of them, with respect to the subject matter hereof, and except as otherwise expressly provided herein, are not intended to confer upon any other person any rights or remedies hereunder.   Section 8.8Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto, in whole or in part (whether by operation of Law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void. Section 8.9Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors and assigns, and nothing in this Agreement, express or implied, other than pursuant to Section 5.12,Sections 5.11 and 5.17, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.   Section 8.10Mutual Drafting. Each party hereto has participated in the drafting of this Agreement, which each party acknowledges is the result of extensive negotiations between the parties.   Section 8.11Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury.Jury.   (a) This Agreement shall be governed by, and construed in accordance with, the Laws of the State of California,Delaware, without regard to laws that may be applicable under conflicts of laws principles.   (b) Each of the parties hereto irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of or relating to this Agreement or any of the agreements delivered in connection herewith or the transactions contemplated hereby or thereby shall be brought in state courts of the State of Delaware (or, if such courts do not have jurisdiction or do not accept jurisdiction, in the United States District Court for the Northern District of California (or, if such court does not have jurisdiction or does not accept jurisdiction, in any state court of general jurisdiction located in Alameda County, California)the State of Delaware), (ii) consents to the jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection that such party may have to the laying of venue of any such suit, action or proceeding in any such court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 8.2. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by Law.   (c)EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 8.11(c).   Section 8.12Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.   Section 8.13Specific Performance. The parties hereto agree that irreparable damage wouldcould occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitlednot object to the granting of such relief on the basis that an injunction or injunctions, withoutadequate remedy exists at law and shall not insist upon the posting of any bond as a condition to prevent breachesthe granting of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction,such relief, this being in addition to any other remedy to which they are entitled at law or in equity.   [Signature Page Follows] IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.   ZHONE TECHNOLOGIES, INC. By:   /s/    KSIRK/ MORTEZA EJABATISAKA             a duly authorized signatory SELENEPARROT ACQUISITION CORP. By:   /s/    KSIRK/ MORTEZA EJABATISAKA             a duly authorized signatory SORRENTOPARADYNE NETWORKS, CORPORATIONINC. By:   /s/    SS/    PHILLIPEAN AE. BRNESONELANGER             a duly authorized signatory SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER ANNEX B   VOTING AGREEMENT   VOTING AGREEMENT, dated April 22, 2004July 7, 2005 (this “Agreement”), by and among SorrentoParadyne Networks, Corporation,Inc., a Delaware corporation (the “Company”), and each of the persons listed onSchedule A hereto (each a “Stockholder” and, collectively, the “Stockholders”).   WHEREAS, each of the Stockholders is, as of the date hereof, the record and beneficial owner of that number of shares of Common Stock, par value $0.001 per share (the “Parent Common Stock”), of Zhone Technologies, Inc., a Delaware corporation (“Parent”), set forth opposite such Stockholder’s name onSchedule A hereto;   WHEREAS, Parent, SeleneParrot Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub”), and the Company concurrently with the execution and delivery of this Agreement are entering into an Agreement and Plan of Merger, dated as of the date hereof (as the same may be amended or supplemented, the “Merger Agreement”), providing for, among other things, the merger (the “Merger”) of Merger Sub with and into the Company upon the terms and subject to the conditions set forth in the Merger Agreement (capitalized terms used and not otherwise defined herein shall have the meanings attributed thereto in the Merger Agreement); and   WHEREAS, as a condition to the willingness of the Company to enter into the Merger Agreement, and in order to induce the Company to enter into the Merger Agreement, the Stockholders have agreed to enter into this Agreement.   NOW, THEREFORE, in consideration of the execution and delivery by the Company of the Merger Agreement and the mutual representations, warranties, covenants and agreements contained herein and therein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:   Section 1.Representations and Warranties of the Stockholders. Each of the Stockholders hereby represents and warrants to the Company, severally and not jointly, as follows:   (a) Such Stockholder is the recordbeneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and beneficialunless otherwise indicated, the record owner of the shares of Parent Common Stock (as may be adjusted from time to time pursuant to Section 5 hereof, the “Shares”) set forth opposite such Stockholder’s name onSchedule A to this Agreement and such Shares represent all of the Sharesshares of Parent Common Stock beneficially owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) by such Stockholder.Stockholder as of the date hereof. For purposes of this Agreement, the term “Shares” shall include any shares of Parent Common Stock issuable to such Stockholder upon exercise or conversion of any existing right, contract, option, or warrant to purchase, or securities convertible into or exchangeable for, Parent Common Stock (“Stockholder Rights”) that are currently exercisable or convertible or become exercisable or convertible and any other shares of Parent Common Stock such Stockholder may acquire or beneficially own during the term of this Agreement.Schedule A lists all Stockholder Rights held by such Stockholder.   (b) Such Stockholder has all requisite power and authority and, if an individual, the legal capacity, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been validly executed and delivered by such Stockholder and, assuming that this Agreement constitutes the legal, valid and binding obligation of the other parties hereto, constitutes the legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms (except insofar as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, or by principles governing the availability of equitable remedies). (c) The execution and delivery of this Agreement by such Stockholder does not, and the performance of this Agreement by such Stockholder will not, (i) conflict with the Certificate of Incorporation or By-laws or similar organizational documents of such Stockholder as presently in effect (in the case of a Stockholder that is a legal entity), (ii) conflict with or violate any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to such Stockholder or by which it is bound or affected, (iii)(A) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, (B) give to any other person any rights of termination, amendment, acceleration or cancellation of, or (C) result in the creation of any pledge, claim, lien, charge, encumbrance or security interest of any kind or nature whatsoever upon any of the properties or assets of the Stockholder under, any agreement, contract, indenture, note or instrument to which such Stockholder is a party or by which it is bound or affected, except for such breaches, defaults or other occurrences that would not prevent or materially delay the performance by such Stockholder of any of such Stockholder’s obligations under this Agreement, or (iv) except for applicable requirements, if any, of the Exchange Act, the Securities Act of 1933, as amended (the “Securities Act”), or the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), require any filing by such Stockholder with, or any permit, authorization, consent or approval of, any governmental or regulatory authority, except where the failure to make such filing or obtain such permit, authorization, consent or approval would not prevent or materially delay the performance by Stockholder of any of such Stockholder’s obligations under this Agreement.   (d) The Shares and the certificates representing the Shares owned by such Stockholder are now and at all times during the term hereof will be held by such Stockholder, or by a nominee or custodian for the benefit of such Stockholder, free and clear of all pledges, liens, charges, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever, except for any such encumbrances or proxies arising hereunder or under applicable federal and state securities laws or under the agreements set forth onSchedule B hereto. Such Stockholder owns of record or beneficially no shares of Parent Common Stock other than such Stockholder’s Shares.   (e) As of the date hereof, neither such Stockholder, nor any of its respective properties or assets is subject to any order, writ, judgment, injunction, decree, determination or award that would prevent or delay the consummation of the transactions contemplated hereby.   (f) Such Stockholder understands and acknowledges that the Company is entering into the Merger Agreement in reliance upon the Stockholder’s execution and delivery of this Agreement.   Section 2.Representations and Warranties of the Company. The Company hereby represents and warrants to the Stockholders as follows:   (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. This Agreement has been duly executed and delivered by the Company and, assuming that this Agreement constitutes the legal, valid and binding obligation of the other parties hereto, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms (except insofar as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, or by principles governing the availability of equitable remedies).   (b) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, (i) conflict with the Certificate of Incorporation or By-laws or similar organizational documents of the Company as presently in effect, (ii) conflict with or violate any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or by which the Company is bound or affected, (iii) (A) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, (B) give to others any rights of termination, amendment, acceleration or cancellation of, or (C) result in the creation of any pledge, claim, lien, charge, encumbrance or security interest of any kind or nature whatsoever upon any of the properties or assets of the Company under, any agreement, contract, indenture, note or instrument to which the Company is a party or by which it is bound or affected, except for such breaches, defaults or other occurrences that would not prevent or materially delay the performance by the Company of its obligations under this Agreement, or (iv) except for applicable requirements, if any, of the Exchange Act, the Securities Act or the HSR Act, require any filing by the Company with, or any permit, authorization, consent or approval of, any governmental or regulatory authority, except where the failure to make such filing or obtain such permit, authorization, consent or approval would not prevent or materially delay the performance by the Company of its obligations under this Agreement.   Section 3.Covenants of the Stockholders. Each of the Stockholders, severally and not jointly, agrees as follows:   (a) Such Stockholder shall not, except as contemplated by the terms of this Agreement, sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option or other arrangement (including any profit-sharing arrangement) or understanding with respect to the sale, transfer, pledge, assignment or other disposition of, the Shares (including any options or warrants to purchase Parent Common Stock) to any person (any such action, a “Transfer”). For purposes of clarification, the term “Transfer” shall include, without limitation, any short sale (including any “short sale against the box”), pledge, transfer, and the establishment of any open “put equivalent position” within the meaning of Rule 16a-1(h) under the Exchange Act. Notwithstanding the foregoing, (i) Transfers of Shares as bona fide gifts, (ii) distributions of Shares to partners, members, stockholders, subsidiaries, affiliates, affiliated partnerships or other affiliated entities of the undersigned, (iii) Transfers of Shares by will or intestacy, and (iv) Transfers of Shares to (A) the undersigned’s immediate family or (B) a trust, the beneficiaries of which are the undersigned and/or members of the undersigned’s immediate family, shall not be prohibited by this Agreement; provided that in the case of any such transfer or distribution pursuant to clause (i), (ii), (iii) or (iv), each donee or distributee shall execute and deliver to the Company a valid and binding counterpart to this Agreement.   (b) Such Stockholder shall not, except as contemplated by the terms of this Agreement (i) enter into any voting arrangement, whether by proxy, voting agreement, voting trust, power-of-attorney or otherwise, with respect to the Shares or (ii) take any other action that would in any way restrict, limit or interfere with the performance of his/her obligations hereunder or the transactions contemplated hereby or make any representation or warranty of such Stockholder herein untrue or incorrect in any material respect.   (c) At any meeting of Stockholders of Parent called to vote upon the Merger, andthe Merger Agreement, the issuance of shares of Parent Common Stock pursuant to the Merger or any other transaction contemplated by the Merger Agreement or at any adjournment thereof or in any other circumstances upon which a vote, consent or other approval (including by written consent) with respect to the Merger and the Merger Agreementsuch matters is sought, each Stockholder shall vote (or cause to be voted), or shall consent, execute a consent or cause to be executed a consent in respect of, such Stockholder’s Shares in favor of the Merger, the adoption by Parent of the Merger Agreement, the issuance of shares of Parent Common Stock pursuant to the Merger and the approval of theany other transactions contemplated by the Merger Agreement. At any meeting of Stockholders of Parent or at any adjournment thereof or in any other circumstances upon which the Stockholder’s vote, consent or other approval is sought, such Stockholder shall vote (or cause to be voted) such Stockholder’s Shares against any amendment of Parent’s certificate of incorporation or by-laws or other proposal, action or transaction involving Parent or any of its Subsidiaries, which amendment or other proposal, action or transaction would in any manner impede, frustrate, prevent or nullify the Merger, the Merger Agreement, the issuance of shares of Parent Common Stock pursuant to the Merger or any of the other transactions contemplated by the Merger Agreement (collectively, “Frustrating Transactions”).   (d) Such Stockholder agrees to permit the Company to publish and disclose in the Proxy Statement and related filings under the securities laws such Stockholder’s identity and ownership of Shares and the nature of its commitments, arrangements and understandings under this Agreement and any other information required by applicable law. Section 4.Grant of Irrevocable Proxy; Appointment of Proxy.   (a) Each Stockholder hereby irrevocably grants to, and appoints, Joe Armstrong,Patrick M. Murphy, and any other individual who shall hereafter be designated by the Company, such Stockholder’s proxy and attorney-in-fact (with full power of substitution), for and in the name, place and stead of such Stockholder, to vote such Stockholder’s Shares, or grant a consent or approval in respect of such Shares, at any meeting of Stockholders of Parent or at any adjournment thereof or in any other circumstances upon which their vote, consent or other approval is sought, in favor of the Merger, the adoption by Parent of the Merger Agreement and the approval of the other transactions contemplated by the Merger Agreement and against any Frustrating Transaction.   (b) Each Stockholder represents that any proxies heretofore given in respect of such Stockholder’s Shares are not irrevocable, and that any such proxies are hereby revoked.   (c) Each Stockholder hereby affirms that the irrevocable proxy set forth in this Section 4 is given in connection with the execution of the Merger Agreement, and that such irrevocable proxy is given to secure the performance of the duties of such Stockholder under this Agreement. Such Stockholder hereby further affirms that the irrevocable proxy is coupled with an interest and may under no circumstances be revoked, subject to Section 7 herein. Such Stockholder hereby ratifies and confirms all that such irrevocable proxy may lawfully do or cause to be done by virtue hereof. Such irrevocable proxy is executed and intended to be irrevocable in accordance with the provisions of Section 212(e) of the General Corporation Law of the State of Delaware. Such irrevocable proxy shall be valid until the termination of this Agreement pursuant to Section 7 herein.   Section 5.Adjustments Upon Share Issuances, Changes in Capitalization. In the event of any change in Parent Common Stock or in the number of outstanding shares of Parent Common Stock by reason of a stock dividend, split-up,subdivision, reclassification, recapitalization, split, combination, exchange of shares or other similar event or transaction or any other change in the corporate or capital structure of Parent (including, without limitation, the declaration or payment of an extraordinary dividend of cash, securities or other property), and consequently the number of Shares shall bechanges or is otherwise adjusted, appropriately, and this Agreement and the obligations hereunder shall attach to any additional shares of Parent Common Stock, Stockholder Rights or other securities or rights of Parent issued to or acquired by each of the Stockholders.   Section 6.Further Assurances. Each Stockholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further transfers, assignments, endorsements, consents and other instruments as the Company may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement and to vest the power to vote such Stockholder’s Shares as contemplated by Section 3 herein.   Section 7.Termination. This Agreement, and all rights and obligations of the parties hereunder, shall terminate upon the earlier of (a) the Effective Time and (b) the date upon which the Merger Agreement is terminated pursuant to Section 7.1 thereof. Notwithstanding the foregoing, Sections 7, 8 and 9 shall survive any termination of this Agreement.   Section 8.Action in Stockholder Capacity Only. No person executing this Agreement who is or becomes during the term hereof a director or officer of Parent makes any agreement or understanding herein in his or her capacity as such director or officer. Each Stockholder signs solely in his or her capacity as the record holder and beneficial owner of, or the trustee of a trust whose beneficiaries are the beneficial owners of, such Stockholder’s Shares and nothing herein shall limit or affect any actions taken by a Stockholder in his or her capacity as an officer or director of Parent to the extent permitted by the Merger Agreement.   Section 9.Miscellaneous.   (a)Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties without the prior written consent of the other parties. Subject to the preceding preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Each Stockholder agrees that this Agreement and the obligations of such Stockholder hereunder shall attach to such Stockholder’s Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Shares shall pass, whether by operation of law or otherwise, including without limitation such Stockholder’s heirs, guardians, administrators or successors.   (b)Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated thereby shall be paid by the party incurring such expenses.   (c)Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto and in compliance with applicable law.   (d)Notice. All notices and other communications hereunder shall be in writing and shall be deemed duly given if delivered personally, mailed by registered or certified mail (return receipt requested), delivered by Federal Express or other nationally recognized overnight courier service or sent via facsimile to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):   (i) if to the Company, addressed to it at:   SorrentoParadyne Networks, CorporationInc. 9990 Mesa Rim Road8545 126th Avenue North San Diego, CA 92121Largo, Florida 33773 Attention: Joe ArmstrongPatrick M. Murphy, Chief Financial Officer Fax: (858) 558-3977(727) 530-2210   with a copy to:to (which shall not constitute notice):   Stradling Yocca CarlsonAlston & RauthBird LLP 660 Newport Center Drive, Suite 16001201 West Peachtree Street Newport Beach, California 92660Atlanta, Georgia 30309-3424 Attention: K.C. Schaaf,Bryan E. Davis, Esq. Fax: (949) 725-4100(404) 253-8441   and   (ii) if to a Stockholder, to the address set forth under the name of such Stockholder onSchedule A hereto   with a copy to:to (which shall not constitute notice):   Latham & Watkins LLP 12636 High Bluff Drive, Suite 300400 San Diego, California 92130 Attention: Craig M. Garner, Esq. Fax: (858) 523-5450   (e)Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. In this Agreement, unless a contrary intention appears, (i) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision and (ii) reference to any Section means such Section hereof. No provision of this Agreement shall be interpreted or construed against any party hereto solely because such party or its legal representative drafted such provision.   (f)Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. (g)Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements and undertakings, both written and oral, between the parties, or any of them, with respect to the subject matter hereof, and except as otherwise expressly provided herein, is not intended to confer upon any other person any rights or remedies hereunder. (h)Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Delaware, without regard to laws that may be applicable under conflicts of laws principles. Each of the parties hereto irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of or relating to this Agreement or any of the agreements delivered in connection herewith or the transactions contemplated hereby or thereby shall be brought in the state courts of the State of Delaware (or, if such courts do not have jurisdiction or do not accept jurisdiction, in the United States District Court for the Northern District of California (or, if such court does not have jurisdiction or does not accept jurisdiction, in any state court of general jurisdiction located in Alameda County, California)the State of Delaware), (ii) consents to the jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection that such party may have to the laying of venue of any such suit, action or proceeding in any such court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9(d). Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by Law.   EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9(h).   (i)Specific Performance.Performance. The parties hereto agree that irreparable damage wouldcould occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitlednot object to the granting of such relief on the basis that an injunction or injunctions, withoutadequate remedy exists at law and shall not insist upon the posting of any bond as a condition to prevent breachesthe granting of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction,such relief, this being in addition to any other remedy to which they are entitled at law or in equity.   (j)Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.   [Signature Page Follows] IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer thereunto duly authorized and each Stockholder has signed this Agreement, all as of the date first written above.   SORRENTOPARADYNE NETWORKS, CORPORATIONINC. By:   /s/    PSHILLIPEAN AE. BRNESONELANGER         Name:   Phillip ArnesonSean E. Belanger Title:   Chief Executive OfficerChairman and CEO VOTING AGREEMENT COUNTERPART SIGNATURE PAGE IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer thereunto duly authorized and each Stockholder has signed this Agreement, all as of the date first written above. STOCKHOLDERS: /s/    MORTEZA EJABAT         Morteza Ejabat Address: c/o Zhone Technologies, Inc. 7001 Oakport St. Oakland, CA 94621 /s/    JEANETTE SYMONS         Jeanette Symons Address: c/o Zhone Technologies, Inc. 7001 Oakport St. Oakland, CA 94621 /s/    KIRK MISAKA         Kirk Misaka Address: c/o Zhone Technologies, Inc. 7001 Oakport St. Oakland, CA 94621 /s/    MICHAEL M. CONNORS Michael M. Connors Address: c/o Zhone Technologies, Inc. 7001 Oakport St. Oakland, CA 94621 /s/    ROBERT K. DAHL         Robert K. Dahl Address: c/o Zhone Technologies, Inc. 7001 Oakport St. Oakland, CA 94621STOCKHOLDERS: VOTING AGREEMENT COUNTERPART SIGNATURE PAGE IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer thereunto duly authorized and each Stockholder has signed this Agreement, all as of the date first written above. STOCKHOLDERS: /s/    ADAM CLAMMER         Adam Clammer Address: c/o KKR 2800 Sand Hill Road Menlo Park, CA 94025 /s/    JAMES H. GREENE, JR.         James H. Greene, Jr. Address: c/o KKR 2800 Sand Hill Road Menlo Park, CA 94025 /s/    JAMES COULTER         James Coulter Address: 301 Commerce St., Ste. 3300 Fort Worth, TX 76102 /s/    C. RICHARD KRAMLICH         C. Richard Kramlich Address: 1119 St. Paul St. Baltimore, MD 21202 /s/    BARTON Y. SHIGEMURA         Barton Y. Shigemura Address: c/o Yotta Yotta, Inc. 6020 104th St. Northwest Edmonton, AB T6H5S4 /s/    JAMES TIMMINS         James Timmins Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE TPG ZHONE, L.L.C. By: TPG Partners II, L.P., Managing Member By: TPG GenPar II, L.P. By: TPG Advisors II, Inc. By: /s/    RICHARD A. EKLEBERRY         Richard A. Ekleberry Its: Vice President Address: 301 Commerce St., Ste. 3300 Fort Worth, TX 76102 TPG GENPAR II, L.P. By: TPG Advisors II, Inc. By: /s/    RICHARD A. EKLEBERRY         Richard A. Ekleberry Its: Vice President Address: 301 Commerce St., Ste. 3300 Fort Worth, TX 76102 KKR-ZT, L.L.C. By: /s/    JAMES H. GREENE, JR.         Its: By: Its: Address: 9 West 57th St., Ste. 4200 New York, NY 10019 NEW ENTERPRISE ASSOCIATES VIII, L.P. By: /s/    C. RICHARD KRAMLICH         Its: General Partner By: C. RICHARD KRAMLICH Its: General Partner Address: 1119 St. Paul St. Baltimore, MD 21202 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE NEW ENTERPRISE ASSOCIATES 9, L.P. By: /s/    C. RICHARD KRAMLICH         Its: General Partner By: C. RICHARD KRAMLICH Its: General Partner Address: 1119 St. Paul St. Baltimore, MD 21202 NEW ENTERPRISE ASSOCIATES 8A, L.P. By: /s/    C. RICHARD KRAMLICH         Its: General Partner By: C. RICHARD KRAMLICH Its: General Partner Address: 1119 St. Paul St. Baltimore, MD 21202 NEA PARTNERS 10, L.P. By: /s/    C. RICHARD KRAMLICH         Its: General Partner By: C. RICHARD KRAMLICH Its: General Partner Address: 1119 St. Paul St. Baltimore, MD 21202 NEA VENTURES 2000 By: /s/    C. RICHARD KRAMLICH         Its: Vice President By: DIANE L. WILLIAMS Its: Vice President Address: 1119 St. Paul St. Baltimore, MD 21202 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE NEA DEVELOPMENT CORPORATION By: /s/    C. RICHARD KRAMLICH         Its: General Partner By: C. RICHARD KRAMLICH Its: General Partner Address: 1119 St. Paul St. Baltimore, MD 21202 INVESTMENT ENTERPRISE PARTNERSHIP “NIF NEW TECHNOLOGY FUND 2000/1” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 INVESTMENT ENTERPRISE PARTNERSHIP “NIF NEW TECHNOLOGY FUND 2000/2” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 INVESTMENT ENTERPRISE PARTNERSHIP “NIF NEW TECHNOLOGY FUND 99-A” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE INVESTMENT ENTERPRISE PARTNERSHIP “NIF NEW TECHNOLOGY FUND 99-B” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 INVESTMENT ENTERPRISE PARTNERSHIP “NIF 21-ONE (1)” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 INVESTMENT ENTERPRISE PARTNERSHIP “NIF 21-ONE (2-A)” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 INVESTMENT ENTERPRISE PARTNERSHIP “NIF 21-ONE (2-B)” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE INVESTMENT ENTERPRISE PARTNERSHIP “NIF-TT FUND” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 INVESTMENT ENTERPRISE PARTNERSHIP “NIF-ST FUND” By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 NIF VENTURES CO., LTD By: /s/    JAMES TIMMINS         Its: Managing Director By: Its: Address: 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE SCHEDULE A   OWNERSHIP OF SHARES   Name and Address of Stockholder    Number of Record and Beneficial Shares of Company Common Stock(1)    Number of Shares Underlying Stockholder Rights(2) Morteza Ejabat c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621    3,651,036    258,500 Jeanette Symons c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621    3,063,542    141,000 Kirk Misaka c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621    97,462    93,371 Adam Clammer c/o KKR 2800 Sand Hill Road Menlo Park, California 94025    0    1,175 Michael M. Connors c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621    95,833    37,500 James Coulter 301 Commerce St., Ste. 3300 Fort Worth, Texas 76102    0    0 Robert K. Dahl c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621    187,489    0 James H. Greene, Jr. c/o KKR 2800 Sand Hill Road Menlo Park, California 94025    0    1,175 C. Richard Kramlich 1119 St. Paul St. Baltimore, Maryland 21202    0    0 Barton Y. Shigemura Yotta Yotta, Inc. 6020 104th St. Northwest Edmonton, AB T6H5S4    1,250    37,500 Name and Address of Stockholder Number of Record and Beneficial Shares of Company Common Stock(1) Morteza Ejabat c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 3,451,036 Jeanette Symons c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 3,063,542 Kirk Misaka c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 97,462 Adam Clammer c/o KKR 2800 Sand Hill Road Menlo Park, California 94025 7,468 Michael M. Connors c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 109,925 James Coulter 301 Commerce St., Ste. 3300 Fort Worth, Texas 76102 7,468 Robert K. Dahl c/o Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 190,925 James H. Greene, Jr. c/o KKR 2800 Sand Hill Road Menlo Park, California 94025 7,468 C. Richard Kramlich 1119 St. Paul St. Baltimore, Maryland 21202 7,468 James Timmins 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306 7,468 TPG Zhone, L.L.C. 301 Commerce St., Ste. 3300 Fort Worth, Texas 76102 8,959,375 TPG Genpar II, L.P. 301 Commerce St., Ste. 3300 Fort Worth, Texas 76102 0 Name and Address of Stockholder    Number of Record and Beneficial Shares of Company Common Stock(1)    Number of Shares Underlying Stockholder Rights(2) James Timmins 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    0    0 TPG Zhone, L.L.C. 301 Commerce St., Ste. 3300 Fort Worth, Texas 76102    8,959,375    0 TPG Genpar II, L.P. 301 Commerce St., Ste. 3300 Fort Worth, Texas 76102    0    2,350 KKR-ZT, L.L.C. 9 West 57th St., Ste 4200 New York, New York 10019    8,959,375    0 New Enterprise Associates VIII, L.P. 1119 St. Paul St. Baltimore, Maryland 21202    1,817,129    0 New Enterprise Associates 9, L.P. 1119 St. Paul St. Baltimore, Maryland 21202    3,407,077    0 New Enterprise Associates 8A, L.P. 1119 St. Paul St. Baltimore, Maryland 21202    853,629    0 NEA Partners 10, L.P. 1119 St. Paul St. Baltimore, Maryland 21202    90,032    0 NEA Ventures 2000 1119 St. Paul St. Baltimore, Maryland 21202    88    0 NEA Development Corporation 1119 St. Paul St. Baltimore, Maryland 21202    0    3,525 NIF Ventures Co., LTD 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    363,667    0 Investment Enterprise Partnership “NIF New Technology Fund 2000/1” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    260,282    0 Investment Enterprise Partnership “NIF New Technology Fund 2000/2” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    223,387    0 Name and Address of Stockholder    Number of Record and Beneficial Shares of Company Common Stock(1)    Number of Shares Underlying Stockholder Rights(2) Investment Enterprise Partnership “NIF New Technology Fund 99-A” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    143,414    0 Investment Enterprise Partnership “NIF New Technology Fund 99-B” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    143,414    0 Investment Enterprise Partnership “NIF 21- One (1)” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    74,532    0 Investment Enterprise Partnership “NIF 21- One (2-A)” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    39,780    0 Investment Enterprise Partnership “NIF 21- One (2-B)” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    39,780    0 Investment Enterprise Partnership “NIF-TT Fund” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    21,725    0 Investment Enterprise Partnership “NIF-ST Fund” 5 Palo Alto Square, 9th Floor Palo Alto, CA 94306    10,862    0 Name and Address of Stockholder Number of Record and Beneficial Shares of Company Common Stock(1) KKR-ZT, L.L.C. 9 West 57th St., Ste 4200 New York, New York 10019 8,959,375 New Enterprise Associates VIII, L.P. 1119 St. Paul St. Baltimore, Maryland 21202 1,817,129 New Enterprise Associates 9, L.P. 1119 St. Paul St. Baltimore, Maryland 21202 4,106,687 New Enterprise Associates 8A, L.P. 1119 St. Paul St. Baltimore, Maryland 21202 1,204,649 NEA Partners 10, L.P. 1119 St. Paul St. Baltimore, Maryland 21202 4,691,078 NEA Ventures 2000 1119 St. Paul St. Baltimore, Maryland 21202 88 NEA Development Corporation 1119 St. Paul St. Baltimore, Maryland 21202 0 (1) Includes shares outstanding as of the date of this Agreement. (2) Includes shares issuable upon exercise or conversion of Stockholder Rights on or prior to the Outside Date. ANNEX C   VOTING AGREEMENT   VOTING AGREEMENT, dated April 22, 2004July 7, 2005 (this “Agreement”), by and among Zhone Technologies, Inc., a Delaware corporation (“Parent”), SeleneParrot Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub”), and each of the persons listed onSchedule A hereto (each a “Stockholder” and, collectively, the “Stockholders”).   WHEREAS, each of the Stockholders is, as of the date hereof, the record and beneficial owner of that number of shares of Common Stock, par value $0.001 per share (the “Company Common Stock”), of SorrentoParadyne Networks, Corporation,Inc., a Delaware corporation (the “Company”), set forth opposite such Stockholder’s name onSchedule A hereto;   WHEREAS, Parent, Merger Sub and the Company concurrently with the execution and delivery of this Agreement are entering into an Agreement and Plan of Merger, dated as of the date hereof (as the same may be amended or supplemented, the “Merger Agreement”), providing for, among other things, the merger (the “Merger”) of Merger Sub with and into the Company upon the terms and subject to the conditions set forth in the Merger Agreement (capitalized terms used and not otherwise defined herein shall have the meanings attributed thereto in the Merger Agreement); and   WHEREAS, as a condition to the willingness of Parent and Merger Sub to enter into the Merger Agreement, and in order to induce Parent and Merger Sub to enter into the Merger Agreement, the Stockholders have agreed to enter into this Agreement.   NOW, THEREFORE, in consideration of the execution and delivery by Parent and Merger Sub of the Merger Agreement and the mutual representations, warranties, covenants and agreements contained herein and therein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:   Section 1.Representations and Warranties of the Stockholders. Each of the Stockholders hereby represents and warrants to Parent and Merger Sub, severally and not jointly, as follows:   (a) Such Stockholder is the recordbeneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and beneficialunless otherwise indicated, the record owner of the shares of Company Common Stock (as may be adjusted from time to time pursuant to Section 5 hereof, the “Shares”) set forth opposite such Stockholder’s name onSchedule A to this Agreement and such Shares represent all of the Sharesshares of Company Common Stock beneficially owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) by such Stockholder.Stockholder as of the date hereof. For purposes of this Agreement, the term “Shares” shall include any shares of Company Common Stock issuable to such Stockholder upon exercise or conversion of any existing right, contract, option, or warrant to purchase, or securities convertible into or exchangeable for, Company Common Stock (“Stockholder Rights”) that are currently exercisable or convertible or become exercisable or convertible and any other shares of Company Common Stock such Stockholder may acquire or beneficially own during the term of this Agreement.Schedule A lists all Stockholder Rights held by such Stockholder.   (b) Such Stockholder has all requisite power and authority and, if an individual, the legal capacity, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been validly executed and delivered by such Stockholder and, assuming that this Agreement constitutes the legal, valid and binding obligation of the other parties hereto, constitutes the legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms (except insofar as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, or by principles governing the availability of equitable remedies). (c) The execution and delivery of this Agreement by such Stockholder does not, and the performance of this Agreement by such Stockholder will not, (i) conflict with the Certificate of Incorporation or By-laws or similar organizational documents of such Stockholder as presently in effect (in the case of a Stockholder that is a legal entity), (ii) conflict with or violate any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to such Stockholder or by which it is bound or affected, (iii)(A) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, (B) give to any other person any rights of termination, amendment, acceleration or cancellation of, or (C) result in the creation of any pledge, claim, lien, charge, encumbrance or security interest of any kind or nature whatsoever upon any of the properties or assets of the Stockholder under, any agreement, contract, indenture, note or instrument to which such Stockholder is a party or by which it is bound or affected, except for such breaches, defaults or other occurrences that would not prevent or materially delay the performance by such Stockholder of any of such Stockholder’s obligations under this Agreement, or (iv) except for applicable requirements, if any, of the Exchange Act, the Securities Act of 1933, as amended (the “Securities Act”), or the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), require any filing by such Stockholder with, or any permit, authorization, consent or approval of, any governmental or regulatory authority, except where the failure to make such filing or obtain such permit, authorization, consent or approval would not prevent or materially delay the performance by Stockholder of any of such Stockholder’s obligations under this Agreement.   (d) The Shares and the certificates representing the Shares owned by such Stockholder are now and at all times during the term hereof will be held by such Stockholder, or by a nominee or custodian for the benefit of such Stockholder, free and clear of all pledges, liens, charges, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever, except for any such encumbrances or proxies arising hereunder or under applicable federal and state securities laws or under the agreements set forth onSchedule B hereto. Such Stockholder owns of record or beneficially no shares of Company Common Stock other than such Stockholder’s Shares.   (e) As of the date hereof, neither such Stockholder, nor any of its respective properties or assets is subject to any order, writ, judgment, injunction, decree, determination or award that would prevent or delay the consummation of the transactions contemplated hereby.   (f) Such Stockholder understands and acknowledges that Parent is entering into, and causing Merger Sub to enter into, the Merger Agreement in reliance upon the Stockholder’s execution and delivery of this Agreement.   Section 2.Representations and Warranties of Parent and Merger Sub. Parent and Merger Sub hereby jointly and severally represent and warrant to the Stockholders as follows:   (a) Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of Parent and Merger Sub has all requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement. This Agreement has been duly executed and delivered by each of Parent and Merger Sub and, assuming that this Agreement constitutes the legal, valid and binding obligation of the other parties hereto, constitutes the legal, valid and binding obligation of each of Parent and Merger Sub, enforceable against each of them in accordance with its terms (except insofar as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, or by principles governing the availability of equitable remedies).   (b) The execution and delivery of this Agreement by each of Parent and Merger Sub does not, and the performance of this Agreement by each of Parent and Merger Sub will not, (i) conflict with the Certificate of Incorporation or By-laws or similar organizational documents of each of Parent and Merger Sub as presently in effect, (ii) conflict with or violate any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or Merger Sub or by which either is bound or affected, (iii) (A) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, (B) give to others any rights of termination, amendment, acceleration or cancellation of, or (C) result in the creation of any pledge, claim, lien, charge, encumbrance or security interest of any kind or nature whatsoever upon any of the properties or assets of Parent or Merger Sub under, any agreement, contract, indenture, note or instrument to which Parent or Merger Sub is a party or by which it is bound or affected, except for such breaches, defaults or other occurrences that would not prevent or materially delay the performance by Parent or Merger Sub of their obligations under this Agreement, or (iv) except for applicable requirements, if any, of the Exchange Act, the Securities Act or the HSR Act, require any filing by Parent or Merger Sub with, or any permit, authorization, consent or approval of, any governmental or regulatory authority, except where the failure to make such filing or obtain such permit, authorization, consent or approval would not prevent or materially delay the performance by Parent or Merger Sub of their obligations under this Agreement.   Section 3.Covenants of the Stockholders. Each of the Stockholders, severally and not jointly, agrees as follows:   (a) Such Stockholder shall not, except as contemplated by the terms of this Agreement, sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option or other arrangement (including any profit-sharing arrangement) or understanding with respect to the sale, transfer, pledge, assignment or other disposition of, the Shares (including any options or warrants to purchase Company Common Stock) to any person other than Merger Sub or Merger Sub’s designee (any such action, a “Transfer”). For purposes of clarification, the term “Transfer” shall include, without limitation, any short sale (including any “short sale against the box”), pledge, transfer, and the establishment of any open “put equivalent position” within the meaning of Rule 16a-1(h) under the Exchange Act. Notwithstanding the foregoing, (i) Transfers of Shares as bona fide gifts, (ii) distributions of Shares to partners, members, stockholders, subsidiaries, affiliates, affiliated partnerships or other affiliated entities of the undersigned, (iii) Transfers of Shares by will or intestacy, and (iv) Transfers of Shares to (A) the undersigned’s immediate family or (B) a trust, the beneficiaries of which are the undersigned and/or members of the undersigned’s immediate family, shall not be prohibited by this Agreement; provided that in the case of any such transfer or distribution pursuant to clause (i), (ii), (iii) or (iv), each donee or distributee shall execute and deliver to Parent a valid and binding counterpart to this Agreement.   (b) Such Stockholder shall not, except as contemplated by the terms of this Agreement (i) enter into any voting arrangement, whether by proxy, voting agreement, voting trust, power-of-attorney or otherwise, with respect to the Shares or (ii) take any other action that would in any way restrict, limit or interfere with the performance of his/her obligations hereunder or the transactions contemplated hereby or make any representation or warranty of such Stockholder herein untrue or incorrect in any material respect.   (c) Until the Merger is consummated or this Agreement is terminated, except to the extent specifically permitted by the Merger Agreement, such Stockholder shall not, norand shall such Stockholder permituse its reasonable best efforts to cause any investment banker, financial adviser, attorney, accountant or other representative or agent of such Stockholder not to, directly or indirectly (i) solicit, initiate, orknowingly encourage (including by way of furnishing nonpublic information), or take any other action designed to, or which could reasonably be expected to, facilitate an Acquisition Proposal with respect to the Company, or the making, submission or announcement of, any such Acquisition Proposal with respect to the Company or (ii) participate or engage in any discussions or negotiations regarding, or furnish to any person any nonpublic information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes or couldmay reasonably be expected to lead to, any Acquisition Proposal with respect to the Company or (iii) engage in any discussions with any person with respect to any Acquisition Proposal, with respect to the Company, except to notify such person as to the existence of this Agreement. Such Stockholder shall immediately terminate, and each ofshall use its reasonable best efforts to cause its affiliates shall immediately cease and cause to be terminatedterminate, any existing discussions or negotiations with any persons (other than Parent) conducted heretofore with respectthat could be reasonably expected to any of the foregoing.lead to an Acquisition Proposal. Such Stockholder shall as promptly as practicable (and in any event within 48 hours) advise Parent orally and in writing of (a) any Acquisition Proposal with respect to the Company or any request for information with respect to any such Acquisition Proposal received by the Stockholder or any of its affiliates and the material terms and conditions of such Acquisition Proposal or request (includingof any Acquisition Proposal, or any inquiry or proposal, and within 48 hours of the receipt thereof, promptly provide to Parent copies of any written materials received in connection with any of the foregoing, and the identity of the person making such Acquisition Proposal or request) and (b) any changes in any such Acquisition Proposal or such request, (andinquiry or proposal and shall keep Parent reasonably informed of the status and material details (including material amendments) with respect to the information previously provided in connection with the Acquisition Proposal, and shall provide to Parent within 48 hours of receipt thereof all written materials received by it with respect thereto. The Shareholder may satisfy its obligation to provide notice and information to Parent with copies of any writtenrespect to an Acquisition Proposals or amendments or supplements thereto). Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentenceProposal by an investment banker, financial advisor, attorney, accountant or other representative or agent of such Stockholder shall be deemed to be a violation of this Section 3(c) by such Stockholder. Notwithstanding the foregoing, and without limiting the effect of Section 8 of this Agreement, nothing in this Agreement shall prevent any director or officer ofarranging for the Company from taking any actions, in his or her capacity as such, as are permitted by Section 5.5 of the Merger Agreement.to provide that information to Parent.   (d) At any meeting of Stockholders of the Company called to vote upon the Merger, andthe Merger Agreement or any other transaction contemplated by the Merger Agreement or at any adjournment thereof or in any other circumstances upon which a vote, consent or other approval (including by written consent) with respect to the Merger and the Merger Agreementsuch matters is sought, each Stockholder shall vote (or cause to be voted), or shall consent, execute a consent or cause to be executed a consent in respect of, such Stockholder’s Shares in favor of the Merger, the adoption by the Company of the Merger Agreement and the approval of theany other transactions contemplated by the Merger Agreement. At any meeting of Stockholders of the Company or at any adjournment thereof or in any other circumstances upon which the Stockholder’s vote, consent or other approval is sought, such Stockholder shall vote (or cause to be voted) such Stockholder’s Shares against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by the Company or any other Acquisition Proposal with respect to the Company (collectively, “Alternative Transactions”) or (ii) any amendment of the Company’s certificate of incorporation or by-laws or other proposal, action or transaction involving the Company or any of its Subsidiaries, which amendment or other proposal, action or transaction would in any manner impede, frustrate, prevent or nullify the Merger, the Merger Agreement or any of the other transactions contemplated by the Merger Agreement (collectively, “Frustrating Transactions”).   (e) Such Stockholder agrees to permit Parent and Merger Sub to publish and disclose in the Proxy Statement and related filings under the securities laws such Stockholder’s identity and ownership of Shares and the nature of its commitments, arrangements and understandings under this Agreement and any other information required by applicable law.   Section 4.Grant of Irrevocable Proxy; Appointment of Proxy.   (a) Each Stockholder hereby irrevocably grants to, and appoints, MoryMorteza Ejabat, and any other individual who shall hereafter be designated by Parent, such Stockholder’s proxy and attorney-in-fact (with full power of substitution), for and in the name, place and stead of such Stockholder, to vote such Stockholder’s Shares, or grant a consent or approval in respect of such Shares, at any meeting of Stockholders of the Company or at any adjournment thereof or in any other circumstances upon which their vote, consent or other approval is sought, in favor of the Merger, the adoption by the Company of the Merger Agreement and the approval of the other transactions contemplated by the Merger Agreement and against any Alternative Transaction or Frustrating Transaction.   (b) Each Stockholder represents that any proxies heretofore given in respect of such Stockholder’s Shares are not irrevocable, and that any such proxies are hereby revoked.   (c) Each Stockholder hereby affirms that the irrevocable proxy set forth in this Section 4 is given in connection with the execution of the Merger Agreement, and that such irrevocable proxy is given to secure the performance of the duties of such Stockholder under this Agreement. Such Stockholder hereby further affirms that the irrevocable proxy is coupled with an interest and may under no circumstances be revoked, subject to Section 7 herein. Such Stockholder hereby ratifies and confirms all that such irrevocable proxy may lawfully do or cause to be done by virtue hereof. Such irrevocable proxy is executed and intended to be irrevocable in accordance with the provisions of Section 212(e) of the General Corporation Law of the State of Delaware. Such irrevocable proxy shall be valid until the termination of this Agreement pursuant to Section 7 herein. Section 5.Adjustments Upon Share Issuances, Changes in Capitalization. In the event of any change in Company Common Stock or in the number of outstanding shares of Company Common Stock by reason of a stock dividend, split-up,subdivision, reclassification, recapitalization, split, combination, exchange of shares or other similar event or transaction or any other change in the corporate or capital structure of the Company (including, without limitation, the declaration or payment of an extraordinary dividend of cash, securities or other property), and consequently the number of Shares shall bechanges or is otherwise adjusted, appropriately, and this Agreement and the obligations hereunder shall attach to any additional shares of Company Common Stock, Stockholder Rights or other securities or rights of the Company issued to or acquired by each of the Stockholders.   Section 6.Further Assurances. Each Stockholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further transfers, assignments, endorsements, consents and other instruments as Parent or Merger Sub may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement and to vest the power to vote such Stockholder’s Shares as contemplated by Section 3 herein.   Section 7.Termination. This Agreement, and all rights and obligations of the parties hereunder, shall terminate upon the earlier of (a) the Effective Time and (b) the date upon which the Merger Agreement is terminated pursuant to Section 7.1 thereof. Notwithstanding the foregoing, Sections 7, 8 and 9 shall survive any termination of this Agreement.   Section 8.Action in Stockholder Capacity Only. No person executing this Agreement who is or becomes during the term hereof a director or officer of the Company makes any agreement or understanding herein in his or her capacity as such director or officer. Each Stockholder signs solely in his or her capacity as the record holder and beneficial owner of, or the trustee of a trust whose beneficiaries are the beneficial owners of, such Stockholder’s Shares and nothing herein shall limit or affect any actions taken by a Stockholder in his or her capacity as an officer or director of the Company to the extent permitted by the Merger Agreement.   Section 9.Miscellaneous.   (a)Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties without the prior written consent of the other parties, except that Merger Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned subsidiary of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Each Stockholder agrees that this Agreement and the obligations of such Stockholder hereunder shall attach to such Stockholder’s Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Shares shall pass, whether by operation of law or otherwise, including without limitation such Stockholder’s heirs, guardians, administrators or successors.   (b)Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated thereby shall be paid by the party incurring such expenses.   (c)Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto and in compliance with applicable law.   (d)Notice. All notices and other communications hereunder shall be in writing and shall be deemed duly given if delivered personally, mailed by registered or certified mail (return receipt requested), delivered by Federal Express or other nationally recognized overnight courier service or sent via facsimile to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):   (i) if to Parent, addressed to it at:   Zhone Technologies, Inc. 7001 Oakport Street Oakland, California 94621 Attention: Mory EjabatChief Executive Officer Fax: (510) 777-7001 with a copy to:to (which shall not constitute notice):   Latham & Watkins LLP 12636 High Bluff Drive, Suite 300400 San Diego, California 92130 Attention: Craig M. Garner, Esq. Fax: (858) 523-5450   and   (ii) if to a Stockholder, to the address set forth under the name of such Stockholder onSchedule A hereto   with a copy to:to (which shall not constitute notice):   Stradling Yocca CarlsonHill, Ward & RauthHenderson 660 Newport Center Drive, 101 East Kennedy Boulevard Suite 1600 Newport Beach, California 926603700 Attention: K.C. Schaaf,David S. Felman Fax: (813) 221-2900 and a copy to (which shall not constitute notice): Alston & Bird LLP 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Attention: Bryan E. Davis, Esq. Fax: (949) 725-4100(404) 253-8441   (e)Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. In this Agreement, unless a contrary intention appears, (i) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision and (ii) reference to any Section means such Section hereof. No provision of this Agreement shall be interpreted or construed against any party hereto solely because such party or its legal representative drafted such provision.   (f)Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.   (g)Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements and undertakings, both written and oral, between the parties, or any of them, with respect to the subject matter hereof, and except as otherwise expressly provided herein, is not intended to confer upon any other person any rights or remedies hereunder.   (h)Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Delaware, without regard to laws that may be applicable under conflicts of laws principles. Each of the parties hereto irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of or relating to this Agreement or any of the agreements delivered in connection herewith or the transactions contemplated hereby or thereby shall be brought in the state courts of the State of Delaware (or, if such courts do not have jurisdiction or do not accept jurisdiction, in the United States District Court for the Northern District of California (or, if such court does not have jurisdiction or does not accept jurisdiction, in any state court of general jurisdiction located in Alameda County, California)the State of Delaware), (ii) consents to the jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection that such party may have to the laying of venue of any such suit, action or proceeding in any such court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9(d). Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by Law. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9(h).   (i)Specific Performance.Performance. The parties hereto agree that irreparable damage wouldcould occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitlednot object to the granting of such relief on the basis that an injunction or injunctions, withoutadequate remedy exists at law and shall not insist upon the posting of any bond as a condition to prevent breachesthe granting of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction,such relief, this being in addition to any other remedy to which they are entitled at law or in equity.   (j)Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.   [Signature Page Follows] IN WITNESS WHEREOF, each of Parent and Merger Sub has caused this Agreement to be signed by its officer thereunto duly authorized and each Stockholder has signed this Agreement, all as of the date first written above.   ZHONE TECHNOLOGIES, INC. By: /S/s/    KIRK MISAKA         Kirk Misaka Chief Financial Officer SELENE ACQUISITION CORP. /S/    KIRK MISAKA         Kirk Misaka Chief Financial Officer VOTING AGREEMENT COUNTERPART SIGNATURE PAGE IN WITNESS WHEREOF, each of Parent and Merger Sub has caused this Agreement to be signed by its officer thereunto duly authorized and each Stockholder has signed this Agreement, all as of the date first written above. STOCKHOLDERS: By: /S/    PHILLIP W. ARNESON   Name:   Phillip W. Arneson Title: Chief Executive Officer Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, CA 92121 By: /S/    JOE ARMSTRONG   Name: Joe ArmstrongKirk Misaka Title:   Chief Financial Officer Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 PARROT ACQUISITION CORP. By:   /s/    KSIRK/    D. F. F MISHERISAKA         Name:   D. F. FisherKirk Misaka Title:   DirectorChief Financial Officer Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 STOCKHOLDERS: By: /S/    ROBERT L. HIBBARD   Name: Robert L. Hibbard Title: Director Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 By: /s/    LARRY MATTHEWS     Name:       Larry Matthews Title:       Director Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE By: /s/    DON HERZOG         Name: Don Herzog Title: Director Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 By: /s/    THOMAS SCHILLING         Name: Thomas Schilling Title: Director Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 By: /s/    GARY M. PARSONS         Name: Gary M. Parsons Title: Director Address: c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121 VOTING AGREEMENT COUNTERPART SIGNATURE PAGE SCHEDULE A   OWNERSHIP OF SHARES   Name and Address of Stockholder    Number of Record and Beneficial Shares of Company Common Stock(1)    Number of Shares Underlying Stockholder Rights(2) Phillip W. Arneson c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    250    514,550 Joe R. Armstrong c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    150    302,768 Donne F. Fisher c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    24,212    53,000 Robert L. Hibbard c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    50    80,500 Gary M. Parsons c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    0    53,084 Larry J. Matthews c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    0    51,750 Don Herzog c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    0    45,833 Tom Schilling c/o Sorrento Networks Corporation 9990 Mesa Rim Road San Diego, California 92121    0    45,833 Name and Address of Stockholder Number of Shares of Company Common Stock Sean E. Belanger c/o Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 34,7771 Patrick M. Murphy c/o Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 02 Thomas E. Epley c/o Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 235,9823 Scott C. Chandler c/o Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 1,5004 Keith B. Geeslin c/o Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 21,7815 William R. Stensrud c/o Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 353,9356 David Walker c/o Paradyne Networks, Inc. 8545 126th Avenue North Largo, Florida 33773 07 (1)1 IncludesExcludes 2,946,534 shares outstanding as of the date of this Agreement.subject to options exercisable within 60 days. (2)2 Excludes 1,123,937 shares subject to options within 60 days. 3 Excludes 30,000 shares subject to options under the 1999 Non-Employee Directors’ Stock Option Plan. Includes 192,485 shares held by the Thomas E. Epley Trust and 43,497 shares held by the Anderson Epley Family Trust. Mr. Epley is the trustee of each of these trusts. 4 Excludes 15,000 shares subject to options under the 1999 Non-Employee Directors’ Stock Option Plan. 5 Includes 21,781 shares issuable upon exercise or conversionheld by Mr. Geeslin individually. Excludes 25,000 shares subject to options under the 1999 Non-Employee Directors’ Stock Option Plan and 1,605,952 shares beneficially owned by the Sprout Group. Mr. Geeslin occupies various positions of Stockholder Rights on or priorcontrol of the entities associated with the Sprout Group however Mr. Geeslin disclaims beneficial ownership of these shares, except to the Outside Date.extent of his pecuniary interest therein. 6 Includes 353,690 shares held by the Stensrud Family Trust and 245 shares held indirectly by Mr. Stensrud’s son. Excludes 15,000 shares subject to options under the 1999 Non-Employee Directors’ Stock Option Plan. 7 Excludes 20,000 shares subject to options under the 1999 Non-Employee Directors’ Stock Option Plan. ANNEX D   April 21, 2004July 7, 2005   The Board of Directors Zhone Technologies, Inc. 7001 Oakport Drive Oakland, CA 94621 Gentlemen: We understand that Sorrento Networks Corporation, a Delaware corporation (“Seller”), Zhone Technologies, Inc., a Delaware corporation (“Buyer”), and Selene Acquisition Corp., a Delaware corporation (“Merger Sub”), are proposing to enter into an Agreement and Plan of Merger in substantially the form presented to us as of the date hereof (the “Merger Agreement”), pursuant to which Seller will be merged with and into Merger Sub, and Seller will be the surviving entity and the wholly owned subsidiary of Buyer (the “Merger”). Pursuant to the Merger, as more fully described in the Merger Agreement and as further described to us by management of Buyer, we understand that Seller has a total of 16,743,320 shares of its $.001 par value Common Stock (“Seller Common Stock”) and that each outstanding share Seller Common Stock will be converted into and exchangeable at a rate (“Exchange Rate”) of 0.90 shares of the common stock, $.001 par value per share (“Buyer Common Stock”), of Buyer, subject to certain adjustments (the “Consideration”). As an additional part of the Consideration, Buyer will assume at Closing (i) 2,149,758 shares of Seller Common Stock issuable upon exercise of those certain Seller Common Stock options (defined as the “Company Options” in the Merger Agreement) outstanding as of the date hereof, (ii) 3,827,632 shares of Seller Common Stock issuable upon exercise of those certain Seller Common Stock warrants (defined as the “Company Warrants” in the Merger Agreement) outstanding as of the date hereof, and (iii) 2,274,479 shares of Seller Common Stock issuable upon conversion of that certain 7.5% senior convertible debentures due 2007 (defined as the “Company Debentures” in the Merger Agreement) outstanding as of the date hereof, each as provided in the Merger Agreement. The terms and conditions of the Merger are set forth in more detail in the Merger Agreement. You have asked for our opinion as investment bankers as to whether the Consideration to be paid by Buyer pursuant to the Merger is fair to Buyer from a financial point of view, as of the date hereof. In connection with our opinion, we have, among other things: (i) reviewed certain publicly available financial and other data with respect to Seller and Buyer, including the consolidated financial statements for recent years and interim periods to January 31, 2004 and December 31, 2003, respectively, and certain other relevant financial and operating data relating to Seller and Buyer made available to us from published sources and from the internal records of Seller and Buyer; (ii) reviewed the financial terms and conditions of the Merger Agreement; (iii) reviewed certain publicly available information concerning the trading of, and the trading market for, Seller Common Stock and Buyer Common Stock; (iv) compared Seller and Buyer from a financial point of view with certain other companies in the optical networking industry which we deemed to be relevant; (v) considered the financial terms, to the extent publicly available, of selected recent business combinations of companies in the optical networking industry which we deemed to be comparable, in whole or in part, to the Merger; (vi) reviewed and discussed with representatives of the management of Seller and Buyer certain information of a business and financial nature regarding Seller and Buyer, furnished to us by them, including financial forecasts and related assumptions of Seller and Buyer; (vii) made inquiries regarding and discussed the Merger and the Merger Agreement and other matters related thereto with Buyer’s counsel; and (viii) performed such other analyses and examinations as we have deemed appropriate. The Board of Directors Zhone Technologies, Inc. April 21, 2004 Page 2 In connection with our review, we have not assumed any obligation independently to verify the foregoing information and have relied on its being accurate and complete in all material respects. With respect to the financial forecasts for Seller and Buyer provided to us by their respective management, upon their advice and with your consent we have assumed for purposes of our opinion that the forecasts have been reasonably prepared on bases reflecting the best available estimates and judgments of their respective management at the time of preparation as to the future financial performance of Seller and Buyer and that they provide a reasonable basis upon which we can form our opinion. In that regard, we are aware that each of Buyer and Seller are announcing financial results on April 22, 2004 for financial periods ended March 31, 2004 and January 31, 2004, respectively. Any opinions expressed herein by us are based on the valuations of each of Buyer and Seller at the date hereof, and such opinions do not take into consideration or account any changes in such valuations that may occur following such announcements by each of Buyer and Seller. We have also assumed that there have been no material changes in Seller’s or Buyer’s assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statements made available to us. We have relied on advice of counsel and independent accountants to Buyer as to all legal and financial reporting matters with respect to Buyer, the Merger and the Merger Agreement. We have assumed that the Merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934 and all other applicable federal and state statutes, rules and regulations. In addition, we have not assumed responsibility for making an independent evaluation, appraisal or physical inspection of any of the assets or liabilities (contingent or otherwise) of Seller or Buyer, nor have we been furnished with any such appraisals. Finally, our opinion is based on economic, monetary and market and other conditions as in effect on, and the information made available to us as of, the date hereof. Accordingly, although subsequent developments may affect this opinion, we have not assumed any obligation to update, revise or reaffirm this opinion. We have further assumed with your consent that the Merger will be consummated in accordance with the terms described in the Merger Agreement, without any further amendments thereto, and without waiver by Buyer of any of the conditions to its obligations thereunder. We have acted as financial advisor to Buyer in connection with the Merger and will receive a fee for our services, including rendering this opinion, a significant portion of which is payable upon our rendering of this opinion. In the ordinary course of our business, we actively trade the equity securities of Seller and Buyer for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. We have also acted as an underwriter in connection with offerings of securities of Seller and Buyer and performed various investment banking services for Seller and Buyer. A venture fund that is affiliated with us owns equity securities in Buyer that represent less than 5% of the outstanding shares of Buyer’s Common Stock. Based upon the foregoing and in reliance thereon, it is our opinion as investment bankers that the Consideration to be paid by Buyer pursuant to the Merger is fair to Buyer from a financial point of view, as of the date hereof. This opinion is directed to the Board of Directors of Buyer in its consideration of the Merger and is not a recommendation to any stockholder as to how such stockholder should vote with respect to the Merger. Further, this opinion addresses only the financial fairness of the Consideration to the Buyer and does not address the relative merits of the Merger and any alternatives to the Merger, Buyer’s underlying decision to proceed with or effect the Merger, or any other aspect of the Merger. This opinion may not be used or referred to by Buyer, or quoted or disclosed to any person in any manner, without our prior written consent, which consent is hereby The Board of Directors Zhone Technologies, Inc. April 21, 2004 Page 3 given to the inclusion of this opinion in a the Joint Proxy Statement/Prospectus to be filed with the Securities and Exchange Commission in connection with the Merger. In furnishing this opinion, we do not admit that we are experts within the meaning of the term “experts” as used in the Securities Act and the rules and regulations promulgated thereunder, nor do we admit that this opinion constitutes a report or valuation within the meaning of Section 11 of the Securities Act. Very truly yours, THOMAS WEISEL PARTNERS LLC ANNEX E April 21, 2004 Board of Directors Sorrento Networks CorporationZhone Technologies, Inc. 9990 Mesa Rim Road7001 Oakport Street San Diego,Oakland, CA 9212194621   Ladies and Gentlemen:   We understand that Sorrento Networks Corporation (“Sorrento”), Zhone Technologies, Inc. (“Zhone”), Paradyne Networks, Inc. (“Paradyne”), and a wholly-owned subsidiary of Zhone (“Merger Sub”), propose to enter into an Agreement and Plan of Merger (the “Merger Agreement”) whereby, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into SorrentoParadyne and SorrentoParadyne will becomecontinue as a wholly-owned subsidiary of Zhone (the “Merger”). The terms and conditions of the Merger will be set forth more fully in the Merger Agreement.   Pursuant to the proposed Merger Agreement, we understand that at the Effective Time (as defined in the Merger Agreement), each issued and outstanding share of Common Stock,common stock, par value $0.001$.001 per share, of SorrentoParadyne (“SorrentoParadyne Common Stock”) will be converted into the right to receive the number of shares of common stock, $0.001 par value $.001 per share, of Zhone (“Zhone Common Stock”) equal to the Exchange Ratio (as defined below). The Exchange Ratio shallwill equal 0.901.0972 shares of Zhone Common Stock for each share of SorrentoParadyne Common Stock.   You have asked us to advise you as to the fairness, from a financial point of view, to Zhone of the Exchange Ratio pursuant to the holders of Sorrento Common Stock.Merger Agreement.   For purposes of this opinion we have, among other things: (i) reviewed a draft of the Merger Agreement dated April 19, 2004;July 6, 2005; (ii) reviewed certain publicly available information concerning Zhone and SorrentoParadyne and certain other relevant financial and operating data of Zhone and SorrentoParadyne furnished to us by Zhone and Sorrento;Paradyne; (iii) reviewed the historical stock prices and trading volumes of Zhone Common Stock and SorrentoParadyne Common Stock; (iv) held discussions with members of management of Zhone and SorrentoParadyne concerning their current and future business prospects and joint prospects for the combined companies, including the potential cost savings and other synergies that may be achieved by the combined companies; (v) reviewed certain research analyst projections with respect to Zhone and held discussions with members of the management of Zhone concerning those projections; (vi) reviewed certain financial forecastsresearch analyst projections with respect to Sorrento prepared by the management of SorrentoParadyne and held discussions with members of the management of Zhone and SorrentoParadyne concerning those projections; (vii) compared certain publicly available financial data of companies whose securities are traded in the public markets and that we deemed relevant to similar data for Sorrento;Paradyne; (viii) reviewed the financial terms of certain other business combinations that we deemed generally relevant; and (ix) performed and/or considered such other studies, analyses, inquiries and investigations as we deemed appropriate.   In connection with our review and in arriving at our opinion, we have assumed and relied on the accuracy and completeness of all of the financial and other information reviewed by us for purposes of this opinion and have neither attempted to verify independently nor assumed responsibility for verifying any of such information. In addition, we have assumed, with your consent, that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986 and that the Merger will be consummated upon the terms and subject to the conditions set forth in the draft Merger Agreement dated April 19, 2004July 6, 2005 without material alteration or waiver thereof. With respect to the financial forecastsresearch analyst projections for Sorrento provided to us by Sorrento managementZhone and the joint prospects of the combined companies,Paradyne, we have assumed, with your consent and based upon discussions with the respective managements of Zhone and Sorrento,Paradyne, that such forecasts have been reasonably prepared on bases reflectingprojections represent reasonable estimates as to the best currently available estimates and judgments of such management, at the time of preparation, of the future operating and financial performance of SorrentoZhone and the combined companies, and weParadyne. We have relied, without independent verification, upon the estimates of such managementsmanagement of Zhone and Board of Directors Zhone Technologies, Inc. July 7, 2005 Page 2 Needham & Company, LLC Paradyne of the potential cost savings and other synergies, including the amount and timing thereof, that may be achieved as a result of the proposed Merger. With respect to the research analyst projections with respect to Zhone, we have assumed, with your consent and based upon discussions with management of Zhone, that such projections represent reasonable estimates as to the future financial performance of Zhone. We express no opinion with respect to any of such forecasts, projections or estimates or the assumptions on which they were based. We have relied on advice of counsel and independent accountants to Zhone as to all legal and financial reporting matters with respect to Zhone, the Merger and the Merger Agreement. We have not assumed any responsibility for or made or obtained any independent evaluation, appraisal or physical inspection of the assets or liabilities of Zhone or Sorrento. We have relied on advice of counsel and independent accountants to Sorrento as to all legal and financial reporting matters with respect to Sorrento, the Merger and the Merger Agreement.Paradyne. Further, our opinion is based on economic, monetary and market conditions as they exist and can be evaluated as of the date hereof and we assume no responsibility to update or revise our opinion based upon circumstances and events occurring after the date hereof. Our opinion as expressed herein is limited to the fairness, from a financial point of view, to Zhone of the Exchange Ratio pursuant to the holders of Sorrento Common StockMerger Agreement and does not address Sorrento’sZhone’s underlying business decision to engage in the Merger or the relative merits of the Merger as compared to other business strategies that might be available to Sorrento.Zhone. Our opinion does not constitute a recommendation to any stockholder of SorrentoZhone as to how such stockholder should vote onwith respect to the proposed Merger.   We are not expressing any opinion as to what the value of Zhone Common Stock will be when issued pursuant to the Merger or the prices at which Zhone Common Stock or SorrentoParadyne Common Stock will actually trade at any time.   Needham & Company, Inc.,LLC, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. We have been engaged by SorrentoZhone as financial advisor in connection with the Merger and to render this opinion and will receive a fee for our services, a substantial portionnone of which is contingent on the consummation of the Merger. In addition, SorrentoZhone has agreed to indemnify us for certain liabilities arising out of our role as financial advisor and out of the rendering of this opinion and under certain circumstances to reimburse us for our reasonable out-of-pocket expenses. We may in the future provide investment banking and financial advisory services to Sorrento and Zhone, for which services we expect to receive compensation. In the ordinary course of our business, we may actively trade the equity securities of Zhone and SorrentoParadyne for our own account or for the accounts of customers or affiliates and, accordingly, may at any time hold a long or short position in such securities.   This letter and the opinion expressed herein are provided at the request and for the information of the Board of Directors of SorrentoZhone and may not be quoted or referred to or used for any purpose without our prior written consent, except that this letter may be disclosed in connection with any registration statement or proxy statement used in connection with the Merger so long asprovided that this letter is quoted in full in such registration statement or proxy statement.   Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Exchange Ratio pursuant to the Merger Agreement is fair to the holders of Sorrento Common StockZhone from a financial point of view.   Very truly yours,   NEEDHAM & COMPANY, LLC ANNEX E July 7, 2005 Board of Directors Paradyne Networks, Inc. 8545 126th Ave. North Largo, Florida 33773 Members of the Board of Directors: You have requested our opinion as to the fairness, from a financial point of view, to the holders (the “Stockholders”) of the outstanding common stock, par value $0.001 (the “Common Stock”) of Paradyne Networks, Inc. (the “Company”), of the consideration to be received by the Stockholders in connection with the proposed merger (the “Merger”) of a subsidiary of Zhone Technologies, Inc. (“Zhone Technologies”) with the Company pursuant and subject to the Agreement and Plan of Merger by and among Zhone Technologies, Parrot Acquisition Corp. and the Company dated as of July 7, 2005 (the “Agreement”). Under and subject to the terms and conditions of the Agreement, each issued and outstanding share of Common Stock of the Company held by the Stockholders will be converted in the Merger into the right to receive 1.0972 shares of Zhone Technologies common stock (the “Consideration”). In connection with our review of the proposed Merger and the preparation of our opinion herein, we have, among other things: 1. reviewed the financial terms and conditions as stated in the Agreement; 2. reviewed the audited financial statements of the Company as of and for the years ended December 31, 2002, 2003 and 2004 and its unaudited financial statements for the quarter ended March 31, 2005; 3. reviewed the Company’s annual reports filed on Form 10-K for the years ending December 31, 2002, 2003 and 2004 and its quarterly report filed on Form 10-Q for the quarter ended March 31, 2005; 4. reviewed the audited financial statements of Zhone Technologies as of and for the years ended December 31, 2002, 2003 and 2004 and its unaudited financial statements for the quarter ended March 31, 2005; 5. reviewed Zhone Technologies’ Registration Statement on Form 10 dated April 30, 2003, as amended, and its annual reports filed on Form 10-K for the years ended December 31, 2003 and 2004 and its quarterly report filed on Form 10-Q for the quarter ended March 31, 2005; 6. reviewed the annual report filed on Form 10-K for the year ending December 31, 2002 of Tellium, Inc. which merged with Zhone Technologies in 2003; 7. reviewed other Company and Zhone Technologies financial and operating information requested from and/or provided by the Company or Zhone Technologies; 8. reviewed certain other publicly available information on the Company and Zhone Technologies; 9. visited the operations and facilities of Zhone Technologies located in Oakland, California; and 10. discussed with members of the senior management of the Company and Zhone Technologies certain information relating to the aforementioned, the business and affairs of the Company and Zhone Technologies, and any other matters which we have deemed relevant to our inquiry. We have assumed and relied upon the accuracy and completeness of all information supplied or otherwise made available to us by the Company, Zhone Technologies or any other party, and we have undertaken no duty or responsibility to verify independently any of such information. We have not made or obtained an independent Board of Directors Paradyne Networks, Inc. July 7, 2005 Page 2 appraisal of the assets or liabilities (contingent or otherwise) of the Company or Zhone Technologies. With respect to financial forecasts and other information and data provided to or otherwise reviewed by or discussed with us, we have assumed, with your consent, that such forecasts and other information and data have been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management, and we have relied upon each party to advise us promptly if any information previously provided became inaccurate or was required to be updated during the period of our review. We have assumed, with your consent, that for federal income tax purposes, the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. We have also assumed, with your consent, that the Merger will be consummated in accordance with the terms of the Agreement, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the Merger and the other transactions contemplated by the Agreement, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on the Company, Zhone Technologies or the contemplated benefits of the Merger in any way meaningful to our analysis. In rendering our opinion, we have assumed and relied on the truth and accuracy of the representations and warranties in the Agreement. Our opinion is based upon market, economic, financial and other circumstances and conditions existing and disclosed to us as of July 6, 2005 and any material change in such circumstances and conditions would require a reevaluation of this opinion, which we are not obligated to undertake unless the Company requests us to do so. We express no opinion as to the underlying business decision to effect the Merger, the structure or tax consequences of the Agreement or the availability or advisability of any alternatives to the Merger. We did not structure the Merger or negotiate the final terms of the Merger. This letter does not express any opinion as to the likely trading range of the Common Stock or Zhone Technologies common stock after the date hereof, which may vary depending on numerous factors that generally impact the price of securities or on the financial condition of Zhone Technologies or the Company, as the case may be, at that time. Our opinion is limited to the fairness to the Stockholders, from a financial point of view, of the Consideration to be received by the Stockholders in the Merger. We express no opinion with respect to any other reasons, legal, business, or otherwise, that may support the decision of the Board of Directors to approve or consummate the Merger. In conducting our investigation and analyses and in arriving at our opinion expressed herein, we have taken into account such accepted financial and investment banking procedures and considerations as we have deemed relevant, including the review of (i) historical and projected revenues, earnings before interest, taxes, depreciation and amortization (commonly referred to as “EBITDA”), net income and capitalization of the Company and certain other publicly held companies in businesses we believe to be comparable to the Company; (ii) the current and projected financial position and results of operations of the Company; (iii) pro forma and projected contribution of the Company to the combined enterprise after the Merger; (iv) the historical market prices and trading activity of the Common Stock of the Company; (v) financial and operating information concerning selected business combinations which we deemed comparable to the Merger in whole or in part; and (vi) the general condition of the securities markets. In arriving at this opinion, Raymond James & Associates, Inc. (“Raymond James”) did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Raymond James believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all analyses, would create an incomplete view of the process underlying this opinion. Board of Directors Paradyne Networks, Inc. July 7, 2005 Page 3 Raymond James is actively engaged in the investment banking business and regularly undertakes the valuation of investment securities in connection with public offerings, private placements, business combinations and similar transactions. Raymond James will receive a fee upon the delivery of this opinion. Raymond James has been engaged to render financial advisory services to the Company in connection with the proposed Merger and will also receive a fee for such services, which fee is larger than the fee for the fairness opinion and is contingent upon consummation of the Merger. In addition, the Company has agreed to indemnify us against certain liabilities arising out of our engagement. Raymond James has also provided certain investment banking services to the Company from time to time in the past, including having provided investment advisory services to the Company in July 2004, and may provide such services to the Company or Zhone Technologies in the future. In the ordinary course of our business, Raymond James may trade in the securities of the Company or Zhone Technologies for our own account or for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. It is understood that this letter is for the information of the Board of Directors of the Company in evaluating the proposed Merger and does not constitute a recommendation to any Stockholder of the Company regarding how said Stockholder should vote on the proposed Merger. The Company may include the full text of Raymond James’ written opinion in any proxy statement / registration statement filed by the Company in connection with the Merger and a description thereof, which description shall be reasonably acceptable to Raymond James. Based upon and subject to the foregoing, it is our opinion that, as of July 7, 2005, the Consideration to be received by the Stockholders in the Merger pursuant to the Agreement is fair, from a financial point of view, to the Stockholders. Very truly yours, RAYMOND JAMES & ASSOCIATES, INC. PART II   INFORMATION NOT REQUIRED IN PROSPECTUS   Item 20.Indemnification of Directors and Officers   Delaware lawSection 145 of the DGCL provides that a corporation may eliminate or limit the personal liability ofindemnify a director, to the corporationofficer, employee or its stockholders for monetary damages for breach of fiduciary duty as a director, subject to certain exceptions. The effect of this provision is to eliminate the personal liability of directors to the company or its stockholders for monetary damages for actions involving a breach of their fiduciary duty of care, including any actions involving gross negligence. Delaware law also provides, in general, that a corporation has the power to indemnify any personagent who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, (other than an action by or in the rightreason of the corporation), because the person is orfact that he was a director, officer, employee or officeragent of the corporation. Such indemnity may becorporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the personhim in connection with such action suit or proceeding, if the personhe acted in good faith and in a manner the personhe reasonably believed to be in, or not opposed to, the best interests of the corporation and, if, with respect to any criminal action or proceeding, the person did not havehad no reasonable cause to believe the person’shis conduct was unlawful. Delaware law further provides, in general, that a corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor because the person is or was a director or officer of the corporation, against any expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation. Additionally, under Delaware law, a corporation generally has the power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation against any liability asserted against the person in any such capacity, or arising out of the person’s status as such, whether or not the corporation would have the power to indemnify the person against such liability under the provisions of the law.   Zhone’s certificate of incorporation as amended and restated, eliminates the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liabilities arising (a) from any breach of the director’s duty of loyalty to the corporation or its stockholders; (b) from acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) under Section 174 of the Delaware General Corporation Law; or (d) from any transaction from which the director derived an improper personal benefit. Zhone’s certificate of incorporation, as amended and restated, requires Zhone to indemnify its directors and officers to the full extent permitted under the Delaware General Corporation Law.DGCL. Zhone’s certificate of incorporation as amended and restated, provides that Zhone will indemnify any person who was or is a party or is threatened to be made a party to any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or officer of Zhone, or is or was serving at the request of Zhone as a director or officer of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, whether the basis of the proceeding is alleged action in an official capacity as a director or officer or in any other capacity while so serving, to the full extent authorized by the Delaware General Corporation Law.DGCL.   II-1 The above discussion of Delaware law and of Zhone’s certificate of incorporation eliminates the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as amended and restated, isa director, except for liabilities arising (1) from any breach of the director’s duty of loyalty to Zhone or its stockholders; (2) from acts or omissions not intended to be exhaustive and is qualified in its entirety by such statutes and Zhone’s certificategood faith or which involve intentional misconduct or a knowing violation of incorporation, as amended and restated.law; (3) under Section 174 of the DGCL; or (4) from any transaction from which the director derived an improper personal benefit.   Zhone has entered into indemnification agreements with its directors and officers, and has obtained insurance policies insuring its directors and officers and those of its subsidiaries against some liabilities they may incur in their capacity as directors and officers.   The foregoing is only a general summary of certain aspects of Delaware law, Zhone’s certificate of incorporation, indemnification agreements and insurance policies dealing with indemnification of directors and officers, and does not purport to be complete. It is qualified in its entirety by reference to the detailed provisions of Section 145 of the DGCL and the various documents of that are referred to in this summary. Item 21.Exhibits and Financial Statement Schedules   (a) The following exhibits are filed herewith orExhibit Index on page II-5 is incorporated herein by reference:reference as the list of exhibits required as part of this registration statement. Exhibit Number Description 2.1 Agreement and Plan of Merger, dated as of April 22, 2004, by and among Zhone Technologies, Inc., Selene Acquisition Corp. and Sorrento Networks Corporation (included as Annex A to the joint proxy statement/prospectus forming a part of this registration statement) 5.1 Legal opinion of Latham & Watkins LLP 8.1 Tax opinion of Stradling Yocca Carlson & Rauth 23.1 Consent of Latham & Watkins LLP (included in Exhibit 5.1 hereto) 23.2 Consent of Stradling Yocca Carlson & Rauth (included in Exhibit 8.1 hereto) 23.3 Consent of KPMG LLP 23.4 Consent of BDO Seidman, LLP 24.1 * Powers of Attorney 99.1 Form of Proxy Card for Zhone Technologies, Inc. 99.2 Form of Proxy Card for Sorrento Networks Corporation 99.3 Voting Agreement, dated as of April 22, 2004, by and among Sorrento Networks Corporation and certain stockholders of Zhone Technologies, Inc. (included as Annex B to the joint proxy statement/prospectus forming a part of this registration statement) 99.4 Voting Agreement, dated as of April 22, 2004, by and among Zhone Technologies, Inc., Selene Acquisition Corp. and certain stockholders of Sorrento Networks Corporation (included as Annex C to the joint proxy statement/prospectus forming a part of this registration statement) 99.5 Opinion of Thomas Weisel Partners LLC, financial advisor to Zhone Technologies, Inc. (included as Annex D to the joint proxy statement/prospectus forming a part of this registration statement) 99.6 Opinion of Needham & Company, Inc., financial advisor to Sorrento Networks Corporation (included as Annex E to the joint proxy statement/prospectus forming a part of this registration statement) 99.7 * Consent of Thomas Weisel Partners LLC, financial advisor to Zhone Technologies, Inc. 99.8 * Consent of Needham & Company, Inc., financial advisor to Sorrento Networks Corporation * Previously filed.   (b) Not applicable.   (c) Not applicable.   Item 22.Undertakings The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; II-2 (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initialbona fideoffering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.   The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report II-1 pursuant to Section 15(d) of the Securities Exchange Act)Act of 1934) that is incorporated by reference in the registration statement willshall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time willshall be deemed to be the initial bona fide offering thereof.   The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any persondeliver or party who is deemedcause to be an underwriter withindelivered with the meaning of Rule 145(c),prospectus, to each person to whom the issuer undertakes that such reoffering prospectus will containis sent or given, the information called for by the applicable registration form with respectlatest annual report, to reofferings by persons who may be deemed under-writers, in addition to the information called for by the other items of the applicable form. The registrant undertakes that every prospectus: (i)security holders that is filedincorporated by reference in the prospectus and furnished pursuant to paragraph (1) immediately preceding, or (ii) that purports to meetand meeting the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability14a-3 or Rule 14c-3 under the Securities Exchange Act each such post-effective amendment will be deemedof 1934; and, where interim financial information required to be a new registration statement relatingpresented by Article 3 of Regulation S-X is not set forth in the prospectus, to the securities offered therein, and the offering of such securities at that time will be deemeddeliver, or cause to be delivered to each person to whom the initial bona fide offering thereof.prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information.   Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SECSecurities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless II-3 in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.   The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.   The undersigned registrant hereby undertakes to supply by means of a post-effectiveposteffective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.   II-4II-2 SIGNATURES   Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Oakland, State of California, on May 21, 2004.August 1, 2005.   ZHONE TECHNOLOGIES, INC. ZHONE TECHNOLOGIES, INC. By:   /s/    MORTEZA EJABAT             Morteza Ejabat Chairman of the Board of Directors, Chief Executive Officer and President   II-5II-3 Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and as of the dates indicated.indicated on August 1, 2005.   Signature    Title Date /s/    MORTEZA EJABAT         Morteza Ejabat    Chairman of the Board of Directors, and Chief Executive Officer and President (Principal Executive Officer) May 21, 2004 /s/    KIRK MISAKA*         Kirk Misaka    Chief Financial Officer, Vice President, FinanceTreasurer and TreasurerSecretary (Principal Financial and Accounting Officer) May 21, 2004 /s/    ADAM CLAMMER*         Adam Clammer    Director May 21, 2004 /s/    MICHAEL M. CONNORS*         Michael M. Connors    Director May 21, 2004 /s/    JAMES COULTER*         James Coulter    Director May 21, 2004 /s/    ROBERT DAHL*         Robert Dahl    Director May 21, 2004 /s/    JAMES H. GREENE, JR.*         James H. Greene, Jr.    Director May 21, 2004 /s/    C. RICHARD KRAMLICH*         C. Richard Kramlich    Director May 21, 2004 /s/    BARTON SHIGEMURA*         Barton Shigemura Director May 21, 2004 /s/    JAMES TIMMINS*         James Timmins    Director May 21, 2004 *By:   /s/S/    MORTEZA EJABAT         Morteza Ejabat Attorney-in-factAttorney-in-Fact   II-6II-4 EXHIBIT INDEX   Exhibit Number      Description 2.1      Agreement and Plan of Merger, dated as of April 22, 2004,July 7, 2005, by and among Zhone Technologies, Inc., SeleneParrot Acquisition Corp. and SorrentoParadyne Networks, CorporationInc. (included as Annex A to the joint proxy statement/prospectus forming a part of this registration statement) 5.1 *    Legal opinion of Latham & Watkins LLP 8.1 *    Tax opinion of Stradling Yocca CarlsonAlston & RauthBird LLP 10.1 Voting Agreement, dated as of July 7, 2005, by and among Paradyne Networks, Inc. and certain stockholders of Zhone Technologies, Inc. (included as Annex B to the joint proxy statement/prospectus forming a part of this registration statement) 10.2 Voting Agreement, dated as of July 7, 2005, by and among Zhone Technologies, Inc., Parrot Acquisition Corp. and certain stockholders of Paradyne Networks, Inc. (included as Annex C to the joint proxy statement/prospectus forming a part of this registration statement) 10.3 Consulting Agreement, dated July 7, 2005, by and between Zhone Technologies, Inc. and Sean E. Belanger (incorporated by reference from Zhone Technologies, Inc.’s Form 8-K filed with the SEC on July 8, 2005) 10.4 Consulting Agreement, dated July 7, 2005, by and between Zhone Technologies, Inc. and Patrick M. Murphy (incorporated by reference from Zhone Technologies, Inc.’s Form 8-K filed with the SEC on July 8, 2005) 10.5 Restrictive Covenant Agreement, dated July 7, 2005, by and between Zhone Technologies, Inc. and Sean E. Belanger (incorporated by reference from Zhone Technologies, Inc.’s Form 8-K filed with the SEC on July 8, 2005) 10.6 Restrictive Covenant Agreement, dated July 7, 2005, by and between Zhone Technologies, Inc. and Patrick M. Murphy (incorporated by reference from Zhone Technologies, Inc.’s Form 8-K filed with the SEC on July 8, 2005) 23.1   Consent of KPMG LLP, Independent Registered Public Accounting Firm 23.2 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm 23.3 *    Consent of Latham & Watkins LLP (included in Exhibit 5.1 hereto) 23.223.4 *    Consent of Stradling Yocca CarlsonAlston & RauthBird LLP (included in Exhibit 8.1 hereto) 23.3 Consent of KPMG LLP 23.4 Consent of BDO Seidman, LLP 24.1 *    PowersPower of Attorney (included on the signature page of this registration statement) 99.1      Form of Proxy Card for Zhone Technologies, Inc. 99.2      Form of Proxy Card for SorrentoParadyne Networks, CorporationInc. 99.3      Voting Agreement, dated as of April 22, 2004, by and among Sorrento Networks Corporation and certain stockholders of Zhone Technologies, Inc. (included as Annex B to the joint proxy statement/prospectus forming a part of this registration statement) 99.4 Voting Agreement, dated as of April 22, 2004, by and among Zhone Technologies, Inc., Selene Acquisition Corp. and certain stockholders of Sorrento Networks Corporation (included as Annex C to the joint proxy statement/prospectus forming a part of this registration statement) 99.5 Opinion of Thomas Weisel PartnersNeedham & Company, LLC, financial advisor to Zhone Technologies, Inc. (included as Annex D to the joint proxy statement/prospectus forming a part of this registration statement) 99.699.4      Opinion of NeedhamRaymond James & Company,Associates, Inc., financial advisor to SorrentoParadyne Networks, CorporationInc. (included as Annex E to the joint proxy statement/prospectus forming a part of this registration statement) 99.799.5 *    Consent of Thomas Weisel PartnersNeedham & Company, LLC, financial advisor to Zhone Technologies, Inc. 99.899.6 *    Consent of NeedhamRaymond James & Company,Associates, Inc., financial advisor to SorrentoParadyne Networks, CorporationInc. * Previously filed. II-5