<PAGE>

                                                                   Exhibit 10.26

                         AMENDMENT TO SECURITY AGREEMENT

        This Amendment to Security Agreement (this "Agreement") is entered into
as of December 30, 2002, by and between CIT Technology Financing Services, Inc.,
successor in interest to CIT Venture Leasing Fund, LLC ("Secured Party") and
Zhone Technologies, Inc., a Delaware corporation (the "Debtor"), with reference
to the following facts:

        A.      Debtor is indebted to Secured Party pursuant to the PROMISSORY
NOTE WITH BALOON PAYMENT, dated as of January 31, 2001, in the original
principal amount of $12,493,355.29 by Debtor in favor of Secured Party (the
"Note"), which indebtedness is secured by a security interest in specific
equipment pursuant to the SECURITY AGREEMENT, dated as of January 31, 2001
between Debtor and Secured Party (the "Security Agreement"). In addition, as of
December 30, 2002, Secured Party is holding, as additional collateral, reserves
of $2,498,671 and $153,469.33 respectively.

        B.      Prior to execution of the Note and Security Agreement, the
parties also executed a PROMISSORY NOTE WITH BALOON PAYMENT, dated as of January
26, 2001, and a SECURITY AGREEMENT, dated as of January 26, 2001 (the "January
26 Agreements"), which were intended to be superceded and replaced with the Note
and Security Agreement.

        C.      As December 30, 2002, there is owing under the Note a principal
amount of $4,971,652.78, plus $7,098.31 consisting of accrued but unpaid
interest, fees and costs of enforcement arising under the Note and the Security
Agreement. Such amount together with interest accruing after December 18, 2002
under the Note is hereinafter sometimes referred to herein as the "Existing
Debt." Other than the Existing Debt, there is no indebtedness owing from Debtor
to Secured Party.

        NOW, THEREFORE, for good and valuable consideration, the parties agree
as follows:

        1.      Amendments.

                (a)     Section 1 of the Security Agreement is amended, by
replacing the last three lines of the first full paragraph of that section with
the following:

                hereby grants to Secured Party a security interest in: (a) the
                property described in Schedule 1 to this Agreement and made a
                part hereof (the "Original Equipment Collateral"); and (b) the
                property described in Schedule 3 to this Agreement and made a
                part hereof (the "Supplemental Collateral").

                        Notwithstanding the foregoing, the security interest
                granted herein does not extend to and the term "Supplemental
                Collateral" does not include: (A) equipment and related software
                subject to the liens of lenders or lessors to secure the costs
                of acquisition of such equipment or software or existing on such
                equipment and software when acquired by Debtor; (B) any license
                or contract rights or any other property to the extent (i) the
                granting of a security interest in it would be contrary to
                applicable law, or (ii) that such rights are nonassignable by
                their terms (but only to the extent the prohibition is
                enforceable under applicable law) without the consent of the
                licensor or other party (but only to the extent such consent has
                not been obtained); and (C) more than 65% of the presently
                existing and hereafter arising issued and outstanding shares of
                capital stock owned by Debtor of any foreign subsidiary which
                shares entitle the holder thereof to vote for directors or any
                other matter.

<PAGE>

                (b)     Sections 2(a), 2(b), 2(c), 2(d), 2(f), 2(g), 2(j), 2(l),
3(c) and 3(f) of the Security Agreement are hereby amended by replacing the word
"Collateral" wherever it appears with the words "Original Equipment Collateral".

                (c)     Sections 2(i), 2(k), 4, and 5(a) of the Security
Agreement are hereby amended by replacing the word "Collateral" wherever it
appears with the words "Original Equipment Collateral and Supplemental
Collateral".

                (d)     Section 2(f) of the Security Agreement is hereby amended
by: (i) inserting "Permitted Liens and" after the words "other than" on line 3;
(ii) inserting "Permitted Liens and liens" after the words "other than" on line
6; (iii) inserting "other than Permitted Liens" at the end of the first
sentence; and (iv) inserting the following at the end of that section:

                As used herein "Permitted Lien" means (i) mechanic's,
                materialmen's, landlord's and similar liens, (ii) liens arising
                under worker's compensation, unemployment insurance, social
                security, retirement and similar legislation, (iii) liens on
                goods in transit incurred pursuant to documentary letters of
                credit, (iv) liens for taxes not yet due and payable or which
                are being contested in good faith and by appropriate
                proceedings, (v) judgment, attachment or similar lien, so long
                as the judgment it secures has not been discharged or execution
                thereof effectively stayed and bonded against pending appeal
                within 30 days of the entry thereof; (vi) liens incurred by
                Secured Party, (vii) liens on the Supplemental Collateral
                existing on the effective date of the Amendment to Security
                Agreement, dated as of December 30, 2002 (including those
                identified on Schedule 4 hereto); (viii) purchase money security
                interests in Equipment and related software or liens on
                Equipment and related software when acquired; (ix) leases of
                Equipment and related software; (x) licenses or sublicenses
                granted in the ordinary course of Debtor's business and any
                interest or title of a licensor or under any license or
                sublicense to Debtor; (xi) liens on earnest money deposits
                required under a letter of intent or purchase agreement; (xii)
                liens on insurance proceeds in favor of insurance companies
                granted solely as security for financed premiums; (xiii) liens
                on escrowed cash in an aggregate amount not exceeding
                $1,000,000, representing a portion of the proceeds of sales or
                other transactions, established to satisfy contingent post
                closing obligations that Debtor owes (including earn-outs,
                indemnities and working capital adjustments); (xiv) leases or
                subleases granted in the ordinary course of Debtor's business,
                including in connection with Debtor's leased premises or leased
                property; (xv) liens in favor of customs and revenue authorities
                which secure payment of customs duties in connection with the
                importation of goods; (xvi) governmental liens in connection
                with progress payments made on government contracts which are
                limited to the Inventory being sold pursuant to such government
                contract; (xvii) liens in favor of Silicon Valley Bank that are
                the subject to the Subordination Agreement, dated as of December
                30, 2002 (the "SVB Subordination Agreement"); and (xviii) any
                other liens which shall be junior to the security interest
                granted to Secured Party pursuant to this Security Agreement and
                which shall be subject to an intercreditor agreement between
                Secured Party and the holder thereof on terms reasonably
                acceptable to Secured Party (and Secured Party agrees to
                negotiate such intercreditor agreement in good faith and any
                such agreement will be deemed reasonably acceptable to Secured
                Party if it provides for the same material terms as the SVB
                Subordination Agreement).

                (e)     Section 3(c) of the Security Agreement is hereby amended
by replacing the clause beginning on line 8 of that section with the following:

<PAGE>

                "the existence or creation of any lien (other than Permitted
                Liens) upon the Original Equipment Collateral or a substantial
                part of Debtor's property;"

                (f)     Section 3(d) of the Security Agreement is hereby amended
in its entirety and replaced with the following

                "The failure to effectively and promptly discharge, stay or
                indemnify against, to Secured Party's satisfaction, any lien or
                attachment (other than Permitted Liens) against any substantial
                part of Debtor's property or the Original Equipment Collateral;"

                (g)     The Security Agreement is hereby amended to include the
collateral description attached hereto as Exhibit A, as a new Schedule 3 to the
Security Agreement.

                (h)     The Security Agreement is hereby amended to include the
schedule attached hereto as Exhibit B, as a new Schedule 4 to the Security
Agreement.

        2.      Termination. Upon the payment in full of the Existing Debt
together with amounts coming due under the Note after the date hereof and other
indebtedness due and owing to Secured Party that is secured by the Security
Agreement, Secured Party shall promptly deliver to Debtor, such termination
statements as Debtor may request releasing the Original Equipment Collateral and
the Supplemental Collateral from the liens granted to or for the benefit of
Secured Party, including those created by this Agreement, and do all further
acts and execute and deliver all instruments and documents necessary to
terminate the security interests granted herein and in the Security Agreement.

        3.      Miscellaneous.

                (a)     Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of Debtor and Secured Party and their
respective successors and assigns.

                (b)     Integration; No Other Agreements. This Agreement and any
documents executed in connection herewith or pursuant hereto contain the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements, understandings, offers and negotiations, oral or
written, with respect thereto and no extrinsic evidence whatsoever may be
introduced in any judicial or arbitration proceeding, if any, involving this
Agreement; except that any financing statements or other agreements or
instruments filed by Secured Party with respect to Debtor shall remain in full
force and effect. For avoidance of doubt, the January 26 Agreements are hereby
cancelled and terminated, effective as of January 26, 2001 and are of no force
or effect. Other than the Note, the Security Agreement and this Agreement, there
are no documents, agreements or instruments evidencing indebtedness of Debtor to
Secured Party or providing for security interests in property of Debtor favor of
Secured Party.

                (c)     Entire Agreement. This Agreement, the Note and the
Security Agreement contain the entire agreement of the parties hereto and
supersede any other oral or written agreements or understandings with respect to
the subject matter hereof and thereof.

                (d)     Governing Law. This Agreement is governed by and shall
be construed in accordance with the laws of the State of New Jersey, without
reference to the conflicts of law provisions thereof

<PAGE>

                (e)     Counterparts. This Agreement may be signed in
counterparts and all of such counterparts when properly executed by the
appropriate parties thereto together shall serve as a fully executed document,
binding upon the parties.

                IN WITNESS WHEREOF the undersigned have executed this Agreement
as of the first date above written.

                                     Zhone Technologies, Inc.

                                     By:
                                            ---------------------------------

                                     Title:
                                            ---------------------------------

                                     CIT Technology Financing Services, Inc.,
                                     Successor to Cit Venture Leasing Fund, LLC

                                     By:
                                            ---------------------------------
                                     Title:
                                            ---------------------------------

<PAGE>

                                    Exhibit A

                        SCHEDULE 3 TO SECURITY AGREEMENT

                       SUPPLEMENTAL COLLATERAL DESCRIPTION

        All personal property of Debtor (herein referred to as "Debtor" or
"Debtor"), other than property that is Original Equipment Collateral, whether
presently existing or hereafter created or acquired, and wherever located,
including:

                (a)     all accounts (including health-care-insurance
receivables), chattel paper (including tangible and electronic chattel paper),
deposit accounts, documents (including negotiable documents), equipment
(including all accessions and additions thereto), general intangibles (including
payment intangibles and software), goods (including fixtures), instruments
(including promissory notes), inventory (including all goods held for sale or
lease or to be furnished under a contract of service, and including returns and
repossessions), investment property (including securities and securities
entitlements), letter of credit rights, money, and all of Debtor's books and
records with respect to any of the foregoing, and the computers and equipment
containing said books and records;

                (b)     all common law and statutory copyrights and copyright
registrations, applications for registration, now existing or hereafter arising,
in the United States of America or in any foreign jurisdiction, obtained or to
be obtained on or in connection with any of the forgoing, or any parts thereof
or any underlying or component elements of any of the forgoing, together with
the right to copyright and all rights to renew or extend such copyrights and the
right (but not the obligation) of Secured Party to sue in its own name and/or in
the name of the Debtor for past, present and future infringements of copyright;

                (c)     all trademarks, service marks, trade names and service
names and the goodwill associated therewith, together with the right to
trademark and all rights to renew or extend such trademarks and the right (but
not the obligation) of Secured Party to sue in its own name and/or in the name
of the Debtor for past, present and future infringements of trademark;

                (d)     all (i) patents and patent applications filed in the
United States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (ii)
licenses pertaining to any patent whether Debtor is licensor or licensee, (iii)
income, royalties, damages, payments, accounts and accounts receivable now or
hereafter due and/or payable under and with respect thereto, including, without
limitation, damages and payments for past, present or future infringements
thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or
in the name of Secured Party for past, present and future infringements thereof,
(v) rights corresponding thereto throughout the world in all jurisdictions in
which such patents have been issued or applied for, and (vi) reissues,
divisions, continuations, renewals, extensions and continuations-in-part with
respect to any of the foregoing; and

                (e)     any and all cash proceeds and/or noncash proceeds of any
of the foregoing, including, without limitation, insurance proceeds, and all
supporting obligations and the security therefor or for any right to payment.
All terms above have the meanings given to them in the California Uniform
Commercial Code, as amended or supplemented from time to time, including revised
Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats.
1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.

<PAGE>

                                    Exhibit B

                        SCHEDULE 4 TO SECURITY AGREEMENT

                                 EXISTING LIENS

Financing Statement filings with California Secretary of State:

   FILING DATE            FILE NO.             SECURED PARTY
------------------------------------------------------------------
05/22/00                0014760122          Telogy, Inc.
------------------------------------------------------------------
06/13/00                0017160644          Telogy, Inc.
------------------------------------------------------------------
11/13/00                0032260178          Fleet Business
                                            Credit
                                            Corporation
------------------------------------------------------------------

Financing Statement filings with Delaware Secretary of State:

   FILING DATE            FILE NO.             SP/ASSIGNEE
------------------------------------------------------------------
12/05/01                20089981            Raymond Leasing
                                            Corporation
------------------------------------------------------------------
03/06/02                20765374            Network
                                            Appliance, Inc.
------------------------------------------------------------------