UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                            ------------------------

                                    FORM 10-K

  X   Annual report  pursuant to Section 13 or 15(d) of the Securities  Exchange
      Act of 1934 for the fiscal year ended June 26, 1998

      Transition  report  pursuant  to  Section  13 or 15(d)  of the  Securities
      Exchange Act of 1934 for the transition period from to .

Commission file number: 0-25684

                          PREMISYS COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)

                     Delaware                                 94-3153847
          (State or other jurisdiction                     (I.R.S. Employer
       of incorporation or organization)                 Identification No.)

    48664 Milmont Drive, Fremont, California                    94538
    (Address of principal executive offices)                  (Zip code)

       Registrant's telephone number, including area code: (510) 353-7600

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

                Securities registered pursuant to Section 12(g) of the Act:
                               Common Stock, $0.01 par value
                                (Title of Class)

      Indicate by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                   Yes X No__

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. X

      The aggregate market value of the voting stock held by  non-affiliates  of
the registrant as of September 16, 1998, was approximately $251,574,000.

      As of September 16, 1998, Registrant had outstanding  25,314,363 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Company's  definitive proxy statement to be filed with the
Securities and Exchange Commission relative to the Company's 1998 annual meeting
of stockholders are incorporated by reference in Part III of this Form 10-K.


<PAGE>


                          PREMISYS COMMUNICATIONS, INC.
                                ANNUAL REPORT ON
                                    FORM 10-K
                        For the Year Ended June 26, 1998

                                TABLE OF CONTENTS
Form 10-K                          Name of Item
 Item No.                                                                   Page

 PART I

Item 1    Business                                                             3
Item 2    Properties                                                          16
Item 3    Legal Proceedings                                                   16
Item 4    Submission of Matters to a Vote of Security Holders                 16

 PART II

Item 5    Market for the  Registrant's  Common Equity and Related
          Stockholder Matters                                                 17
Item 6    Selected Financial Data                                             17
Item 7    Management's  Discussion  and  Analysis of Financial  Conditionnd   19
          and Results of Operations
Item 7A   Quantitative and Qualitative Disclosures About Market Risk          28
Item 8    Financial Statements and Supplementary Data                         29
Item 9    Changes in and  Disagreements  with  Accountants  on Accounting     46
          and Financial Disclosure

 PART III
Item 10   Directors and Executive Officers of the Registrant                  46
Item 11   Executive Compensation                                              46
Item 12   Security Ownership of Certain Beneficial Owners and Management      46
Item 13   Certain Relationships and Related Transactions                      46

 PART IV
Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K     46
Signatures                                                                    50





                                        -----------

      Premisys(R) is a registered trademark of the Company.  This Form 10-K also
includes trade names and trademarks of other companies.



<PAGE>


                                     PART I

Item 1.  Business

      This Form 10-K contains  forward-looking  statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended,  and Section 27A
of the  Securities  Act of 1933, as amended.  These  forward-looking  statements
involve a number of risks and uncertainties which are described  throughout this
Form  10-K,  including  demand  from and its  relationships  with its  strategic
partners  and  major  customers,   including  ADC  Telecommunications   ("ADC"),
Motorola, Inc. ("Motorola") and Paradyne Corporation ("Paradyne"); limited order
backlog  and  quarterly  fluctuations;  delays and  cancellations  of actual and
projected  customer  orders;  new product  development and  introductions by the
Company and its competitors  including products based on the technology licensed
by the Company from Positron Fiber Systems Corporation ("Positron") and Switched
Network  Technologies  ("SNT");  deregulation of, and legislation  regarding the
domestic and  international  telecommunications  industry;  continued success of
competitive  local  exchange  carriers  ("CLECs")  in taking  market  share from
incumbent carriers in the U.S. business  communications  services market; market
acceptance  of  the  SlimLine  and   StreamLine   products;   rapidly   changing
technologies and the Company's ability to respond thereto;  the growth of demand
for  telecommunications  services  such as wireless,  cellular and the Internet;
competition;  changes in the mix of  products  or  customers  or in the level of
operating  expenses;  and other  factors  described  throughout  this Form 10-K,
including under  "Revenues" and "Other Factors That May Affect Future  Operating
Results" in Item 7, "Management's Discussion and Analysis of Financial Condition
and  Results of  Operations",  of this Form 10-K.  The actual  results  that the
Company achieves may differ materially from any  forward-looking  statements due
to such risks and  uncertainties.  The Company has  identified,  using asterisks
(*), various sentences within this Form 10-K which contain such  forward-looking
statements, and words such as "believes",  "anticipates",  "expects",  "intends"
and similar expressions are intended to identify forward-looking statements, but
these are not the exclusive means of identifying such  statements.  In addition,
the section labeled "Other Factors That May Affect Future Operating  Results" in
Item 7 of this  Form  10-K,  which  does  not  include  asterisks  for  improved
readability,  consists  primarily of  forward-looking  statements and associated
risks.  The  Company  undertakes  no  obligation  to revise any  forward-looking
statements in order to reflect events or circumstances  that may arise after the
date of this  report.  Readers are urged to  carefully  review and  consider the
various  disclosures  made by the  Company in this  report and in the  Company's
other reports filed with the Securities and Exchange  Commission that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.


Overview

      Premisys  Communications,  Inc.  (the  "Company" or  "Premisys")  designs,
manufactures  and markets  integrated  access  products  for  telecommunications
service  providers.  The Company  pioneered the integrated access device ("IAD")
equipment  market with the  introduction  of the first of a family of integrated
multiple access communications  systems ("IMACS") products in December 1991. The
IMACS products are designed to enable public  carriers to provide their business
customers   with    flexible,    cost-effective    and   reliable    access   to
telecommunications  services.  The IMACS  products  provide  access to  numerous
services,  including plain old telephone service ("POTS"), Centrex, digital data
networks,  integrated  services  digital  networks  ("ISDN"),  frame relay,  and
asynchronous transfer mode ("ATM") services.  The IMACS platform allows carriers
to  offer  a  variety  of  value-added  services,   switching  technologies  and
transmission  technologies to their business  customers  through a single access
device.  The IMACS  products'  modular design and  standards-based  architecture
enable carriers to offer advanced  telecommunications  services more quickly and
cost-effectively  than  single  purpose  access  equipment  and to  enhance  the
manageability of their networks.  In fiscal 1998, the Company introduced two new
integrated  access  products,  the SlimLine and the  StreamLine,  which  address
simpler, single T1 access applications.

      The Company's  products are distributed and serviced  worldwide  primarily
through strategic distribution relationships with significant telecommunications
equipment   vendors.   The  Company  considers  its  relationships   with  these
telecommunications  equipment  suppliers to be strategic in that they enable the
Company to gain access to public  carriers  worldwide,  to  establish  the IMACS
products as  essential  value added  elements of the public  carriers'  business
communications   solutions  and,  in  some  cases,  to  incorporate  proprietary
technology  into the IMACS  products.  The IMACS  products are typically sold as
access components of the suppliers'  communications  equipment solutions.  It is
expected  that the SlimLine and  StreamLine  products  will be resold by many of
these same strategic distributors as well as directly to carriers. The Company's
strategic distribution relationships, from which the Company has derived most of
its revenues to date, include ADC, Motorola and Paradyne. To a lesser degree the
Company also sells its products  directly to carriers and end user customers and
through value-added reseller relationships.

     Premisys Communications,  Inc. was incorporated in California in July 1990,
and Premisys  Communications Pte. Ltd. was incorporated in August 1990 under the
laws of Singapore to be its parent. Premisys  Communications  Holdings, Inc. was
incorporated  in  California  in January 1992 to serve as a holding  company for
both Premisys  Communications Pte. Ltd. and Premisys  Communications,  Inc. This
reorganization  was completed in March 1992.  Premisys  Communications,  Inc., a
Delaware  corporation,  was  incorporated  in  October  1994 to be the  Delaware
successor  corporation to the California  corporations  Premisys  Communications
Holdings, Inc. and Premisys  Communications,  Inc. The Delaware  reincorporation
was  effected  in March  1995.  As a  result  of the  reincorporation,  Premisys
Communications  Holdings, Inc. and Premisys  Communications,  Inc., a California
corporation,  merged with and into  Premisys  Communications,  Inc.,  a Delaware
corporation,  and Premisys  Communications Pte. Ltd. and Premisys Communications
Limited, a United Kingdom corporation,  became wholly-owned  subsidiaries of the
Delaware  corporation.  The Company also has a wholly owned Canadian subsidiary.
The Company's  principal  executive  offices are located at 48664 Milmont Drive,
Fremont, California 94538, and its telephone number is (510) 353-7600.

Background

Industry Trends

     The market for telecommunications products and services is changing rapidly
because of  deregulation  and resulting  competition,  evolving  requirements of
business  communications,  the drive for higher capacity and more cost-effective
technologies and services,  and the shift from private to public  networks.  The
resulting proliferation of value-added services and technologies has created the
need for  solutions  that  permit  carriers'  business  customers  to access the
variety of telecommunications services provided by these carriers.

Deregulation  and  Resulting  Competition.   Deregulation  and  competition  are
accelerating throughout the worldwide  telecommunications industry. In 1984, the
United States government  deregulated the domestic  telecommunications  industry
and forced AT&T Corporation ("AT&T") to divest its monopoly and create the seven
regional  bell  operating  companies  ("RBOCs").  Since  that  time,  continuing
domestic deregulation,  including the Telecommunications Reform Act of 1996, has
led to fierce  competition  for the  provision  of both long  distance and local
telecommunications  services.  In the long distance market,  MCI  Communications
Corporation ("MCI"),  U.S. Sprint Communications  Company ("Sprint"),  WorldCom,
Inc.  ("WorldCom")  and others have emerged as  competitors to AT&T. In regional
and local markets,  the incumbent local exchange  carriers  ("ILECs") are facing
stiff  and  intensifying  competition  from  a  variety  of  competitive  access
providers  and CLECs,  such as WorldCom and Teleport  Communications  Group Inc.
("Teleport").  Over the last  year,  many new CLECs  have been  formed  and have
raised substantial capital to build new networks.  Nearly all CLECs have focused
on servicing  commercial  customers,  and surveys have  indicated that they have
been successful in taking market share from the ILECs. The international  market
is also opening up as a result of deregulation,  privatization  and the presence
of new  wireline  and  wireless  alternative  carriers.  The  resulting  intense
competition  requires carriers to differentiate  themselves by offering enhanced
value-added services based on new and emerging technologies.

Evolving Requirements of Business  Communications.  In recent years,  businesses
have become increasingly  dependent on the flow of voice, data and video through
various    telecommunications    systems.    This   increased    dependence   on
telecommunications  has resulted from several business trends: the growth of the
Internet, the shift to client/server  computing;  the increase in local area and
wide area  networking;  the demand for new  telecommunications  services such as
video  conferencing;  and the increase in cellular  telephone  and facsimile use
nationally and  internationally.  In addition,  businesses  have expanded beyond
their  traditional  corporate  walls to include remote sales offices,  employees
working at home,  mobile  offices and far-flung  customers and  suppliers.  As a
result,  these  businesses  require  telecommunications  services  that  provide
significantly  higher  bandwidth,  the flexibility to choose among services with
varying bandwidth and the ability to access such services from remote locations.

 Drive for New Technologies and Services. The changing  communications  patterns
of business users and the fierce  competition among carriers have fueled a drive
for technologies that allow carriers to provide additional  value-added services
and to  effectively  deliver a growing  portion of  packet-based  communications
services. Carriers are under pressure to invest aggressively in new technologies
that  can  deliver  services  quickly,  reliably  and  cost-effectively.  Having
invested in new  switching  and  transmission  technologies,  many carriers have
initiated  aggressive programs focused on expanding their access  infrastructure
to broadly deliver new services efficiently.  In addition, carriers are offering
a range of services (e.g.,  Internet access,  ISDN, LAN  interconnection,  video
conferencing) on a bundled basis to their business  subscribers,  and integrated
access  devices  facilitate  these  offerings.  Bundled  services  give business
subscribers  turnkey  solutions that free them from the burden of managing their
own private  networks,  and they often provide  higher  margins to carriers than
other services.

 The Shift  from  Private  to Public  Networks.  During  the  1980s,  most large
corporations  established and maintained  their own private networks to transmit
voice and data because the data transmission services offered by public carriers
were limited and expensive. To build these private networks, corporations leased
transmission lines from the public carriers at fixed monthly rates and purchased
vendor-specific networking equipment.  However, these corporations have begun to
favor public carrier services as traditional and emerging carriers have improved
the price, performance and range of services they offer.  Corporations have also
sought to shift to the carriers the costs and burdens of maintaining the network
infrastructure  and the risks of investing in new technologies in the absence of
a single technological standard.

Access to Telecommunications Services

In response to the industry  trends  described  above,  new and emerging  public
carriers are aggressively  investing in switching and transmission  technologies
to  construct  new  and  to  upgrade   existing   telecommunications   networks.
Telecommunications  equipment suppliers are offering more sophisticated  central
office  switching  equipment that enables  carriers to provide new,  value-added
services. In addition, carriers are upgrading to fiber optic networks to provide
additional bandwidth to their customers. Traditionally,  customer access to data
and voice services has been provided by multiple  single purpose access devices.
This  solution  was adequate  until  recently  because only a limited  number of
services  were offered.  However,  with the  proliferation  of new switching and
transmission  technologies and services,  the traditional approach for accessing
carrier  services via separate devices results in a very complex access solution
that is  expensive,  consumes  valuable  space and is  difficult  to manage  and
maintain.

      The diagram below illustrates the complexity of having numerous  dedicated
discrete access devices.


                      [Diagram of complex discrete access]


      A major need has developed for a new  generation of access  equipment that
enables   carriers  to  provide  their   business   customers   with   flexible,
cost-effective  and reliable access to the increasing number of available public
carrier services  without  requiring a different access device on the customer's
premises  for each  technology  or type of service.  More  specifically,  public
carriers are looking for an access device that:

      o Integrates circuit,  packet and cell switching technologies and supports
wireless,  fiber  optic  cable,  coaxial  cable  and  copper  wire  transmission
technologies;

      o Accommodates a variety of different  business  communications  equipment
types  (such as PBXs,  LAN  routers,  automatic  call  distribution  devices and
modems) at end-user locations;

      o Operates within the carrier's  existing  network  management  system for
operations, administration, maintenance and provisioning;

      o Has the  flexibility  and  open  architecture  to  accommodate  both the
requirements of existing installed equipment and the technology  developments of
the future; and

      o Is  reliable,  easy to  maintain  and  can be  configured  and  serviced
remotely.

Such a device would  facilitate  faster  connections to new services as they are
offered and reduce the carriers' costs of providing these services.

The Premisys Solution

         Since 1990, Premisys has been involved in developing  integrated access
devices that would enable public  carriers to provide their  business  customers
flexible,   cost-effective   and   reliable   access  to   present   and  future
telecommunications  technologies and services. The diagram below illustrates the
advantages of a single IAD compared to the approach  shown above using  numerous
dedicated discrete access devices.

                     [Diagram of integrated access solution]

     The  Company's  IADs are  designed  to serve as a single  connection  point
between a broad variety of carrier services,  such as ISDN, frame relay and ATM,
as well as various business communications equipment types, such as PBXs and LAN
routers. The Company designs its products with high levels of system redundancy,
ease-of-maintenance  and hardware  safety to conform to established  reliability
and maintenance standards,  practices and processes. Premisys has three distinct
IADs covering a wide range of needs and  applications.  The  Company's  flagship
product is the IMACS.  The architecture of the IMACS product line is designed to
permit  integrated  access  to a  wide  variety  of  voice  and  data  services,
independent  of  the  carriers'  switching  or  transmission  technologies.  The
modular,  software-based  design of the IMACS product allows carriers to upgrade
easily  to new  communications  services  as they  become  available.  The IMACS
product  can be  managed  remotely  and  have  remote  testing,  monitoring  and
diagnostic  features that allow carriers to minimize  expensive  on-site testing
and trouble shooting.  In addition,  the Company's IMACS product provides access
to network  management  information,  such as line performance,  traffic volume,
configuration  and alarm data,  to the  carriers'  existing  network  management
systems.  The IMACS product is based on open industry standards for multi-vendor
interoperability  and enable carriers to deliver a comprehensive set of services
without building proprietary overlay networks or management systems.

         In fiscal 1998, Premisys,  in response to a growing demand for smaller,
lower-cost  IADs,  introduced  two new IADs with more limited  feature sets, the
StreamLine and the SlimLine.  The StreamLine product is a scaled down version of
the IMACS product.  It is an IAD designed for deployment of multiple services at
small  business  locations.  Using a single T1/E1 access  line,  the  StreamLine
product has expansion slots for up to 4 IMACS  compatible  voice,  data, ISDN or
frame relay cards.  Because of its  compatibility  with the IMACS  product,  the
StreamLine  minimizes  spares  costs,  reduces  training  costs and  provides  a
migration path to the larger IMACS system.

         The SlimLine  product,  the smallest of Premisys' IADs and designed for
low-cost  applications,  accommodates  a single T1 access line and is offered in
two fixed  configurations  for rapid  deployment of voice and data services.  It
comes  in  either  12 or 24  port  voice  and 2 port  data  configurations.  The
SlimLine,  a plug-and-play  product, has a very low profile designed to minimize
space requirements.

      The design and features of the  Company's  IAD products  provide  carriers
with four major benefits:

      o Lower Cost. The  integration  of multiple  switching  technologies  in a
single  IAD  platform  reduces  carriers'  costs of  providing  access  to these
technologies.  These reductions are realized in part by eliminating the need for
numerous dedicated discrete access devices,  thereby decreasing equipment costs.
In addition, the Company's IAD products are able to concentrate multiple sources
of low and high-speed traffic into fewer high-speed channels, thereby increasing
utilization  of carrier  network  capacity.  The  Company's  IAD products  allow
carriers  to  deliver  multiple  communications  products  and  services,  while
minimizing their risks of technology obsolescence or incompatibility.

      o Ability to Offer Services Rapidly.  The scaleable,  upgradable design of
the Company's IAD products enables carriers to add revenue  generating  services
such as ISDN, frame relay and ATM, more quickly,  cost-effectively  and targeted
to only those areas with demand.

      o Remote  Manageability.  The remote management  features of the Company's
IAD products enhance the  manageability of carriers'  networks without requiring
additional network management systems.

      o Reliability. The redundancy, diagnostic, testing and monitoring features
of the Company's IAD products enhance the reliability of carriers' networks.


Company Strategy

     The  Company's  strategic  objective is to establish  itself as the leading
worldwide provider of access equipment to public carriers for business services.
The key elements of the Company's strategy are described below.

Focus on Public Carrier Access Market

     The Company's IAD products  were designed in  anticipation  of a shift from
private to public networks.  The Company believes that its IAD products were the
first and are the leading standards-based integrated access devices specifically
targeted to the public  carriers.  The  Company's  IAD  products are designed to
deliver  voice,  data and video  applications  regardless of whether the carrier
uses  circuit,  packet or cell  switching  technologies  and whether the carrier
network  uses  copper  wire,  fiber  optic  cable,  coaxial  cable  or  wireless
transmission.  In recent years,  carriers have focused on upgrading  existing or
building new networks by investing in switching and  transmission  technologies.
The remaining  links needed by the carriers in order to offer these new services
are access devices,  and the Company  believes that a single  integrated  access
device offers carriers the most  cost-effective  access solution.  Carriers that
deployed the  Company's  IAD products  into their  networks  during  fiscal 1998
included:

     Domestic Wireline Carriers            International Carriers
     AT&T                                  AT&T Network Services International
     Alltel Mobile Commnications           Comcore (Russia)
     Cablevision Systems Corporation       DACOM (Korea)
     MCI                                   Macomnet (Russia)
     MediaOne                              Mannesmann (Germany)
     Southwestern Bell Telephone Company   Metrocom (Russia)
     Teleport Communications Group         Philippines Telephone & Telegraph
     Time Warner Communications            Quanzhou PTA (China)
     WorldCom                              Saudi Telecommunications Company
                                           Shenyong PTA (China)
     Domestic Wireless Carriers            Telmex (Mexico)
     AT&T                                  Telmos (Russia)
     Airtouch Communications               Time Telekom (Malaysia)
     Bell Atlantic Nynex Mobile
     GTE Mobilnet Service Corporation
     PrimeCo Personal Communications
     Sprint Spectrum


Increase Market Penetration Through Strategic Relationships

      The Company has focused on forming  strategic  relationships  with leading
telecommunications  equipment  suppliers in order to gain market  acceptance and
penetration  of its IAD  products.  This  distribution  strategy has enabled the
Company:

      o  To  take  advantage  of  distribution   capabilities   and  established
relationships between leading  telecommunications  equipment suppliers and their
public carrier  customers and thereby gain access to public carriers  worldwide,
which do not generally purchase important  infrastructure equipment from smaller
companies such as Premisys;

      o To establish the IAD products as essential  value-added  elements of the
public carriers' business communications solutions; and

      o To incorporate  proprietary  next-generation  technology developed by or
with these  strategic  telecommunications  equipment  suppliers into one or more
elements   of  the  IAD   products,   which   are   then   distributed   by  the
telecommunications equipment suppliers.

      The Company believes that the joint development of technology with certain
of these  strategic  telecommunications  equipment  suppliers  demonstrates  the
commitment of these suppliers to the Company's IAD product line and encourages a
longer term relationship with the Company.  Relationships with Paradyne,  Lucent
Technologies  ("Lucent"),  Motorola  and  others  have  allowed  the  Company to
incorporate  advanced  technology  into its IAD products and have  broadened the
Company's markets worldwide.

Market Premisys Access Solutions Directly to CLECs

         The recent,  rapid growth of CLECs has  stimulated  demand for IADs. In
addition to supporting its strategic  distribution  partners  efforts to service
their CLEC  customers,  the Company's  sales force also calls directly on CLECs.
This  direct  coverage of CLECs  ensures  that these  carriers  are aware of the
advantages  of Premisys'  access  solutions  and provides  input to Premisys for
defining new products and features. Purchases of Premisys products by CLEC's are
made through both  strategic  distribution  partners and direct contact with the
Company.

Increased Focus on International Markets

      Since  a major  portion  of the  telecommunications  equipment  market  is
outside  of  the  United  States,   the  Company  is  increasing  its  focus  on
international markets. Although most of the Company's current revenues represent
shipments  to  domestic  telecommunications  equipment  suppliers,  all of these
companies  market and distribute  the Company's  products  worldwide.  *Premisys
intends to increase and diversify its sales in international markets by ensuring
that its IAD  products  meet  international  standards,  pursuing  international
strategic  relationships and distributors,  and adding to its own sales presence
in key regions. In fiscal 1998 the Company hired a Vice President, International
Operations   to  plan  and  direct  these   efforts.   Premisys   currently  has
international  sales  offices  in  Singapore,  Hong  Kong,  China and the United
Kingdom.

Customers  and Applications

Customers

      A  substantial  majority  of  the  Company's  sales  are to  suppliers  of
telecommunications  equipment with whom the Company has strategic relationships.
These  telecommunications  equipment  suppliers  generally  resell the Company's
products to public  carriers and end users.  The Company also sells  products to
value-added resellers ("VARs"),  distributors and systems integrators, and, to a
much lesser degree, directly to carriers and end users. Certain of the Company's
customers in fiscal 1998 are listed by channel in the table below.

       Strategic Relationships

       ADC                                    Paradyne
       Alcatel U.S.A., Inc. (1)               Pulsecom
       ECI Telecom Ltd.                       Rockwell International Corporation
       Ericsson Telecom S.A. de C.V.          Tadiran Microwave Networks
       Lucent                                 UTStarcom
       Motorola                               XEL Communications
       Northern Telecom

(1) - Alcatel  U.S.A.,  Inc.  ("Alcatel") is the  combination of Alcatel Network
Systems, Inc. and DSC Communications Corp, ("DSC"),  previously listed as having
a strategic relationship with the Company.  Alcatel completed the acquisition of
DSC in September, 1998.


<PAGE>



       Value-Added Resellers, Distributors and System Integrators

       Datacraft Asia                         PSI Technologies Corporation
       Harris Corporation/Farinon Division    Schmidt Telecom
       InComA Ltd.                            SRT Associates
       Integrated Telecommunication           TechLink Telecom Ltd.
       Technology Sdn. Bhd.
       Interlink Communication Systems        Telos Engineering Limited
       Metro-Link Services Co. Ltd.           Telsource Corporation
       MSN Communications                     Trends and Technologies
       N.E.T. Federal

       Direct

       Cox Communications                     Teleport
       Powertel, Inc.                         Telesat Corporation Co., Ltd.
       MediaOne                               Transaction Network Services
       Motorola Paging                        Sprint
       Southwestern Bell Telephone Company    WorldCom


      Paradyne was the  Company's  first  strategic  partner and was its largest
customer until fiscal 1998. Paradyne markets the Company's  products,  under its
label, AccuLink Access Controller (AAC), primarily to Lucent and AT&T. In fiscal
1996,  1997 and 1998,  Paradyne  accounted for 33%, 30% and 15% of the Company's
revenues,  respectively.  The Company's  agreement  with Paradyne gives Paradyne
exclusive  distribution  rights to AT&T  entities.  See  "-Results of Operations
Sources of Revenues" and "Other Factors That May Affect Future Operating Results
Relationship  with  Paradyne"  within  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this Form 10-K.

      ADC was the  Company's  largest  customer in fiscal 1998; it accounted for
16%, 12% and 29% of the Company's  revenues  during fiscal 1996,  1997 and 1998,
respectively.  The majority of products  shipped to ADC during  fiscal 1998 were
resold to MCI. Motorola accounted for 15%, 15% and 11% of the Company's revenues
during fiscal 1996, 1997 and 1998, respectively. *The loss of any one or more of
the  Company's  major  customers  would  have a material  adverse  effect on the
Company's  business  and  operating  results.  *Any  of  the  telecommunications
equipment  suppliers that market and sell the Company's  products could elect to
cease  marketing  and  selling  the  Company's  products,  and  there  can be no
assurance  that these  telecommunications  equipment  suppliers will continue to
place orders with the Company or that the Company will be able to obtain  orders
from  new  telecommunications  equipment  suppliers  or end  users.  See Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Other Factors That May Affect Future  Operating  Results - Indirect
Channels of Distribution."

The Premisys Product Lines

     Premisys  Communications offers a full family of integrated access devices:
the IMACS, StreamLine and SlimLine products. The IMACS is the Company's flagship
product  having the greatest  capacity and broadest  range of services among the
Company's IAD product family.  The Company began shipping the IMACS in 1992, and
it has represented  nearly all of the Company's  revenues.  The StreamLine has a
similar modular architecture as the IMACS and supports all IMACS user cards in a
smaller chassis with a single T1/E1 design. Shipments of the StreamLine began in
March  1998.  The  SlimLine  is a single T1 voice and data IAD,  offering a very
small  footprint,  low price,  and easy to provision unit ideal for the small or
remote office  environment.  Shipments of the SlimLine  began in June 1998.  The
table below compares the capabilities and prices of these three product lines.

<PAGE>



                     NARROW BAND PRODUCTS
                     [SLIMLINE PICTURE]  [STREAMLINE PICTURE] [IMACS PICTURE]
                          SlimLine           StreamLine               IMACS
Network                                                       1-8 T1/E1s  TDM,
Connections             Single T1         Single T1/E1        Frame Relay, DS3
                                                              ATM
--------------------------------------------------------------------------------
User                    12 or 24          User cards:         Server cards:
Connections             voice ports       ISDN, FXS, FXO,     Frame Relay, PRI,
                        2 data ports      FRAD, Data, IP      ATM, ADPCM
                                                              User Cards:
                                                              ISDN, FXS, FXO,
                                                              Frame Relay, IP
--------------------------------------------------------------------------------
Management              Plug & play,      Remotely via EMS    Remotely via EMS
                        front panel       & Telnet            & Telnet
                        configuration                         Full range of
                                                              SNMP MIBs
--------------------------------------------------------------------------------
Other                   TR - 08           TR-08               Server Cards for
Functions                                 Drop & insert       Advanced functions
                                          Voice compression   0/1 cross-connect
                                          Modular design      Redundancy
                                                              TR-08
                                                              Modular design
--------------------------------------------------------------------------------
List Price Range      $3,500 - $5,000    $7,000 - $12,000      $10,000 - $40,000

In June 1998 the Company announced the Q-155 product,  which manages  narrowband
access devices,  delivers broadband services,  and acts as a gateway to both TDM
and cell-based carrier networks.

PRODUCT UNDER DEVELOPMENT

                        [Q-155 PICTURE]
                              Q-155
Network                  72 T1/E1s  TDM
Connections              DS3/E3, OC3/STM 1
                         SONET/SDH
--------------------------------------------
User                     HDSL
Connections              T1/E1 & DS3/E3
                         OC3C/STM 1
--------------------------------------------
Management               Remotely via
                         OnLine
                         TL1
--------------------------------------------
Key                      3/1/0 Cross
Functions                Connect
                         ATM Switch
                         GR303/V5.2
--------------------------------------------
List Price Range        $50,000 - $100,000
--------------------------------------------
Expected Availability    December 1998


<PAGE>



IMACS Products

The IMACS product is a modular,  software-based  platform that can be configured
for  delivering  a wide  variety  of  communications  services.  The  product is
designed for mission-critical applications and supports full redundancy for CPU,
wide area network ("WAN") interfaces, power supplies and ringing generators. The
components of the IMACS system  architecture are the WAN modules,  user modules,
server  modules  and common  equipment  modules.  The WAN  modules  provide  the
connections to the carrier  network.  The user modules connect user voice,  data
and video systems to the IMACS. The server modules process  information  flowing
between user and WAN modules,  performing tasks such as voice  compression,  ATM
adaptation and inverse  multiplexing.  The common equipment  modules contain the
central processor and provide power and interface functions. Two versions of the
IMACS with three unique chassis designs are available: the 3.x Host series which
does  not  have  server  modules  and  supports  an  intelligent   channel  bank
application  and the 5.x Host series which offers the full  functionality  of an
IAD. The chassis designs are the IMACS/600 and IMACS/900 which are  front-access
devices,  and the IMACS/800  which can be accessed from the front and back. This
allows the IMACS to work in any carrier  environment.  Environmentally  hardened
units are also available, including units designed for desert installation.

      The Company  also offers  pre-configured  versions of the IMACS to address
specific  applications.  These  pre-configured  products include: the BRX, which
offers carriers a cost-effective  solution for provisioning ISDN BRI services to
remote customers,  and the CellDAX,  which is configured to reduce the amount of
equipment at the  wireless  cell site,  decreasing  bandwidth  requirements  and
reducing operating costs.

StreamLine

      The  StreamLine  product,  like the  IMACS,  has a modular  design  and is
software-based.  It  supports  all of the user  cards  supported  by the  IMACS,
offering carriers an inventory  control and cost benefit.  It is also manageable
via the same EMS system that supports the IMACS.  However,  it only has half the
footprint of the IMACS, making it ideal for space constrained  collocation space
and telco closets.

      As with all Premisys  products,  StreamLine is standards  based  including
TR-08.  The single T1/E1 design  positions it for the small and medium  business
market that Carriers are targeting,  without losing the scaleability  offered by
the IMACS.

SlimLine

      The  SlimLine  product is designed  for small or remote  business  offices
seeking plug & play provisioning of integrated T1 service.  It is offered in two
fixed  configurations  - one with 12 voice channels and two V.35 data ports, and
the other with 24 voice  channels  and two V.35 data ports.  Either or both data
ports can support a low cost  router for  Internet  and  Intranet  service.  The
chassis is a  pizza-box  design  with  configuration  done with front  panel dip
switches. Installation is very simple.

      TR-08  support  comes  standard  with  either  the  12  or 24  port  voice
configurations,  supports FXS, loop and ground start, caller ID, and an integral
CSU.

Network Management

      The IMACS and  StreamLine  products  offer a number of network  management
options  that are based on open  industry  standards  in order to  provide  easy
integration with generic network management systems and interfaces,  such as the
Simplified  Network  Management  Protocol  (SNMP).  They can be managed  locally
through an  attached  terminal or remotely  through an integral  modem.  Network
management  messaging is supported  locally through TCP/IP  protocol  standards,
including  support for SLIP, and remotely  through the virtual  terminal  TELNET
protocol.  Network  management  messaging  can be sent  across the network via a
carrier's standards-based network infrastructure.

      The  Company has also  developed  application  software  for the IMACS and
StreamLine  products  called the Element  Management  System ("EMS") and the new
OnLine EMS.  EMS' features  include  fault  management  and  statistics,  remote
testing  and  diagnostics,   surveillance  management,  performance  monitoring,
software-download,  inventory  reporting  and  configuration  management.  These
features  reduce  the  carrier's  cost of  providing  multiple  services  to its
business customers by allowing remote management and control.


<PAGE>



Q-155 Product Line

      In June 1998,  at  Supercomm,  a major  industry  tradeshow,  the  Company
demonstrated a new product,  the Q-155,  which is designed to bring the benefits
of IADs to  broadband  networks.  *The Q-155 is being  designed to increase  the
utilization of higher bandwidth services such as SONET or SDH fiber optic rings.
*Furthermore,  the Q-155 is being  designed  to accept  legacy  TDM or  advanced
packet  traffic and route it to the  appropriate  central office or data switch,
again in any protocol required (SONET, SDH, ATM, TDM).

      *The Q-155 will  enable  carriers  to deliver a variety of  broadband  and
narrowband services to their business customers with higher utilization of their
transmission networks and reduced requirements for ports on their central office
cross-connects   and  switches.   *The  Q-155  is  being   developed   utilizing
technologies  licensed  from  Positron in January  1997,  and from  technologies
licensed from SNT in March 1998.  First shipments of the Q-155 are projected for
the quarter ending December 31, 1998.

      *The Q-155 is designed to complement  the IMACS,  StreamLine  and SlimLine
products as the Q-155 can integrate these devices into a total network solution.
*With the addition of the Q-155 product line,  Premisys products are expected to
provide a full access product line offering  multiple price points from a single
T1 to SONET/SDH  speeds and are expected to enable  Premisys to offer a complete
solution to network  access.  For a discussion of certain risks related to these
new  products,  see "Other  Factors that May Affect Future  Operating  Results -
Rapidly  Evolving  Technology"  within  item  7,  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations."


Marketing, Sales and Distribution

      The primary market for the Company's products is public telecommunications
carriers,  including major domestic  carriers  providing long distance and local
service,  competitive  access providers,  competitive  local exchange  carriers,
wireless  service  providers,   enhanced  service  providers  and  international
carriers.  The focus of the Company's  sales  strategy is to form and to support
strategic  relationships with  telecommunications  equipment suppliers,  systems
integrators  and  international  distributors  (collectively,  "Partners").  The
Company also has relationships with distributors and sells its products directly
to end  users on a limited  basis.  The  Company  currently  has sales  staff in
several  locations  across the United  States and also  maintains  international
sales offices in Singapore,  Hong Kong, Beijing,  Mexico and the United Kingdom.
The offices in Singapore,  Beijing and Hong Kong serve the Asia/Pacific  region,
the office in the United Kingdom  serves Europe,  the Middle East and Africa and
the office in Mexico serves the Latin America region.  The Company's sales staff
supports the sales organizations of the  telecommunications  equipment suppliers
that distribute and market its products. In addition,  the Company's sales staff
provides field system training,  develops new strategic relationships and, where
appropriate, sells directly to carriers.

 Strategic Relationships

      The Company  believes that the combination of  technologies,  services and
support  mechanisms  needed to reach the  world-wide  market  for the  Company's
products  can best be provided  through  strategic  relationships  with  leading
Partners. Many of these Partners have established  relationships with the public
carriers  and  provide  a broad  range of  services  to these  carriers  through
existing  front-line  service and support  networks.  Premisys  seeks  strategic
relationships  that offer (i) an established  presence in the Company's  primary
markets,  (ii) a product line that the IMACS  product can  complement to provide
value-added  networking  solutions and (iii) a core  technology that enables the
telecommunications  equipment suppliers to develop enhanced products with market
differentiation that can be integrated with the IMACS platform.

      The Company believes that the joint development of technology demonstrates
the  commitment  of these  Partners to the IMACS  product line and  encourages a
longer-term  relationship  with the Company.  *The Company has  completed  joint
development  projects  with  Paradyne,  Lucent,  Northern  Telecom,  Alcatel and
Motorola,  which has led to IMACS  products  being sold as  components  of these
companies' specific products.

      The Company's  agreements  with  Partners  generally  grant  non-exclusive
licenses to distribute  and, based on volume,  provide for certain  discounts on
the purchase  prices of the  Company's  products.  *Any Partner that markets and
sells the  Company's  products  could elect to cease  marketing  and selling the
Company's  products,  and there can be no  assurance  that these  Partners  will
continue to place  orders  with the Company or that the Company  will be able to
obtain orders from new  customers or end users.  *The loss of any one or more of
the Company's  strategic  Partners  would have a material  adverse effect on the
Company's business and operating results. The Company derived approximately 77%,
77% and 81% of its revenues  from its  Partners in fiscal  1996,  1997 and 1998,
respectively.  See Item 7,  "Management's  Discussion  and Analysis of Financial
Condition  and Results of  Operations - Results of  Operations  Revenues" and "-
Other  Factors  That May  Affect  Future  Operating  Results  Relationship  with
Paradyne."

 Distributors

      The Company  also uses a select  number of VARs,  system  integrators  and
distributors to market and sell its products. These customers generally sell the
Company's  products  to  smaller  carriers  and  corporations  accessing  public
networks  as  well  as  to  service  international  markets  where  the  VAR  or
distributor is located.  The Company derived  approximately  11%, 19% and 10% of
its revenues from value added resellers and non-strategic distributors in fiscal
1996, 1997 and 1998, respectively.

Direct Sales

         Direct  sales by the  Company  to  carriers  and end  users to date has
represented a minor part of the Company's business. Generally, the Company sells
directly  only to carriers that have their own  established  support and service
infrastructures  and to end users within  market  segments  where the  Company's
strategic telecommunications  equipment suppliers,  distributors and VARs cannot
cost-effectively  market and sell the Company's  products.  The Company  derived
approximately  12%, 4% and 9% of its revenues  from direct sales in fiscal 1996,
1997  and  1998,  respectively.  Direct  sales  by  the  Company  to  CLECs  and
Alternative Carriers is a rapidly growing and dynamic  opportunity.  The Company
believes  that  these new and  generally  small  carriers  are not  aggressively
targeted by large  telecommunications  equipment providers much as the small and
medium business  customers are not  aggressively  targeted by the ILECs or PTTs.
Moreover, the Company believes that its products are ideally suited to these new
carriers  offering  bundled  services,  a range of  technologies,  protection of
legacy investment,  and low cost implementation.  The Company intends to augment
its  technical  support,  training,  collateral  development  and  marketing  to
actively develop its direct sales capabilities.

Customer Support

      The first level of customer support for the Company's products is provided
by the Partners that sell the Company's  products  directly to the end user. The
Company's  personnel provide backup support and training.  When a Partner is not
able to provide  solutions to product  problems,  service  personnel contact the
Company's  customer  support  group,  which has hardware  and software  products
configured  to  simulate  networking  problems.  In some  cases,  the  Company's
customer  support  representatives  dial  into the end user  network  to  assist
directly  in   troubleshooting   and   problem   isolation.   Customer   support
representatives  are  available by telephone 24 hours a day, 7 days a week.  The
Company also provides on-site service when requested.

      The  Company's  products have been designed to ensure that problems can be
easily  diagnosed.  All voice and data modules contain  integral  testing suites
that allow isolation of networking problems.  The Company currently warrants its
systems products  against  workmanship or defects for five years and its network
management  software products for 90 days. During the warranty period,  Premisys
repairs or replaces any failed system component at no charge.

      The Company also provides  technical  training  either at the sites of its
strategic Partners or at Company facilities. Training courses include the theory
of operation,  equipment diagnostics and the testing and troubleshooting of both
the  equipment  and the network.  Train-the-trainer  courses are also offered to
help the telecommunications equipment suppliers educate their support personnel.

Competition

      The market  for  telecommunications  products  is highly  competitive  and
subject to rapid  technological  change,  regulatory  developments  and emerging
industry standards.  The Company believes that the principal competitive factors
in the  carrier  access  market  are:  support  for  multiple  types of  carrier
services;  conformance to public carrier standards for signaling,  transmission,
network   management,   reliability  and  safety;   the  development  and  rapid
introduction  of new product  features;  price/performance;  quality of customer
support;  and installed base. The Company believes it has competed  favorably to
date with respect to these factors. *However, there can be no assurance that the
Company will compete  successfully  in the future with respect to these or other
factors.

     The  Company's   principal   competition   to  date  has  been  from  major
telecommunications  equipment suppliers,  such as Newbridge Networks Corporation
and  Tellabs,  Inc.,  both of these  companies  offer  broad  lines of  products
including  access  devices  for  business  applications.  *The  Company  expects
substantial  additional  competition  from existing  competitors as they develop
products to compete with the  functionality  and  flexibility  of the  Company's
products.  Since Premisys began selling SlimLine and StreamLine products, it has
faced additional competition from both start-ups and existing telecommunications
equipment  manufacturers  selling channel bank and CSU/DSU products.  *The Q-155
product will likely compete with broadband  access products offered or announced
by a number of vendors.  *Certain of the telecommunications  equipment suppliers
that market and  distribute  the  Company's  products may in the future  develop
other  products  that  could be sold for  selected  applications  for  which the
Company's products are currently provided.  *Successful,  timely development and
market  acceptance of such products  could reduce the level of demand from these
telecommunications  equipment  suppliers  for the  Company's  products.  *To the
extent that current or potential  competitors can expand their current offerings
to  include  access to  circuit,  packet  and cell  switching  in an  integrated
product,  the  Company's  business and  operating  results  could be  materially
adversely affected. Many of the Company's competitors have technical, financial,
manufacturing and marketing  resources  significantly  greater than those of the
Company.   In  addition,   many  of  such  competitors   have   long-established
relationships with public carriers.  *There can be no assurance that the Company
will  have  the  financial  resources,   technical   expertise,   manufacturing,
marketing,  distribution and support capabilities to compete successfully in the
future.


Manufacturing and Suppliers

      The  Company's  manufacturing  operations  consist  primarily of materials
planning and procurement, module testing and quality control. The Company relies
on  contract  manufacturers,  primarily  in the  United  States.  The  Company's
reliance on third-party  subcontractors  reduces the Company's  flexibility  and
responsiveness to changes. For example,  contract manufacturers are not as quick
as internal  manufacturing  organizations to react to new products or changes in
product designs or product quantities.  Use of contract manufacturers can expose
Premisys  to  supply  interruptions  due to  production,  quality  or  financial
problems of its  contractors.  *This loss of flexibility or supply  interruption
can result in shipment delays, which could have a material adverse effect on the
Company's business and operating results. The Company believes, however, that by
using a limited number of third-party subcontractors, it is in a better position
to reduce  product  costs,  acquire  additional  capacity and reduce its capital
investment. All testing of the Company's products is performed by the Company at
its Fremont, California facility. Products are rigorously tested using automated
test  equipment  prior to  shipment to  customers.  All  printed  circuit  board
assemblies  are tested  individually.  To date,  the Company has  experienced no
adverse affects on flexibility or responsiveness to changes due to the Company's
use of third-party subcontractors.

      Generally, the Company uses industry standard components for its products.
It uses field programmable gate arrays with erasable  programmable memory rather
than custom  integrated  circuits in order to maximize  its ability to customize
products  quickly for  individual  carriers  and add product  features.  Certain
components  used  in  the  Company's  products,  including  microprocessors  and
communications  chips that are  manufactured  by Motorola,  Siemens AG,  Xilinx,
Lucent  and  National  Semiconductor,  are  currently  available  from  only one
supplier. In the past, the Company has experienced shortages of certain of these
and other  components  because of vendor  production or quality problems and the
inability  of  suppliers  to  increase  delivery  rates  to meet  the  Company's
requirements.  In the past certain  components  have been in short supply within
the  Company's  industry,  and in such cases,  Premisys  must  compete for these
components   with  larger   companies   that  often  have   longer   established
relationships  with  these  vendors.  Component  shortages  and  delays  have on
occasion resulted in delays in the shipment of the Company's  products,  and the
component  shortages have also on occasion  resulted in higher  component costs.
Certain  components used in the Company's products require an order lead time of
up to one year.  *Other  components  that  currently  are readily  available may
become  difficult  to obtain in the  future.  *Failure  of the  Company to order
sufficient  quantities of these  components in advance could prevent the Company
from increasing  production of products in response to customer orders in excess
of amounts projected by the Company,  which could have a material adverse effect
on the Company's  business and operating results.  *Alternatively,  ordering too
much of a component in advance could lead to excess inventory,  which could have
a material adverse effect on the Company's business and operating results.

      *An extended  delay in deliveries  of  components  or of finished  printed
circuit board  assemblies  would have a material adverse effect on the Company's
business  and  operating  results  and  possibly on its  relationships  with its
customers.  *Although  Premisys  typically  maintains some reserve  inventory of
components,  this inventory would not cover a significant  delay in the delivery
of such components.

Research and Development

      During  fiscal  1996,  1997  and  1998,  total  research  and  development
expenditures were $7.5 million,  $10.5 million and $16.2 million,  respectively.
All research and development expenditures are expensed as incurred. In addition,
in fiscal 1997 and 1998 the Company  incurred a charges of $4.0 million and $4.4
million for licenses to certain  SONET and SDH based  technologies  and cell and
packet  technologies,  respectively.  See  "Results  of  Operations  -  Acquired
In-Process Technology" within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Form 10-K.

      The  telecommunications  equipment  market  is  characterized  by  rapidly
changing  technologies  and frequent new product  introductions,  which  include
frame  relay,  ATM  and  new  digital  subscriber  line  technologies  ("xDSL").
Standards  for new services such as ATM and xDSL are still  evolving.  *As these
technologies and related standards evolve, the Company may be required to modify
its  products or develop and support new  versions of its  products.  *The rapid
development  of  new  technologies  increases  the  risk  that  current  or  new
competitors could develop products that would reduce the  competitiveness of the
Company's  products.  *The Company's success will depend to a substantial degree
upon its ability to respond to changes in  technology,  industry  standards  and
customer requirements.  *This will require the timely selection, development and
marketing of new products and enhancements on a cost-effective basis. *There can
be no assurance that the Company will be successful in  developing,  introducing
or managing the transition to new or enhanced products or that any such products
will be responsive to technological changes or will gain market acceptance.  See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Other Factors That May Affect Future Operating Results - Rapidly
Evolving Technology."

     In fiscal 1997 and 1998, the Company's research and development  activities
focused on the  development  and release of the SlimLine,  StreamLine and Q-155.
The SlimLine and  StreamLine  were released in the March and June 1998 quarters,
respectively.  The prototype  version of the Q-155 was demonstrated at the trade
show  Supercomm  in June 1998 and is  expected  to be  available  in the quarter
ending December 31, 1998.  Premisys licensed SONET/SDH  technology from Positron
in the March,  1997 quarter and licensed cell and packet switching  technologies
from SNT in the  March  1998  quarter;  the  Company  plans to  integrate  these
technologies into future versions of Q-155.

      *Products  as  complex  as  those  offered  by  the  Company  may  contain
undetected  errors or failures  when first  introduced  or as new  versions  are
released.  *Such  errors  have  occurred  in the past year,  and there can be no
assurance  that,  despite  testing by the Company  and by current and  potential
customers,  errors  will not be  found in new  products  after  commencement  of
commercial  shipments.  *The occurrence of such errors have in the past resulted
(including during fiscal 1997 and 1998), and could in the future,  result in the
loss or delay in market acceptance of the Company's products, which could have a
material  adverse effect on the Company's  quarterly  operating  results and its
market  opportunities.  *As the  functionality  and  complexity of the Company's
products continue to grow, the Company may experience an increased  incidence of
such errors or failures, as well as delays in introducing its products.

      As  of  June  30,  1998,  106  employees  were  engaged  in  research  and
development  programs,  including  hardware and software  development,  test and
engineering  support  personnel.   The  Company  believes  that  recruiting  and
retaining engineering personnel is essential to its success. *To the extent that
the Company is not successful in attracting  and retaining its technical  staff,
its business and  operating  results  would be adversely  affected.  See Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Other Factors That May Affect Future Operating Results - Dependence
on Key Personnel."

Government Regulation

      *Government  regulatory  policies  are likely to  continue to have a major
impact on the  pricing of existing as well as new public  network  services  and
therefore   are   expected  to  affect   demand  for  such   services   and  the
telecommunications  products that support such  services.  *Regulations  and FCC
rulings  arising  from the  Telecommunications  Reform  Act of 1996 will  impact
service offerings and  competitiveness  in the communications  marketplace,  and
thus could have an affect on the timing and size of the industry's investment in
access equipment.  *Tariff rates, whether determined autonomously by carriers or
in response  to  regulatory  directives,  may affect the cost  effectiveness  of
deploying public network services.  *Tariff policies are under continuous review
and are subject to change. *User uncertainty  regarding future policies may also
affect demand for telecommunications products, including the Company's products.

      Governmental   communications   regulatory  authorities  have  promulgated
regulations that, among other things,  set installation and equipment  standards
for private  telecommunications  systems and  require  that all newly  installed
hardware be registered and meet certain governmental standards.  *The failure of
the  Company's  products  to  comply  with  these  standards,  or any  delays in
compliance, could delay introduction of the Company's products, which could have
a material adverse effect on the Company's business and operating  results.  See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of  Operations  - Other  Factors  That May  Affect  Future  Operating  Results -
Industry Standards and Regulatory Matters."

Intellectual Property

      The Company relies upon a combination of patent,  trade secret,  copyright
and  trademark  laws and  contractual  restrictions  to  establish  and  protect
proprietary rights in its products. The Company currently holds one U.S. patent.
This patent relates to the manner in which the various modules that are included
within an IMACS  communicate  with one another and expires  December  2012.  The
Company  has  also  entered  into   confidentiality  and  invention   assignment
agreements with its employees,  and enters into  non-disclosure  agreements with
its suppliers,  distributors and appropriate  customers so as to limit access to
and disclosure of its proprietary  information.  *There can be no assurance that
these  statutory and  contractual  arrangements  will prove  sufficient to deter
misappropriation  of  the  Company's  technologies  or  independent  third-party
development of similar  technologies.  *The laws of certain foreign countries in
which the Company's  products are or may be developed,  manufactured or sold may
not protect the Company's  products or intellectual  property rights to the same
extent as do the laws of the  United  States  and thus make the  possibility  of
piracy of the Company's technology and products more likely.

      The  telecommunications  industry is  characterized  by the existence of a
large number of patents and frequent  litigation  based on allegations of patent
infringement.  *From time to time,  third parties may assert  exclusive  patent,
copyright, trademark and other intellectual property rights to technologies that
are important to the Company.  There are no currently  pending  material  claims
that the Company's products, trademarks or other proprietary rights infringe the
proprietary  rights of third parties.  *However,  there can be no assurance that
the Company  will not receive  communications  from third  parties in the future
asserting that the Company's  products  infringe or may infringe the proprietary
rights of third parties. In its distribution  agreements,  the Company agrees to
indemnify its customers for any expenses or  liabilities  resulting from claimed
infringements  of patents,  trademarks or copyrights of third  parties.  *In the
event of litigation to determine the validity of any  third-party  claims,  such
litigation,  whether or not determined in favor of the Company,  could result in
significant  expense to the  Company  and divert  the  efforts of the  Company's
technical and management  personnel from productive  tasks.  *In the event of an
adverse ruling in such litigation,  the Company might be required to discontinue
the use and sale of infringing products, expend significant resources to develop
non-infringing  technology or obtain licenses from third parties.  *There can be
no assurance  that  licenses from third parties would be available on reasonable
commercial  terms,  if at all. *In the event of a successful  claim  against the
Company  and the  failure of the  Company  to  develop  or license a  substitute
technology,  the Company's  business and  operating  results would be materially
adversely affected.

Employees

      At June  30,  1998,  Premisys  employed  331  individuals  on a  full-time
equivalent  basis. Of these, 121 were involved in sales,  marketing and customer
support, 106 in research and development, 74 in manufacturing, and the remaining
30 in  administration  and  finance.  The  Company  also  uses  contractors  and
temporary workers.  The Company considers its relations with its employees to be
good and has not experienced any interruption of operations as a result of labor
disagreements.  *The  Company's  future  success  will  depend on its ability to
attract,  motivate and retain highly skilled employees, the competition for whom
is intense.  See Item 7,  "Management's  Discussion  and  Analysis of  Financial
Condition  and Results of  Operations  - Other  Factors  That May Affect  Future
Operating Results - Dependence on Key Personnel."

Item 2.  Properties

     The Company's  principal offices are located in three facilities,  totaling
150,281 square feet, leased by the Company in Fremont, California. The leases on
these  facilities,  which are  classified as  non-cancelable  operating  leases,
expire on various  dates  through  December 31, 2005.  In addition,  the Company
leases facilities in Florida, Canada,  Singapore,  Hong Kong, the United Kingdom
and the Peoples  Republic of China.  The leases on these  facilities,  which are
classified as non-cancelable  operating leases,  expire on various dates through
September 30, 2003.  Approximately  60% of the space in the Fremont,  California
facilities  is used or  reserved  for  manufacturing,  product  development  and
testing;  the balance of the space is used or reserved for sales,  marketing and
other general  administrative  activities.  See Note 9 of Notes to  Consolidated
Financial Statements.  The Company believes that its present facilities are well
maintained and are in good operating condition.

Item 3.  Legal Proceedings

      Not applicable.

Item 4.     Submission of Matters to a Vote of Security Holders

      Not applicable.


<PAGE>



                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters


Price Range of Common Stock

      The Company's  Common Stock is quoted on the Nasdaq  National Market under
the symbol "PRMS." The Company's  Common Stock  commenced  trading on the Nasdaq
National  Market on April 6, 1995.  The  following  table lists the high and low
closing prices during fiscal 1997 and fiscal 1998.



                                                     High         Low

    Fiscal  1997:
             First Quarter                           $ 62 3/4     $ 29 1/8
             Second Quarter                          $ 54 1/2     $ 35 3/8
             Third Quarter                           $ 37 1/4     $  7 1/8
             Fourth Quarter                          $ 16 1/4     $   73/4

    Fiscal  1998:
             First Quarter                           $ 25 1/4     $ 15
             Second Quarter                          $ 33 1/4     $ 20 3/8
             Third Quarter                           $ 29 3/4     $ 18 13/16
             Fourth Quarter                          $ 32 1/4     $ 22 1/2


      There were  approximately  169 holders of record of the  Company's  Common
Stock as of September 11, 1998.

Dividend Policy

      The Company has not paid any cash  dividends on its capital stock to date.
*The Company  currently  anticipates that it will retain all future earnings for
use in its business  and does not  anticipate  paying any cash  dividends in the
foreseeable future.

Item 6.  Selected Financial Data
<TABLE>
<CAPTION>

                                                 Year Ended June 30, (1)
                                     -------------------------------------------------
                                      1994      1995       1996      1997      1998
                                     --------  --------  --------- ---------  --------
                                          (in thousands, except per share data)
<S>                                  <C>       <C>       <C>       <C>        <C>

Consolidated Statements of Operations Data:
Revenues                             $ 17,164  $ 30,888  $  73,912 $  78,358  $102,298
Income from operations                    961     4,784     24,577    15,213    18,371
Net income                           $    886  $  3,967  $  16,788 $  10,891  $ 13,715
                                     ========  ========  ========= =========  ========

Net income per share - Basic         $   1.03  $   0.60  $    0.70 $    0.44  $   0.54
                                     ========  ========  ========= =========  ========
Net income per share - Diluted       $   0.05  $   0.18  $    0.64 $    0.41  $   0.50
                                     ========  ========  ========= =========  ========
Shares used in computing net income per share
   Basic                                  856     6,622     23,876    24,722    25.569
                                     ========  ========  ========= =========  ========
   Diluted                             17,107    22,246     26,389    26,498    27,495
                                     ========  ========  ========= =========  ========
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                    As of June 30, (1)
                                     --------------------------------------------------
                                      1994      1995       1996      1997       1998
                                     --------  --------   --------  --------   --------
                                                      (in thousands)
<S>                                  <C>       <C>        <C>        <C>       <C>

Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments               $  6,533  $ 42,963   $ 60,861  $ 73,224   $105,981
Working capital                         8,537    45,520     74,853    90,263    112,079
Total assets                           12,643    52,621     87,522   107,101    138,757
Long-term debt                            194       109         91         9        ---
Mandatorily redeemable convertible     18,217       ---        ---       ---        ---
preferred stock
Total stockholder's equity (deficit) $(8,638)  $ 47,007   $ 77,580  $ 96,817   $120,776
</TABLE>

Quarterly Financial Data

      The following table sets forth certain unaudited  quarterly financial data
for each  quarter  of fiscal  1997 and 1998.  In the  opinion  of the  Company's
management,  this unaudited  information  has been prepared on the same basis as
the audited consolidated  financial statements contained herein and includes all
adjustments  (consisting  only of normal  recurring  adjustments)  necessary  to
present fairly the information set forth therein. *The operating results for any
quarter are not  necessarily  indicative of results for any future  period.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Quarterly Fluctuations."
<TABLE>
<CAPTION>

                                              Quarter Ended
                   --------------------------------------------------------------------
                           Fiscal 1997 (1)                    Fiscal 1998 (1)
                   --------------------------------   ---------------------------------
                   Sept 30,  Dec 31,  Mar 31,   June 30, Sept 30,  Dec 31,   Mar 31, June 30,
                     1997     1997     1997       1997     1997     1997      1998     1998
                   -------- -------- --------  --------  -------- --------  -------- --------
                                  (in thousands, except per share data)
<S>               <C>       <C>      <C>       <C>       <C>      <C>       <C>      <C>

Revenues          $ 24,294 $ 26,356  $ 12,237  $ 15,471  $ 19,285 $ 24,616  $ 27,154 $ 31,243
Gross Profit        15,763   17,588     7,913     9,832    12,067   16,338    18,045   20,262
Income (loss)
from operations      8,788    9,335  (4,152)(2)   1,242     3,536    5,498   2,000(3)   7,337
Net income (loss) $  5,723 $  6,098 ($2,109)(2)$  1,180  $  2,677 $  4,012  $1,841(3)$  5,185
                  ======== ========  ========  ========  ======== ========  ======== ========

Net income per
share-Basic       $   0.23 $   0.25  ($ 0.09)  $   0.05  $   0.11 $   0.16  $   0.07 $   0.20
                  ======== ========  ========  ========  ======== ========  ======== ========
Net income per
share-Diluted     $   0.22 $   0.23  ($ 0.09)  $   0.04  $   0.10 $   0.15  $   0.07 $   0.19
                  ======== ========  ========  ========  ======== ========  ======== ========

Shares used in computing net income per share
     Basic          24,432   24,550    24,764    25,142    25,308   25,462    25,630  25,874
     Diluted        26,479   26,721    24,764    26,501    27,287   27,578    27,507  27,608
                  ======== ========  ========  ========  ======== ========  ======== =======
</TABLE>

---------------------------------
   (1)The Company  uses a fiscal  year ending on the Friday  closest to June 30.
      For ease of  presentation,  however,  annual and quarterly  periods during
      fiscal  1996,  1997 and 1998 are  shown in this Form 10-K as ending on the
      last  day  of  the  last   calendar   month  in  such  year  and  quarter,
      respectively.

   (2)Includes  a  $4,000,000  charge  for a  technology  license.  See  Item 7,
      "Management's  Discussion and Analysis of Financial  Condition and Results
      of Operations - Acquired In-Process Technology" of this Form 10-K and Item
      7,  "Management's  Discussion  and  Analysis of  Financial  Condition  and
      Results of Operations - Other Operating Expenses" of the Form 10-K for the
      year ended June 30, 1997.

   (3)Includes  a  $4,431,000  charge  for a  technology  license.  See  Item 7,
      "Management's  Discussion and Analysis of Financial  Condition and Results
      of Operations - Acquired In-Process Technology" of this Form 10-K and Note
      3 of Notes to Consolidated Financial Statements.


<PAGE>


Item 7.     Management's   Discussion  and  Analysis  of  Financial  Condition
            and Results of Operations

      As  indicated  in the first  paragraph  of Item 1,  above,  this Form 10-K
contains certain forward looking statements within the meaning of Section 21E of
the  Securities  Exchange  Act of  1934,  as  amended,  and  Section  27A of the
Securities Act of 1933, as amended.  The Company has identified by asterisks (*)
various  sentences  within  this Form 10-K which  contain  such  forward-looking
statements,  and words such as "believes,"  "anticipates," "expects," "intends,"
"will" and similar  expressions  are also intended to identify  forward  looking
statements,   but  these  are  not  the  exclusive  means  of  identifying  such
statements.  The forward looking  statements  included in this Form 10-K involve
numerous risks and uncertainties which are described  throughout this Form 10-K,
such as those  referenced  in the first  paragraph  of Item 1, above,  and other
factors  described  throughout this Form 10-K,  including  under  "Revenues" and
"Other Factors That May Affect Future Operating Results" within this Item 7. The
actual results that the Company achieves may differ  materially from any forward
looking statements due to such risks and uncertainties.

Overview

      Premisys was founded in July 1990 and became a publicly owned  corporation
in April 1995. The Company develops,  manufactures,  and markets access products
for use by  telecommunications  carriers for  delivering a wide variety of voice
and data services to its business customers.

      The Company's products enable carriers to deliver multiple services with a
single device. The Company's IMACS product supports the widest range of services
and up to eight T1 or E1 connections;  its StreamLine product, which was derived
from the IMACS,  supports the same voice  services and most of the data services
offered by the  IMACS,  but has a single T1  connection;  its  SlimLine  product
supports a limited  number of voice and data services and has one T1 connection;
its Q-155 product,  not yet released,  is a broadband  integrated  access device
combining TDM, ATM and Sonet/SDH on a single platform which  accommodates a wide
range of voice and data services. Although the IMACS accounted for nearly all of
the Company's revenues in fiscal 1996, 1997 and 1998, the Company's new products
provide additional options in order to offer carriers more complete solutions to
provide delivery of services to their business customers.

      Most of the  Company's  products are deployed in new  networks,  typically
built by new  carriers,  such as CLECs in the  United  States  and new  wireless
service providers.

      The  Company  sells  its  products  worldwide,   primarily  through  large
telecommunications  equipment  suppliers,  systems integrators and distributors.
The Company  derived 11%, 7% and 5%,  respectively,  of its revenues from direct
sales to international  customers in fiscal 1996, 1997 and 1998.  (International
sales through domestic suppliers and distributors are reflected in the Company's
domestic  revenues).  *The Company  intends to continue to expand its operations
outside the United  States and  anticipates  that direct sales to  international
customers  will  increase  in the  future,  both in  absolute  dollars  and as a
percentage   of  the  Company's   revenues.   In  order  to  sell  its  products
internationally,  the Company must meet standards  established by  international
telecommunications  committees  and  telecommunications  authorities  in various
countries.  *Conducting  business  outside  of the  United  States is subject to
certain risks, including longer payment cycles, unexpected changes in regulatory
requirements and tariffs,  currency  conversion risks,  difficulties in staffing
and managing  foreign  operations,  greater  difficulty  in accounts  receivable
collection and potentially adverse tax consequences.  See " - Other Factors That
May Affect Future Operating Results - Indirect Channels of Distribution."

Results of Operations

Revenues

      Revenues consist primarily of gross sales of products,  less discounts and
sales  returns  and  allowances.  Revenues  in fiscal  1996,  1997 and 1998 were
$73,912,000,  $78,358,000 and  $102,298,000,  respectively.  The majority of the
revenue increases from fiscal 1996 to fiscal 1997 and from fiscal 1997 to fiscal
1998 were attributable to unit growth. The rate of revenue growth in fiscal 1997
over fiscal 1996 was significantly lower than the rates of growth of revenues in
earlier years.  Although the Company  maintained a significant  level of revenue
growth during the first two quarters of fiscal 1997 as compared to the first two
quarters of fiscal 1996, the Company experienced a large decrease in revenues in
the  quarters  ended March 31, 1997 and June 30,1997 as compared to the quarters
ended March 31, 1996 and June 30, 1996, respectively. The decrease from revenues
of  $26,356,000  in the quarter ended  December 31, 1996 to  $12,237,000  in the
quarter ended March 31, 1997 was due primarily to several major  deployments  of
the Company's IMACS product being deferred or lost by domestic and international
distribution  partners. An important contributor to the Company's unit growth in
fiscal 1998 has been its success with domestic  CLECs,  most notably MCI through
the Company's strategic relationship with ADC. Sales to CLECs have been realized
both through  distribution  partners and direct sales. The Company's list prices
for its products did not change  significantly  from fiscal 1996 through  fiscal
1998. The impact of average selling price  fluctuations on revenues during these
comparison  periods was not significant.  The average revenue to the Company per
entire  system  decreased  from fiscal  1996 to fiscal  1997 and was  relatively
unchanged  from fiscal 1997 to fiscal 1998. * The Company  expects that its rate
of revenue  growth  from  fiscal 1998 to fiscal 1999 will be the same or greater
than the 31% growth rate  experienced  in fiscal 1998.  *However,  the Company's
expectations  regarding  future revenue levels are subject to numerous risks and
uncertainties,   including   limited  order   backlog,   the  level  of  capital
expenditures  by  CLEC's  and  other  carriers  and its  relationships  with its
strategic  partners and the  introduction  of new products.  See "-Other Factors
That May Affect Future Operating  Results  -Indirect  Channels of Distribution,"
"-Slowdown in Telecommunications  Carriers Capital  Expenditures,"  "-Mergers of
the Company's Customers" and "-Rapidly Evolving Technology."

      The following table sets forth,  for the periods  indicated,  the revenues
generated by customers which accounted for 10% or more of the Company's revenues
in  fiscal  1996,  1997  or  1998,  other  domestic  customers  as a  group  and
international  customers as a group, in absolute  dollars and as a percentage of
total revenues.
<TABLE>
<CAPTION>

Source of Revenues
------------------
                           Fiscal      % Change    Fiscal      % Change     Fiscal
                            1996                    1997                     1998
                        ------------   -------- ------------   --------  ------------
<S>                     <C>            <C>      <C>            <C>       <C>

ADC                     $ 11,464,000     (16%)  $  9,576,000      214%   $ 30,024,000
Paradyne                  24,446,000      (5%)    23,355,000      (34%)    15,345,000
Motorola                  10,838,000      11%     11,996,000       (9%)    10,946,000
DSC                          (a)          ---      7,950,000       ---        (a)
Other Domestic            18,594,000       6%     19,802,000      107%     41,043,000
Customers
International Customers    8,570,000     (34%)     5,679,000      (13%)     4,940,000
                        ------------   -------- ------------   --------  ------------
    Total Revenues      $ 73,912,000       6%   $ 78,358,000       31%   $102,298,000
------------------------============   ======== ============   ========  ============
</TABLE>
<TABLE>
<CAPTION>

Percentage of Total Revenues
                           Fiscal                  Fiscal                   Fiscal
                            1996                    1997                     1998
                           ------                  ------                   ------
<S>                        <C>                     <C>                      <C>

ADC                           16%                     12%                      29%
Paradyne                      33%                     30%                      15%
Motorola                      15%                     15%                      11%
DSC                          (a)                      10%                     (a)
Other Domestic Customers      25%                     26%                      40%
International Customers       11%                      7%                       5%
                           ------                  ------                   ------
    Total Revenues           100%                    100%                     100%
</TABLE>

(a) - Amounts not  provided as revenues for the period were less than 10% of the
total.

      As  illustrated  in the  table  above,  the  Company  sells a  substantial
majority  of its  products to a limited  number of  customers,  which  generally
resell the Company's products to public carriers and end users. *The loss of any
one or more of the  Company's  major  customers  would have a  material  adverse
effect  on  the  Company's   business  and  operating   results.   *Any  of  the
telecommunications  equipment  suppliers  that  market  and sell  the  Company's
products could elect to cease marketing and selling the Company's products,  and
there can be no assurance that these telecommunications equipment suppliers will
continue to place  orders  with the Company or that the Company  will be able to
obtain orders from new telecommunications  equipment suppliers or end users. See
"-Other Factors That May Affect Future Operating  Results - Indirect Channels of
Distribution."

      The  Company  has a  strategic  relationship  with  Paradyne,  formerly  a
wholly-owned  subsidiary  of AT&T,  that  involves the marketing and sale of the
Company's  products by Paradyne to Lucent.  See "-Other  Factors That May Affect
Future Operating  Results - Relationship  with Paradyne." The Company also has a
strategic  relationship  with ADC that has recently  involved the  marketing and
sale of a  significant  amount of the  Company's  products to MCI.  Shipments to
Paradyne and ADC have generated a substantial  portion of the Company's revenues
to date. *The Company  expects that sales to Paradyne will increase  somewhat in
fiscal 1999 and that a decrease in sales to ADC in fiscal 1999 will be offset by
increases to other  customers  such as WorldCom and Teleport.  *Paradyne and ADC
are not  subject  to any  minimum  purchase  requirements,  and  there can be no
assurance  that  Paradyne or ADC will continue to place orders with the Company.
*Significant  reductions  in shipments  to Paradyne or ADC (or their  customers)
could have a material  adverse  impact on the  Company's  business and operating
results.


<PAGE>



Gross Profit
                Fiscal 1996   % Change  Fiscal 1997   % Change   Fiscal 1998
                -----------   --------  -----------   --------   -----------
Gross Profit    $47,494,000       8%    $51,096,000      31%     $66,712,000
As a percentage
 of revenues        64%                     65%                      65%

      Cost of  revenues  consists of  component  costs,  compensation  costs and
overhead  related  to  the  Company's  manufacturing   operations  and  warranty
expenses.  Gross profit improved from fiscal 1996 to fiscal 1997 and from fiscal
1997 to fiscal 1998 primarily as a result of increased unit volumes.  The slight
increase in gross margin from fiscal 1996 to fiscal 1997 was the result of lower
product costs and a further shift in customer mix toward  customers who purchase
the  Company's  products at higher  prices,  which were  partially  offset by an
increase in discounts and the sale of fewer  modules per platform.  Gross margin
was relatively  unchanged from fiscal 1997 to fiscal 1998.  *The Company expects
its gross  margins for fiscal 1999 to decline  somewhat from the 65% realized in
fiscal 1998 due primarily to changes in product mix.  *However,  achievement  of
the Company's  expectations is subject to a number of  uncertainties,  including
customer mix, the mix and volume of products  sold and the Company's  ability to
realize expected revenue levels.

Research and Development Expenses

                      Fiscal 1996  % Change  Fiscal 1997   % Change  Fiscal 1998
                      -----------  --------  -----------   --------  -----------
Research and
development expenses   $7,468,000      41%   $10,519,000      54%    $16,205,000
As a percentage of
revenues                  10%                     13%                     16%

      Research and development  expenses  consist of personnel  costs,  contract
development fees, consulting,  testing,  supplies and depreciation expenses. All
software  development  costs have been expensed in the period in which they were
incurred.  Research and development expenses increased $3,051,000,  or 41%, from
fiscal 1996 to fiscal 1997 and  $5,686,000,  or 54%,  from fiscal 1997 to fiscal
1998.  The  increase  from  fiscal  1996 to fiscal  1997 and from fiscal 1997 to
fiscal  1998 was  primarily  due to  additional  personnel  for the  purpose  of
expanding  the  Company's  product  line  and,  to a  lesser  extent,  increased
consulting  and  supply  expenses.  In  fiscal  1998 the  Company's  development
activities  focused on the  development  of the SlimLine,  StreamLine  and Q-155
products. See "-Other Factors That May Affect Future Operating Results - Rapidly
Evolving   Technology."   Research  and  development  expenses  increased  as  a
percentage  of the  Company's  revenues from 10% in fiscal 1996 to 13% in fiscal
1997 and to 16% in fiscal  1998.  The  increase in expenses as a  percentage  of
revenues  from  fiscal 1996 to fiscal  1997 was  primarily  due to the fact that
while research and development  expenses grew as planned, the Company's revenues
did not.  The  increase  from  fiscal  1997 to fiscal 1998 was the result of the
increased  research and development  activities  discussed  above.  *The Company
anticipates  that the amount of these expenses will increase in fiscal 1999, but
as a percentage of revenues,  will decrease  slightly in fiscal 1999 as compared
to fiscal  1998.  *However,  the expected  decrease in research and  development
expenses as a  percentage  of revenues is subject to,  among other  things,  the
Company's level of revenues.

Acquired In-Process Technology

      In the quarter  ended March 31,  1997,  the Company  executed a technology
license  agreement with  Positron.  The Company  licensed  certain SONET and SDH
based  technologies for use in its future products,  including the Q-155,  which
was announced in June 1997.  *First  shipments of the Q-155 are projected in the
quarter ending December 31, 1998. *However,  achievement of this is subject to a
number of uncertainties,  including undetected errors and incompatibilities with
installed products.

      The  licensed  technology  includes  the right to modify  and  manufacture
products which are based on Positron's  OSIRIS-155Mb/s  SONET/SDH products.  The
licensed  technology  also  includes the right to use and  manufacture  Positron
proprietary  application-specific  integrated circuits (ASICs), and training and
integration assistance on all design materials.

      The Company will pay Positron $4 million of license fees over three years.
Positron  will also be paid a royalty on the  Company's  products  utilizing the
licensed  technology  up to a maximum of $4  million.  Thus,  total  payments to
Positron will be between $4 million and $8 million.  The Company expensed the $4
million of license  fees in the quarter  ended March 31,  1997,  resulting  in a
$0.09 per share  earnings  reduction.  Payments  of license  fees to Positron in
fiscal 1997 and 1998 totaled $2.0 million and $1.0  million,  respectively.  *If
the Company is  unsuccessful  in developing the product,  this technology has no
alternative  use. See "-Other Factors That May Affect Future  Operating  Results
Rapidly Evolving Technology."

      In the quarter ended March 31, 1998,  the Company  announced the execution
of a technology  license agreement with SNT. SNT's technologies will provide the
Company  with  a  non-blocking  switching  core  expandable  to  11.6  Gbs,  ATM
interfaces to OC-3 and OC-12, 10/100MB  Ethernet/Fast  Ethernet interfaces,  and
related software.  *The Company will use these technologies to develop broadband
ATM and IP multiservice platforms.  *However, there can be no assurance that the
Company  will  be  able to  integrate  successfully  this  technology  into  its
products.  *If the Company is  unsuccessful  in  developing  the  product,  this
technology  has no alternative  use. See "-Other  Factors That May Affect Future
Operating Results Rapidly Evolving Technology."

      The Company paid a total of $4.4 million for  licensing  SNT  technologies
and  related  software.  The  Company  expensed  these  fees  as a  purchase  of
in-process  research  and  development  in the  quarter  ended  March  31,  1998
resulting in a $0.10 per share  earnings  reduction.  The Company also  received
options to license future releases of SNT software for additional fees.

Selling, General and Administrative Expenses

                        Fiscal 1996  % Change  Fiscal 1997  % Change Fiscal 1998
                        -----------  --------  -----------  -------- -----------
Selling, general and
administrative expenses $15,449,000     38%    $21,364,000     30%   $27,705,000
As a percentage of
revenues                     21%                    27%                   27%

      Selling expenses consist  principally of compensation  costs for sales and
marketing personnel (including sales commissions and bonuses),  travel expenses,
customer support expenses, trade show expenses and advertising expenses. General
and  administrative  expenses  consist  primarily of  compensation  expenses for
administration,  finance and general management personnel,  as well as legal and
accounting  fees.  Selling,   general  and  administrative   expenses  increased
$5,915,000, or 38%, from fiscal 1996 to fiscal 1997 and $6,341,000, or 30%, from
fiscal 1997 to fiscal 1998.  The increases  during the  comparison  periods were
primarily the result of increased staffing,  primarily for sales, and associated
expenses,  such as payroll  taxes and sales  commissions  and to a lesser extent
increased  occupancy and travel expenses.  Selling,  general and  administrative
expenses  increased as a percentage of the Company's revenues from 21% in fiscal
1996 to 27% in fiscal 1997 and was unchanged at 27% in fiscal 1998. The increase
in these  expenses as a percentage  of revenues  from fiscal 1996 to fiscal 1997
was due to the fact that while selling, general and administrative expenses grew
as planned,  the Company's  revenues did not. *The Company  anticipates that the
amount of these  expenses  will  increase  in  fiscal  1999,  but will  decrease
somewhat as a percentage  of revenues in fiscal 1999 as compared to fiscal 1998.
*However, the expected decrease in selling,  general and administrative expenses
as a percentage  of revenues is subject to, among other  things,  the  Company's
level of revenues.

Interest and Other Income, Net
                       Fiscal 1996  % Change  Fiscal 1997  % Change  Fiscal 1998
                       -----------  --------  -----------  --------  -----------
Interest and other
income, net             $1,899,000     39%     $2,641,000     29%     $3,399,000
As a percentage of
revenues                     3%                     3%                     3%

      Interest  and other  income,  net  consists of interest  income,  interest
expense and, to a much lesser extent,  foreign  currency  gains and losses.  The
increase  in  interest  and other  income,  net for all  comparison  periods was
primarily due to increased  interest income from higher cash balances  resulting
from the positive cash flow from operating activities.

Provision for Income Taxes
                       Fiscal 1996  % Change  Fiscal 1997  % Change  Fiscal 1998
                       -----------  --------  -----------  --------  -----------
Provision for income
taxes                   $9,688,000    (28%)    $6,963,000     16%     $8,055,000
As a percentage of income
before income taxes         37%                    39%                    37%

      The Company's provision for income taxes represents  estimated federal and
state income taxes.  The Company's  effective rate for fiscal 1996 was 37% which
was less than the combined  federal and state  statutory rate due to the release
of the  remaining  valuation  allowance  on deferred tax assets.  The  Company's
effective  income tax rate for fiscal  1997 was 39% which was also less than the
combined  federal and state  statutory  rate as a result of tax-exempt  interest
income  from  the  Company's  municipal  securities  portfolio  and  anticipated
utilization of research and  development  tax credits  available in fiscal 1997.
The Company's  effective  income tax rate for fiscal 1998 was reduced to 37% due
to increased tax exempt income from the Company's municipal securities portfolio
and the reversal of a portion of prior year timing  differences  for book versus
tax purposes.  *The Company  anticipates that its effective income tax rate will
remain unchanged in fiscal 1999.

Net Income per Share
                       Fiscal 1996  % Change  Fiscal 1997  % Change  Fiscal 1998
                       -----------  --------  -----------  --------  -----------
Net income             $16,788,000            $10,891,000            $13,715,000
Net income per share         $0.64    (36%)         $0.41      22%         $0.50
(diluted)
Shares used in
computing diluted net
income per share        26,389,000      1%     26,498,000       3%    27,495,000

      The  decrease  in net income per share from fiscal 1996 to fiscal 1997 was
due to the decrease in net income,  which resulted  principally  from the slower
than planned  rate of growth in revenues,  operating  expenses  increasing  at a
higher rate than revenues and the charge associated with the Positron  licensing
agreement.  The Company expensed the $4 million of license fees for the Positron
agreement in fiscal 1997,  which  reduced net income per share in fiscal 1997 by
$.09.  The  increase  in net  income  per share for  fiscal  1998 was due to the
increase  in net  income,  which  was a  result  of the  rate of  growth  of the
Company's  revenues  being  greater  than the rate of  growth  in the  Company's
operating expenses. This increase in net income per share was slightly offset by
a greater number of weighted average common shares and common share  equivalents
used to calculate  net income per share.  Net income for fiscal 1998 was reduced
by license  fees paid to SNT, as  discussed  above.  The Company  expensed  $4.4
million of license  fees for the SNT  agreement in fiscal  1998,  which  reduced
reported net income per share in fiscal 1998 by $0.10.

      In June 1997, the FASB issued Statement No. 130, "Reporting  Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive
income and its components in a full set of general purpose financial statements.
SFAS 130  requires  that items to be recorded  in  comprehensive  income,  which
include  unrealized   gains/losses  on  marketable   securities   classified  as
available-for-sale and cumulative translation adjustments, be displayed with the
same  prominence  as other  financial  statements.  SFAS 130 is  required  to be
adopted in the Company's financial statements for the year ending June 30, 1999.

Liquidity and Capital Resources
                       Fiscal 1996 % Change  Fiscal 1997  % Change  Fiscal 1998
                       ----------- --------- -----------  --------- -----------
Net  cash   provided
by operating activities $6,115,000     51%    $9,233,000     189%    $26,629,000
Year  end   cash,
cash equivalents and
short-term investments $60,861,000     20%   $73,224,000      45%   $105,981,000
Year end
working capital        $74,853,000     21%   $90,254,000      24%   $112,079,000

      In fiscal  1998,  net cash of $26.6  million  was  provided  by  operating
activities  primarily due to net income,  a decrease in inventories  and prepaid
expenses  and other assets and an increase in accrued  liabilities  and accounts
payable, which were partially offset by an increases in accounts receivable.

      The Company  purchased  $4.1 million of property  and  equipment in fiscal
1998,  primarily for computers and peripherals and machinery and equipment.  See
Note 2 of Notes  to  Consolidated  Financial  Statements.  Financing  activities
provided $10.3 million of cash in fiscal 1998. The primary  sources of financing
in fiscal 1998 were the tax benefits of disqualifying  dispositions of exercised
stock options and the issuance of Common Stock in connection  with the Company's
employee benefits plan.

      At June 30, 1998, the Company's  principal  sources of liquidity  included
$106 million of cash,  cash  equivalents  and  short-term  investments,  and the
Company had working capital of approximately  $112.1 million. The Company has no
significant capital spending or purchase  commitments other than normal purchase
commitments and commitments  under facilities and capital leases.  See Note 9 of
Notes to Consolidated Financial Statements. *The Company believes that available
funds and  anticipated  cash flows from  operations  will satisfy the  Company's
projected working capital and capital expenditure  requirements through at least
the next 18 months.

         On  August  31,  1998,  the  Company's  Board of  Directors  authorized
repurchase,  at management's discretion, of up to four (4) million shares of the
Company's  Common Stock over the  subsequent  12 months at market  prices not to
exceed $14.00 per share and as the market and business  conditions  warrant.  By
September  17, 1998,  the Company had  repurchased  for cash  890,000  shares at
market prices ranging from $8.69 to $10.81 per share.  As of September 17, 1998,
pursuant to the  authorized  stock  repurchase  program,  the  Company  sold 2.0
million put warrants and purchased  1.5 million call options.  The Company had a
maximum potential  obligation related to the put warrants of $21.3 million.  The
put warrants and call options  expire in equal amounts (50% each) on January 15,
1999 and September 15, 1999.

On September 17, 1998,  the  Company's  Board of Directors  ("Board")  adopted a
Stockholder  Rights Plan ("Plan")  designated to protect the long-term  value of
the  Company  for its  stockholders  during any future  unsolicited  acquisition
attempt.  Pursuant to the Plan,  the Board  declared a dividend of one preferred
share for each share right ("Right") of the Company's  Common Stock  outstanding
on October 5, 1998. Each Right becomes exercisable to purchase one one-hundredth
(1/100)  of a share  of  Series  A Junior  Participating  Preferred  Stock at an
exercise  price of $80.00.  The Rights will expire on September  18,  2008.  The
Company may redeem the Rights at a price of $0.001 per Right.





Other Factors That May Affect Future Operating Results

      As  referenced  in the first  paragraph of Item 1, this  section  consists
primarily  of  forward-looking  statements  but does not include  asterisks  for
improved readability.

      INDIRECT  CHANNELS OF DISTRIBUTION.  Substantially all of the sales of the
Company's  products are through  indirect  channels of  distribution.  Thus, the
Company's  ability to affect and judge the  timing and size of  individual  user
orders is more limited than for manufacturers  selling directly to the end users
of their  products.  Any of the  strategic  Partners  that  market  and sell the
Company's  products  could elect to cease  marketing  and selling the  Company's
products,  and there can be no  assurance  that these  strategic  Partners  will
continue to place  orders  with the Company or that the Company  will be able to
obtain orders from new strategic Partners or end users. See "-Relationship  with
Paradyne."  strategic  Partners  could  develop  products that could be sold for
selected  applications for which the Company's products are currently  provided,
which could reduce the level of demand from these  telecommunications  equipment
suppliers  for the  Company's  products.  See  "Competition."  In addition,  the
Company's  revenues for a given quarter may depend to a significant  degree upon
planned product shipments for a single carrier's  equipment  deployment project.
For example, in the quarters ended September 30 and December 31, 1997, March 31,
1998 and June 30, 1998,  shipments  of the  Company's  products to a CLEC,  MCI,
through ADC, one of the Company's strategic distribution  partners,  represented
more  than 10% of the  Company's  total  revenues  for such  quarters.  Revenues
derived from particular  carrier projects are often difficult to forecast due to
a relatively  long sales cycle and delays in the timing of such  projects.  Such
delays  occurred in the quarter ended March 31, 1997, and  materially  adversely
affected the  Company's  business and operating  results for that quarter.  Such
delays  may  occur in the  future  and would  have a similar  impact if they did
occur.  Delays can be caused by late  deliveries  by other  vendors,  changes in
implementation  priorities,  slower  than  anticipated  growth in demand for the
services that the equipment  supports or in the capital  expenditures of the end
user customer,  consolidation among carriers and delays in obtaining  regulatory
approvals  for new  tariffs.  See  "-Slowdown  In  Telecommunications  Carriers'
Capital  Expenditures" and "-Mergers of the Company's  Customers."  Revenues can
also be affected by delays in initial shipments of new products and new software
releases developed by the Company. See "-Rapidly Evolving Technology." In fiscal
1997, a delay of the development and release of a new feature resulted in a loss
of a large, forecasted shipment. In developing countries,  delays and reductions
in the planned deployment of the Company's products can also be caused by sudden
declines  in the  local  economy  or  capital  availability  and  by new  import
controls.  Suppliers of the  Company's  products have in the past and may in the
future build significant  inventory in order to facilitate more rapid deployment
of anticipated major projects or for other reasons.  Decisions by such suppliers
to sell from their  inventory  could lead to  reductions  in purchases  from the
Company.  These reductions,  in turn, could cause  fluctuations in the Company's
operating  results  and have an adverse  effect on the  Company's  business  and
operating  results  in the  periods  in which  the  inventory  is  utilized.  In
addition, the Company has in the past experienced delays as a result of the need
to modify its products to comply with unique customer specifications. While such
delays have not to date had a material adverse effect on the Company's  business
or operating results, there can be no assurance that any future delays would not
have such an adverse effect.

      SLOWDOWN IN TELECOMMUNICATIONS CARRIERS' CAPITAL EXPENDITURES.  Currently,
the end user  customers  for the  Company's  products  are  primarily  CLECs and
interexchange carriers ("IXCs").  These carriers have been expanding their local
networks at a rapid pace in the past two years to provide  services to small and
medium-sized  businesses  that have  historically  been served  inadequately  by
ILECs.  Based on industry  information,  it now appears  likely that the pace of
capital  expenditure growth by the CLECs and IXCs will slow  significantly.  The
Company believes that there are a number of reasons for this potential slowdown.
The largest U.S.  CLECs and the IXCs which have been entering local markets have
already  built out major  portions of their  planned  local  networks  using the
billions in capital raised in the past two years.  The Company believes that the
smaller  U.S.  CLEC's may have  difficulty  continuing  to raise  capital in the
chaotic financial markets that may persist over the next year.  Capital spending
by carriers serving businesses in the Japan,  Southeast Asia, Eastern Europe and
Latin  America  markets are also being  negatively  impacted  by the  continuing
financial  crisis in Japan and Asia and looming problems in the economies of the
other markets. Besides reducing the rate of growth of the markets into which the
Company sells,  the Company  believes that this near global  slowdown in capital
spending  increases the intensity of price competition for these markets.  While
the Company has recently  introduced its StreamLine and SlimLine  products which
are more  price  competitive  than the IMACS  platform,  which has  historically
produced  most  of its  revenues,  these  new  products  must  compete  with  an
increasing  number  of  low  priced  IADs.  As  a  result  of  the  slowdown  in
telecommunications  carriers' capital expenditures and related increase in price
competition,  the Company may find it more difficult to achieve  expected levels
of revenues and profitability.

      MERGERS OF THE COMPANY'S  CUSTOMERS.  A number the largest CLECs which use
the Company's  products have announced  plans to merge with larger carriers over
the next  several  quarters.  MCI has  announced  an  intention  to  merge  with
WorldCom;  Teleport has  announced an intention to merge with AT&T;  and GTE has
announced an intention to merge with Bell  Atlantic.  The Company  believes that
part of the  impetus  for each of these  mergers  is to  increase  the  combined
carrier's  ability to compete for local access  markets.  In the long term,  the
Company  believes  that this should cause capital  spending on local access,  in
which the Company's  products  serve a vital  function,  to grow  significantly.
However, over the next several quarters, as these mergers are consummated, it is
likely  that  capital  expenditures  will be  temporarily  deferred as the newly
combined  companies  evaluate  inventories  of undeployed  equipment,  potential
overlaps in network  deployment  plans,  strategies  for on-net  versus  off-net
deployments,  and  assignment of  responsibilities  for  deployments in targeted
local  markets.  This  risk of a  deferral  in  expenditures  on  local  access,
including  expenditures for the Company's products,  has already materialized in
the case of MCI. Not only may this risk be realized  repeatedly  as the Teleport
and GTE  mergers  are  completed  in  up-coming  quarters,  but the  slowdown in
expenditures  may  persist for  multiple  quarters  following  the  mergers.  In
addition,  the increased  buying power  wielded by these merged  carriers and by
merged  equipment  suppliers,  such as Alcatel and DSC, is likely to place added
competitive price pressure on equipment manufacturers such as Premisys.

      QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate on a
quarterly  and  annual  basis due to factors  such as the timing of new  product
announcements  and  introductions  by the Company,  its major  customers and its
competitors,  delays  in  equipment  deployment,  market  acceptance  of  new or
enhanced versions of the Company's products,  changes in the product or customer
mix of revenues, changes in the level of operating expenses, competitive pricing
pressures,  the gain or loss of significant  customers,  increased  research and
development  expense  associated  with  new  product  introductions,   component
shortages  (see  "-Dependence  on  Certain  Suppliers"),  and  general  economic
conditions.  The Company's  planned  product  shipments  for a single  carrier's
equipment  deployment  project  can  be a  significant  portion  of a  quarter's
revenues, and delays in the timing of such a project (which have occurred in the
past,  including the quarter ended March 31, 1997) could and have had a material
adverse effect on the Company's business and operating results. All of the above
factors are  difficult  for the Company to forecast,  and these or other factors
can materially adversely affect the Company's business and operating results for
one quarter or a series of quarters.  The Company's  expense levels are based in
part on its  expectations  regarding  future  revenues and in the short term are
fixed to a large extent. Therefore, the Company may be unable to adjust spending
in a timely manner to compensate for any unexpected future revenue shortfall. In
the quarter ended March 31, 1997, the Company  experienced  such an unforecasted
revenue  shortfall  and  was not  able  to  compensate  for it  through  expense
reduction,  which  resulted  in a net loss.  Any  significant  decline in demand
relative to the Company's  expectations or any material delay of customer orders
would have a material  adverse  effect on the  Company's  business and operating
results.  The  Company's  operating  results  may also be  affected  by seasonal
trends.  Such trends may include lower  revenues in the summer months during the
Company's first fiscal quarter when many businesses  experience lower sales, and
in the Company's third fiscal quarter, as compared to its second fiscal quarter,
as a result of strong calendar year end purchasing  patterns from certain of the
Company's strategic customers.

      COMPETITION.   The  market  for  telecommunications   products  is  highly
competitive and subject to rapid  technological  change. The Company's principal
competition to date has been from major telecommunications  equipment suppliers,
such as Newbridge  Networks  Corporation and Tellabs,  Inc., which offer a broad
line of products including access devices for business applications. The Company
expects  substantial  additional  competition from existing  competitors as they
develop  products  to compete  with the  functionality  and  flexibility  of the
Company's  products.  As Premisys  begins  shipping its SlimLine and  StreamLine
products,  it expects  to face  additional  competition  from  channel  bank and
CSU/DSU  vendors as well as with new startups  focusing on the access  equipment
market. See "-Relationship With Paradyne." The Q-155 product will likely compete
with  broadband  access  products  offered or  announced by a number of vendors.
Certain of the telecommunications equipment suppliers that market and distribute
the Company's products may in the future develop products that could be sold for
selected  applications for which the Company's products are currently  provided.
Successful,  timely development or acquisition of such products could reduce the
level of  demand  from  these  telecommunications  equipment  suppliers  for the
Company's products.  In addition,  certain of the  telecommunications  equipment
suppliers  which market the Company's  products have recently either acquired or
expressed an interest in acquiring companies which have products or technologies
that may be adapted to compete with the Company's products in the future.

      LIMITED ORDER BACKLOG.  The Company typically  operates with limited order
backlog,  and a majority  of its  revenues  in each  quarter  result from orders
booked in that quarter.  Also, the Company has from time-to-time,  including the
four  quarters of fiscal 1997,  recognized a majority of its revenues from sales
booked  and  shipped  in the  last  month  of a  quarter.  Due  to the  delivery
requirements  of its  customers,  the Company  expects to continue to experience
limited order backlog.  The Company's  manufacturing  procedures are designed to
assure rapid response to customer demand, but may, in some circumstances, create
risk of excess or inadequate inventory,  which may have an adverse affect on the
Company's  business and operating  results.  The Company's  agreements  with its
customers  typically  allow  customers  to  cancel  orders  or  delay  scheduled
shipments without penalty until a relatively short period of time before planned
shipment. The Company has experienced  cancellation of orders from time to time,
and  expects to receive  order  cancellations  from time to time in the  future,
which could adversely  affect the Company's  revenues for a quarter or series of
quarters. Because a substantial portion of customer orders are filled within the
fiscal quarter of receipt,  and because of the ability of customers to revise or
cancel orders and change delivery  schedules without  significant  penalty,  the
Company  believes  that its  backlog  as of any  given  date is not  necessarily
indicative of actual revenues for any succeeding period.

      RAPIDLY EVOLVING TECHNOLOGY.  The  telecommunications  equipment market is
characterized  by  rapidly  changing   technologies  and  frequent  new  product
introductions,  which  include  cell and  packet  technologies  and new  digital
subscriber line  technologies  ("xDSL").  The Company's success will depend to a
substantial  degree  upon its  ability to respond to changes in  technology  and
customer requirements.  This will require the timely selection,  development and
marketing  of new products  and  enhancements  on a  cost-effective  basis.  For
example, the Company has licensed certain technology from Positron for inclusion
in the  Company's  Q-155  products,  which were  announced  in June 1997 and are
expected to begin shipping in the quarter ending December 31, 1998. Also, in the
quarter ended March 31, 1998, the Company licensed cell and packet  technologies
from SNT. The Company  intends to ship products based upon the SNT technology in
calendar 1999. However,  there can be no assurance that the Company will be able
to  successfully  integrate  the SNT or Positron  technology  into new  products
within such time  frames,  or at all.  In  addition,  failure to achieve  market
acceptance of the recently  introduced  SlimLine and  StreamLine  products could
have  a  material  adverse  effect  on  the  Company's  operating  results.  The
introduction of new and enhanced  products also requires that the Company manage
transitions  from older  products in order to minimize  disruptions  in customer
orders, avoid excess inventory of old products and ensure that adequate supplies
of new products can be delivered to meet customer orders.  In the past,  certain
of the Company's newly introduced products have contained  undetected errors and
incompatibilities  with  installed  products,  which has  resulted in losses and
delays  in  market  acceptance  of  such  products.  As  the  functionality  and
complexity  of  the  Company's  products  continue  to  grow,  the  Company  has
experienced  and may in the future  experience  an  increased  incidence of such
errors or failures as well as delays in introducing its products.

      RELATIONSHIP WITH PARADYNE.  The Company has a strategic relationship with
Paradyne,  formerly a wholly-owned  subsidiary of AT&T,  that involves the joint
development,  marketing and sale of the Company's IMACS product by Paradyne. The
Company's  agreement  with Paradyne  provides  Paradyne  exclusive  distribution
rights with respect to the products  covered by the agreement to AT&T  entities,
as defined under the  agreement.  At the time that the Company  entered into its
OEM agreement  with Paradyne,  Paradyne was a 100%-owned  subsidiary of AT&T. In
1996, AT&T separated into three  publicly-held  stand-alone  businesses,  one of
which - Lucent would focus on the communications equipment market. In June 1996,
Lucent  concluded  a stock  purchase  agreement  for the sale of Paradyne to the
Texas Pacific Group. In the quarter ended March 31, 1997, Paradyne announced new
products which are extensions of its existing line of CSU/DSU products. Premisys
believes  that the  higher  capacity  models of  Paradyne's  916x  series  offer
features  that are  similar  to  those of the  Company's  IMACS  and  StreamLine
products.  See "-Competition" and "-Rapidly Evolving Technology." In the quarter
ended December 31, 1997,  the Company  entered into an OEM agreement with Lucent
for the purchase of the SlimLine and StreamLine products directly from Premisys.
Although  sales to  Paradyne  declined  34% from  fiscal  1997 to  fiscal  1998,
shipments  to  Paradyne  continued  to  represent a  significant  portion of the
Company's  revenues in fiscal 1998.  Neither  Paradyne nor Lucent are subject to
any minimum purchase requirements,  and there can be no assurance that they will
continue to place orders with the Company.  Significant  reductions in shipments
to Paradyne could have a material  adverse effect on the Company's  business and
operating results.

      INDUSTRY  STANDARDS AND REGULATORY  MATTERS.  The market for the Company's
products is also characterized by the need to meet a significant number of voice
and data  communications  regulations and standards,  including those defined by
the  Federal  Communications   Commission,   Underwriters   Laboratories,   Bell
Communications Research ("Bellcore") and, internationally, various countries and
international   standards   committees.   Regulations  can  be  changed  by  new
legislation, as occurred with the enactment of the Telecommunications Reform Act
of 1996; these changes can impact service offerings and  competitiveness  in the
communications marketplace, and thus could have an effect on the timing and size
of the industry's investment in access equipment.  New standards are evolving as
new  technologies,  such as ATM and xDSL,  are  deployed.  As  existing  and new
standards evolve, the Company will be required to modify its products or develop
and  support  new  versions  of its  products.  It is also  important  that  the
Company's  products  be easily  integrated  with  carriers'  network  management
systems.  The  failure  of the  Company's  products  to  comply,  or  delays  in
compliance,  with the various  existing and evolving  industry  standards  could
delay  introduction  of the  Company's  products,  which  could  have a material
adverse  effect on the Company's  business and operating  results.  In addition,
government  regulatory policies are likely to continue to have a major impact on
the pricing of existing as well as new public network services and therefore are
expected to affect demand for such services and the telecommunications  products
that support such services.

      DEPENDENCE  ON KEY  PERSONNEL.  The  Company's  success  to date  has been
significantly  dependent on the  contributions  of its senior officers and other
key employees.  Certain of the Company's  senior  officers,  including its Chief
Executive  Officer,  Senior Vice  President,  Sales and Marketing and its Senior
Vice President,  Finance and Administration,  and Chief Financial Officer,  have
only recently assumed their current  positions.  The loss of the services of any
one of the  Company's  senior  officers or key  employees  could have a material
adverse effect on the Company's  business and operating  results.  The Company's
success  also  depends to a  significant  extent on its  ability to attract  and
retain additional highly-skilled  technical,  managerial and sales and marketing
personnel, the competition for whom is intense.

      LIMITED  PROTECTION OF  INTELLECTUAL  PROPERTY.  The Company relies upon a
combination  of  patent,   trade  secret,   copyright  and  trademark  laws  and
contractual  restrictions  to establish  and protect  proprietary  rights in its
products.  There  can be no  assurance  that  these  statutory  and  contractual
arrangements  will prove sufficient to deter  misappropriation  of the Company's
technologies or independent third-party development of similar technologies. The
telecommunications  industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent  infringement.
In the event of litigation to determine the validity of any  third-party  claims
asserting that the Company's  products  infringe or may infringe the proprietary
rights of such third  parties,  such  litigation,  whether or not  determined in
favor of the  Company,  could result in  significant  expense to the Company and
divert the efforts of the Company's  technical  and  management  personnel  from
productive  tasks.  In the event of an adverse  ruling in such  litigation,  the
Company  might  be  required  to  discontinue  the  use and  sale of  infringing
products,  expend significant resources to develop non-infringing  technology or
obtain licenses from third parties.

      DEPENDENCE ON CERTAIN SUPPLIERS.  Certain components used in the Company's
products are  currently  available  from only one  supplier.  In  addition,  the
Company relies on contract  manufacturers  to produce its printed  circuit board
assemblies.  Use  of  contract  manufacturers  can  expose  Premisys  to  supply
interruptions  due  to  production,   quality  or  financial   problems  of  its
contractors.  Shortages or delays in the delivery of the components  used in the
Company's  products  (which have  occurred  in the past) or  extended  delays in
deliveries  of printed  circuit board  assemblies  could result in delays in the
shipment of the Company's products and/or increase  component costs.  Failure of
the Company to order sufficient  quantities of any required component in advance
could prevent the Company from increasing  production of products in response to
customer  orders in excess of amounts  projected  by the  Company.  Although the
Company  typically  maintains  some reserve  inventory of components and printed
circuit board assemblies,  this inventory would not cover a significant delay in
the delivery of such items.

      YEAR 2000 RISKS. The Company has a formal Year 2000 Conformance Project in
place that focuses on three key  readiness  areas:  (1) internal  infrastructure
readiness,   addressing   internal   information   systems  and  non-information
technology systems;  (2) supplier readiness,  addressing the preparedness of our
supplier  base;  and (3) product  readiness,  addressing  the Company's  product
functionality,  which  includes  customer  support of the installed  base of the
Company's  product.  For each  readiness  area,  a task force is  systematically
performing a Company-wide risk assessment,  conducting  testing and remediation,
and  communicating  with employees,  suppliers,  customers and other third party
business  partners to raise  awareness of the Year 2000  problem.  Following are
overviews of each readiness area and the Company's progress thereon for becoming
ready for the Year 2000.  Internal  infrastructure  readiness:  An assessment of
internal  and  computer  software  and  hardware  is  being  completed  with the
assistance  of a third  party.  The Company is in the process of migrating to an
upgraded version of its  enterprise-wide  accounting and  manufacturing  system,
which will be Year 2000 compliant. For other systems, the Company has identified
all  non-compliant  systems,   established  a  project  for  prioritized  system
compliance,  and is in the process of executing under such  compliance  project.
With  respect to the  Company's  enterprise-wide  accounting  and  manufacturing
system,  compliance is scheduled for completion by November 1998.  Other systems
are  scheduled  to  be  compliant  no  later  than  May  1999.  In  addition  to
applications  and information  technology  hardware,  the Company is testing and
developing  remediation  plans  for  embedded  systems,   facilities  and  other
operations.  Supplier readiness:  This program is focused on minimizing the risk
associated with suppliers in two areas: (1) a supplier's  business capability to
continue  providing  products  and  services,  and  (2)  a  supplier's  products
compliance with Year 2000. Suppliers are being identified and contacted based on
their relative risk in these two areas. The Company has received  responses from
a significant number of its preferred suppliers.  Most of the respondents are in
the process of developing  remediation  plans.  Supplier issues that potentially
affect the Company's  products are targeted to be resolved by July 1999. Product
readiness:  The Company has completed a  comprehensive  program which focused on
identifying and resolving Year 2000 issues  existing in the Company's  products.
The program  encompassed a number of key efforts including testing,  evaluation,
engineering and manufacturing  implementation.  In addition, the program focused
on customer  support of the installed base,  including  coordination of retrofit
activity and testing existing customer electronic transaction capability.  Based
on these  efforts,  the  Company  believes  that  its  products  are  Year  2000
compliant.  General  and Risk  Factors:  The  Company's  Year  2000  project  is
currently  in the  assessment  phase and,  with  respect to certain  information
systems and products,  in the remediation  phase.  The Company believes that its
greatest potential risks are associated with its information systems and systems
embedded in its operations and  infrastructure.  The Company is at the beginning
stage of assessment for its operations  and  infrastructure,  and cannot predict
whether  significant  problems  will  be  identified.  The  Company  has not yet
determined the extent of contingency planning that may be required. Based on the
status of the  assessment  made and  remediation  plans  developed to date,  the
Company is not in a position to state the total cost of  remediation of all Year
2000 issues,  however, the Company believes such costs will not exceed $500,000.
However,   the  Company  has  not  yet  completed  its  assessments,   developed
remediation  for all problems,  developed any  contingency  plans, or completely
implemented  or tested any of its  remediation  plans.  As the Year 2000 project
continues,  the Company may discover  additional Year 2000 problems,  may not be
able to develop,  implement,  or test  remediation or contingency  plans, or may
find that the costs of these  activities  exceed current  expectations.  In many
cases, the Company is relying on assurances from suppliers that new and upgraded
information systems and other products will be Year 2000 compliant.  The Company
plans to test such third-party products,  but cannot be sure that its tests will
be adequate or that, if problems are  identified,  they will be addressed by the
supplier in a timely and satisfactory way. Because the Company uses a variety of
information  systems and has additional  systems  embedded in its operations and
infrastructure,  it cannot be sure that all of its systems will work together in
a Year 2000-compliant fashion.  Furthermore,  the Company cannot be sure that it
will not  suffer  business  interruptions,  either  because of its own Year 2000
problems or those of its  customers  or suppliers  whose Year 2000  problems may
make it difficult or  impossible  for them to fulfill their  commitments  to the
Company.  If the Company fails to satisfactory  resolve Year 2000 issues related
to its  products in a timely  manner,  it could be exposed to liability to third
parties.

      STOCK PRICE  FLUCTUATIONS.  All of the above factors are difficult for the
Company to  forecast,  and these or other  factors,  such as changes in earnings
estimates by securities  analysts,  can  materially  affect the Company's  stock
price for one quarter or a series of  quarters.  Further,  the stock  market has
experienced  extreme  price  and  volume  fluctuations  that  have  particularly
affected the market  prices of  securities  of many high  technology  companies.
These  fluctuations,   as  well  as  general  economic,   political  and  market
conditions,  may materially  adversely  affect the market price of the Company's
Common Stock.  There can be no assurance that the trading price of the Company's
Common Stock will remain at or near its current level.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

      The Company,  in the normal  course of  business,  is subject to the risks
associated  with foreign  currency  exchange  rates,  fluctuations in the market
value of its fixed income securities available-for-sale, and changes in interest
rates.

      To date, the Company's exposure to foreign currency  fluctuations has been
minimized  through the denomination of its foreign sales, and hence its accounts
receivable,  in US  dollars  as  well  as the  use of  letters  of  credit  when
warranted.  The Company funds its  international  operations from US dollar bank
accounts  on an as needed  basis  and,  accordingly,  does not keep  significant
amounts of funds in foreign  currencies.  Presently,  the Company does not hedge
foreign currency exposures for its non-dollar  denominated operating expenses in
Europe, Asia, Canada and Latin America as such amounts have not been material in
relation to the Company's  domestic operating  expenses.  Until fiscal 1997, the
Company purchased a substantial amount of its modules from one foreign supplier.
Today, substantially all of these modules are sourced in the United States.

      The Company  also  maintains  a  portfolio  of  marketable,  fixed  income
securities,  available  for sale,  of  various  issuers,  types and  maturities.
Substantially all of the portfolio consists of municipal securities. The Company
limits its  exposure to interest  and credit risk by  establishing  and strictly
monitoring  clear policies and guidelines  for its fixed income  portfolio.  The
maximum  allowable  maturity for any one  investment  is 3 years and the maximum
allowable duration of the portfolio is limited to 1.5 years. The guidelines also
establish credit quality  standards and limits on exposure to one issue,  issuer
and type of instrument.  The fair market value of the portfolio at June 30, 1998
was $89 million with the  corresponding  unrealized gain included as a component
of shareholder  equity.  The average  duration of the portfolio at June 30, 1998
was 0.99 years.

      The following  table presents the  hypothetical  changes in fair values in
the municipal  securities  held by the Company at June 30, 1998.  Market changes
reflect  immediate  hypothetical  parallel  shifts in the yield curve of plus or
minus 50 basis points (BPS), 100 BPS and 150 BPS.
<TABLE>
<CAPTION>

                                 Decrease in Federal      Increase in Federal
                                      Funds Rate               Funds Rate
                               --------------------------------------------------
<S>                            <C>      <C>      <C>      <C>     <C>      <C>    
Change in Federal Funds Rate   (150 BPS)(100 BPS)(50 BPS) 50 BPS  100 BPS  150 BPS
-----------------------------------------------------------------------------------
Change in Securities
Valuation ($000's)              $1,320     $871    $423   ($436)   ($865)  ($1,287)
</TABLE>
<TABLE>
<CAPTION>

The probability  that the Federal Funds Rate will move a specified  amount (BPS)
is shown below:

                                      Rate Move
<S>      <C>      <C>      <C>       <C>       <C>     <C>     <C>      <C>      <C>    
         (200BPS) (150 BPS)(100 BPS) (50 BPS)  0 BPS   50 BPS  100 BPS  150 BPS  200 BPS
3 Months       0%       0%       2%      16%     50%      84%      98%     100%     100%
6 Months       0%       2%       8%      24%     50%      76%      92%      98%     100%
9 Months       1%       4%      12%      28%     50%      72%      88%      96%      99%
1 Year         2%       7%      16%      31%     50%      69%      84%      93%      98%
</TABLE>
Source: Analysis of Federal Funds Rates published by the Federal Reserve Board

Item 8.  Financial Statements and Supplementary Data

      Quarterly  supplementary  data is  included  as part of Item 6,  "Selected
Financial Data." The Company's  consolidated  financial  statements  required by
this item are set forth below.


<PAGE>


                            PREMISYS COMMUNICATIONS, INC.
                      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
Report of Independent Accountants                                             31
Consolidated Balance Sheet as of June 30, 1997 and 1998                       32
Consolidated Statement of Operations for the years ended June 30, 1996,       33
1997 and 1998
Consolidated Statement of Stockholders' Equity for the years ended June 30,   34
1996, 1997 and 1998
Consolidated Statement of Cash Flows for the years ended June 30, 1996,       35
1997 and 1998
Notes to Consolidated Financial Statements                                    36


<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Premisys Communications, Inc.

         In our opinion,  the  accompanying  consolidated  balance sheet and the
related  consolidated  statements of operations,  of stockholders' equity and of
cash flows present fairly, in all material  respects,  the financial position of
Premisys  Communications,  Inc. and its  subsidiaries at June 30, 1997 and 1998,
and the results of their  operations  and their cash flows for each of the three
years in the period ended June 30, 1998, in conformity  with generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.



 /s/ PricewaterhouseCoopers LLP
 PRICEWATERHOUSECOOPERS LLP
 San Jose, California
 July 23, 1998, except for Note 10 which is as of September 24, 1998







<PAGE>


                          PREMISYS COMMUNICATIONS, INC.
                           CONSOLIDATED BALANCE SHEET
                      (in thousands, except per share data)

                                        ASSETS

                                                             June 30,
                                                    ----------------------------
                                                          1997          1998
                                                       ------------  -----------
Current assets:
   Cash and cash equivalents                            $   28,923    $  31,006
   Short-term investments                                   44,301       74,975
       Accounts receivable, net                              7,658       12,208
   Inventories                                               8,775        3,859
   Deferred tax assets                                       7,207        7,355
   Prepaid expenses and other assets                         3,674          657
                                                       ------------  -----------

     Total current assets                                  100,538      130,060

Property and equipment, net                                  6,444        8,392
Other assets                                                   119          305
                                                       ------------  -----------

                                                        $  107,101    $  138,757
                                                       ============  ===========


                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                     $    4,756    $   6,969
   Accrued liabilities                                       5,438       10,207
   Income taxes payable                                        ---          735
   Current portion of long-term debt                            90           70
                                                        -----------  -----------

     Total current liabilities                              10,284       17,981
                                                        -----------  -----------

Commitments (Note 9)                                           ---          ---

Stockholders' equity:
   Preferred Stock, $0.01 par value, 2,000 shares
   authorized; no
     shares issued or outstanding                              ---          ---
   Common stock, $0.01 par value, 100,000 shares
   authorized;
     25,191 and 25,974 shares issued and outstanding           252          260
   Additional paid-in capital                               74,994       85,230
   Retained earnings                                        21,571       35,286
                                                        -----------  -----------

     Total stockholders' equity                             96,817      120,776
                                                        -----------  -----------

                                                         $ 107,101    $ 138,757
                                                        ===========  ===========





                   The accompanying notes are an integral part
                         of these financial statements.


<PAGE>


                          PREMISYS COMMUNICATIONS, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                      (in thousands, except per share data)

                                                       Year Ended June 30,
                                                -------------------------------
                                                 1996        1997       1998
                                               ----------  ---------  ----------
Revenues                                       $  73,912   $ 78,358   $ 102,298
Cost of revenues                                  26,418     27,262      35,586
                                               ----------  ---------  ----------

     Gross profit                                 47,494     51,096      66,712
                                               ----------  ---------  ----------
Operating expenses:
   Research and development                        7,468     10,519      16,205
   Acquired in-process technology                    ---      4,000       4,431
   Selling, general and administrative            15,449     21,364      27,705
                                                 --------    -------    --------

     Total operating expenses                     22,917     35,883      48,341
                                               ----------  ---------  ----------

Income from operations                            24,577     15,213      18,371
Interest and other income, net                     1,899      2,641       3,399
                                               ----------  ---------  ----------

Income before income taxes                        26,476     17,854      21,770
Provision for income taxes                         9,688      6,963       8,055
                                               ----------  ---------  ----------

Net income                                     $  16,788   $ 10,891   $  13,715
                                               ==========  =========  ==========

Net income per share
   Basic                                       $    0.70   $   0.44   $    0.54
                                               ==========  =========  ==========
   Diluted                                     $    0.64   $   0.41   $    0.50
                                               ==========  =========  ==========

Shares used in computing net income per share
   Basic                                          23,876     24,722      25,569
                                               ==========  =========  ==========
   Diluted                                        26,389     26,498      27,495
                                               ==========  =========  ==========























                   The accompanying notes are an integral part
                         of these financial statements.


<PAGE>

<TABLE>
<CAPTION>

                          PREMISYS COMMUNICATIONS, INC.
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)

                                                                   Notes
                                                    Additional   Receivable
                                   Common Stock       Paid-In       From        Retained
                                 Shares     Amount    Capital    Stockholders   Earnings
<S>             <C> <C>          <C>       <C>       <C>           <C>         <C>      
  Balance, June 30, 1995         11,716    $   117   $ 53,017      $ (138)     $ (5,989)

  Stock dividend                 11,716        119        ---          ---         (119)
  Shares issued under
  Employee Stock Purchase Plan       51        ---        677          ---           ---
  Exercise of options               916          8      1,578          ---           ---
  Repayment of notes
  receivable from stockholders      ---        ---        ---          138           ---
  Tax benefit of exercised
  stock options                     ---        ---     11,384          ---           ---
  Net income for fiscal 1996        ---        ---        ---          ---        16,788
  --------------------------   ---------  --------- ----------  ------------  -----------
  Balance, June 30, 1996         24,399        244      6,656           ---       10,680

  Shares issued under
  Employee Stock Purchase Plan       46        ---      1,109           ---          ---
  Exercise of options               746          8      2,776           ---          ---
  Tax benefit of exercised
  stock options                     ---        ---      4,453           ---          ---
  Net income for fiscal 1997        ---        ---        ---           ---       10,891

  ---------------------------  ---------  --------- ----------  ------------  -----------
  Balance, June 30, 1997         25,191        252     74,994           ---       21,571

  Shares issued under
  Employee Stock Purchase Plan       52        ---        919           ---          ---
  Exercise of options               731          8      3,213           ---          ---
  Tax benefit of exercised
  stock options                     ---        ---      6,104           ---          ---
  Net income for fiscal 1998        ---        ---        ---           ---       13,715

  ---------------------------  ---------  --------- ----------  ------------  -----------
  Balance, June 30, 1998         25,974    $   260   $ 85,230           ---    $  35,286
                               =========  ========= ==========  ============  ===========
</TABLE>


                     The accompanying notes are an integral part of these
                            financial statements.



<PAGE>

<TABLE>
<CAPTION>

                          PREMISYS COMMUNICATIONS, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)


                                                             Year Ended June 30,
                                                      1996           1997          1998
-------------------------------------------------  ------------  -------------  ------------

<S>                                                <C>           <C>            <C>
Cash flows from operating activities:
  Net income                                        $   16,788    $    10,891    $   13,715
  Adjustments to reconcile net income to net
  cash provided by (used in) operating activities:
     Depreciation                                          838          1,347         2,194
     Deferred tax assets                               (1,831)        (4,292)         (148)
     Changes in assets and liabilities:
       Accounts receivable                            (12,725)          8,609       (4,550)
       Inventories                                     (1,107)        (4,554)         4,916
       Prepaid expenses and other assets                 (171)        (3,235)         2,831
       Accounts payable                                  1,946          1,506         2,213
       Accrued liabilities                               3,242          (459)         4,769
       Income taxes payable                              (865)          (580)           735
                                                   ------------  -------------  ------------
Net cash provided by operating activities                6,115          9,233        26,675
                                                   ------------  -------------  ------------

Cash flows from investing activities:
  Purchase of property and equipment                   (2,007)        (5,091)       (4,142)
  Purchase of short-term investments                   (8,113)        (5,498)      (30,674)
                                                   ------------  -------------  ------------
Net cash used in investing activities                 (10,120)       (10,589)      (34,816)
                                                   ------------  -------------  ------------

Cash flows from financing activities:
  Proceeds from issuance of Common Stock, net            2,264          3,893         4,140
  Tax benefit of exercised stock options                11,384          4,453         6,104
  Repayment of notes receivable from stockholders          138            ---           ---
  Proceeds (repayment) of long-term debt                     4          (125)          (20)
                                                   ------------  -------------  ------------
Net cash provided by financing activities               13,790          8,221        10,224
                                                   ------------  -------------  ------------

Net increase in cash                                     9,785          6,865         2,083
Cash and cash equivalents at beginning of year          12,273         22,058        28,923
                                                   ------------  -------------  ------------

Cash and cash equivalents at end of year            $   22,058    $    28,923    $   31,006
                                                   ============  =============  ============

Supplemental disclosures:
  Cash paid for income taxes                        $     975     $    10,644    $      63
</TABLE>


                   The accompanying notes are an integral part
                         of these financial statements.


<PAGE>



                          PREMISYS COMMUNICATIONS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


The Company

      Premisys  Communications,  Inc.  and  its  subsidiaries,   (together,  the
"Company"),  design,  manufacture and market integrated  digital access products
for telecommunications service providers. The Company's products assist domestic
and  international  public  carriers in building,  expanding and managing  their
worldwide telecommunications networks for their business customers.

Summary of Significant Accounting Policies

Management estimates and assumptions

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and reported  amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Principles of consolidation

      The  consolidated  financial  statements  include the accounts of Premisys
Communications,   Inc.  and  its  wholly-owned  subsidiaries.   All  significant
intercompany accounts and transactions have been eliminated.

Cash, cash equivalents and short-term investments

      Cash and cash  equivalents  include  cash,  money market funds and certain
municipal securities with a maturity of three months or less when purchased. The
Company determines the appropriate  classification of debt and equity securities
at the time of purchase and  reassesses  the  classification  at each  reporting
date. All of the Company's  short-term  investments,  consisting  principally of
municipal  securities,  have been classified as  available-for-sale.  Under this
classification the investments are reported at fair value, with unrealized gains
and losses  excluded  from  earnings  and  reported as a separate  component  of
stockholders'  equity.  At June 30,  1997 and 1998,  such  unrealized  gains and
losses were not significant.

Inventories

      Inventories  are  stated  at the  lower  of cost  or  market,  cost  being
determined using the first-in, first-out (FIFO) method.

Property and equipment

      Property and equipment are stated at cost,  and  depreciation  is computed
using the  straight-line  method over their estimated useful lives,  which range
from two years for computer  equipment and purchased  software to five years for
machinery and equipment and furniture and fixtures.  Leasehold  improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful  lives (all of which are  currently  five years) or the  remaining  lease
term.

Revenue recognition

      The Company  recognizes  revenue  upon  shipment  of product to  customers
provided no  significant  obligations  remain and  collectibility  is  probable.
Certain  distributors  have sales  agreements  allowing limited rights to return
product without  penalties.  In such cases the Company  recognizes  revenue upon
sales of the product by the distributor to its customers.

Software development costs

      Software   development  costs  incurred  prior  to  the  establishment  of
technological  feasibility are expensed as incurred.  Software development costs
incurred  subsequent to the  establishment of technological  feasibility will be
capitalized,  if material.  To date,  all software  development  costs  incurred
subsequent  to  the   establishment  of  technological   feasibility  have  been
immaterial, and therefore no software development costs have been capitalized.

Warranty expense

      Upon product  shipment,  the Company  provides for the estimated cost that
may be incurred under its various product warranties.

Net income per share

     The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings per Share," ("SFAS 128")in the first quarter of fiscal 1998.  SFAS 128
requires  presentation  of both  Basic  EPS and  Diluted  EPS on the face of the
statement of  operations.  Basic EPS is computed by dividing  net income  (loss)
available to common stockholders by the weighted average number of common shares
outstanding  during  the  period.  Diluted  EPS  gives  effect  to all  dilutive
potential common shares  outstanding  during a period. In computing Diluted EPS,
the  average  stock  price for the period is used in  determining  the number of
shares assumed to be purchased  under the treasury stock method from exercise of
stock options.

Foreign currency transactions

     The U.S.  dollar is the  functional  currency  of Premisys  Asia,  Premisys
Canada  and  Premisys   Europe.   Exchange  gains  and  losses   resulting  from
transactions  denominated in currencies  other than U.S. dollars are included in
net income. To date, the resulting gains and losses have not been material.

Fiscal year

      The  Company  uses a 52/53  week  accounting  year that ends on the Friday
closest to June 30. For  purposes  of  financial  statement  presentation,  each
fiscal year is considered to have ended on June 30.

Recently issued accounting pronouncements

      In June 1997, the FASB issued Statement No. 130, "Reporting  Comprehensive
Income,"   ("SFAS   130").   SFAS  130   establishes   standards  for  reporting
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial   statements.   SFAS  130  requires  that  items  to  be  recorded  in
comprehensive  income,  which  include  unrealized  gains/losses  on  marketable
securities   classified  as   available-for-sale   and  cumulative   translation
adjustments,  be displayed with the same prominence as other financial statement
items. SFAS 130 is required to be adopted in the Company's financial  statements
for the year ending June 30, 1999.

      In June 1997,  the FASB  issued  Statement  No.  131,  "Disclosures  about
Segments of an  Enterprise  and Related  Information,"  ("SFAS  131").  SFAS 131
establishes standards for the way public business enterprises report information
about  operating  segments in annual  financial  statements  and requires  those
enterprises to report selected  information about operating  segments in interim
financial  reports issued to shareholders.  SFAS 131 also establishes  standards
for related disclosures about products and services, geographic areas, and major
customers.  SFAS  131 is  required  to be  adopted  in the  Company's  financial
statements for the year ending June 30, 1999.

      In  June  1998,  the  FASB  issued  Statement  No.  133,  "Accounting  for
Derivative  Instruments and Hedging  Activities,"  ("SFAS 133").  This statement
provides   guidance  on  accounting  for  derivative   instruments  and  hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or  liabilities  and measure  those  instruments  at fair value.  It also
provides  guidance  for  accounting  changes in the fair  value of a  derivative
(i.e., gains and losses). SFAS 133 is effective for all quarters of fiscal years
beginning after June 15, 1999.



<PAGE>



NOTE 2 - BALANCE SHEET COMPONENTS

                                                              June 30,
                                                         --------------------
                                                           1997       1998
                                                         ---------  ----------
                                                            (in thousands)
Accounts receivable:
  Trade accounts receivable                              $  7,858   $  12,408
  Less:  allowance for doubtful accounts                    (200)       (200)
                                                         ---------  ----------
                                                         $  7,658   $  12,208
                                                         =========  ==========
Inventories:
  Raw materials                                          $  1,562   $     582
  Work-in-process                                           1,080         676
  Finished goods                                            6,133       2,601
                                                         ---------  ----------
                                                         $  8,775   $   3,859
                                                         =========  ==========
Property and equipment:
  Machinery and equipment                                $  3,099   $   4,355
  Computers and purchased software                          2,707       4,931
  Furniture and fixtures                                    1,638       2,074
  Leasehold improvements                                    2,176       2,402
                                                         ---------  ----------
                                                            9,620      13,762
  Less: Accumulated depreciation                          (3,176)     (5,370)
                                                         ---------  ----------
                                                         $  6,444   $   8,392
                                                         =========  ==========
Accrued liabilities:
  Employee compensation                                  $  1,868   $   3,960
  Warranty                                                  2,424       3,842
  Other                                                     1,146       2,405
                                                         ---------  ----------
                                                         $  5,438   $  10,207
                                                         =========  ==========



NOTE 3 - ACQUIRED RESEARCH AND DEVELOPMENT IN-PROCESS

      In the quarter  ended March 31,  1997,  the Company  executed a technology
license  agreement with  Positron.  The Company  licensed  certain SONET and SDH
based  technologies for use in its future products,  including the Q-155,  which
was announced in June 1997. The licensed technology includes the right to modify
and manufacture products which are based on Positron's  OSIRIS-155Mb/s SONET/SDH
products. The licensed technology also includes the right to use and manufacture
Positron  proprietary  application-specific  integrated  circuits  (ASICs),  and
training and integration assistance on all design materials.

      The Company will pay Positron $4 million of license fees over three years.
Positron  will also be paid a royalty on the  Company's  products  utilizing the
licensed  technology  up to a maximum of $4  million.  Thus,  total  payments to
Positron will be between $4 million and $8 million.  The Company expensed the $4
million of license fees as acquired  research and  development in process in the
quarter  ended March 31,  1997.  Payments of license  fees to Positron in fiscal
1997 and 1998 totaled $2.0 million and $1.0 million, respectively.

In the quarter  ended March 31, 1998,  the Company  announced the execution of a
technology  license  agreement  with SNT.  SNT's  technologies  will provide the
Company  with  a  non-blocking  switching  core  expandable  to  11.6  Gbs,  ATM
interfaces to OC-3 and OC-12, 10/100MB  Ethernet/Fast  Ethernet interfaces,  and
related software.  The Company will use these  technologies to develop broadband
ATM and IP multiservice platforms.

      The  Company  is  paying  a  total  of  $4.4  million  for  licensing  SNT
technologies and related  software.  The Company expensed these fees as acquired
research and development  in-process in the March 31, 1998 quarter.  The Company
also received  options to license future releases of SNT software for additional
fees.


NOTE 4 - INCOME TAXES

      The provision for income taxes consists of the following:


                                                Year Ended June 30,
                                     ---------------------------------------

                                        1996          1997          1998
                                     -----------   -----------   -----------
     Current:                                      (in thousands)
       Federal                        $  8,889      $  9,058      $  6,230
       State                             2,494         2,138         1,891
       Foreign                             136            59            82
                                     -----------   -----------   -----------
                                      11,519          11,255         8,203
                                     -----------   -----------   -----------

     Deferred:
       Federal                          (1,024)     (3,467)         (216)
       State                              (807)       (825)            68
                                     -----------   -----------   -----------
                                        (1,831)     (4,292)         (148)
                                     -----------   -----------   -----------
                                      $   9,688     $ 6,963       $ 8,055
                                     ===========   ===========   ===========


      Deferred  income taxes  reflect the tax effects of  temporary  differences
between carrying  amounts of assets and liabilities for financial  reporting and
income tax purposes. Significant components of the Company's deferred tax assets
are as follows:

                                                              June 30,
                                                      ------------------------

                                                        1997          1998
                                                      ----------    ----------
                                                          (in thousands)
     Financial accruals not yet deductible             $ 6,086       $ 5,265
     Capitalized purchased technology                    1,067         2,076
     Capitalized research and development expenses          54            14
                                                      ----------    ----------
                                                       $ 7,207       $ 7,355
                                                      ==========    ==========


      A  reconciliation  of the income  tax  provisions  computed  at the United
States federal statutory rate to the effective tax rate is as follows:

                                                    Year Ended June 30,
                                      ------------------------------------------
                                          1996           1997            1998
                                      ------------   ------------   ------------

Federal statutory rate                     35.0%          35.0%          35.0%
State taxes, net of federal benefit         6.1            6.1            6.1
Increase (decrease) in valuation
allowance                                  (2.7)           ---            ---
Tax exempt interest income                 (2.4)          (4.8)          (5.0)
Other                                       0.6            2.7            0.9
                                      ------------   ------------   ------------
Effective  tax  rate                       36.6%          39.0%          37.0%
                                      ============   ============   ============



<PAGE>


NOTE 5 - NET INCOME PER SHARE
<TABLE>
<CAPTION>

     Following is a presentation of the Basic and Diluted EPS computations for
     the periods presented below:
                                                                              Per share
(In thousands, except per share amounts)        Income         Shares          Amount
---------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996
<S>                                            <C>                <C>        <C>     
Earnings per share of common stock - basic     $   16,788         23,876     $   0.70
Effect of dilutive securities:
    Stock options                                     ---          2,513
                                              ------------   ------------
Earnings per share of common stock - diluted   $   16,788         26,389     $   0.64
                                              ------------   ------------   ----------

YEAR ENDED JUNE 30, 1997
Earnings per share of common stock - basic     $   10,891         24,722     $   0.44
Effect of dilutive securities:
    Stock options                                     ---          1,776
                                              ------------   ------------
Earnings per share of common stock - diluted   $   10,891         26,498     $   0.41
                                              ------------   ------------   ----------

YEAR ENDED JUNE 30, 1998
Earnings per share of common stock - basic     $   13,715         25,569     $   0.54
Effect of dilutive securities:
    Stock options                                     ---          1,926
                                              ------------   ------------
Earnings per share of common stock - diluted   $   13,715         27,495     $   0.50
                                              ------------   ------------   ----------
</TABLE>


NOTE 6 - STOCK BENEFIT PLANS

Stock option plans

      In March 1992,  the Company  adopted a Stock Option Plan (the "1992 Option
Plan").  The 1992 Option Plan  provides  for the  granting  of  incentive  stock
options and nonqualified  stock options to employees at prices not less than the
fair  market  value  and not  less  than  85% of the  fair  market  value of the
Company's  Common Stock,  respectively,  on the date of grant.  While previously
issued options remain outstanding under the 1992 Option Plan, the Company can no
longer issue new options out of the 1992 Option Plan.

      On November 16, 1994, the Company's  Board of Directors  approved the 1994
Stock Option Plan (the "1994 Option  Plan").  Under the terms of the 1994 Option
Plan,  5,200,000  shares of the Company's Common Stock are reserved for issuance
at exercise prices not less than the fair value of the Company's Common Stock at
the date of grant.  The incentive and  nonqualified  stock options have ten-year
terms, and vest over a period  determined by the Board of Directors,  but not to
exceed five years. Options granted to date have vesting terms of four years. The
1994 Option Plan will terminate ten years after its adoption  unless  terminated
earlier by the Board of Directors.

      In February  1995,  the  Company's  Board of  Directors  adopted,  and the
Company's   stockholders   approved,   the  1995  Directors  Stock  Option  Plan
("Directors  Plan"),  which  provides  for the  automatic  grant of  options  to
purchase  shares  of  Common  Stock to  non-employee  directors  of the  Company
("Eligible Directors"). The maximum number of shares of Common Stock that may be
issued pursuant to options granted under the Directors Plan is 240,000. Pursuant
to the terms of the Directors Plan, each Eligible  Director who becomes a member
of the Board and who has not otherwise  received  options in connection with his
Board service will  automatically be granted an option to purchase 24,000 shares
of Common Stock on the date the Eligible  Director  first joins the board.  Each
Eligible  Director will  automatically be granted an additional option for 6,000
shares of Common  Stock  annually.  Each Grant will vest as to 25% of the shares
per year thereafter,  so long as the  non-employee  director remains a member of
the Board.  Options  granted under the Directors  Plan expire ten years from the
date of grant.  The exercise  price of options under the Directors  Plan must be
equal to the fair  market  value of the  Company's  Common  Stock on the date of
grant.  The  Directors  Plan will  terminate  in February  2005,  unless  sooner
terminated by the Board.

      On March 19, 1997 the  Compensation  Committee  of the Board of  Directors
approved offering employees the right to amend outstanding stock options granted
under the  Company's  1994 Stock Option Plan.  The amended stock options have an
exercise price equal to the closing price of the Company's Common Stock on April
23, 1997 and a new vesting  schedule  beginning on the same date with a duration
equal to that of the original option. Corporate officers were excluded from this
option repricing  offer.  Employees  elected to amend options for  approximately
1,051,000  shares;  the new exercise price was $8.1875 per share. In the summary
table below, these options are included in shares granted and shares canceled in
fiscal 1997.

      As of June 30,  1998,  of the  4,653,215  shares  subject  to  outstanding
options,  1,298,957  shares of such  Options  were  exercisable;  and options to
purchase  776,639 shares of the Company's Common Stock were available for future
grant under all of the Company's option plans.


A summary of  transactions  relating to all of the Company's  option plans is as
follows:


                                   Options             Options Outstanding
                                                 -------------------------------
                                  Available                          Weighted
                                  for Grant          Shares          Average
                                                                  Exercise Price
                                ---------------  ---------------  --------------

Balance at June 30, 1995  (a)        1,447,100        3,176,462            $2.49
Additional shares authorized,        2,000,000              ---              ---
December 1995
Options granted                      (774,300)          774,300           $32.31
Options canceled                       124,961        (124,961)            $4.18
Options exercised                          ---        (916,343)            $1.70
                                ---------------  ---------------  --------------

Balance at June 30, 1996             2,797,761        2,909,458           $10.61
Options granted                    (3,401,647)        3,401,647           $16.35
Options canceled                     1,457,105      (1,457,105)           $27.33
Options exercised                          ---        (746,089)            $3.80
                                ---------------  ---------------  --------------

Balance at June 30, 1997               853,219        4,107,911           $10.67
Additional shares authorized,        1,200,000              ---              ---
December 1997
Options granted                    (1,761,550)        1,761,550           $24.07
Options canceled                       484,970        (484,970)           $12.03
Options exercised                          ---        (731,276)            $4.41
                                ---------------  ---------------  --------------

Balance at June 30, 1998               776,639        4,653,215           $16.58
                                ===============  ===============  ==============

(a)  All share amounts adjusted for 2 for 1 stock dividend at December, 1995.

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options as of June 30, 1998:

                           Options Outstanding             Options Exercisable
                    -----------------------------------   ----------------------
                                 Weighted
                                  Average
                                 Remaining     Weighted
                                Contractual     Average                 Weighted
     Range of         Number       Life        Exercise      Number      Average
  Exercise Prices   Outstanding  (in years)      Price    Exerciseable  Exercise
                                                                          Price

$0.10 - $5.25          711,993      6.30       $  3.51        584,898     $ 3.23
$7.25 - $8.19        1,330,299      8.34       $  8.09        307,099     $ 8.09
$8.88 - $20.56         612,823      9.01       $ 13.18         97,623     $10.16
$21.31 - $29.50      1,413,838      9.66       $ 25.07         43,171     $24.68
$30.75 - $51.00        584,262      8.16       $ 34.91        266,166     $34.61
                    ===========                           ============
$0.10 - $51.00       4,653,215      8.50       $ 16.59      1,298,957     $12.04
                    ===========                           ============


Stock Purchase Plan

      In February  1995,  the  Company's  Board of  Directors  approved the 1995
Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the terms of the
Stock  Purchase  Plan,  all  employees  of the Company may  contribute,  through
payroll  deductions,  up to 10% of their annual compensation toward the purchase
of the  Company's  Common  Stock.  The Company has reserved  400,000  shares for
issuance  under the Stock  Purchase Plan. The purchase price per share is 85% of
the lesser of (a) the fair market  value of the Common Stock on the first day of
the  offering  period,  as defined,  or (b) the fair market  value of the Common
Stock on the last day of the offering  period,  as defined.  The Stock  Purchase
Plan will terminate ten years after its adoption  unless  terminated  earlier by
the Board of Directors.


Pro forma net income and earnings per share

      The Company has elected to follow Accounting  Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") in accounting for its
employee stock options  because,  as discussed below, the alternative fair value
accounting  provided for under Statement of Financial  Accounting  Standards No.
123, "Accounting for Stock-based Compensation," ("SFAS 123") requires the use of
option  valuation  models that were not  developed  for use in valuing  employee
stock  options.  Under  APB 25,  because  the  exercise  price of the  Company's
employee  stock  options  has in all  cases  equaled  the  market  price  of the
underlying stock on the date of grant, no compensation  expense is recognized in
the Company's financial statements for employee stock options.

      Pro forma  information  regarding  net  income and  earnings  per share is
required by SFAS 123.  This  information  is required to be determined as if the
Company had accounted for its employee  stock options,  including  shares issued
under the Stock Purchase Plan (collectively the "options") granted subsequent to
June 30, 1995, under the fair value method of that statement.  The fair value of
options  granted in fiscal 1997 and 1998 reported  below have been  estimated at
the date of grant using a Black-Scholes  option pricing model. The Black-Scholes
option  valuation  model was developed  for use in estimating  the fair value of
publicly  traded  options  that  have no  vesting  restrictions  and  are  fully
transferable.  In addition,  option valuation models require the input of highly
subjective assumptions,  including the expected stock price volatility.  Because
the Company's options have characteristics significantly different from those of
publicly traded options, and because changes in the subjective input assumptions
can materially  affect the fair value  estimates,  in the opinion of management,
the existing models do not necessarily  provide a reliable single measure of the
fair value of its options.

      Had stock-based compensation cost for the options been determined based on
the fair value at the grant dates using the Black-Scholes model as prescribed by
SFAS 123, the Company's Results of Operations for the years ended June 30, 1996,
1997 and 1998 would have been as follows:

                                                 Year Ended June 30,
                                    --------------------------------------------
                                              1996           1997           1998
                                         (in thousands except per share data)
          Net income:
             As reported                 $16,788          $10,891        $13,715
             Pro forma                   $14,642           $2,371         $3,474
          Earnings per share -- basic:
             As reported                   $0.70            $0.44          $0.54
             Pro forma                     $0.61            $0.10          $0.14
          Earnings per share -- diluted
             As reported                   $0.64            $0.41          $0.50
             Pro forma                     $0.55            $0.09          $0.13

      The pro forma effect on net income and earnings per share for fiscal 1996,
1997 and fiscal 1998 is not representative of the pro forma effect on net income
in  future  years  because  it  does  not  take  into  consideration  pro  forma
compensation expense related to grants made prior to fiscal 1996.


<PAGE>



      The fair  value of each  option  grant is  estimated  on the date of grant
using the Black-Scholes model with the following weighted average assumptions:

                                                 Year Ended June 30,
                                    --------------------------------------------
                                            1996             1997           1998
   Stock option plans:
      Expected dividend yield               0.0%             0.0%           0.0%
      Expected stock price volatility      65.0%            65.0%          65.0%
      Risk free interest rate               6.2%             6.4%           5.6%
      Expected life of options (years)      3.11             3.09           3.57

   Stock purchase plan:
      Expected dividend yield               0.0%             0.0%           0.0%
      Expected stock price volatility      65.0%            65.0%          65.0%
      Risk free interest rate               5.8%             5.4%           5.3%
      Expected life of options (years)      0.39             0.50           0.50

      The weighted  average  estimated grant date fair value, as defined by SFAS
123, for options  granted under stock option plans during fiscal 1996,  1997 and
1998 was $15.37, $7.51 and $11.18 per share, respectively.  The weighted average
estimated  grant date fair value,  as defined by SFAS 123, for  purchase  rights
granted  under the Stock  Purchase  Plan during  fiscal 1996,  1997 and 1998 was
$5.45, $7.46 and $5.75 per share, respectively.

401(k) Plan

      During  fiscal 1994,  the Company  adopted a 401(k) plan for its employees
whereby  eligible  employees may  contribute up to 20% of their  earnings,  on a
pre-tax basis,  subject to the maximum amount  permitted by the Internal Revenue
Code.  Under  the  401(k)  plan,  the  Company  may  make  contributions  at the
discretion of the Board of Directors.  During fiscal 1996,  the Company  matched
employee  contributions up to $800 per contributor per plan year and reduced the
maximum  contribution  to 15% of earnings.  The Company  continued  the $800 per
contributor per plan year match and the 15% maximum  contribution in fiscal 1997
and 1998.



<PAGE>



NOTE 7 - INTERNATIONAL OPERATIONS

      The following is a summary of the Company's operations:

                                                   Year Ended June 30,
                                           1996           1997            1998
                                     -------------  --------------  ------------
                                                   (in thousands)
Revenues from third party customers:
  United States                       $    65,342    $     72,679    $    97,358
  Asia                                      6,961           3,452          2,996
  Europe                                    1,609             355            954
  Latin America                               ---           1,872            990
                                     -------------  --------------  ------------
                                      $    73,912    $     78,358    $   102,298
                                     =============  ==============  ============

Income (loss) from operations:
  United States                       $    21,043    $     15,114    $    18,060
  Asia                                      3,917           1,025          1,216
  Europe                                    (383)         (1,706)          (796)
  Latin America                               ---             780          (109)
                                     -------------  --------------  ------------
                                      $    24,577    $     15,213    $    18,371
                                     =============  ==============  ============

                                                June 30,
                                      -----------------------------
                                          1997            1998
                                      -------------   -------------
                                             (in thousands)
Identifiable assets:
  United States                        $   106,127     $   137,104
  Asia                                         874             307
  Canada                                       ---             646
  Europe                                       100             683
  Latin America                                ---              17
                                      =============   =============
                                       $   107,101     $   138,757
                                      =============   =============

      The Company  derived 11%, 7% and 5% of its  revenues  from direct sales to
international customers in fiscal 1996, 1997 and 1998, respectively.


NOTE 8 - CONCENTRATION OF SALES AND CREDIT RISK

      The following table summarizes the percentage of revenues accounted for by
the Company's significant customers:

                                                 Year Ended June 30,
                                      ------------------------------------------
                                           1996           1997         1998
ADC Telecommunications                      16%           12%          29%
Paradyne                                    33%           30%          15%
Motorola                                    15%           15%          11%
DSC                                         (a)           10%          (a)

(a) - Amounts not  provided as revenues for the period were less than 10% of the
total.

      Financial  instruments that potentially subject the Company to significant
concentrations of credit risk consist  principally of cash and cash equivalents,
short-term investments,  municipal securities and trade accounts receivable. The
Company's  investment  policy  limits the amount of credit  exposure  to any one
financial  institution or commercial issuer. The Company has not experienced any
material losses on its investments.

      The Company generally extends 30-day credit terms to its customers,  which
is consistent with industry  business  practices.  The Company  performs ongoing
credit  evaluations  of  its  customers'  financial  condition  and,  generally,
requires no collateral  from its customers.  The Company  maintains an allowance
for doubtful accounts  receivable based upon the expected  collectibility of all
accounts receivable.  The Company has not experienced any material write-offs of
uncollectible accounts receivable.

NOTE 9 - COMMITMENTS

      The Company's principal offices are located in three facilities,  totaling
150,281 square feet, leased by the Company in Fremont, California. The leases on
these  facilities,  which are  classified as  non-cancelable  operating  leases,
expire on various  dates  through  December 31, 2005.  In addition,  the Company
leases facilities in other locations. The leases on these facilities,  which are
classified as non-cancelable  operating leases,  expire on various dates through
September 30, 2003.

      Future minimum lease payments under all noncancelable operating leases are
as follows:

Year Ending June 30,
                                                      (In thousands)
1999                                                     $   1,869
2000                                                         2,047
2001                                                         2,007
2002                                                         2,020
2003                                                         2,080
Thereafter                                                   2,858
                                                       ------------
Total minimum payments                                  $   12,881
                                                       ============

     Rent  expense  under  facility  leases  totaled   $372,000,   $941,000  and
$1,365,000 during fiscal 1996, 1997 and 1998, respectively.

      In addition,  the Company leases certain  equipment  under long-term lease
agreements that are classified as capital leases. These capital leases expire at
various  dates  through  2001.  Property and equipment at June 30, 1997 and 1998
include assets acquired under capitalized leases of $437,000 and $351,000,  with
related accumulated amortization of $342,000 and $272,000, respectively.  Future
minimum payments under capitalized leases are not material.

NOTE 10 - SUBSEQUENT EVENTS

         On  August  31,  1998,  the  Company's  Board of  Directors  authorized
repurchase,  at management's discretion, of up to four (4) million shares of the
Company's  Common Stock over the  subsequent  12 months at market  prices not to
exceed $14.00 per share and as the market and business  conditions  warrant.  By
September  17, 1998,  the Company had  repurchased  for cash  890,000  shares at
market prices ranging from $8.69 to $10.81 per share.  As of September 17, 1998,
pursuant to the  authorized  stock  repurchase  program,  the  Company  sold 2.0
million put warrants and purchased  1.5 million call options.  The Company had a
maximum potential  obligation related to the put warrants of $21.3 million.  The
put warrants and call options  expire in equal amounts (50% each) on January 15,
1999 and September 15, 1999.

On September 17, 1998,  the  Company's  Board of Directors  ("Board")  adopted a
Stockholder  Rights Plan ("Plan")  designated to protect the long-term  value of
the  Company  for its  stockholders  during any future  unsolicited  acquisition
attempt.  Pursuant to the Plan,  the Board  declared a dividend of one preferred
share for each share right ("Right") of the Company's  Common Stock  outstanding
on October 5, 1998. Each Right becomes exercisable to purchase one one-hundredth
(1/100)  of a share  of  Series  A Junior  Participating  Preferred  Stock at an
exercise  price of $80.00.  The Rights will expire on September  18,  2008.  The
Company may redeem the Rights at a price of $0.001 per Right.







                                    PART III

Item 9.     Changes  in  and   Disagreements with Accountants on Accounting  and
            Financial Disclosure

      Not applicable.

Item 10.  Directors and Executive Officers of the Registrant.

      Information  required by this Item is  incorporated  by reference from the
section  titled  "Directors/Nominees"  under  "Proposal  No.  1  -  Election  of
Directors,"   "Executive  Officers"  and  "Section  16(a)  Beneficial  Ownership
Reporting and Compliance"  from the definitive  proxy statement to be filed with
the Securities and Exchange  Commission relative to the Company's annual meeting
of stockholders to be held in December 1998 (the "Definitive Proxy Statement").

Item 11.  Executive Compensation.

      Information  required by this Item is  incorporated  by reference from the
sections  titled  "Director  Compensation"  under  "Proposal No. 1 - Election of
Directors" and "Executive  Compensation"  and "Employment  Agreements"  from the
Definitive Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

      Information  required  by this  Item is  incorporated  by  reference  from
"Security  Ownership  of  Certain  Beneficial  Owners and  Management"  from the
Definitive Proxy Statement.

Item 13.  Certain Relationships and Related Transactions.

      Information  required  by this  Item is  incorporated  by  reference  from
"Certain  Relationships  and Related  Transactions"  from the  Definitive  Proxy
Statement.


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)(1) The following  financial  statements  and  schedules are filed as part of
this report:

      Financial Statements See index included in Part II, Item 8.

(a)(2) and (d)    Financial Statement Schedules
      All schedules are omitted because they are not applicable, or the required
      information is included in the financial statements or notes thereto.

(a)(3)  and (c).  The  following exhibits are filed herewith or incorporated  by
reference:

Exhibit
Number    Exhibit Title

2.01      Premisys  California   Acquisition   Agreement  between  Premisys
          Communications  Holdings,  Inc. and Premisys  Communications Pte.
          Ltd., dated as of March 12, 1992, and exhibits thereto.(1)
2.02      Exchange   Agreement   by  and  among   Premisys   Communications
          Holdings,   Inc.  and  the  shareholders,   warrant  holders  and
          noteholders of Premisys  Communications  Pte.  Ltd.,  dated as of
          March 12, 1992, and material exhibits thereto.***(1)
2.03      Form  of   Agreement   and  Plan  of  Merger  by  and  among  the
          Registrant,  Premisys Communications  Holdings, Inc. and Premisys
          Communications, Inc.(1)
3.01      Registrant's  Amended and Restated  Certificate  of  Incorporation  as
          filed with the Delaware Secretary of State on April 12, 1995.(2)
3.02      Certificate  of Amendment of Amended and Restated  Certificate of
          Incorporation of Premisys Communications, Inc.(4)
3.03      Certifcate of Designations Specifying the Terms of the Series A Junior
          Participating Preferred Stock of Premisys Communications, Inc. (15)
3.04      Registrant's Bylaws, as amended.(1)
4.01      Form of  Specimen  Certificate  for  Registrant's  Common  Stock.(1)
4.02      Investors' Rights Agreement, dated as of March 12, 1992, as
          amended June 15, 1992, October 22, 1993,  December 14, 1993,  February
          18, 1994 and May 9, 1994 among Registrant and various investors.(1)
4.03      Waiver Relating to and Amendment of Investors'  Rights Agreement dated
          as of July 24, 1995 among Registrant and various investors.(3)
4.04      Rights Agreement dated September 18, 1998 between  Registrant and
          ChaseMellon Shareholder Services LLC, as Rights Agent. (15)
+10.01    Registrant's   1992  Stock  Option  Plan  and  related   documents.(1)
+10.02    Registrant's   1994  Stock  Option  Plan  and  related  documents.(10)
+10.03    Registrant's 1995 Directors Stock Option Plan and related
          documents.(1)
+10.04    Registrant's  1995  Employee  Stock  Purchase  Plan  and  related
          documents.(1)
+10.06    Founders  Agreement  by  and  among  Registrant,  Raymond  Lin,  Boris
          Auerbuch and Marcus Auerbuch, dated as of March 12, 1992.**(1)
10.08     Form of Indemnity  Agreement entered into by Registrant with each
          of its directors and executive officers.(1)
10.09     Warranty and Indemnification Agreement by and among Raymond Lin, Boris
          Auerbuch and Registrant dated as of August 2, 1990.(1)
10.10     Agreement  for  Purchase  and  Sale  of  Assets  by  and  between
          Premisys  Communications,  Inc.,  a California  corporation,  and
          Premisys  Communications  Pte. Ltd., dated as of January 1, 1992,
          including Bill of Sale.(1)
10.11     Technology  Cost  and  Risk  Sharing  Agreement  by  and  between
          Premisys  Communications,  Inc.,  a California  corporation,  and
          Premisys  Communications  Pte.  Ltd.,  dated  as  of  January  1,
          1992.(1)
10.12     Agreement    Regarding    Payment   by   and   between   Premisys
          Communications,  Inc.,  a  California  corporation,  and Premisys
          Communications Pte. Ltd., dated as of September 30, 1992.(1)
10.13     Technology  Cost and Risk Sharing  Agreement  Amendment by and between
          Premisys Communications,  Inc., a California corporation, and Premisys
          Communications Pte. Ltd., dated as of July 1, 1995.
          (6)
10.15     Option  Agreement  by and between  Registrant  and AT&T  Paradyne
          Corporation, dated as of December 4, 1992.(1)
10.16     Series C Preferred Stock Purchase  Agreement by and between Registrant
          and AT&T  Paradyne  Corporation,  dated as of  December  14,  1993 and
          material exhibits thereto.***(1)
10.18     Lease  Agreement by and between  Registrant  and Aetna Life  Insurance
          Company, dated October 4, 1993, as amended to date.(1)
10.19     OEM Agreement by and among  Premisys  Communications  Holdings,  Inc.,
          Premisys  Communications,  Inc.,  a California  corporation,  and AT&T
          Paradyne Corporation, dated as of December 4, 1992, as amended July 8,
          1993, March 17, 1994 and May 24, 1994.**(1)
10.20     Extension  Agreements by and among Premisys  Communications  Holdings,
          Inc., Premisys  Communications,  Inc., a California  corporation,  and
          AT&T Paradyne Corporation, dated as of June 30, 1993 and July 12, 1993
          and September 30, 1993.**(1)
10.21     Co-Development   Agreement   between   Registrant  and  AT&T  Paradyne
          Corporation,  dated as of September 30, 1993,  as amended  November 9,
          1993 and May 25, 1994.**(1)
10.22     Private Label Purchase/Resale  Agreement by and between Registrant and
          DSC Technologies Corporation, effective as of March 31, 1994.**(1)
10.23     Purchase/Resale  Agreement  by and  between  Registrant  and  ADC
          Telecommunications, Inc., effective as of January 1, 1994.**(1)
10.24     Manufacturing   Agreement  by  and  between   Registrant   and  Eltech
          Electronics   Technology  (M)  SDN  BHD  (Malaysia)  as  of  July  22,
          1996.**(6)
10.26     Original  Equipment  Manufacturer (OEM) Volume Purchase Agreement
          between   Registrant  and  Motorola,   Inc.  dated  December  21,
          1994.**(1)
+10.27    Employment  Agreement  by  and  between  Premisys  Communications
          Holdings,  Inc.  and Riley R.  Willcox  dated as of February  10,
          1994.(1)
10.28     Amendment  No.  4  to  OEM   Agreement  by  and  among   Premisys
          Communications Holdings,  Inc., Premisys Communications,  Inc., a
          California  corporation,  and AT&T Paradyne  Corporation dated as
          of March 6, 1995.**(1)
+10.29    Registrant's  Management Salary and Incentive Plan for the Fiscal
          Year Ended June 30, 1996.(3)
10.30     Lease Agreement by and between  Premisys and Berg & Berg  Enterprises,
          Inc.,  dated  October  24,  1995,  for the  premises  located at 48700
          Milmont Drive, Fremont, California.(13)***
10.31     Amendments  Number 5 and 6 to OEM  Agreement  by and between  Premisys
          Communications,   Inc.,  a  Delaware  Corporation  and  AT&T  Paradyne
          Corporation, dated as of April 1, 1995. (5)**
+10.32    Registrant's  Management Incentive Plan for the fiscal year ended
          June 30, 1997.(6)
10.33     Amendment  Number 7 and 8 to OEM  Agreement  by and  between  Premisys
          Communications,   Inc.,   a   Delaware   Corporation,   and   Paradyne
          Corporation, dated as of December 2, 1996.**(9)
10.34     First   Amendment  to  Lease   Agreement   by  and  between   Premisys
          Communications,   Inc.  and  Berg  &  Berg  Enterprises,  Inc.,  dated
          September 17, 1996,  for the premises  located at 48800 Milmont Drive,
          Fremont,   California   (formerly   48700  Milmont   Drive,   Fremont,
          California). (8)
10.35     Second  Amendment  to Lease  Agreement  by and  between  Premisys
          Communications,  Inc.  and Aetna Life  Insurance  Company,  dated
          August 9, 1996. (7)


<PAGE>


10.36     Manufacturing  Agreement by and between Premisys  Communications,
          Inc. and CMC Mississippi, Inc. as of January 9, 1997. (11)**
10.37     Amendment   Number   9  OEM   Agreement   by  and   between   Premisys
          Communications,   Inc.,  a  Delaware  Corporation  and  AT&T  Paradyne
          Corporation, dated as of May 13, 1997. (11)**
10.38     Employment Agreement by and between Premisys  Communications Inc.
          and Nicholas Williams dated as of March 31, 1997. (11)
+10.39    Registrant's  Management Incentive Plan for the fiscal year ended
          June 30, 1998. (11)
10.40     License  Agreement  dated  December  27,  1996  between  Premisys
          Communications  Inc. and Positron Fiber Systems  Corporation.  **
          (11)
+10.41    Employment  Status  Change  Agreement  by  and  between  Premisys
          Communications,  Inc.  and  William J. Smith  dated as of October
          31, 1997. (12)
+10.42    Employment  Agreement  by and  between  Premisys  Communications,
          Inc. and Peter Hauser dated as of January 5, 1998. (13)
10.43     Third  Amendment  to  Lease  Agreement  by and  between  Premisys
          Communications,  Inc.  and Aetna Life  Insurance  Company,  dated
          January 8, 1998. (14)
+10.44    Employment  Status  Change  Agreement  by  and  between  Premisys
          Communications,  Inc. and Riley R.  Willcox  dated as of July 16,
          1998.
+10.45    Employment  Agreement  by and  between  Premisys  Communications,
          Inc. and John J. Hagedorn dated as of June 1, 1998.
+10.46    Amendment  to  Employment   Agreement  by  and  between  Premisys
          Communications,  Inc. and John J.  Hagedorn  dated as of July 14,
          1998.
+10.47    Registrant's  Management Incentive Plan for the fiscal year ended June
          30, 1999.
10.48     Lease Agreement by and between Premisys Communications, Inc. and Aetna
          Life Insurance Company, dated June 4, 1998 for the premises located at
          48634 Milmont Drive, Fremont, California.
10.49     First   Amendment  to  Lease   Agreement   by  and  between   Premisys
          Communications,  Inc. and Aetna Life Insurance Company, dated July 20,
          1998  for the  premises  located  at  48634  Milmont  Drive,  Fremont,
          California.
21.01     List of Registrant's subsidiaries.
23.01     Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.01     Power of Attorney (See page 49 of this Form 10-K).
27.01     Financial Data Schedule.
-----------

   (1)      Incorporated by reference to the exhibit bearing the same number in
Registrant's Form S-1 Registration Statement  declared  effective  April
15, 1995 (File No. 33-89598).

   (2) Incorporated by reference to Exhibit 3.01 to the  Registrant's  Form 10-Q
(File No. 0-25684) for the quarter ended March 31, 1995 filed May 22, 1995.

   (3)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form S-1  Registration  Statement  filed  August 1, 1995 (File No.
33-95266).

   (4) Incorporated by reference to Exhibit 3.05 in Registrant's Form 10-Q (File
No. 0-25684) for the quarter ended December 29, 1995 filed February 12, 1996.

   (5)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended March 29, 1996
filed May 3, 1996.

   (6)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-K (File No.  0-25684)  for the fiscal  year ended June 28,
1996 initially filed September 26, 1996.

   (7)   Incorporated by reference  to the exhibit bearing the number 10.33 in
Registrant's Form 10-Q  (File No. 0-25684)  for    the     quarter     ended
September 27, 1996 filed November 10, 1996.

   (8)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended  September 27,
1996 filed November 10, 1996.

   (9)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter  ended  December 27,
1996 filed February 9, 1997.

  (10)  Incorporated  by  reference  to Exhibit  4.04 in  Registrant's  Form S-8
Registration Statement filed April 13, 1998 (File No. 333-49991).

  (11)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-K (File No.  0-25684)  for the fiscal  year ended June 27,
1997 initially filed September 25, 1997.

  (12)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended  September 26,
1997 filed November 10, 1997.

  (13)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter  ended  December 26,
1997 filed February 2, 1998.

  (14)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended March 27, 1998
filed May 1, 1998.

  (15)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's Form 8-A (File No. 0-25684) filed September 22, 1998.

    +   Management contract or compensatory plan or arrangement.

  * Confidential  treatment has been requested with respect to certain  portions
of this  agreement.  Such  portions  have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.

 ** Confidential treatment was received with respect to certain portions of this
agreement.  Such portions have been omitted from this filing and have been filed
separately with the Securities and Exchange Commission.

*** Certain  exhibits to the exhibit  will be  furnished  supplementally  to the
Securities and Exchange Commission upon its request.

(b) Reports on Form 8-K.

      No reports on Form 8-K were filed during the quarter ended June 30, 1998.


<PAGE>


      SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly  authorized,  in the
City of Fremont, State of California, on the 24th day of September, 1998.

                                      PREMISYS COMMUNICATIONS, INC.

                                   By: /s/Nicholas J. Williams
                                       ---------------------------------
                                       Nicholas J. Williams
                                       Chief  Executive Officer


      Each  person  whose  signature  appears  below  constitutes  and  appoints
Nicholas J. Williams and John J. Hagedorn,  jointly and severally,  his true and
lawful  attorneys-in-fact,  each with the power of substitution,  for him in any
and all capacities,  to sign amendments to this Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorneys-in-fact,  or his substitute or substitutes,  may do or cause
to be done by virtue thereof.

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended,  this report has been signed by the following persons in the capacities
and on the dates indicated.

Name                            Title                          Date
Principal Executive Officer:


/s/Nicholas J. Williams         Chief    Executive Officer,   September 24, 1998
                                President, Chief
--------------------------------
Nicholas J. Williams            Operating   Officer  and  a
                                Director

Principal Financial Officer:


/s/John J. Hagedorn             Senior Vice President,        September 24, 1998
                                Finance and Administration
--------------------------------
John J. Hagedorn                Chief Financial Officer
                                   and Secretary


Principal Accounting Officer:


/s/Robert W. Dilfer            Vice President and Controller  September 24, 1998
--------------------------------
Robert W. Dilfer


Additional Directors:


/s/Raymond C. Lin              Chairman of the Board of       September 24, 1998
                               Directors
--------------------------------
Raymond C. Lin


/s/Boris J. Auerbuch            Director                      September 24, 1998
--------------------------------
Boris J. Auerbuch


/s/Lip-Bu Tan                   Director                      September 24, 1998
--------------------------------
Lip-Bu Tan



<PAGE>



/s/Gary J. Morgenthaler         Director                      September 24, 1998
--------------------------------
Gary J. Morgenthaler


/s/Marino R. Polestra           Director                      September 24, 1998
--------------------------------
Marino R. Polestra


/s/Edward A. Keible             Director                      September 24, 1998
--------------------------------
Edward A. Keible


/s/Robert C. Hawk               Director                      September 24, 1998
--------------------------------
Robert C. Hawk



<PAGE>









      SECURITIES AND EXCHANGE COMMISSION

      Washington, D.C. 20549

      -----------

      EXHIBITS
      to
      Form 10-K
      Under
      THE SECURITIES ACT OF 1933
      -----------

      PREMISYS COMMUNICATIONS, INC.









<PAGE>


Exhibit Index
Exhibit
Number    Exhibit Title

2.01      Premisys  California   Acquisition   Agreement  between  Premisys
          Communications  Holdings,  Inc. and Premisys  Communications Pte.
          Ltd., dated as of March 12, 1992, and exhibits thereto.(1)
2.02      Exchange   Agreement   by  and  among   Premisys   Communications
          Holdings,   Inc.  and  the  shareholders,   warrant  holders  and
          noteholders of Premisys  Communications  Pte.  Ltd.,  dated as of
          March 12, 1992, and material exhibits thereto.***(1)
2.03      Form  of   Agreement   and  Plan  of  Merger  by  and  among  the
          Registrant,  Premisys Communications  Holdings, Inc. and Premisys
          Communications, Inc.(1)
3.01      Registrant's  Amended and Restated  Certificate  of  Incorporation  as
          filed with the Delaware Secretary of State on April 12, 1995.(2)
3.02      Certificate  of Amendment of Amended and Restated  Certificate of
          Incorporation of Premisys Communications, Inc.(4)
3.03      Certifcate of Designations Specifying the Terms of the Series A Junior
          Participating Preferred Stock of Premisys Communications, Inc. (15)
3.04      Registrant's Bylaws, as amended.(1)
3.05      Certificate  of Amendment of Amended and Restated  Certificate of
          Incorporation of Premisys Communications, Inc.(4)
4.01      Form of  Specimen  Certificate  for  Registrant's  Common  Stock.(1)
4.02      Investors' Rights Agreement, dated as of March 12, 1992, as
          amended June 15, 1992, October 22, 1993,  December 14, 1993,  February
          18, 1994 and May 9, 1994 among Registrant and various investors.(1)
4.03      Waiver Relating to and Amendment of Investors'  Rights Agreement dated
          as of July 24, 1995 among Registrant and various investors.(3)
4.04      Rights Agreement dated September 18, 1998 between  Registrant and
          ChaseMellon Shareholder Services LLC, as Rights Agent. (15)
+10.01    Registrant's   1992  Stock  Option  Plan  and  related   documents.(1)
+10.02    Registrant's   1994  Stock  Option  Plan  and  related  documents.(10)
+10.03    Registrant's 1995 Directors Stock Option Plan and related
          documents.(1)
+10.04    Registrant's  1995  Employee  Stock  Purchase  Plan  and  related
          documents.(1)
+10.06    Founders  Agreement  by  and  among  Registrant,  Raymond  Lin,  Boris
          Auerbuch and Marcus Auerbuch, dated as of March 12, 1992.**(1)
10.08     Form of Indemnity  Agreement entered into by Registrant with each
          of its directors and executive officers.(1)
10.09     Warranty and Indemnification Agreement by and among Raymond Lin, Boris
          Auerbuch and Registrant dated as of August 2, 1990.(1)
10.10     Agreement  for  Purchase  and  Sale  of  Assets  by  and  between
          Premisys  Communications,  Inc.,  a California  corporation,  and
          Premisys  Communications  Pte. Ltd., dated as of January 1, 1992,
          including Bill of Sale.(1)
10.11     Technology  Cost  and  Risk  Sharing  Agreement  by  and  between
          Premisys  Communications,  Inc.,  a California  corporation,  and
          Premisys  Communications  Pte.  Ltd.,  dated  as  of  January  1,
          1992.(1)
10.12     Agreement    Regarding    Payment   by   and   between   Premisys
          Communications,  Inc.,  a  California  corporation,  and Premisys
          Communications Pte. Ltd., dated as of September 30, 1992.(1)
10.13     Technology  Cost and Risk Sharing  Agreement  Amendment by and between
          Premisys Communications,  Inc., a California corporation, and Premisys
          Communications Pte. Ltd., dated as of July 1, 1995.
          (6)
10.15     Option  Agreement  by and between  Registrant  and AT&T  Paradyne
          Corporation, dated as of December 4, 1992.(1)
10.16     Series C Preferred Stock Purchase  Agreement by and between Registrant
          and AT&T  Paradyne  Corporation,  dated as of  December  14,  1993 and
          material exhibits thereto.***(1)
10.18     Lease  Agreement by and between  Registrant  and Aetna Life  Insurance
          Company, dated October 4, 1993, as amended to date.(1)
10.19     OEM Agreement by and among  Premisys  Communications  Holdings,  Inc.,
          Premisys  Communications,  Inc.,  a California  corporation,  and AT&T
          Paradyne Corporation, dated as of December 4, 1992, as amended July 8,
          1993, March 17, 1994 and May 24, 1994.**(1)
10.20     Extension  Agreements by and among Premisys  Communications  Holdings,
          Inc., Premisys  Communications,  Inc., a California  corporation,  and
          AT&T Paradyne Corporation, dated as of June 30, 1993 and July 12, 1993
          and September 30, 1993.**(1)
10.21     Co-Development   Agreement   between   Registrant  and  AT&T  Paradyne
          Corporation,  dated as of September 30, 1993,  as amended  November 9,
          1993 and May 25, 1994.**(1)
10.22     Private Label Purchase/Resale  Agreement by and between Registrant and
          DSC Technologies Corporation, effective as of March 31, 1994.**(1)
10.23     Purchase/Resale  Agreement  by and  between  Registrant  and  ADC
          Telecommunications, Inc., effective as of January 1, 1994.**(1)
10.24     Manufacturing   Agreement  by  and  between   Registrant   and  Eltech
          Electronics   Technology  (M)  SDN  BHD  (Malaysia)  as  of  July  22,
          1996.**(6)
10.26     Original  Equipment  Manufacturer (OEM) Volume Purchase Agreement
          between   Registrant  and  Motorola,   Inc.  dated  December  21,
          1994.**(1)
+10.27    Employment  Agreement  by  and  between  Premisys  Communications
          Holdings,  Inc.  and Riley R.  Willcox  dated as of February  10,
          1994.(1)
10.28     Amendment  No.  4  to  OEM   Agreement  by  and  among   Premisys
          Communications Holdings,  Inc., Premisys Communications,  Inc., a
          California  corporation,  and AT&T Paradyne  Corporation dated as
          of March 6, 1995.**(1)
+10.29    Registrant's  Management Salary and Incentive Plan for the Fiscal
          Year Ended June 30, 1996.(3)
10.30     Lease Agreement by and between  Premisys and Berg & Berg  Enterprises,
          Inc.,  dated  October  24,  1995,  for the  premises  located at 48700
          Milmont Drive, Fremont, California.(13)***
10.31     Amendments  Number 5 and 6 to OEM  Agreement  by and between  Premisys
          Communications,   Inc.,  a  Delaware  Corporation  and  AT&T  Paradyne
          Corporation, dated as of April 1, 1995. (5)**
+10.32    Registrant's  Management Incentive Plan for the fiscal year ended
          June 30, 1997.(6)
10.33     Amendment  Number 7 and 8 to OEM  Agreement  by and  between  Premisys
          Communications,   Inc.,   a   Delaware   Corporation,   and   Paradyne
          Corporation, dated as of December 2, 1996.**(9)
10.34     First   Amendment  to  Lease   Agreement   by  and  between   Premisys
          Communications,   Inc.  and  Berg  &  Berg  Enterprises,  Inc.,  dated
          September 17, 1996,  for the premises  located at 48800 Milmont Drive,
          Fremont,   California   (formerly   48700  Milmont   Drive,   Fremont,
          California). (8)
10.35     Second  Amendment  to Lease  Agreement  by and  between  Premisys
          Communications,  Inc.  and Aetna Life  Insurance  Company,  dated
          August 9, 1996. (7)


<PAGE>


10.36     Manufacturing  Agreement by and between Premisys  Communications,
          Inc. and CMC Mississippi, Inc. as of January 9, 1997. (11)**
10.37     Amendment   Number   9  OEM   Agreement   by  and   between   Premisys
          Communications,   Inc.,  a  Delaware  Corporation  and  AT&T  Paradyne
          Corporation, dated as of May 13, 1997. (11)**
10.38     Employment Agreement by and between Premisys  Communications Inc.
          and Nicholas Williams dated as of March 31, 1997. (11)
+10.39    Registrant's  Management Incentive Plan for the fiscal year ended
          June 30, 1998. (11)
10.40     License  Agreement  dated  December  27,  1996  between  Premisys
          Communications  Inc. and Positron Fiber Systems  Corporation.  **
          (11)
+10.41    Employment  Status  Change  Agreement  by  and  between  Premisys
          Communications,  Inc.  and  William J. Smith  dated as of October
          31, 1997. (12)
+10.42    Employment  Agreement  by and  between  Premisys  Communications,
          Inc. and Peter Hauser dated as of January 5, 1998. (13)
10.43     Third  Amendment  to  Lease  Agreement  by and  between  Premisys
          Communications,  Inc.  and Aetna Life  Insurance  Company,  dated
          January 8, 1998. (14)
+10.44    Employment  Status  Change  Agreement  by  and  between  Premisys
          Communications,  Inc. and Riley R.  Willcox  dated as of July 16,
          1998.
+10.45    Employment  Agreement  by and  between  Premisys  Communications,
          Inc. and John J. Hagedorn dated as of June 1, 1998.
+10.46    Amendment  to  Employment   Agreement  by  and  between  Premisys
          Communications,  Inc. and John J.  Hagedorn  dated as of July 14,
          1998.
+10.47    Registrant's  Management Incentive Plan for the fiscal year ended June
          30, 1999.
10.48     Lease  Agreement by and between  Registrant  and Aetna Life  Insurance
          Company,  dated June 4, 1998 for the premises located at 48634 Milmont
          Drive, Fremont, California.
10.49     First   Amendment  to  Lease   Agreement   by  and  between   Premisys
          Communications,  Inc. and Aetna Life Insurance  Company dated July 20,
          1998  for the  premises  located  at  48634  Milmont  Drive,  Fremont,
          California.
21.01     List of Registrant's subsidiaries.
23.01     Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.01     Power of Attorney (See page 49 of this Form 10-K).
27.01     Financial Data Schedule.
-----------

   (1)   Incorporated  by  reference  to the exhibit bearing the same  number in
Registrant's Form S-1 Registration Statement declared  effective  April
15, 1995 (File No. 33-89598).

   (2) Incorporated by reference to Exhibit 3.01 to the  Registrant's  Form 10-Q
(File No. 0-25684) for the quarter ended March 31, 1995 filed May 22, 1995.

   (3)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form S-1  Registration  Statement  filed  August 1, 1995 (File No.
33-95266).

   (4) Incorporated by reference to Exhibit 3.05 in Registrant's Form 10-Q (File
No. 0-25684) for the quarter ended December 29, 1995 filed February 12, 1996.

   (5)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended March 29, 1996
filed May 3, 1996.

   (6)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-K (File No.  0-25684)  for the fiscal  year ended June 28,
1996 initially filed September 26, 1996.

   (7)  Incorporated  by  reference to the exhibit bearing the number  10.33 in
Registrant's Form 10-Q  (File No. 0-25684)  for    the     quarter     ended
September 27, 1996 filed November 10, 1996.

   (8)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended  September 27,
1996 filed November 10, 1996.

   (9)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter  ended  December 27,
1996 filed February 9, 1997.

  (10)  Incorporated  by  reference  to Exhibit  4.04 in  Registrant's  Form S-8
Registration Statement filed April 13, 1998 (File No. 333-49991).

 (11)  Incorporated  by  reference  to the  exhibit  bearing  the same number in
Registrant's  Form 10-K (File No.  0-25684)  for the fiscal  year ended June 27,
1997 initially filed September 25, 1997.

  (12)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended  September 26,
1997 filed November 10, 1997.

  (13)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter  ended  December 26,
1997 filed February 2, 1998.

  (14)  Incorporated  by  reference  to the  exhibit  bearing the same number in
Registrant's  Form 10-Q (File No.  0-25684) for the quarter ended March 27, 1998
filed May 1, 1998.

 (15)  Incorporated  by  reference  to the  exhibit  bearing  the same number in
    Registrant's Form 8-A (File No. 0-25684) filed September 22, 1998.

   +    Management contract or compensatory plan or arrangement.

  * Confidential  treatment has been requested with respect to certain  portions
of this  agreement.  Such  portions  have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.

 ** Confidential treatment was received with respect to certain portions of this
agreement.  Such portions have been omitted from this filing and have been filed
separately with the Securities and Exchange Commission.

*** Certain  exhibits to the exhibit  will be  furnished  supplementally  to the
Securities and Exchange Commission upon its request.



                                                                  Exhibit 10.44


                              July 16, 1998

Mr. Riley R. Willcox
56 Marvin Avenue
Los Altos, California 94022

Re:   Change in Status to Part-Time Employment

Dear Riley:
This letter confirms the agreement  between you and Premisys  Corporation,  Inc.
("Premisys")  concerning  the  change  in the  terms  of  your  employment  with
Premisys.

      1. Change in Employment Status: Effective August 31, 1998, your employment
status with Premisys will change from  full-time to part-time.  You and Premisys
anticipate  you will  work  approximately  ten  (10)  hours  per week  beginning
September 1, 1998 and ending March 30, 1999. In addition, you hereby resign from
your position as the Chief Financial Officer,  Corporate  Secretary,  and Senior
Vice President of Finance and Administration, and you further hereby resign from
your position as an officer of Premisys, effective August 3, 1998.

      2. Compensation:  Premisys will pay you an annual salary of $50,000.00 for
your  part-time  work.  You will receive a pro rate portion (for the 2 months of
full time  employment)  of your MIP bonus earned during the first half of fiscal
1999.  Premisys will continue to reimburse you for all  reasonable and necessary
business  expenses  approved in accordance  with Company  Policy.  As a employee
working less than 20 hours per week,  you will no longer be able to  participate
in certain employee  benefit programs (e.g.,  Employee Stock Purchase Plan, 401k
savings plan,  group life and disability  insurance).  You will continue to earn
vacation at one-fourth the rate you would accrue as a full-time  employee.  Your
will be able to continue your medical and dental insurance under COBRA; Premisys
will pay the premiums  associated  with your  coverage;  you will  continue your
current level of contribution to this insurance.

      3. Vesting of Shares:  Premisys  agrees that all stock options  granted to
you during the term of your full-time  employment with Premisys will continue to
vest.

      4.  Services  for other  Entities:  You agree that during the term of your
part-time  employment with Premisys,  you will not accept  full-time  employment
with any other company or business entity.  You may accept a position as a Board
member for another company,  but you agree not to accept a position on the Board
of any  competitors of Premisys,  and you agree to notify Premisys in advance of
accepting  membership  on the  Board  of  any  company.  You  may  also  perform
consulting  services  for  other  companies  during  the term of your  part-time
employment with Premisys,  but you agree not to perform consulting  services for
any  competitors  of  Premisys  and you agree to notify  Premisys  in advance of
performing any consulting services for other companies.

      5. Return of Company  Property:  You hereby  warrant to Premisys  that you
will return to Premisys at the end of your part-time employment (March 30, 1999)
all  property or data to Premisys of any type  whatsoever  that has been in your
possession or control.

      6.  Confidential  Information:  You acknowledge that you have acquired and
will acquire  information  and materials  from Premisys and knowledge  about the
business,  products,  programming  techniques,   experimental  work,  customers,
clients and suppliers of Premisys and that all such  knowledge,  information and
materials  acquired  are and will be the  trade  secrets  and  confidential  and
proprietary information of Premisys (collectively  "Confidential  Information").
Confidential Information will not include,  however, any information which is or
becomes  part of the public  domain  through no fault of yours or that  Premisys
regularly gives to third parties without  restriction on use or disclosure.  You
agree to hold all such  Confidential  Information in strict  confidence,  not to
disclose it to others or use it in any way, commercially or otherwise, except in
performing  services  for  Premisys,  and not to allow any  unauthorized  person
access  to it,  either  before  or  after  expiration  or  termination  of  this
Agreement.  You  further  agree  to take all  action  reasonably  necessary  and
satisfactory to protect the  confidentiality of the Confidential  Information in
your  possession,  including,  without  limitation,  implementing  and enforcing
operating  procedures to minimize the possibility of unauthorized use or copying
of the Confidential Information.

      7. At-Will Employment:  You acknowledge that your employment with Premisys
is "at will," and that you may terminate  your  employment  with Premisys at any
time, with our without cause,  and Premisys may terminate your employment at any
time, with or without cause.

      8. Entire  Agreement:  This  agreement  constitutes  the entire  agreement
between  you  and  Premisys  with  respect  to the  subject  matter  hereof  and
supersedes  all prior  negotiations  and  agreements,  whether  written or oral,
relating to such subject matter. You acknowledge that neither Premisys nor their
agents  or  attorneys  have  made  any  promise,   representation   or  warranty
whatsoever,  either express or implied,  written or oral, which is not contained
in this agreement for the purpose of inducing you to execute the agreement,  and
you acknowledge that you have executed this agreement in reliance only upon such
promises, representations and warranties as are contained herein.

      9.  Modification:  It is expressly  agreed that this  agreement may not be
altered,  amended,  modified,  or  otherwise  changed in any  respect  except by
another written agreement that specifically  refers to this agreement,  executed
by authorized representatives of each of the parties to this agreement.



<PAGE>






If you agree to abide by the terms  outlined  in this  letter,  please  sign the
attached copy and return it to me.

                                   Sincerely,

                                          PREMISYS CORPORATION, INC.


                                          By:     /s/Raymond C. Lin
                                                Raymond C. Lin


READ, UNDERSTOOD AND AGREED


/s/Riley R. Willcox                 Date:       July 16, 1998
Riley R. Willcox



<PAGE>



                                                                  Exhibit 10.45

June 1, 1998



John J. Hagedorn
19 Woodhill Drive
Redwood City, California  94061

Dear John:

I am pleased to offer you the  position  of Chief  Financial  Officer and Senior
Vice  President,  Finance and  Administration,  reporting  directly to the Chief
Executive  Officer.  Your  salary  will be  payable  biweekly  in the  amount of
$7,692.31  ($200,000  annualized).  Your will also participate in the Management
Incentive Plan, with a target bonus of $90,000 for fiscal 1999. The Compensation
Committee  of the Board of  Directors  has  approved  a stock  option  grant for
200,000  shares of Premisys  stock as governed by the  Premisys  Employee  Stock
Plan, which will vest over four years (25% at the end of the first year, monthly
thereafter).

Your   responsibilities  will  include  accounting,   treasury,   tax,  investor
relations,   legal,  planning,   information  systems,   human  resources,   and
facilities. You will be a full member of the senior management team.

As a full time  employee,  you will be eligible to  participate  in the benefits
program  offered by Premisys in accordance  with our policies,  which may change
from time to time, and after meeting the applicable eligibility requirements, if
any. The benefits program includes medical,  dental,  life, long term disability
coverage,  profit  sharing,  employee  stock  purchase  plan  and a  401K  plan.
Additionally,  you will be entitled to paid  holidays and vacation in accordance
with our policy.

Premisys  will also provide a  twelve-month  salary  extension  and  accelerated
vesting of your  outstanding  stock  options if Premisys is acquired and you are
not named Chief Financial Officer of the combined companies.


<PAGE>



This offer is  contingent  upon the  receipt of two items:  (1) a signed copy of
this  letter by June 8, 1998,  and (2)  documentary  proof that you are a United
States  citizen or a non citizen who is lawfully  entitled to work in the United
States  within  three days  following  your start  date.  Your  employment  with
Premisys, if you choose to accept this offer, will be at-will.  Thus, either you
or the Company may terminate  the  employment  relationship  at any time with or
without cause. It is understood that as part of the Company's  effort to protect
its proprietary information, you will assist in safeguarding the Company's trade
secrets and related sensitive information.  Consequently, you will enter into an
Invention Assignment and Proprietary  Information  Agreement with the Company on
your first day.

John, I am pleased to offer you this  challenging  opportunity  to contribute to
the success of Premisys and look forward to having you join us on July 15, 1998.

Sincerely,

/s/Raymond C. Lin
Raymond C. Lin
Chief Executive Officer


I accept the above offer of employment, pursuant to the items and conditions set
forth in this letter.

Signature:        /s/John J. Hagedorn

Date:       _________6/21/98__________________

Attachments:      Copy of offer letter
            Benefit Summary
            Description of Management Incentive Plan



<PAGE>



                                                                  Exhibit 10.46


July 14, 1998

John J. Hagedorn
19 Woodhill Drive
Redwood City, CA 94061

Dear John:

In my letter of June 1, 1998 in which I offered  you  employment  as  Premisys's
Chief Financial Officer,  which you accepted on June 2, the following commitment
was made:

Premisys  will also provide a  twelve-month  salary  extension  and  accelerated
vesting  of your  outstanding  stock  options if  Premisys  [the  "Company"]  is
acquired  and  you  are  not  named  Chief  Financial  Officer  of the  combined
companies.

As you have  requested,  I am  defining  the  terms of this  commitment  and the
obligations   of   successors   to   Premisys   so  as  to   prevent   potential
misunderstanding  between you and any such  successors with regard to the letter
and spirit of this commitment.

1. Acquisition of Premisys
Premisys  shall be deemed to be "acquired"  should any of the  following  events
occur:

   a) Any  "person"  (as such  term is used in  Sections  13(d) and 14(d) of the
      Securities  Exchange  Act  of  1934,  as  amended),   is  or  becomes  the
      "beneficial owner" (as defined in Rule 13d-3 under said Act),  directly or
      indirectly,  of securities of Premisys  representing  more than 50% of the
      total voting power  represented by the Company's then  outstanding  voting
      securities.

   b) The  shareholders  of Premisys  approve a merger or  consolidation  of the
      Company with any other  corporation,  other than a merger or consolidation
      which  would  result  in the  voting  securities  of  Company  outstanding
      immediately  prior thereto  continuing  to represent  (either by remaining
      outstanding or by being converted into voting  securities of the surviving
      entity)  more  than  fifty   percent  (50%)  of  the  total  voting  power
      represented by the voting  securities of Company or such surviving  entity
      outstanding immediately after such merger or consolidation.

   c) The  shareholders  of Premisys  approve a plan of complete  liquidation of
      Company or an agreement for the sale or  disposition  by Company of all or
      substantially all the Company's assets.

2. Chief Financial Officer of the Combined Companies
   Positions  which would  qualify as being the Chief  Financial  Officer of the
   combined  companies under the intent of the above described  commitment shall
   not entail any of the following limitations:

   a) The  "combined  companies"  are  organized  as a division or wholly  owned
      subsidiary of a third company and have no publicly traded stock.

   b) The "combined  companies"  publicly traded voting stock is more than fifty
      percent  (50%) owned by another  "person"  (as  defined  above) or a third
      company.

   c) The  facility  in which  the  Chief  Financial  Officer  of the  "combined
      companies"  is required to maintain his  principal  office is more than 30
      miles  distance  from your Redwood City home to which the offer letter was
      addressed.

3. Premisys's Successors
   Any  successor  to  Premisys  (whether  direct or  indirect  and  whether  by
   purchase, lease, merger,  consolidation,  liquidation or otherwise) to all or
   substantially  all of Premisys's  business,  equity  securities and/or assets
   shall assume the  obligations  under the offer letter and agree  expressly to
   perform the obligations  under this letter in the same manner and to the same
   extent as  Premisys  would be  required to perform  such  obligations  in the
   absence of a succession.

John, I hope that these  definitions  provide you with the comfort which you are
seeking  that  the  commitment  which I made in my offer  letter  to you will be
carried  out in  the  spirit  in  which  it  was  intended  should  Premisys  be
"acquired."


Sincerely,

/s/Raymond C. Lin
Raymond C. Lin
Chief Executive Officer


I accept the above  definitions  to the  commitment  made in the offer letter of
June 1, 1998 that  should  Premisys  be  acquired  and I not be named CFO of the
combined companies, my options would vest and I would be provided a twelve-month
salary extension.

Signature:             /s/John J. Hagedorn

Date:             ______July 15, 1998____________________



<PAGE>



                                                                  Exhibit 10.47
                         Management Incentive Plan for FY1999
                            Premisys Communications, Inc.
                     Compensation Committee of Board of Directors
                                    July 23, 1998

I. Participation
   A. Participants ("Participants") are executives and senior managers that have
      an impact of the overall success of the Company.
   B. Participants  must be full-time,  regular  employees as of the last day of
      each bonus period to earn a bonus.
   C. Participants of the Management Incentive Plan can not participate in
      profit sharing plan.
II.   Bonus Formula
   A. The target  individual  bonuses are set as a percentage of annual salaries
      and reflect  bonuses paid to individuals in comparable  positions at other
      companies and their responsibilities at Premisys.
   B. Operating Profit in all calculations is the consolidated  operating profit
      before  accruals  for  Management  Bonus  and  the  Profit  Sharing  Plans
      ("Pre-bonus Operating Profit").
   C. The basis of earning bonuses varies with the responsibilities of the
      manager:
      1. Ray Lin, Nick Williams and John J. Hagedorn - Company  performance;
         measured as actual Pre-bonus Operating Profit versus plan
      2. Al  Fyffe  and  Peter  Hauser-  product  revenue   (through  his  sales
         commission plan), goal  accomplishments  and actual Pre-bonus Operating
         Profit versus plan
      3. All other  participants  - combination  of actual  Pre-bonus  Operating
         Profit versus plan and achievement of individual  goals,  with specific
         portions of their bonuses tied to the accomplishment of each goal.
   D. The  Company  performance  bonuses  that  are  tied  to  actual  Pre-bonus
      Operating Profit versus plan will be calculated as follows:  1. The earned
      bonus is the product of individual bonus percentage of planned
         Pre-bonus Operating Profit times the actual Pre-bonus Operating Profit.
      2. If actual  Pre-bonus  Operating  Profit  versus  plan is 120% or more
         of Plan for the  complete  fiscal  year,  the  earned  bonus is the
         product of individual bonus percentage of planned Pre-bonus Operating
         Profit times the ratio of the  actual/planned  Pre-bonus  Operating
         Profit times the actual Pre-bonus Operating Profit.
      3. Individual Bonuses are capped at two times target dollar bonuses.
  E. Bonuses  based  upon  the   accomplishment  of  individual  goals  will  be
     determined by the CEO in conjunction with the individual's  direct manager.
     The target levels represent bonuses to be paid upon achievement of goals on
     a timely basis; to the degree goals are accomplished  later or earlier than
     expected,  and to the  degree  the goal  completion  represented  lesser or
     greater  effort than  expected,  actual bonuses can be from zero to 150% of
     the target levels.
   F. No bonus payments are made if actual  operating  profit is less than 75%
       of Plan.
   G.Management  bonuses  will be  calculated  for the first half and the second
     half of each  fiscal  year and be paid within 30 days after the end of each
     six-month period.
III.  Authorization
   A. The Plan and  participation  must be  approved  at the  beginning  of each
      fiscal year by the Compensation Committee of the Board of Directors.
   B. The Compensation  Committee of the Board of Directors has the authority to
      adjust  amounts paid out based upon corporate  performance  based upon its
      assessment of the overall accomplishments of the management team.
IV.   Compensation Committee Resolution
   A. Approve Management Incentive Plan for fiscal year 1999



<PAGE>

                                                                  Exhibit 10.48




                                 Lease Agreement

                                 By And Between

                          Aetna Life Insurance Company,
                            A Connecticut Corporation

                                   As Landlord

                                       And

                         Premisys Communications, Inc.,
                             A Delaware Corporation

                                    As Tenant

                               Dated June 4, 1998





<PAGE>








17
98LEASE\PREMRV1.DOC: 06/10/98




                                Table Of Contents
                                                                            Page

Basic Lease Information....................................................iii

1.    Demise.................................................................1

2.    Premises...............................................................1

3.    Term...................................................................1

4.    Rent...................................................................1

5.    Late Charge............................................................3

6.    Security Deposit.......................................................3

7.    Possession.............................................................3

8.    Use of Premises........................................................3

9.    Acceptance of Premises.................................................4

10.   Surrender..............................................................4

11.   Alterations and Additions..............................................4

12.   Maintenance of Premises................................................5

13.   Landlord's Insurance...................................................5

14.   Tenant's Insurance.....................................................5

15.   Indemnification........................................................6

16.   Subrogation............................................................6

17.   Abandonment............................................................7

18.   Free From Liens........................................................7

19.   Advertisements and Signs...............................................7

20.   Utilities..............................................................7

21.   Entry by Landlord......................................................7

22.   Destruction and Damage.................................................7

23.   Condemnation...........................................................9

24.   Assignment and Subletting..............................................9

25.   Tenant's Default......................................................10

26.   Landlord's Remedies...................................................11

27.   Attorney's Fees.......................................................12

28.   Taxes.................................................................12

29.   Effect of Conveyance..................................................12

30.   Tenant's Estoppel Certificate.........................................12

31.   Subordination.........................................................13

32.   Environmental Covenants...............................................13

33.   Notices...............................................................15

34.   Waiver................................................................15

35.   Holding Over..........................................................15

36.   Successors and Assigns................................................15

37.   Time..................................................................15

38.   Brokers...............................................................15

39.   Limitation of Liability...............................................15

40.   Financial Statements..................................................15

41.   Rules and Regulations.................................................16

42.   Mortgagee Protection..................................................16

43.   Entire Agreement......................................................16

44.   Interest..............................................................16

45.   Construction..........................................................16

46.   Representations and Warranties of Tenant..............................16


               Exhibit
                  A      Diagram of the Premises
                  B      Tenant Improvements
                 B-1     Final Plans and Specifications for Tenant Improvements
                         (Intentionally omitted)
                  C      Commencement and Expiration Date
                         Memorandum
                  D      Rules and Regulations
                  E      Sign Criteria (Intentionally
                         omitted)
                  F      Hazardous Materials Disclosure
                         Certificate
                  G      Tenant Improvements Loan
                         Amortization Memorandum
                         (Intentionally omitted)

               Addenda   Addendum 1:  Option to Extend the
                         Lease






<PAGE>


                                 Lease Agreement

                             Basic Lease Information

             Lease Date: June 4, 1998
               Landlord: Aetna Life Insurance Company,
                         a Connecticut corporation
     Landlord's Address: c/o Allegis Realty Investors llc
                          455 Market Street, Suite 1540
                         San Francisco, California 94105
                         All notices sent to Landlord  under this Lease shall be
                         sent to the above address, with copies to:

                         LPC MS. Inc.,
                       101 Lincoln Center Drive, 4th Floor
                          Foster City, California 94404
                     Tenant: Premisys Communications, Inc.,
                         a Delaware corporation
    Tenant's Address and 48664 Milmont Drive, Fremont, California 94538
       Telephone Number: (510) 353-4588
Premises Square Footage: Approximately twenty nine thousand eight hundred
                         forty (29,840) rentable square feet
       Premises Address: 48634 Milmont Drive, Fremont, California 94538
                Project: Sutter Hill Business Park - 174 RESA, together with
                         the land on which the Project is situated and all
                         Common Areas
    Building (if not the 48630-48634 Milmont Drive, Fremont,  California same as
   the Project):
  Tenant's Proportionate
       Share of Project: 52.2%
  Tenant's Proportionate
      Share of Building: 52.2%
         Length of Term: Eighty four (84) months
  Estimated Commencement
                   Date: January 3, 1999
    Estimated Expiration December 31, 2005
                   Date:
      Monthly Base Rent:                          Monthly Base     Monthly
                           Months    Sq. Ft.          Rate        Base Rent
                            01-12    29,840       x $1.30       = $ 38,792.00
                            13-24    29,840       x $1.34       = $ 39,985.60
                            25-36    29,840       x $1.38       = $ 41,179.20
                            37-48    29,840       x $1.42       = $ 42,372.80
                            49-60    29,840       x $1.46       = $ 43,566.40

                            61-72    29,840       x $1.50       = $ 44,760.00

                            73-84    29,840       x $1.54       = $ 45,953.60




           Prepaid Rent: Thirty eight  thousand  seven hundred  ninety two and
                           00/100 dollars ($38,792.00)
  Month to which Prepaid
           Base Rent and
 Additional     Rent will be First (1st) month of the Term Applied:
       Security Deposit: Forty five  thousand  nine  hundred  fifty  three and
                           60/100 dollars ($45,953.60)
                Permitted Use: General office and administration,
                         telecommunications, computers, software, electronic and
                         biomedical    research    and    development,     light
                         manufacturing  and assembly of components,  but only to
                         the extent  permitted  by the City of  Fremont  and all
                         agencies   and    governmental    authorities    having
                         jurisdiction thereof.
      Unreserved Parking One   hundred   nineteen   (119)   nonexclusive   and
                 Spaces: undesignated parking spaces
              Broker(s): Bishop Hawk for Tenant
                         LPC MS, Inc. for Landlord

     Tenant Improvements
              Allowance: Twenty nine thousand eight hundred forty and 00/100
                         dollars ($29,840.00)
              Architect: N/A


<PAGE>





                                 LEASE AGREEMENT


      This Lease Agreement is made and entered into by and between  Landlord and
Tenant on the Lease Date. The defined terms used in this Lease which are defined
in the  Basic  Lease  Information  set forth on page 1 of this  Lease  Agreement
("Basic Lease  Information") shall have the meaning and definition given them in
the Basic Lease Information.  The Basic Lease Information,  the exhibit(s),  the
addendum or addenda  described  in the Basic Lease  Information,  and this Lease
Agreement are and shall be construed as a single  instrument and are referred to
herein as the "Lease".

1. Demise
In  consideration  for the rents and all other  charges and payments  payable by
Tenant,  and for the agreements,  terms and conditions to be performed by Tenant
in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE
AND TAKE FROM LANDLORD, the Premises described below (the "Premises"),  upon the
agreements, terms and conditions of this Lease for the Term hereinafter stated.

2. Premises
The Premises  demised by this Lease is the square footage of space  specified in
the Basic Lease  Information  and has the address  specified  in the Basic Lease
Information.  The  Premises  are a part of and  are  contained  in the  Building
specified in the Basic Lease  Information.  The location and  dimensions  of the
Premises  are depicted on Exhibit A, which is attached  hereto and  incorporated
herein by this reference.  Tenant shall have the non-exclusive  right to use the
parking and other  common  areas on the real  property on which the  Building is
situated (the  "Property").  No easement for light or air is incorporated in the
Premises.

The Premises  demised by this Lease shall also  include the Tenant  Improvements
(as that term is defined in Exhibit B, attached hereto and  incorporated  herein
by this  reference)  to be  constructed  by Landlord  within the interior of the
Premises.  Landlord  shall  construct the Tenant  Improvements  on the terms and
conditions  set forth in Exhibit B.  Landlord  and Tenant  agree to and shall be
bound by the terms and conditions of Exhibit B.

3. Term
The term of this Lease (the "Term") shall be for the period of months  specified
in the Basic  Lease  Information,  commencing  on the  earliest  to occur of the
following dates (the "Commencement Date"):

       (a)The  date the Tenant  Improvements  are  approved  by the  appropriate
   governmental  agency as being in  accordance  with its building  code and the
   building permit issued for such improvements, as evidenced by the issuance of
   a final building inspection approval; or

       (b)The  date  Landlord's  architect  and  general  contractor  have  both
   certified  in  writing  to  Tenant  that the  Tenant  Improvements  have been
   substantially  completed  in  accordance  with the plans  and  specifications
   therefor; or

       (c)The date Tenant commences occupancy of the Premises;

when the  Commencement  Date  has been  determined  pursuant  to the  foregoing,
Landlord and Tenant shall promptly execute a Commencement Date Memorandum in the
form attached hereto as Exhibit C.

4. Rent

       (a)Base Rent.  Tenant shall pay to Landlord,  in advance on the first day
   of each  month,  without  further  notice or  demand  and  without  offset or
   deduction,  the monthly  installments  of rent  specified  in the Basic Lease
   Information (the "Base Rent").

   Upon  execution of this Lease,  Tenant shall pay to Landlord the Prepaid Rent
specified in the Basic Lease  Information to be applied toward Base Rent for the
month of the Term specified in the Basic Lease Information.

       (b)Additional  Rent.  In addition to the Base Rent,  Tenant  shall pay to
   Landlord,  in accordance with this Paragraph 4, Tenant's  proportionate share
   (which is hereby  agreed to be Tenant's  Proportionate  Share as specified in
   the Basic Lease  Information) of the following items related to the Building,
   the Property, and/or the Outside Areas (as defined in Paragraph 4(b)(3)) (the
   "Additional Rent"):

          (1) Taxes and Assessments. All real estate taxes and assessments. Real
       estate  taxes  and  assessments  shall  include  any form of  assessment,
       license,  fee, tax, levy, penalty (if a result of Tenant's  delinquency),
       or tax (other than net income, estate, succession,  inheritance, transfer
       or  franchise  taxes),  imposed  by any  authority  having  the direct or
       indirect  power  to  tax,  or by  any  city,  county,  state  or  federal
       government  or any  improvement  or other  district or division  thereof,
       whether  such  tax is (i)  determined  by the area of the  Premises,  the
       Building or the Property, or any part thereof, or the Rent and other sums
       payable  hereunder  by Tenant  or by other  tenants,  including,  but not
       limited to, any gross income or excise tax levied by any of the foregoing
       authorities  with respect to receipt of Rent or other sums due under this
       Lease;  (ii) upon any legal or  equitable  interest  of  Landlord  in the
       Premises,  the Building or the Property, or any part thereof;  (iii) upon
       this  transaction  or any document to which Tenant is a party creating or
       transferring any interest in the Premises,  the Building or the Property;
       (iv) levied or assessed in lieu of, in  substitution  for, or in addition
       to,  existing or additional  taxes against the Premises,  the Building or
       the Property, whether or not now customary or within the contemplation of
       the  parties;  or (v)  surcharged  against the parking  area.  Tenant and
       Landlord acknowledge that Proposition 13 was adopted by the voters of the
       State of  California  in the June,  1978  election and that  assessments,
       taxes,  fees, levies and charges may be imposed by governmental  agencies
       for such purposes as fire protection,  street,  sidewalk,  road,  utility
       construction and maintenance,  refuse removal and for other  governmental
       services which may formerly have been provided without charge to property
       owners or occupants.  It is the intention of the parties that all new and
       increased assessments, taxes, fees, levies and charges due to Proposition
       13 or any other cause are to be included  within the  definition  of real
       property taxes for purposes of this Lease.

          (2) Insurance.  All insurance  premiums,  including  premiums for "all
       risk," fire and extended  coverage  (including  earthquake  endorsements)
       insurance for the Building,  public liability insurance,  other insurance
       as Landlord  reasonably deems  necessary,  and any deductibles paid under
       policies of any such insurance.

          (3) Outside Areas Expenses. All reasonable costs to maintain,  repair,
       replace,  supervise,  insure  (including  provision  of public  liability
       insurance)  and  administer  the areas outside of the Building  ("Outside
       Areas"),  including  parking areas,  landscaping  (including  maintenance
       contracts),  sprinkler systems,  sidewalks,  driveways,  curbs,  lighting
       systems, and utilities for Outside Areas.

          (4)  Parking  Charges.  Any  parking  charges or other  costs  levied,
       assessed  or  imposed  by,  or at the  direction  of, or  resulting  from
       statutes or regulations,  or interpretations thereof,  promulgated by any
       governmental  authority  or insurer  (not  affiliated  with  Landlord) in
       connection  with the use or occupancy of the Building,  the Outside Areas
       and/or the Property.

          (5)  Maintenance  and  Repair of  Building.  All  reasonable  costs to
       maintain,  repair,  and replace the structural  portions of the roof, the
       roof coverings,  the foundation,  the floor slab, the load bearing walls,
       and the painting of the exterior walls  (including the painting  thereof)
       of the Building, the heating,  ventilation, and air conditioning ("HVAC")
       systems serving the Building  and/or the Premises  (including the cost of
       maintenance contracts),  and all reasonable costs to maintain, repair and
       replace all utility and plumbing systems,  fixtures and equipment located
       outside the  Building.  Notwithstanding  the  foregoing,  Tenant shall be
       responsible for the cost of replacement of capital expenditures described
       in this  subparagraph  4(b)(5) only on a pro rata basis  corresponding to
       the portion of the useful life of the  capital  expenditure  that will be
       exhausted during the remainder of the Term.

          (6) Management and Administration. All reasonable costs for management
       and administration of the Building and the Property, including a property
       management  fee,  accounting,   auditing,   billing,   postage,  employee
       benefits, payroll taxes, etc.

       (c)Payment of Additional Rent.

          (1) Upon  commencement of this Lease,  Landlord shall submit to Tenant
       an  estimate  of  monthly  Additional  Rent for the  period  between  the
       Commencement Date and the following December 31 and Tenant shall pay such
       estimated  Additional  Rent on a  monthly  basis  concurrently  with  the
       payment of the Base Rent.  Tenant  shall  continue  to make said  monthly
       payments  until notified by Landlord of a change  therein.  By March 1 of
       each  calendar  year,  Landlord  shall  endeavor  to  provide to Tenant a
       statement  showing the actual  Additional  Rent due to  Landlord  for the
       prior calendar year, prorated from the Commencement Date during the first
       year. If the total of the monthly payments of Additional Rent that Tenant
       has made for the prior  calendar  year (or portion  thereof  during which
       this  Lease  was in  effect)  is less  than the  actual  Additional  Rent
       chargeable to Tenant for such prior calendar year,  then Tenant shall pay
       the  difference in a lump sum within ten (10) business days after receipt
       of such statement from Landlord.  Any overpayment by Tenant of Additional
       Rent for the prior calendar year shall be credited towards the Additional
       Rent next due.


<PAGE>


       (2) The actual  Additional Rent for the prior calendar year shall be used
      for  purposes  of  calculating   Tenant's  monthly  payment  of  estimated
      Additional  Rent for the current  year,  subject to adjustment as provided
      above, except that in any year in which resurfacing of the parking area or
      material roof repairs are planned, Landlord may include the estimated cost
      of such work in the estimated monthly Additional Rent. Landlord shall make
      the final  determination  of  Additional  Rent for the year in which  this
      Lease  terminates  as soon as  possible  after  termination  of such year.
      Tenant  shall  remain  liable for payment of any amount due to Landlord in
      excess of the estimated  Additional Rent  previously paid by Tenant,  and,
      conversely, Landlord shall promptly return to Tenant any overpayment, even
      though the Term has expired and Tenant has vacated the  Premises.  Failure
      of Landlord to submit  statements as called for herein shall not be deemed
      a waiver of Tenant's obligation to pay Additional Rent as herein provided.

       (d)General  Payment Terms.  The Base Rent,  Additional Rent and all other
   sums payable by Tenant to Landlord  hereunder  are referred to as the "Rent".
   All Rent shall be paid without deduction, offset or abatement in lawful money
   of the  United  States of  America.  Checks  are to be made  payable to AEtna
   Property  Services and shall be mailed to:  AEtna  Property  Services,  Kodak
   Center,  1740 Technology Drive, #600, San Jose,  California 95110, or to such
   other person or place as Landlord may, from time to time, designate to Tenant
   in writing.  Rent for any partial month during the Term shall be prorated for
   the portion thereof falling due within the Term.

5. Late Charge
Notwithstanding  any other provision of this Lease,  Tenant hereby  acknowledges
that late payment to Landlord of Rent, or other amounts due hereunder will cause
Landlord to incur costs not  contemplated  by this  Lease,  the exact  amount of
which will be extremely  difficult to  ascertain.  If any Rent or other sums due
from  Tenant are not  received by Landlord  or by  Landlord's  designated  agent
within ten (10) days after their due date,  then Tenant  shall pay to Landlord a
late charge equal to ten five percent  (10%) (5%) of such overdue  amount,  plus
any  reasonable  attorneys'  fees  incurred  by  Landlord  by reason of Tenant's
failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant
hereby agree that such late charges represent a fair and reasonable  estimate of
the cost that Landlord will incur by reason of Tenant's late payment. Landlord's
acceptance  of such late  charges  shall  not  constitute  a waiver of  Tenant's
default with respect to such overdue  amount or estop  Landlord from  exercising
any of the other rights and remedies granted under this Lease.

6. Security Deposit
Concurrently  with  Tenant's  execution of the Lease,  Tenant shall deposit with
Landlord  the  Security  Deposit  specified  in the Basic Lease  Information  as
security for the full and faithful  performance of each and every term, covenant
and condition of this Lease.  Landlord may use, apply or retain the whole or any
part of the  Security  Deposit  as may be  reasonably  necessary  (a) to  remedy
Tenant's  default  in the  payment  of any  Rent,  (b) to  repair  damage to the
Premises  caused by Tenant,  (c) to clean the Premises upon  termination of this
Lease,  (d) to reimburse  Landlord for the payment of any amount which  Landlord
may reasonably spend or be required to spend by reason of Tenant's  default,  or
(e) to  compensate  Landlord  for any other loss or damage  which  Landlord  may
suffer by reason of Tenant's default.  Should Tenant faithfully and fully comply
with all of the terms,  covenants and conditions of this Lease, within thirty 30
twenty (20) days following the  expiration of the Term, the Security  Deposit or
any balance  thereof  shall be returned to Tenant or, at the option of Landlord,
to the last assignee of Tenant's  interest in this Lease.  Landlord shall not be
required to keep the Security Deposit separate from its general funds and Tenant
shall not be entitled to any interest on such deposit  deposits.  If Landlord so
uses or applies all or any portion of said  deposit,  within five (5) days after
written  demand  therefor  Tenant shall  deposit cash with Landlord in an amount
sufficient  to restore  the  Security  Deposit  to the full  extent of the above
amount,  and Tenant's  failure to do so shall be a default under this Lease.  In
the event Landlord transfers its interest in this Lease, Landlord shall transfer
the then  remaining  amount of the Security  Deposit to Landlord's  successor in
interest, and thereafter Landlord shall have no further liability to Tenant with
respect to such Security Deposit.

7. Possession
       (a)Tenant's Right of Possession.  Subject to Paragraph 7(b), Tenant shall
   be entitled to possession of the Premises upon commencement of the Term.

       (b)Delay in Delivering Possession. If for any reason whatsoever, Landlord
   cannot deliver  possession of the Premises to Tenant at the  commencement  of
   the Term, this Lease shall not be void or voidable,  nor shall  Landlord,  or
   Landlord's  agents,  be  liable to  Tenant  for any loss or damage  resulting
   therefrom.  Tenant  shall  not be liable  for Rent  until  Landlord  delivers
   possession of the Premises to Tenant.  The expiration  date of the Term shall
   be  extended  by the same  number of days  that  Tenant's  possession  of the
   Premises was delayed.


<PAGE>


8. Use of Premises
       (a)Permitted  Uses.  The Premises  shall be used for the  Permitted  Uses
   specified in the Basic Lease Information and no other. The Premises shall not
   be used to create any nuisance or trespass,  for any illegal purpose, for any
   purpose not permitted by applicable laws and regulations,  or for any purpose
   that would  vitiate the  insurance or increase the premiums for  insurance on
   the Premises or the  Building.  Tenant agrees not to overload the floor(s) of
   the Building.

       (b)Compliance  with Governmental  Regulations.  Tenant shall, at Tenant's
   expense,  faithfully observe and comply with all Municipal, State and Federal
   statutes, rules, regulations,  ordinances,  requirements,  and orders, now in
   force or which  may  hereafter  be in force  pertaining  to the  Premises  or
   Tenant's use thereof,  including  without  limitation,  any statutes,  rules,
   regulations,  ordinances,  requirements,  or orders requiring, as a result of
   Tenant's use of the Premises, installation of fire sprinkler systems, seismic
   reinforcement  and  related  alterations,  and removal of  asbestos,  whether
   substantial in cost or otherwise, and all recorded covenants,  conditions and
   restrictions affecting the Property ("Private  Restrictions") now in force or
   which may hereafter be in force; provided,  however, that Tenant shall not be
   required to make  structural  changes to the Premises or Building not related
   to Tenant's  specific use of the  Premises  unless the  requirement  for such
   changes is  imposed  as a result of any  improvements  or  additions  made or
   proposed  to be made at  Tenant's  request.  The  judgment  of any  court  of
   competent  jurisdiction,  or  the  admission  of  Tenant  in  any  action  or
   proceeding  against Tenant,  whether Landlord be a party thereto or not, that
   Tenant has violated any such rule, regulation,  ordinance, statute or Private
   Restrictions,  shall be  conclusive  of that  fact as  between  Landlord  and
   Tenant.

9. Acceptance of Premises
By entry  hereunder,  Tenant  accepts  the  Premises as  suitable  for  Tenant's
intended use and as being in good and sanitary  operating  order,  condition and
repair,  AS IS, and  without  representation  or  warranty by Landlord as to the
condition,  use or occupancy  which may be made thereof.  Any  exceptions to the
foregoing must be by written agreement executed by Landlord and Tenant.

10.   Surrender
Tenant agrees that on the last day of the Term, or on the sooner  termination of
this  Lease,  Tenant  shall  surrender  the  Premises  to  Landlord  (a) in good
condition  and repair  (damage by Acts of God,  fire,  and normal  wear and tear
excepted),  but with all  interior  walls  painted  or  cleaned  so they  appear
painted,  any carpets cleaned,  and with all floors cleaned and waxed,  together
with all alterations,  additions and improvements which may have been made in or
on the  Premises;  except that Tenant shall remove trade  fixtures put in at the
expense of Tenant and any  improvements  as to which  Landlord has, prior to the
date of  surrender,  consented to or  requested  removal;  and (b)  otherwise in
accordance with Paragraph  32(f).  Tenant shall repair all damage caused by such
removal and  otherwise  restore the Premises in  accordance  with the  preceding
sentence at  Tenant's  sole cost and  expense.  On or before the  expiration  or
sooner  termination of this Lease,  Tenant shall remove all of Tenant's personal
property from the Premises.  All property of Tenant not so removed,  unless such
non-removal  is consented to by Landlord,  shall be deemed  abandoned by Tenant,
provided that in such event Tenant shall remain liable to Landlord for all costs
incurred in storing and disposing of such abandoned  property of Tenant.  If the
Premises are not  surrendered  at the end of the Term or sooner  termination  of
this Lease,  and in accordance  with the  provisions of this Paragraph 10 and of
Paragraph 32(f),  Tenant hereby  indemnifies  Landlord against loss or liability
resulting  from  delay by  Tenant in so  surrendering  the  Premises  including,
without  limitation,  any claims made by any  succeeding  tenant founded on such
delay.

11.   Alterations and Additions
       (a)Tenant  shall  not  make,  or permit  to be made,  any  alteration  or
   addition to the  Premises,  or any part  thereof,  without the prior  written
   consent of Landlord, such consent not to be unreasonably withheld,  provided,
   however,  Tenant  without  Landlord's  consent,  shall  be  entitled  to make
   interior,  non-structural  alterations  or  additions  to  the  Premises  not
   requiring any permits which  separately or in the aggregate  over each twelve
   (12)  month  period  of  the  Term  do  not  exceed  five  thousand   dollars
   ($5,000.00).

       (b)Any  alteration or addition to the Premises  shall be at Tenant's sole
   cost and expense,  in compliance  with all applicable  laws and  requirements
   requested  by  Landlord,  and in  accordance  with  plans and  specifications
   approved in writing by Landlord.

       (c)In the event Landlord  consents to a proposed  alteration or addition,
   such consent shall include Landlord's advice in writing,  whether or not such
   proposed  alteration  or  addition  shall be  required  to be  removed at the
   expiration  or  termination  of this Lease.  If  Landlord  fails so to advise
   Tenant  regarding  whether or not a proposed  alteration  or addition  may be
   removed at the expiration or termination of this Lease, then Tenant, shall be
   required may, at Tenant's  option,  remove the alteration or addition,  or to
   surrender the  alteration or addition to Landlord with the Premises,  without
   compensation to Tenant,  at the expiration or termination of this Lease.  All
   additions,  alterations  or  improvements,  including,  but not  limited  to,
   heating, lighting, electrical, air conditioning, fixed partitioning, drapery,
   wall covering and paneling, built-in cabinet work and carpeting installations
   made by Tenant,  together  with all property that has become an integral part
   of the  Building,  shall at once be and become the property of Landlord,  and
   shall not be deemed trade fixtures.

       (d)Tenant  agrees not to proceed to make such  alterations  or additions,
   notwithstanding  consent  from  Landlord to do so,  until five (5) days after
   Tenant's receipt of such consent, in order that Landlord may post appropriate
   notices to avoid any  liability  to  contractors  or material  suppliers  for
   payment  for  Tenant's  improvements.  Tenant  will at all times  permit such
   notices to be posted and to remain posted until the completion of work.

12.   Maintenance of Premises
       (a)Maintenance by Tenant.  Throughout the Term, Tenant shall, at its sole
   expense,  (1) keep and  maintain  in good order and  condition,  repair,  and
   replace the  Premises,  and every part  thereof,  including  glass,  windows,
   window frames,  skylights,  interior and exterior doors and door frames,  and
   the interior of the Premises,  (excepting only those portions of the Building
   to be maintained by Landlord, as provided in Paragraph 12(c) below), (2) keep
   and maintain in good order and condition, repair, and replace all utility and
   plumbing  systems,  fixtures and  equipment,  including  without  limitation,
   electricity,  gas, water,  and sewer,  located in or on the Premises,  Tenant
   shall be responsible for these costs of replacement  only on a pro rata basis
   corresponding  to the portion of the useful  life of the capital  expenditure
   that will be exhausted during the remainder of the Term and , (3) furnish all
   expendables,  including  light  bulbs,  paper  goods and  soaps,  used in the
   Premises,  (3) (4) repair all damage to the  Premises,  the  Building  or the
   Outside Areas caused by the negligence or willful misconduct of Tenant or its
   agents,  employees,  contractors or invitees. Tenant shall not do anything to
   cause any damage,  deterioration  or  unsightliness  to the  Building and the
   Outside Areas.

       (b)Landlord's   Right  to  Maintain  and  Repair  at  Tenant's   Expense.
   Notwithstanding  the foregoing,  Landlord  shall have the right,  but not the
   obligation,  at Tenant's expense,  to enter the Premises and perform Tenant's
   maintenance,  repair and replacement work. Within ten (10) days after invoice
   therefor from Landlord,  Tenant shall pay all  reasonable  costs and expenses
   incurred  by  Landlord  in  connection  with  such  maintenance,  repair  and
   replacement work.

       (c)Maintenance  by  Landlord.  Subject to the  provisions  of  Paragraphs
   12(a), 22 and 23, and further subject to Tenant's  obligation under Paragraph
   4 to  reimburse  Landlord,  in the  form of  Additional  Rent,  for  Tenant's
   Proportionate Share of the cost and expense of the following items,  Landlord
   agrees to repair and maintain the following items: the structural portions of
   the roof and the roof coverings  (provided that Tenant installs no additional
   air  conditioning  or other  equipment  on the roof that  damages  structural
   portions of the roof or the roof coverings),  the foundation, the floor slab,
   the load bearing walls,  and the exterior walls  (excluding any glass therein
   but including the painting thereof) of the Building; the HVAC systems serving
   the Building and/or the Premises; the utility and plumbing systems, fixtures,
   and  equipment   located  outside  the  Building;   and  the  parking  areas,
   landscaping,  sprinkler systems,  sidewalks,  driveways,  curbs, and lighting
   systems in the  Outside  Areas.  Landlord  shall not be required to repair or
   maintain  conditions created due to any act, negligence or omission of Tenant
   or its agents,  contractors,  employees  or invitees.  Landlord's  obligation
   hereunder to repair and maintain is subject to the condition  precedent  that
   Landlord shall have received  written notice of the need for such repairs and
   maintenance.  Tenant  shall  promptly  report  in  writing  to  Landlord  any
   defective  condition  known to it which  Landlord is required to repair,  and
   failure to so report such defects shall make Tenant  responsible  to Landlord
   for any liability incurred by Landlord by reason of such condition.

       (d)Tenant's  Waiver of Rights.  Tenant hereby expressly waives all rights
   to make  repairs at the expense of Landlord or to  terminate  this Lease,  as
   provided for in California  Civil Code  Sections 1941 and 1942,  and 1932(1),
   respectively,  and any similar or  successor  statute or law in effect or any
   amendment thereof during the Term.

13.   Landlord's Insurance
Landlord shall purchase and keep in force fire, extended coverage and "all risk"
insurance  covering the Building in an amount equal to eighty  percent  (80%) of
the  replacement  cost of the  Building.  Tenant  shall,  at its  sole  cost and
expense,  comply  with any and all  reasonable  requirements  pertaining  to the
Premises of any insurer  necessary for the  maintenance  of reasonable  fire and
public liability insurance,  covering the Building and appurtenances.  Landlord,
at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent
will be paid in a timely manner to Landlord for a period of at least twelve (12)
months if the Premises are destroyed or rendered unusable or inaccessible by any
cause insured against under this Lease.

14.   Tenant's Insurance
       (a)Public Liability Insurance.  Tenant shall, at Tenant's expense, secure
   and keep in force a "broad  form"  public  liability  insurance  and property
   damage policy covering the Premises and the Outside Areas,  insuring  Tenant,
   and naming  Landlord  and its  lenders as  additional  insureds,  against any
   liability arising out of the ownership,  use, occupancy or maintenance of the
   Premises and all Outside Areas.  The minimum limit of coverage of such policy
   shall  be  in  the  amount  of  not  less  than  Three  Two  Million  Dollars
   ($3,000,000.00)  ($2,000,000.00) for injury or death of one person in any one
   accident or  occurrence  and in the amount of not less than Three Two Million
   Dollars ($3,000,000.00)  ($2,000,000.00) for injury or death of more than one
   person in any one accident or occurrence, shall include an extended liability
   endorsement  providing  contractual  liability  coverage (which shall include
   coverage for Tenant's  indemnification  obligations in this Lease), and shall
   contain a severability of interest  clause or a cross liability  endorsement.
   Such insurance shall further insure Landlord and Tenant against liability for
   property damage of at least One Million Dollars ($1,000,000.00). The limit of
   any insurance  shall not limit the liability of Tenant  hereunder.  No policy
   shall be  cancelable  or subject to reduction  of coverage,  and loss payable
   clauses shall be subject to Landlord's  approval.  Such policies of insurance
   shall be issued as primary policies and not contributing with or in excess of
   coverage that Landlord may carry,  by an insurance  company  authorized to do
   business  in the  State  of  California  for the  issuance  of  such  type of
   insurance  coverage and rated A:XIII or better in Best's Key Rating Guide.  A
   copy of said policy or a  certificate  evidencing  to  Landlord's  reasonable
   satisfaction  that such insurance is in effect shall be delivered to Landlord
   upon  commencement  of the  Term,  and  thereafter  whenever  Landlord  shall
   reasonably request.

       (b)Personal  Property Insurance.  Tenant shall maintain in full force and
   effect on all of its fixtures  and  equipment  on the  Premises,  a policy or
   policies of fire and  extended  coverage  insurance  with  standard  coverage
   endorsement to the extent of the full  replacement  cost thereof.  During the
   term of this Lease the proceeds from any such policy or policies of insurance
   shall be used for the repair or  replacement of the fixtures and equipment so
   insured.  Landlord  shall have no interest  in the  insurance  upon  Tenant's
   equipment  and fixtures and will sign all documents  reasonably  necessary in
   connection with the settlement of any claim or loss by Tenant.  Landlord will
   not carry insurance on Tenant's  possessions.  Tenant shall furnish  Landlord
   with a certificate evidencing to Landlord's reasonable satisfaction that such
   insurance is in effect,  and whenever  required,  shall satisfy Landlord that
   such policy is in full force and effect.

15.   Indemnification
       (a)Of  Landlord.  Tenant shall  indemnify and hold harmless  Landlord and
   agents,  employees,   partners,   shareholders,   directors,   invitees,  and
   independent contractors  (collectively "Agents") of Landlord against and from
   any and all claims, liabilities,  judgments, costs, demands, causes of action
   and expenses  (including,  without  limitation,  reasonable  attorneys' fees)
   arising from (1)  Tenant's  use of the  Premises or from any  activity  done,
   permitted or suffered by Tenant in or about the Premises, the Building or the
   Property, and (2) any act, neglect,  fault, willful misconduct or omission of
   Tenant, or Tenant's Agents or from any breach or default in the terms of this
   Lease by Tenant,  and (3) any action or proceeding  brought on account of any
   matter in items (1) or (2),  except to the extent  caused by the sole  active
   negligence or willful  misconduct by Landlord or its agents. If any action or
   proceeding  is brought  against  Landlord by reason of any such  claim,  upon
   notice from  Landlord,  Tenant shall  defend the same at Tenant's  expense by
   counsel  reasonably  satisfactory  to  Landlord.  As a  material  part of the
   consideration  to  Landlord,  Tenant  hereby  assumes  all risk of  damage to
   property  or  injury  to  persons  in or about  the  Premises  from any cause
   whatsoever  (except  that which is caused by the sole  active  negligence  or
   willful misconduct by Landlord or its Agents or by the failure of Landlord to
   observe any of the terms and  conditions  of this Lease,  if such failure has
   persisted for an  unreasonable  period of time after  written  notice of such
   failure),  and Tenant  hereby  waives all claims in respect  thereof  against
   Landlord. The obligations of Tenant under this Paragraph 15 shall survive any
   termination of this Lease.

       (b)No Impairment of Insurance.  The foregoing indemnity shall not relieve
   any insurance  carrier of its obligations  under any policies  required to be
   carried by either  party  pursuant  to this  Lease,  to the extent  that such
   policies  cover the peril or  occurrence  that  results  in the claim that is
   subject to the foregoing indemnity.

16.   Subrogation
Landlord and Tenant  hereby  mutually  waive any claim against the other for any
loss or damage to any of their  property  located on or about the Premises,  the
Building or the  Property  that is caused by or results  from perils  covered by
property  insurance  carried  by the  respective  parties,  to the extent of the
proceeds  of such  insurance  actually  received  with  respect  to such loss or
damage,  whether or not due to the  negligence of the other party or its agents.
Because the foregoing  waivers will preclude the  assignment of any claim by way
of  subrogation  to an  insurance  company or any other  person,  each party now
agrees to immediately  give to its insurer  written notice of the terms of these
mutual waivers and shall have their insurance  policies  endorsed to prevent the
invalidation of the insurance coverage because of these waivers. Nothing in this
Paragraph  16 shall  relieve a party of  liability  to the other for  failure to
carry insurance required by this Lease.


<PAGE>


17.  Abandonment
Tenant shall not abandon the Premises at any time during the Term.  In the event
of  abandonment,  the  rights  and  remedies  of Tenant  and  Landlord  shall be
determined in accordance  with the applicable  California  statutes in effect at
the time of abandonment.

18.   Free From Liens
Tenant shall keep the Premises and the Property, free from any liens arising out
of any work performed,  materials  furnished,  or obligations incurred by or for
Tenant.

19.   Advertisements and Signs
Tenant shall not place or permit to be placed in, upon, or about the Premises or
the Property any signs,  advertisements or notices without obtaining  Landlord's
prior written  consent,  which consent shall not be  unreasonably  withheld,  or
without  complying with  applicable  law, and will not conduct,  or permit to be
conducted,  any sale by auction on the Premises or  otherwise  on the  Property.
Tenant shall remove any sign,  advertisement or notice placed on the Premises by
Tenant upon the expiration of the Term or sooner  termination of this Lease, and
Tenant shall repair any damage or injury to the Premises or the Property  caused
thereby,  all at Tenant's  expense.  If any signs are not removed,  or necessary
repairs not made,  Landlord  shall have the right to remove the signs and repair
any damage or injury to the Premises at Tenant's sole cost and expense.

20.   Utilities
Tenant shall pay for all water, gas, heat, light,  power,  telephone service and
all other  materials and services  supplied to the Premises.  If Tenant fails to
pay for any of the  foregoing  when due,  Landlord may pay the same and add such
amount to the Rent.

21.   Entry by Landlord
 Tenant shall permit Landlord and its Agents to enter into and upon the Premises
at all  reasonable  times,  upon  reasonable  notice  (except  in the case of an
emergency,  for which no notice  shall be  required),  and  subject to  Tenant's
reasonable  security  arrangements,  for the purpose of  inspecting  the same or
showing the Premises to prospective purchasers,  lenders or tenants or to alter,
improve,  maintain  and repair the Premises as required or permitted of Landlord
under the terms hereof,  without any rebate of Rent and without any liability to
Tenant for any loss of  occupation  or quiet  enjoyment of the Premises  thereby
occasioned  (except for actual damages  resulting from the negligence or willful
misconduct of Landlord or its agents);  and Tenant shall permit Landlord to post
notices of  non-responsibility  and  ordinary  "for sale" or "for lease"  signs,
provided  that Landlord may post such "for lease" signs and exhibit the Premises
to  prospective  tenants only during the six (6) months prior to  termination of
this Lease.  No such entry shall be construed to be a forcible or unlawful entry
into,  or a  detainer  of,  the  Premises,  or an  eviction  of Tenant  from the
Premises.

22.   Destruction and Damage
       (a)If the Building is damaged by fire or other perils covered by extended
   coverage insurance, Landlord shall, at Landlord's option:

          (1) In the event of total destruction (which shall mean destruction or
       damage in excess of twenty-five percent (25%) of the full insurable value
       thereof) of the Premises, elect either to commence promptly to repair and
       restore the Premises and prosecute the same diligently to completion,  in
       which event this Lease shall  remain in full force and effect;  or not to
       repair  or  restore  the  Premises,  in  which  event  this  Lease  shall
       terminate.  Landlord  shall give Tenant  written  notice of its intention
       within  sixty (60) days after the date (the  "Casualty  Discovery  Date")
       Landlord obtains actual knowledge of such destruction. If Landlord elects
       not to  restore  the  Premises,  this  Lease  shall  be  deemed  to  have
       terminated as of the date of such total destruction.

          (2)  In  the  event  of  a  partial   destruction  (which  shall  mean
       destruction  or damage to an extent  not  exceeding  twenty-five  percent
       (25%) of the full  insurable  value  thereof) of the  Premises  for which
       Landlord will receive insurance proceeds  sufficient to cover the cost to
       repair and restore such partial destruction and, if the damage thereto is
       such that the Premises may be  substantially  repaired or restored to its
       condition existing immediately prior to such damage or destruction within
       one hundred eighty (180) days from the Casualty Discovery Date,  Landlord
       shall  commence  and  proceed  diligently  with  the work of  repair  and
       restoration,  in which event the Lease  shall  continue in full force and
       effect.  If such repair and restoration  requires longer than one hundred
       eighty (180) days or if the insurance proceeds therefor (plus any amounts
       Tenant may elect or is obligated to  contribute)  are not  sufficient  to
       cover the cost of such repair and restoration,  Landlord may elect either
       to so repair and restore, in which event the Lease shall continue in full
       force and effect,  or not to repair or restore,  in which event the Lease
       shall  terminate.  In either case,  Landlord shall give written notice to
       Tenant  of its  intention  within  sixty  (60) days  after  the  Casualty
       Discovery  Date.  If Landlord  elects not to restore the  Premises,  this
       Lease shall be deemed to have  terminated  as of the date of such partial
       destruction.

          (3)  Notwithstanding  anything  to  the  contrary  contained  in  this
       Paragraph 22, in the event of damage to the Premises occurring during the
       last twelve (12) months of the Term, Landlord may elect to terminate this
       Lease by written  notice of such  election  given to Tenant within thirty
       (30) days after the Casualty  Discovery Date.  Tenant at its option shall
       have up to 120 days to vacate, from date of Landlord's notice;  provided,
       however,  that  Tenant  shall pay the full  scheduled  monthly  base rent
       without  offset,  except for those portions of the Premises that Landlord
       is  occupying  or making  unusable  to  Tenant as a result of  Landlord's
       reconstruction or repair of the Premises, while Tenant is in occupancy of
       the Premises.

       (b)If the  Premises  is  damaged  by any peril not  covered  by  extended
   coverage  insurance,  and the cost to repair such  damage  exceeds any amount
   Tenant  may  agree to  contribute,  Landlord  may elect  either  to  commence
   promptly to repair and restore the Premises and prosecute the same diligently
   to  completion,  in which  event  this Lease  shall  remain in full force and
   effect;  or not to repair or restore the Premises,  in which event this Lease
   shall  terminate.  Landlord shall give Tenant written notice of its intention
   within sixty (60) days after the Casualty  Discovery Date. If Landlord elects
   not to restore the Premises, this Lease shall be deemed to have terminated as
   of the  date  on  which  Tenant  surrenders  possession  of the  Premises  to
   Landlord,  except  that if the  damage  to the  Premises  materially  impairs
   Tenant's  ability to continue its business  operations in the Premises,  then
   this  Lease  shall be deemed to have  terminated  as of the date such  damage
   occurred.

       (c)Notwithstanding  anything  to  the  contrary  in  this  Paragraph  22,
   Landlord shall have the option to terminate this Lease, exercisable by notice
   to Tenant within sixty (60) days after the Casualty  Discovery  Date, in each
   of the following instances:

          (1) If more than twenty-five percent (25%) of the full insurable value
   of the Building or the Project is damaged or destroyed, regardless of whether
   or not the Premises are destroyed.

          (2) If the  Building or the Project or any portion  thereof is damaged
   or destroyed and the repair and  restoration of such damage  requires  longer
   than one hundred eighty (180) days from the Casualty Discovery Date.

          (3) If the  Building or the Project or any portion  thereof is damaged
   or destroyed and the insurance  proceeds therefor are not sufficient to cover
   the costs of repair and restoration.

          (4) If the  Building or the Project or any portion  thereof is damaged
   or destroyed during the last twelve (12) months of the Term.

       (d)In the event of repair and restoration as herein provided, the monthly
   installments of Base Rent shall be abated  proportionately in the ratio which
   Tenant's use of the Premises is impaired  during the period of such repair or
   restoration,  provided,  however,  that Tenant  shall not be entitled to such
   abatement  to the extent that such damage or  destruction  resulted  from the
   acts or inaction of Tenant or Tenant?s Agents.  Except as expressly  provided
   in the immediately preceding sentence with respect to abatement of Base Rent,
   Tenant shall have no claim against Landlord for, and hereby releases Landlord
   and Landlord?s Agents from  responsibility for and waives its entire claim of
   recovery  for any cost,  loss or expense  suffered or incurred by Tenant as a
   result of any damage to or destruction  of the Premises,  the Building or the
   Project or the repair or restoration thereof, including,  without limitation,
   any cost, loss or expense  resulting from any loss of use of the whole or any
   part of the Premises, the Building or the Project and/or any inconvenience or
   annoyance  occasioned  by such damage,  repair or  restoration.however,  that
   Tenant shall not be entitled to any  compensation  or damages for loss of use
   of the  whole  or any  part  of the  Premises  and/or  any  inconvenience  or
   annoyance occasioned by such damage, repair or restoration.

       (e)If  Landlord is  obligated to or elects to repair or restore as herein
   provided,   Landlord   shall  repair  or  restore  only  the  initial  tenant
   improvements, if any, constructed by Landlord in the Premises pursuant to the
   terms of this Lease,  substantially to their condition  existing  immediately
   prior to the  occurrence  of the  damage or  destruction;  and  Tenant  shall
   promptly repair and restore, at Tenant?s expense,  Tenant?s Alterations which
   were not constructed by Landlord.

       (f)Tenant  hereby waives the provisions of California  Civil Code Section
   1932(2)  and  Section  1933(4)  which  permit  termination  of a  lease  upon
   destruction of the leased premises, and the provisions of any similar law now
   or  hereinafter  in effect,  and the  provisions  of this  Paragraph 22 shall
   govern exclusively in case of such destruction.


<PAGE>



      Notwithstanding anything to the contrary contained in the Lease:

       A. If the Premises are substantially  damaged or impaired by fire (25% or
more) or other casualty as reasonably  determined by Landlord,  and the Premises
cannot be  restored  within  two  hundred  ten (210) days after the date of such
damage, Tenant may terminate this Lease.

       B. If this  Lease is not  terminated  by  Landlord  as  provided  herein,
   Landlord shall restore the Premises and all Tenant Improvements  installed by
   Landlord to the  condition  in which they  existed  immediately  prior to the
   casualty.

23.   Condemnation
If twenty-five percent (25%) or more of the Building or the parking area for the
Premises  is  taken  for  any  public  or  quasi-public  purpose  by any  lawful
governmental  power or  authority,  by exercise  of the right of  appropriation,
inverse  condemnation,  condemnation or eminent domain,  or sold to prevent such
taking (each such event being referred to as a "Condemnation"), Landlord may, at
its option,  terminate  this Lease as of the date title vests in the  condemning
party. If the Building after any  Condemnation and any repairs by Landlord would
be untenantable for the conduct of Tenant's  business  operations,  Tenant shall
have the  right to  terminate  this  Lease  as of the  date  title  vests in the
condemning  party.  If either party  elects to terminate  this Lease as provided
herein,  such election  shall be made by written notice to the other party given
within  thirty (30) days after the nature and extent of such  Condemnation  have
been  finally  determined.  Tenant  shall not because of such taking  assert any
claim against  Landlord.  Landlord  shall be entitled to receive the proceeds of
all  Condemnation  awards,  and Tenant  hereby  assigns to  Landlord  all of its
interest in such awards. If less than twenty-five  percent (25%) of the Building
or the parking area is taken,  Landlord at its option may terminate  this Lease.
If neither  Landlord  nor Tenant  elects to  terminate  this Lease to the extent
permitted above, Landlord shall promptly proceed to restore the Premises, to the
extent of any Condemnation  award received by Landlord,  to substantially  their
same  condition  as  existed  prior  to  such  Condemnation,  allowing  for  the
reasonable effects of such Condemnation,  and a proportionate abatement shall be
made to the Base Rent corresponding to the time during which, and to the portion
of the floor area of the Building  (adjusted for any increase thereto  resulting
from any  reconstruction)  of  which,  Tenant is  deprived  on  account  of such
Condemnation  and  restoration.  The  provisions  of  California  Code of  Civil
Procedure Section  1265.130,  which allows either party to petition the Superior
Court to terminate  the Lease in the event of a partial  taking of the Premises,
and any other  applicable  law now or hereafter  enacted,  are hereby  waived by
Landlord and Tenant.

24.   Assignment and Subletting
       (a)Tenant  shall not  voluntarily  or by operation of law, (1)  mortgage,
   pledge, hypothecate or encumber this Lease or any interest herein, (2) assign
   or transfer  this Lease or any  interest  herein,  sublet the Premises or any
   part thereof,  or any right or privilege  appurtenant  thereto,  or allow any
   other  person (the  employees,  agents and  invitees of Tenant  excepted)  to
   occupy or use the Premises,  or any portion thereof,  without first obtaining
   the  written  consent  of  Landlord,  which  consent  shall  not be  withheld
   unreasonably.  When Tenant requests  Landlord's consent to such assignment or
   subletting,  it shall  notify  Landlord in writing of the name and address of
   the  proposed  assignee  or  subtenant  and the nature and  character  of the
   business of the proposed  assignee or  subtenant  and shall  provide  current
   financial  statements  for the  proposed  assignee or  subtenant  prepared in
   accordance with generally accepted accounting  principles.  Tenant shall also
   provide Landlord with a copy of the proposed sublet or assignment  agreement,
   including all material terms and conditions thereof.  Landlord shall have the
   option,  to be exercised within thirty (30) days of receipt of the foregoing,
   to (1) cancel this Lease as of the  commencement  date stated in the proposed
   sublease or assignment,  (2) acquire from Tenant the interest, or any portion
   thereof,  in this Lease and/or the Premises that Tenant proposes to assign or
   sublease,  on the same terms and conditions as stated in the proposed  sublet
   or assignment agreement,  (3) consent to the proposed assignment or sublease,
   or (4) refuse its consent to the proposed  assignment or sublease,  providing
   that such consent shall not be unreasonably withheld.

       (b)Without  otherwise  limiting  the  criteria  upon which  Landlord  may
   withhold its  consent,  Landlord  may take into  account the  reputation  and
   credit worthiness of the proposed assignee or subtenant, the character of the
   business  proposed to be conducted in the Premises or portion  thereof sought
   to be  subleased,  and the  potential  impact of the proposed  assignment  or
   sublease on the economic  value of the Premises.  In any event,  Landlord may
   reasonably  withhold its consent to any  assignment  or sublease,  if (1) the
   actual use  proposed  to be  conducted  in the  Premises  or portion  thereof
   conflicts  with the  provisions  of  Paragraph  8(a),  unless such actual use
   proposed is  consented to by Landlord,  which  consent  shall not be withheld
   unreasonably.  or 8(b) above or with any other lease which  restricts the use
   to which any space in the Building may be put, or (2) the proposed assignment
   or sublease requires  alterations,  improvements or additions to the Premises
   or portions thereof,  which Landlord does not consent to, which consent shall
   not be unreasonably withheld.

       (c)If Landlord  approves an assignment or subletting as herein  provided,
   Tenant shall pay to Landlord, as Additional Rent,  seventy-five percent (75%)
   of the  difference,  if any,  between (1) the Base Rent plus  Additional Rent
   allocable  to that  part of the  Premises  affected  by  such  assignment  or
   sublease  pursuant to the provisions of this Lease,  and (2) the rent and any
   additional  rent  payable by the  assignee  or  sublessee  to  Tenant,  after
   deducting the costs incurred by Tenant in connection with any such assignment
   or sublease. The assignment or sublease agreement,  as the case may be, after
   approval by Landlord,  shall not be amended without  Landlord's prior written
   consent, and shall contain a provision directing the assignee or subtenant to
   pay the  rent and  other  sums  due  thereunder  directly  to  Landlord  upon
   receiving  written  notice from Landlord that Tenant is in default under this
   Lease with respect to the payment of Rent. Landlord's collection of such rent
   and other sums shall not  constitute  an acceptance by Landlord of attornment
   by such  assignee  or  subtenant.  A consent to one  assignment,  subletting,
   occupation  or use  shall  not be  deemed  to be a  consent  to any  other or
   subsequent  assignment,  subletting,  occupation  or use,  and consent to any
   assignment  or  subletting  shall in no way relieve  Tenant of any  liability
   under this Lease.  Any assignment or subletting  without  Landlord's  consent
   shall be void,  and shall,  at the option of  Landlord,  constitute a Default
   under this Lease.

       (d)Tenant  shall  pay  Landlord's  reasonable  fees,  not to  exceed  One
   Thousand Five Hundred Dollars ($1,000.00) ($500) per transaction, incurred in
   connection with Landlord's review and processing of documents regarding
   any proposed assignment or sublease.

       (e)Tenant  acknowledges and agrees that the restrictions,  conditions and
   limitations  imposed by this  Paragraph  24 on Tenant's  ability to assign or
   transfer  this Lease or any  interest  herein,  to sublet the Premises or any
   part thereof, to transfer or assign any right or privilege appurtenant to the
   Premises,  or to allow any other  person to occupy or use the Premises or any
   portion  thereof,  are,  for the  purposes of  California  Civil Code Section
   1951.4, as amended from time to time, and for all other purposes,  reasonable
   at the time  that the  Lease  was  entered  into,  and  shall be deemed to be
   reasonable  at the time that Tenant seeks to assign or transfer this Lease or
   any interest herein, to sublet the Premises or any part thereof,  to transfer
   or assign any right or privilege appurtenant to the Premises, or to allow any
   other person to occupy or use the Premises or any portion thereof.

25.   Tenant's Default
The occurrence of any one of the following  events shall  constitute an event of
default on the part of Tenant ("Default"):

       (a)The abandonment of the Premises by Tenant;

       (b)Failure  to pay any  installment  of Rent or any other  monies due and
   payable  hereunder,  said failure  continuing  for a period of three (3) days
   after the same is due;written  notice that said Rent or other monies have not
   been paid; however,  said notice shall constitute the Three-Day Notice to Pay
   Rent or Quit required under California Law;

       (c)A general assignment by Tenant for the benefit of creditors;

       (d)The filing of a voluntary petition in bankruptcy by Tenant, the filing
   of a  voluntary  petition  for an  arrangement,  the  filing  of a  petition,
   voluntary or involuntary, for reorganization, or the filing of an involuntary
   petition  by  Tenant's   creditors,   said  involuntary   petition  remaining
   undischarged for a period of sixty (60) days;

       (e)Receivership,  attachment,  or other judicial seizure of substantially
   all of Tenant's  assets on the  Premises,  such  attachment  or other seizure
   remaining  undismissed or undischarged  for a period of sixty (60) days after
   the levy thereof;

       (f)Failure  of Tenant to execute  and deliver to  Landlord  any  estoppel
   certificate,  subordination  agreement,  or lease  amendment  within the time
   periods and in the manner required by Paragraph 30 or 31 or 42;

       (g)An  assignment or sublease,  or attempted  assignment or sublease,  of
   this Lease or the Premises by Tenant  contrary to the  provision of Paragraph
   24, unless such assignment or sublease is expressly  conditioned  upon Tenant
   having received Landlord's consent thereto;

       (h)Failure of Tenant to restore the Security  Deposit to the amount and
   within the time period provided in Paragraph 6 above;

       (i)Failure in the performance of any of Tenant's covenants, agreements or
   obligations  hereunder (except those failures  specified as events of Default
   in other  Paragraphs  of this  Paragraph  25, which shall be governed by such
   other  Paragraphs),  which failure  continues for ten (10) days after written
   notice thereof from Landlord to Tenant provided that, if Tenant has exercised
   reasonable  diligence to cure such  failure and such failure  cannot be cured
   within such ten (10) day period despite  reasonable  diligence,  Tenant shall
   not be in default  under this  subparagraph  unless  Tenant fails  thereafter
   diligently and continuously to prosecute the cure to completion; and


<PAGE>



       (j)Chronic  delinquency  by Tenant in the  payment of Rent,  or any other
periodic  payments  required  to be paid by Tenant  under this  Lease.  "Chronic
delinquency"  shall mean  failure by Tenant to pay Rent,  or any other  payments
required  to be paid by  Tenant  under  this  Lease  for any  three  (3)  months
(consecutive  or  nonconsecutive)  during any twelve (12) month  period.  In the
event of a Chronic  Delinquency,  in addition to Landlord's  other  remedies for
Default  provided in this Lease, at Landlord's  option,  Landlord shall have the
right to require that Rent be paid by Tenant quarterly, in advance.

       Tenant  agrees that any notice  given by Landlord  pursuant to  Paragraph
   25(b),  (i) or (j) above shall  satisfy  the  requirements  for notice  under
   California  Code of Civil  Procedure  Section 1161, and Landlord shall not be
   required to give any additional notice in order to be entitled to commence an
   unlawful detainer proceeding.

26.   Landlord's Remedies
       (a)Termination.  In the event of any Default by Tenant,  then in addition
   to any other  remedies  available  to  Landlord at law or in equity and under
   this Lease,  Landlord shall have the immediate option to terminate this Lease
   and all rights of Tenant hereunder by giving written notice of such intention
   to  terminate.  In the event that Landlord  shall elect to so terminate  this
   Lease then Landlord may recover from Tenant:

          (1) the  worth at the time of award of any  unpaid  Rent and any other
       sums  due  and  payable  which  have  been  earned  at the  time  of such
       termination; plus

          (2) the worth at the time of award of the  amount by which the  unpaid
       Rent and any other sums due and  payable  which  would  have been  earned
       after  termination  until the time of award  exceeds  the  amount of such
       rental loss Tenant proves could have been reasonably avoided; plus

          (3) the worth at the time of award of the  amount by which the  unpaid
       Rent and any other sums due and  payable  for the  balance of the term of
       this Lease after the time of award exceeds the amount of such rental loss
       that Tenant proves could be reasonably avoided; plus

          (4) any other  amount  necessary  to  compensate  Landlord for all the
       detriment   proximately   caused  by  Tenant's  failure  to  perform  its
       obligations  under this Lease or which in the  ordinary  course  would be
       likely to result therefrom,  including,  without limitation, any costs or
       expenses incurred by Landlord (i) in retaking possession of the Premises;
       (ii)  in  maintaining,   repairing,  preserving,   restoring,  replacing,
       cleaning, altering or rehabilitating the Premises or any portion thereof,
       including  such acts for reletting to a new tenant or tenants;  (iii) for
       leasing commissions; or (iv) for any other costs necessary or appropriate
       to relet the Premises; plus

          (5) such  reasonable  attorneys' fees incurred by Landlord as a result
       of a Default, and costs in the event suit is filed by Landlord to enforce
       such remedy; and plus

          (6) at  Landlord's  election,  such other amounts in addition to or in
       lieu of the foregoing as may be permitted from time to time by applicable
       law.

As used in subparagraphs  (1) and (2) above, the "worth at the time of award" is
computed by allowing  interest at an annual rate equal to twelve  percent  (12%)
per annum or the maximum rate  permitted by law,  whichever is less.  As used in
subparagraph  (3)  above,  the  "worth  at the time of  award"  is  computed  by
discounting  such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award,  plus one percent (1%). Tenant waives redemption
or relief from forfeiture under California Code of Civil Procedure Sections 1174
and 1179,  or under any other  present  or future  law,  in the event  Tenant is
evicted or Landlord takes possession of the Premises by reason of any Default of
Tenant hereunder.

       (b)Continuation of Lease. In the event of any Default by Tenant,  then in
   addition to any other remedies  available to Landlord at law or in equity and
   under this Lease,  Landlord  shall have the remedy  described  in  California
   Civil Code Section  1951.4  (Landlord may continue this Lease in effect after
   Tenant's Default and abandonment and recover Rent as it becomes due, provided
   Tenant  has the  right  to  sublet  or  assign,  subject  only to  reasonable
   limitations).

       (c)Re-entry.  In the event of any Default by Tenant,  Landlord shall also
   have the right,  with or without  terminating  this Lease, in compliance with
   applicable  law, to re-enter the Premises and remove all persons and property
   from the  Premises;  such  property  may be  removed  and  stored in a public
   warehouse or elsewhere at the cost of and for the account of Tenant.

       (d)Reletting.  In the event of the  abandonment of the Premises by Tenant
   or in the  event  that  Landlord  shall  elect to  re-enter  as  provided  in
   Paragraph  26(c) or shall take  possession of the Premises  pursuant to legal
   proceeding  or pursuant to any notice  provided by law, then if Landlord does
   not elect to terminate  this Lease as provided in Paragraph  26(a),  Landlord
   may from time to time, without  terminating this Lease, relet the Premises or
   any part  thereof  for such term or terms and at such  rental or rentals  and
   upon such other terms and  conditions as Landlord in its sole  discretion may
   deem  advisable  with  the  right  to make  alterations  and  repairs  to the
   Premises.  In the event that Landlord  shall elect to so relet,  then rentals
   received by Landlord  from such  reletting  shall be applied in the following
   order: (1) to reasonable  attorneys' fees incurred by Landlord as a result of
   a Default and costs in the event suit is filed by  Landlord  to enforce  such
   remedies;  (2) to the  payment  of  any  indebtedness  other  than  Rent  due
   hereunder  from Tenant to  Landlord;  (3) to the payment of any costs of such
   reletting;  (4) to the payment of the costs of any alterations and repairs to
   the Premises;  (5) to the payment of Rent due and unpaid  hereunder;  and (6)
   the  residue,  if any,  shall be held by  Landlord  and applied in payment of
   future Rent and other sums payable by Tenant hereunder as the same may become
   due and payable hereunder.  Should that portion of such rentals received from
   such  reletting  during  any month,  which is applied to the  payment of Rent
   hereunder,  be less  than  the  Rent  payable  during  the  month  by  Tenant
   hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency
   shall be calculated and paid monthly.  Tenant shall also pay to Landlord,  as
   soon as  ascertained,  any costs and  expenses  incurred  by Landlord in such
   reletting  or in making  such  alterations  and  repairs  not  covered by the
   rentals received from such reletting.

       (e)Termination.  No re-entry or taking of  possession  of the Premises by
   Landlord  pursuant to this  Paragraph 26 shall be construed as an election to
   terminate  this Lease unless a written  notice of such  intention is given to
   Tenant or unless the  termination  thereof is decreed by a court of competent
   jurisdiction.  Notwithstanding  any reletting without termination by Landlord
   because  of any  Default  by  Tenant,  Landlord  may at any time  after  such
   reletting elect to terminate this Lease for any such Default.

       (f)Cumulative  Remedies.  The remedies  herein provided are not exclusive
   and Landlord shall have any and all other remedies  provided herein or by law
   or in equity.

       (g)No Surrender. No act or conduct of Landlord, whether consisting of the
   acceptance of the keys to the Premises,  or otherwise,  shall be deemed to be
   or  constitute an acceptance of the surrender of the Premises by Tenant prior
   to the expiration of the Term,  and such  acceptance by Landlord of surrender
   by  Tenant  shall  only  flow  from  and  must  be  evidenced  by  a  written
   acknowledgment  of acceptance of surrender signed by Landlord.  The surrender
   of this Lease by Tenant,  voluntarily  or otherwise,  shall not work a merger
   unless  Landlord  elects in writing  that such merger  take place,  but shall
   operate as an  assignment to Landlord of any and all existing  subleases,  or
   Landlord  may, at its option,  elect in writing to treat such  surrender as a
   merger  terminating  Tenant's estate under this Lease, and thereupon Landlord
   may  terminate  any or all such  subleases by notifying  the sublessee of its
   election so to do within five (5) days after such surrender.

27.   Attorney's Fees
In  the  event  any  legal  action  or  proceeding,  including  arbitration  and
declaratory  relief,  is commenced  for the purpose of  enforcing  any rights or
remedies  pursuant  to this  Lease,  the  prevailing  party shall be entitled to
recover from the  non-prevailing  party  reasonable  attorneys' fees, as well as
costs of suit,  in said  action or  proceeding,  whether  or not such  action is
prosecuted to judgment.

28.   Taxes
Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied
against  personal  property  and trade or business  fixtures  of Tenant.  If any
alteration,  addition or improvement  installed by Tenant  pursuant to Paragraph
11, or any personal  property,  trade  fixture or other  property of Tenant,  is
assessed  and taxed with the  Property,  Tenant shall pay such taxes to Landlord
within ten (10) days after delivery to Tenant of a statement therefor.

29.   Effect of Conveyance
The term  "Landlord"  as used in this  Lease,  means only the owner for the time
being of the Property containing the Building, so that, in the event of any sale
of the Property or the Building,  Landlord shall be and hereby is entirely freed
and relieved of all covenants and  obligations  of Landlord  hereunder  accruing
from and  after the  transfer,  and it shall be deemed  and  construed,  without
further  agreement  between the parties and the purchaser at any such sale, that
the  purchaser  of the  Property or the Building has assumed and agreed to carry
out any and all covenants and obligations of Landlord hereunder.

30.   Tenant's Estoppel Certificate
From time to time,  upon  written  request of Landlord,  Tenant  shall  execute,
acknowledge  and  deliver to  Landlord or its  designee,  a written  certificate
stating (a) the date this Lease was executed,  the Commencement Date of the Term
and the date the Term expires; (b) the date Tenant entered into occupancy of the
Premises;  (c) the amount of Rent and the date to which such Rent has been paid;
(d) that this  Lease is in full  force  and  effect  and has not been  assigned,
modified,  supplemented  or  amended  in any way  (or,  if  assigned,  modified,
supplemented  or  amended,  specifying  the date and terms of any  agreement  so
affecting  this  Lease);  (e) that this Lease  represents  the entire  agreement
between  the  parties  with  respect  to  Tenant's  right to use and  occupy the
Premises (or specifying such other agreements, if any); (f) that all obligations
under this Lease to be performed by Landlord as of the date of such  certificate
have been satisfied (or specifying those as to which Tenant claims that Landlord
has yet to perform);  (g) that all required  contributions by Landlord to Tenant
on account of Tenant's  improvements  have been received (or stating  exceptions
thereto);  (h) that on such date there exist no defenses or offsets  that Tenant
has against the  enforcement  of this Lease by Landlord  (or stating  exceptions
thereto);  (i) that no Rent or other sum  payable by Tenant  hereunder  has been
paid more than one (1) month in advance (or  stating  exceptions  thereto);  (j)
that security has been deposited with Landlord,  stating the amount thereof; and
(k) any other matters  evidencing  the status of this Lease that may be required
either by a lender  making a loan to  Landlord  to be secured by a deed of trust
covering the Premises or by a purchaser of the  Premises.  Any such  certificate
delivered  pursuant to this  Paragraph  30 may be relied  upon by a  prospective
purchaser  of  Landlord's  interest or a  mortgagee  of  Landlord's  interest or
assignee of any mortgage upon  Landlord's  interest in the  Premises.  If Tenant
shall fail to provide such certificate within ten (10) days of receipt by Tenant
of a written  request by Landlord as herein  provided,  such failure  shall,  at
Landlord's election,  constitute a Default under this Lease, and Tenant shall be
deemed to have given such certificate as above provided without modification and
shall be deemed to have  admitted  the accuracy of any  information  supplied by
Landlord to a prospective purchaser or mortgagee.

31.   Subordination
Landlord  shall have the right to cause this Lease to be and remain  subject and
subordinate to any and all mortgages,  deeds of trust and ground leases,  if any
("Encumbrances")  that  are  now or  may  hereafter  be  executed  covering  the
Premises,  or  any  renewals,  modifications,  consolidations,  replacements  or
extensions  thereof,  for the full  amount  of all  advances  made or to be made
thereunder  and  without  regard  to the  time or  character  of such  advances,
together  with  interest  thereon  and  subject to all the terms and  provisions
thereof;  provided  only,  that in the event of  termination  of any such ground
lease or upon the  foreclosure of any such mortgage or deed of trust, so long as
Tenant is not in default, the holder thereof ("Holder") shall agree to recognize
Tenant's  rights  under  this  Lease as long as  Tenant  shall  pay the Rent and
observe  and  perform  all the  provisions  of this  Lease  to be  observed  and
performed  by Tenant.  Within ten (10) days after  Landlord's  written  request,
Tenant shall execute,  acknowledge and deliver any and all reasonable  documents
required by Landlord or the Holder to effectuate such  subordination.  If Tenant
fails to do so, such  failure  shall  constitute  a Default by Tenant under this
Lease.  Notwithstanding anything to the contrary set forth in this Paragraph 31,
Tenant hereby attorns and agrees to attorn to any person or entity purchasing or
otherwise  acquiring the Premises at any sale or other proceeding or pursuant to
the exercise of any other rights, powers or remedies under such Encumbrance.

32.   Environmental Covenants
       (a)As used herein, the term "Hazardous Material" shall mean any substance
   or  material  which  has  been  determined  by any  state,  federal  or local
   governmental  authority  to be  capable of posing a risk of injury to health,
   safety  or  property,   including  all  of  those  materials  and  substances
   designated  as  hazardous  or toxic by the city in  which  the  Premises  are
   located,  the U.S.  Environmental  Protection  Agency,  the Consumer  Product
   Safety  Commission,  the Food and Drug  Administration,  the California Water
   Resources  Control  Board,  the Regional  Water Quality  Control  Board,  San
   Francisco Bay Region, the California Air Resources Board,  CAL/OSHA Standards
   Board,  Division of Occupational Safety and Health, the California Department
   of Food and Agriculture,  the California  Department of Health Services,  and
   any federal agencies that have overlapping  jurisdiction with such California
   agencies,  or any other  governmental  agency now or hereafter  authorized to
   regulate  materials and substances in the  environment.  Without limiting the
   generality of the foregoing,  the term "Hazardous Material" shall include all
   of those  materials  and  substances  defined  as  "hazardous  materials"  or
   "hazardous  waste"  in  Sections  66680  through  66685  of  Title  22 of the
   California  Administrative Code, Division 4, Chapter 30, as the same shall be
   amended from time to time,  petroleum,  petroleum-related  substances and the
   by-products,  fractions,  constituents and  sub-constituents  of petroleum or
   petroleum-related  substances,  asbestos,  and any other materials  requiring
   remediation  now or in the future  under  federal,  state or local  statutes,
   ordinances, regulations or policies.

       (b)Tenant  represents,  warrants and  covenants  (i) that it will use and
   store in, on or about the Premises,  only those Hazardous  Materials that are
   necessary for Tenant to conduct its business activities on the Premises, (ii)
   that, with respect to any such Hazardous Materials,  Tenant shall comply with
   all applicable federal,  state and local laws, rules,  regulations,  policies
   and  authorities  relating  to the  storage,  use,  disposal  or  cleanup  of
   Hazardous Materials,  including,  but not limited to, the obtaining of proper
   permits, and (iii) that it will not dispose of any Hazardous Materials in, on
   or about the Premises under any circumstances.

       (c)Tenant  shall  immediately  notify  Landlord  of  any  inquiry,  test,
   investigation or enforcement proceeding by or against Tenant, Landlord or the
   Premises concerning a Hazardous Material.  Tenant acknowledges that Landlord,
   as the owner of the Premises,  shall have the right, at its election,  in its
   own name or as Tenant's agent, to negotiate,  defend,  approve and appeal, at
   Tenant's expense, any action taken or order issued with regard to a Hazardous
   Material by an applicable governmental authority.


<PAGE>



       (d)If Tenant's storage,  use or disposal of any Hazardous Material in, on
   or adjacent to the Premises results in any contamination of the Premises, the
   soil or surface or groundwater (1) requiring remediation under federal, state
   or local statutes,  ordinances,  regulations,  or policies,  or (2) at levels
   which are unacceptable to Landlord, in Landlord's reasonable judgment, Tenant
   agrees to clean up said  contamination.  Tenant  further agrees to indemnify,
   defend and hold Landlord  harmless from and against any claims,  liabilities,
   losses,   suits,  causes  of  action,  costs,  expenses  or  fees,  including
   attorneys'  fees  and  costs,  arising  out  of or  in  connection  with  any
   remediation,  cleanup work,  inquiry or enforcement  proceeding in connection
   therewith, and any Hazardous Materials currently or hereafter used, stored or
   disposed of by Tenant or its agents,  employees,  contractors or invitees in,
   on or adjacent to the Premises.

       (e)Notwithstanding  any other right of entry  granted to  Landlord  under
   this Lease,  Landlord  shall have the right to enter the  Premises or to have
   consultants  enter  the  Premises  throughout  the  term  of this  Lease,  at
   reasonable  times  and  upon  reasonable  notice,  for  the  purpose  of  (1)
   determining  whether the Premises are in conformity  with federal,  state and
   local  statutes,  regulations,   ordinances,  and  policies  including  those
   pertaining to the environmental  condition of the Premises, (2) conducting an
   environmental  audit or  investigation  of the Premises for purposes of sale,
   transfer,  conveyance  or  financing,  (3)  determining  whether  Tenant  has
   complied with this Paragraph 32, and (4) determining the corrective measures,
   if any,  required of Tenant to ensure the safe use,  storage and  disposal of
   Hazardous  Materials,  or to remove Hazardous Materials (except to the extent
   used, stored or disposed of by Tenant or its agents,  employees,  contractors
   or invitees in  compliance  with  applicable  law).  Tenant agrees to provide
   access and reasonable  assistance for such inspections.  Such inspections may
   include,  but are not limited to, entering the Premises or adjacent  property
   with drill rigs or other  machinery  for the purpose of obtaining  laboratory
   samples.  Landlord  shall not be limited  in the  number of such  inspections
   during the term of this Lease.  To the extent such  inspections  disclose the
   presence of Hazardous  Materials used, stored or disposed of by Tenant or its
   agents,  employees,  contractors or invitees, Tenant shall reimburse Landlord
   for the cost of such inspections within ten (10) days of receipt of a written
   statement  thereof.  If such  consultants  determine  that the  Premises  are
   contaminated  with Hazardous  Materials used, stored or disposed of by Tenant
   or its agents,  employees contractors or invitees,  Tenant shall, in a timely
   manner, at its expense,  remove such Hazardous  Materials or otherwise comply
   with the  recommendations of such consultants to the reasonable  satisfaction
   of Landlord and any applicable  governmental  agencies.  The right granted to
   Landlord herein to inspect the Premises shall not create a duty on Landlord's
   part to inspect the  Premises,  or liability  of Landlord  for Tenant's  use,
   storage or disposal of Hazardous  Materials,  it being understood that Tenant
   shall be solely responsible for all liability in connection therewith.

       (f)Tenant shall surrender the Premises to Landlord upon the expiration or
   earlier  termination  of this  Lease  free of  debris,  waste  and  Hazardous
   Materials  used,  stored or disposed  of by Tenant or its agents,  employees,
   contractors  or  invitees,  and  in  a  condition  which  complies  with  all
   governmental statutes, ordinances,  regulations and policies, recommendations
   of consultants hired by Landlord,  and such other reasonable  requirements as
   may be imposed by Landlord.

       (g)Tenant's obligations under this Paragraph 32 shall survive termination
   of this Lease.

       (h)Landlord hereby discloses to Tenant that the Premises and the Property
   are or may be in an area in which  contamination  of soils or  groundwater by
   Hazardous  Materials may exist.  If Tenant desires more definite  information
   regarding the existence or possible  existence of  contamination by Hazardous
   Materials of soils or groundwater  of or beneath the Premises,  the Property,
   or other real property in the general area of the Property, then Tenant shall
   investigate such matters.

       (i)Landlord will not charge Tenant for, and Tenant shall not be obligated
   to Landlord  under any provision of this Lease with respect to (i) any claim,
   remediation obligation, investigation obligation, liability, cause of action,
   penalty,  attorneys'  fee,  consultants'  cost,  expense  or damage  owing or
   alleged to be owing with respect to any Hazardous  Material present in, on or
   about the Premises or the Building, or the soil, groundwater or surface water
   thereof, prior to the Commencement Date; or (ii) the removal,  investigation,
   monitoring or remediation of any Hazardous  Material  present on or about the
   Premises or the Building, or the soil,  groundwater or surface water thereof,
   caused by any source, including third parties other than Tenant, prior to the
   Commencement  Date as a result of or in connection with the acts or omissions
   of  persons  other  than  Tenant  or its  parent,  subsidiaries,  affiliates,
   divisions,  directors, officers, agents, employees,  contractors,  customers,
   invitees,  subtenants or assigns (all such parties  collectively  hereinafter
   referred to in this  subparagraph  as "Tenant");  provided,  however,  Tenant
   shall be fully  obligated to Landlord  under the provisions of this Lease for
   all claims incurred by Landlord to the extent that (a) Tenant  contributes to
   the presence of such Hazardous Materials or Tenant exacerbates the conditions
   of the conditions caused by such Hazardous Materials, or (b) Tenant allows or
   permits such persons to cause such Hazardous  Materials to be present in, on,
   under, through or about the Premises or the Property or does not prevent such
   person  from  causing the  presence of  Hazardous  Materials  in, on,  under,
   through or about the Premises or the Property.

33.   Notices
All notices and demands which may or are to be required or permitted to be given
to either party by the other  hereunder shall be in writing and shall be sent by
United  States mail,  postage  prepaid,  certified,  or by personal  delivery or
overnight courier,  addressed to the addressee at the address for such addressee
as  specified  in the Basic  Lease  Information,  or to such other place as such
party may from time to time  designate  in a notice to the other  party given as
provided  herein,  or by telex or telecopy at the number therefor  designated by
the  addressee  in a written  notice given as provided  herein.  Notice shall be
deemed  given  upon the  earlier of actual  receipt  or the third day  following
deposit in the United States mail in the manner described above.

34.   Waiver
The waiver of any breach of any term,  covenant or condition of this Lease shall
not be  deemed  to be a  waiver  of such  term,  covenant  or  condition  or any
subsequent  breach of the same or any other term,  covenant or condition  herein
contained.  The subsequent acceptance of Rent by Landlord shall not be deemed to
be a waiver of any preceding breach by Tenant,  other than the failure of Tenant
to pay the particular rental so accepted,  regardless of Landlord's knowledge of
such  preceding  breach  at the time of  acceptance  of such  Rent.  No delay or
omission  in the  exercise  of any right or remedy of Landlord on any Default by
Tenant  shall  impair such a right or remedy or be  construed  as a waiver.  Any
waiver by Landlord  of any Default  must be in writing and shall not be a waiver
of any other Default concerning the same or any other provisions of this Lease.

35.   Holding Over
Any holding over after the expiration of the Term,  without the express  written
consent of Landlord, shall constitute a Default and, without limiting Landlord's
remedies  provided in this Lease,  such  holding over shall be construed to be a
tenancy at sufferance, at a rental rate of one hundred fifty thirty-five percent
(150%) (135%) of the Base Rent last due in this Lease, plus Additional Rent, and
shall  otherwise  be on the terms and  conditions  herein  specified,  so far as
applicable.

36.   Successors and Assigns
The  terms,  covenants  and  conditions  of this  Lease  shall,  subject  to the
provisions as to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of all of the parties hereto. If Tenant shall consist
of more than one entity or person,  the  obligations  of Tenant under this Lease
shall be joint and several.

37.   Time
Time is of the  essence of this  Lease and each and every  term,  condition  and
provision herein.

38.   Brokers
Landlord  and Tenant each  represents  and warrants to the other that neither it
nor its  officers  or agents nor anyone  acting on its behalf has dealt with any
real estate broker except the Broker(s) specified in the Basic Lease Information
in the  negotiating or making of this Lease,  and each party agrees to indemnify
and hold  harmless the other from any claim or claims,  and costs and  expenses,
including attorneys' fees, incurred by the indemnified party in conjunction with
any such  claim or claims of any other  broker or  brokers  to a  commission  in
connection with this Lease as a result of the actions of the indemnifying party.

39.   Limitation of Liability
Tenant  agrees  that,  in the event of any  default or breach by  Landlord  with
respect  to any of the  terms  of the  Lease to be  observed  and  performed  by
Landlord  (a) Tenant shall look solely to the estate and property of Landlord or
any a  successor  in  interest  in  the  Property  and  the  Building,  for  the
satisfaction  of Tenant's  remedies for the  collection  of a judgment (or other
judicial  process)  requiring  the  payment of money by  Landlord;  (b) no other
property or assets of Landlord, its partners,  shareholder,  officers, directors
or any  successor  in  interest  shall be  subject to levy,  execution  or other
enforcement procedure for the satisfaction of Tenant's remedies; (c) no personal
liability  shall at any  time be  asserted  or  enforceable  against  Landlord's
partners  or  successors  in  interest  (except to the extent  permitted  in (a)
above),  or against  Landlord's  shareholders,  officers or directors,  or their
respective  partners,   shareholders,   officers,  directors  or  successors  in
interest;  and (d) no judgment will be taken  against any partner,  shareholder,
officer or director of Landlord. The provisions of this section shall apply only
to the  Landlord  and the  parties  herein  described,  and shall not be for the
benefit of any insurer nor any other third party.

40.   Financial Statements
Within thirty (30) days after Landlord's request,  but not more than once in any
calendar  year,  Tenant shall  deliver to Landlord  the then  current  financial
statements of Tenant  (including  interim periods  following the end of the last
fiscal year for which annual statements are available),  prepared or compiled by
a certified  public  accountant,  including a balance  sheet and profit and loss
statement  for the most recent  prior year,  all  prepared  in  accordance  with
generally accepted accounting principles consistently applied.


<PAGE>



41.   Rules and Regulations
Tenant agrees to comply with such  reasonable  rules and regulations as Landlord
may adopt from time to time for the orderly and proper operating of the Building
and  parking  and other  common  areas.  Such rules may include but shall not be
limited to the  following:  (a)  restriction  of employee  parking to a limited,
designated  area or  areas;  and (b)  regulation  of the  removal,  storage  and
disposal  of Tenant's  refuse and other  rubbish at the sole cost and expense of
Tenant.  The rules and regulations shall be binding upon Tenant upon delivery of
a copy of them to Tenant.  Landlord  shall not be  responsible to Tenant for the
failure  of any other  person  to  observe  and  abide by any of said  rules and
regulations.

42.   Mortgagee Protection
       (a)Modifications  for Lender. If, in connection with obtaining  financing
   for the Premises or any portion  thereof,  Landlord's  lender  shall  request
   reasonable  modifications  to this Lease as a  condition  to such  financing,
   Tenant shall not  unreasonably  withhold,  delay or defer its consent to such
   modifications, provided such modifications do not materially adversely affect
   Tenant's rights or increase Tenant's obligations under this Lease.

       (b)Rights  to Cure.  Tenant  agrees to give to any trust deed or mortgage
   holder  ("Holder"),  by  registered  mail, at the same time as it is given to
   Landlord,  a copy of any notice of default  given to Landlord,  provided that
   prior to such notice Tenant has been notified,  in writing, (by way of notice
   of  assignment  of rents and  leases,  or  otherwise)  of the address of such
   Holder. Tenant further agrees that if Landlord shall have failed to cure such
   default  within the time  provided  for in this Lease,  then the Holder shall
   have an additional twenty (20) days after expiration of such period, or after
   receipt of such  notice from Tenant (if such notice to the Holder is required
   by this Paragraph  42(b)),  whichever shall last occur,  within which to cure
   such default or if such default  cannot be cured within that time,  then such
   additional  time as may be  necessary  if within such  twenty (20) days,  any
   Holder has  commenced and is  diligently  pursuing the remedies  necessary to
   cure such default  (including but not limited to  commencement of foreclosure
   proceedings,  if  necessary  to effect such cure),  in which event this Lease
   shall not be terminated.

43.   Entire Agreement
This Lease,  including the Exhibits and any Addenda attached  hereto,  which are
hereby incorporated  herein by this reference,  contains the entire agreement of
the parties hereto, and no representations, inducements, promises or agreements,
oral or otherwise, between the parties, not embodied herein or therein, shall be
of any force and effect.

44.   Interest
Any installment of Rent and any other sum due from Tenant under this Lease which
is not received by Landlord within ten (10) days from when the same is due shall
bear  interest  from such tenth (10th) day until paid at an annual rate equal to
the maximum rate of interest  permitted by law.  Payment of such interest  shall
not excuse or cure any  Default by Tenant.  In  addition,  Tenant  shall pay all
costs and attorneys' fees incurred by Landlord in collection of such amounts.

45.   Construction
This Lease shall be construed and interpreted in accordance with the laws of the
State  of  California.  The  parties  acknowledge  and  agree  that  no  rule of
construction to the effect that any  ambiguities are to be resolved  against the
drafting party shall be employed in the interpretation of this Lease,  including
the Exhibits and any Addenda attached hereto. All captions in this Lease are for
reference  only  and  shall  not be used in the  interpretation  of this  Lease.
Whenever  required by the context of this Lease,  the singular shall include the
plural,  the  masculine  shall  include the  feminine,  and vice  versa.  If any
provision of this Lease shall be determined to be illegal or unenforceable, such
determination  shall not affect any other  provision  of this Lease and all such
other provisions shall remain in full force and effect.

46.   Representations and Warranties of Tenant
Tenant hereby makes the following representations and warranties,  each of which
is material and being relied upon by Landlord, is true in all respects as of the
date of this Lease,  and shall  survive the  expiration  or  termination  of the
Lease.

       (a)If Tenant is an entity, Tenant is duly organized, validly existing and
   in good  standing  under  the laws of the state of its  organization  and the
   persons  executing  this  Lease on behalf of Tenant  have the full  right and
   authority  to  execute  this  Lease on behalf of  Tenant  and to bind  Tenant
   without the consent or  approval  of any other  person or entity.  Tenant has
   full power,  capacity,  authority and legal right to execute and deliver this
   Lease and to perform all of its obligations hereunder. This Lease is a legal,
   valid and binding  obligation of Tenant,  enforceable in accordance  with its
   terms.

       (b)Tenant  has not (1)  made a  general  assignment  for the  benefit  of
   creditors,  (2) filed any  voluntary  petition in  bankruptcy or suffered the
   filing  of an  involuntary  petition  by  any  creditors,  (3)  suffered  the
   appointment of a receiver to take possession of all or  substantially  all of
   its assets,  (4) suffered the attachment or other judicial  seizure of all or
   substantially all of its assets, (5) admitted in writing its inability to pay
   its debts as they come due, or (6) made an offer of settlement,  extension or
   composition to its creditors generally.

   Landlord and Tenant have  executed and  delivered  this Lease as of the Lease
Date specified in the Basic Lease Information.

Tenant:

Premisys Communications, Inc.,
a Delaware Corporation

By:      /s/ Nicholas J. Williams
         ------------------------------
         Nicholas J. Williams
         Chief Executive Officer

Date:           June 26, 1998

Landlord:

AETNA LIFE INSURANCE COMPANY,
a Connecticut corporation

By:      Allegis Realty Investors, LLC
         Its Investment Advisor

By:      /s/  Silvia Melikian
         ------------------------
         Silvia Melikian
         Vice President

Date:    August 20, 1998


<PAGE>








1
98LEASE\PREMRV1.DOC: 06/10/98


                                    Exhibit A

                             Diagram of the Premises




<PAGE>



                          Exhibit B to Lease Agreement
                               Tenant Improvements


This exhibit, entitled "Tenant Improvements",  is and shall constitute EXHIBIT B
to that certain Lease Agreement dated June 4, 1998 (the "Lease"), by and between
AEtna  Life  Insurance  Company,  a  Connecticut  corporation  ("Landlord")  and
Premisys Communications, Inc., a Delaware corporation ("Tenant") for the leasing
of certain  premises  located in the Sutter  Hill  Business  Park at Building A,
48634 Milmont Drive, Fremont, California (the "Premises"). The terms, conditions
and  provisions  of this EXHIBIT B are hereby  incorporated  into and are made a
part of the Lease. Any capitalized  terms used herein and not otherwise  defined
herein shall have the meaning ascribed to such terms as set forth in the Lease:

1. Tenant To Construct  Tenant  Improvements.  Subject to the provisions  below,
Tenant shall be solely responsible for the planning, construction and completion
of the interior tenant improvements  ("Tenant  Improvements") to the Premises in
accordance  with  the  terms  and  conditions  of this  Exhibit  B.  The  Tenant
Improvements  shall  not  include  any  of  Tenant's  personal  property,  trade
fixtures, furnishings, equipment or similar items.

2.    Tenant Improvement Plans.

      A. Preliminary Plans and  Specifications.  Promptly after execution of the
Lease,  Tenant shall retain a licensed and insured  architect  ("Architect")  to
prepare   preliminary   working   architectural   and   engineering   plans  and
specifications   ("Preliminary  Plans  and   Specifications")   for  the  Tenant
Improvements.  Tenant shall deliver the Preliminary Plans and  Specifications to
Landlord. The Preliminary Plans and Specifications shall be in sufficient detail
to show  locations,  types and  requirements  for all heat loads,  people loads,
floor  loads,  power and  plumbing,  regular and special  HVAC needs,  telephone
communications,  telephone and electrical outlets,  lighting,  lighting fixtures
and related  power,  and  electrical  and  telephone  switches.  Landlord  shall
reasonably approve or disapprove the Preliminary Plans and Specifications within
five (5) days after Landlord receives the Preliminary  Plans and  Specifications
and,  if  disapproved,   Landlord  shall  return  the   Preliminary   Plans  and
Specifications to Tenant, who shall make all necessary revisions within ten (10)
days after Tenant's  receipt  thereof.  This  procedure  shall be repeated until
Landlord  approves  the  Preliminary  Plans  and  Specifications.  The  approved
Preliminary Plans and  Specifications,  as modified,  shall be deemed the "Final
Preliminary Plans and Specifications".

      B. Final Plans and  Specifications.  After the Final Preliminary Plans and
Specifications  are  approved  by  Landlord  and  are  deemed  to be  the  Final
Preliminary  Plans and  Specifications,  Tenant  shall  cause the  Architect  to
prepare  in  twenty  (20)  days  following  Landlord's  approval  of  the  Final
Preliminary  Plans  and  Specifications  the  final  working  architectural  and
engineering   plans,    specifications   and   drawings,   ("Final   Plans   and
Specifications")  for the Tenant  Improvements.  Tenant  shall then  deliver the
Final Plans and Specifications to Landlord. Landlord shall reasonably approve or
disapprove  the  Final  Plans  and  Specifications  within  five (5) days  after
Landlord  receives  the Final  Plans and  Specifications  and,  if  disapproved,
Landlord  shall  return the Final Plans and  Specifications  to Tenant who shall
make all  necessary  revisions  within  ten (10)  days  after  Tenant's  receipt
thereof.  This procedure shall be repeated until Landlord approves,  in writing,
the Final Plans and Specifications. The approved Final Plans and Specifications,
as modified, shall be deemed the "Construction Documents".

      C.   Miscellaneous.   All   deliveries  of  the   Preliminary   Plans  and
Specifications,  the Final Preliminary Plans and Specifications, the Final Plans
and  Specifications,  and the  Construction  Documents  shall  be  delivered  by
messenger  service,  by personal hand delivery or by overnight  parcel  service.
While   Landlord   has  the  right  to  approve   the   Preliminary   Plans  and
Specifications,  the Final Preliminary Plans and Specifications, the Final Plans
and Specifications, and the Construction Documents, Landlord's interest in doing
so  is  to  protect  the  Premises,   the  Building  and  Landlord's   interest.
Accordingly,  Tenant shall not rely upon Landlord's approvals and Landlord shall
not be the guarantor of, nor  responsible  for, the adequacy and  correctness or
accuracy of the  Preliminary  Plans and  Specifications,  the Final  Preliminary
Plans  and  Specifications,   the  Final  Plans  and  Specifications,   and  the
Construction  Documents,  or the compliance  thereof with  applicable  laws, and
Landlord  shall  incur no  liability  of any kind by  reason  of  granting  such
approvals.

      D. Building  Standard Work. The Construction  Documents shall provide that
the Tenant  Improvements  to be constructed  in accordance  therewith must be at
least equal, in quality, to Landlord's  building standard materials,  quantities
and procedures then in use by Landlord ("Building Standards") attached hereto as
Exhibit B-2, and shall consist of improvements which are generic in nature.

      E.  Construction  Agreements.  Tenant  hereby  covenants and agrees that a
provision  shall be included in each and every agreement made with the Architect
and the  Contractor  with  respect to the Tenant  Improvements  specifying  that
Landlord  shall  be  a  third  party  beneficiary  thereof,   including  without
limitation,  a  third  party  beneficiary  of  all  covenants,  representations,
indemnities and warranties made by the Architect and/or Contractor.

3. Permits.  Tenant at its sole cost and expense  (subject to the  provisions of
Paragraph 5 below) shall obtain all  governmental  approvals of the Construction
Documents to the full extent necessary for the issuance of a building permit for
the Tenant  Improvements based upon such Construction  Documents.  Tenant at its
sole cost and  expense  shall  also  cause to be  obtained  all other  necessary
approvals and permits from all  governmental  agencies  having  jurisdiction  or
authority for the construction  and  installation of the Tenant  Improvements in
accordance with the approved Construction Documents. Tenant at its sole cost and
expense  (subject to the  provisions  of Paragraph 5 below) shall  undertake all
steps necessary to insure that the  construction  of the Tenant  Improvements is
accomplished in strict compliance with all statutes,  laws,  ordinances,  codes,
rules, and regulations applicable to the construction of the Tenant Improvements
and  the  requirements  and  standards  of  any  insurance  underwriting  board,
inspection  bureau  or  insurance  carrier  insuring  the  Premises  and/or  the
Building.

4.    Construction.

      A. Tenant shall be solely  responsible for the construction,  installation
and completion of the Tenant  Improvements in accordance  with the  Construction
Documents  approved by Landlord and is solely responsible for the payment of all
amounts  when  payable in  connection  therewith  without any cost or expense to
Landlord,  except for Landlord's obligation to contribute the Tenant Improvement
Allowance in accordance  with the provisions of Paragraph 5 below.  Tenant shall
diligently  proceed with the  construction,  installation  and completion of the
Tenant  Improvements  in  accordance  with the  Construction  Documents  and the
completion schedule  reasonably approved by Landlord.  No material changes shall
be made to the Construction  Documents and the completion  schedule  approved by
Landlord without  Landlord's  prior written consent,  which consent shall not be
unreasonably withheld or delayed.

      B.  Tenant at its sole cost and  expense  (subject  to the  provisions  of
Paragraph  5  below)  shall  employ  a  licensed,  insured  and  bonded  general
contractor  ("Contractor")  to construct the Tenant  Improvements  in accordance
with the Construction  Documents.  The construction contracts between Tenant and
the Contractor and between the Contractor and subcontractors shall be subject to
Landlord's  prior written  approval,  which approval  shall not be  unreasonably
withheld or delayed.  Proof that the  Contractor is licensed in  California,  is
bonded as required  under  California  law, and has the  insurance  specified in
Exhibit B-1, attached hereto and incorporated herein by this reference, shall be
provided to Landlord at the time that Tenant requests approval of the Contractor
from  Landlord.  Tenant shall comply with or cause the Contractor to comply with
all other terms and provisions of Exhibit B-1.

      C. Prior to the  commencement of the  construction and installation of the
Tenant  Improvements,  Tenant shall  provide the  following to Landlord,  all of
which shall be to Landlord's reasonable satisfaction:

            (i)  An  estimated   budget  and  cost   breakdown  for  the  Tenant
Improvements.

            (ii) Estimated completion schedule for the Tenant Improvements.

            (iii) Copies of all required approvals and permits from governmental
agencies having  jurisdiction or authority for the construction and installation
of the Tenant Improvements;  provided,  however, if prior to commencement of the
construction and installation of Tenant Improvements Tenant has not received the
electrical,  plumbing or  mechanical  permits,  Tenant shall only be required to
provide Landlord with evidence that Tenant has made application  therefor,  and,
upon receipt by Tenant of such permits,  Tenant shall promptly  provide Landlord
with copies thereof.

            (iv) Evidence of Tenant's  procurement  of insurance  required to be
obtained pursuant to the provisions of Paragraphs 4.B and 4.G.

      D.  Landlord  shall at all  reasonable  times have a right to inspect  the
Tenant  Improvements  (provided Landlord does not materially  interfere with the
work being performed by the Contractor or its  subcontractors)  and Tenant shall
immediately  cease  work  upon  written  notice  from  Landlord  if  the  Tenant
Improvements are not in compliance with the Construction  Documents  approved by
Landlord.  If  Landlord  shall give notice of faulty  construction  or any other
deviation from the Construction Documents,  Tenant shall cause the Contractor to
make  corrections  promptly.  However,  neither the privilege  herein granted to
Landlord  to make  such  inspections,  nor the  making  of such  inspections  by
Landlord,  shall  operate as a waiver of any rights of Landlord to require  good
and workmanlike construction and improvements constructed in accordance with the
Construction Documents.

      E.  Subject to Landlord  complying  with its  obligations  in  Paragraph 5
below,  Tenant shall pay and  discharge  promptly and fully all claims for labor
done and  materials  and  services  furnished  in  connection  with  the  Tenant
Improvements.  The Tenant  Improvements  shall not be  commenced  until five (5)
business days after  Landlord has received  notice from Tenant  stating the date
the construction of the Tenant  Improvements is to commence so that Landlord can
post and record any appropriate Notice of Nonresponsibility.

      F. Tenant  acknowledges  and agrees that the  agreements  and covenants of
Tenant in Sections 10 and 37 of the Lease shall be fully  applicable to Tenant's
construction of the Tenant Improvements.

      G.  Tenant  shall  maintain,  and  cause  to  be  maintained,  during  the
construction of the Tenant Improvements, at its sole cost and expense, insurance
of the types and in the  amounts  specified  in Exhibit B-1 and in Section 12 of
the  Lease,  together  with  builders'  risk  insurance  for the  amount  of the
completed  value of the Tenant  Improvements on an all-risk  non-reporting  form
covering all improvements under construction,  including building materials, and
other  insurance  in  amounts  and  against  such  risks as the  Landlord  shall
reasonably require in connection with the Tenant Improvements.

      H. No materials,  equipment or fixtures shall be delivered to or installed
upon the  Premises  pursuant  to any  agreement  by which  another  party  has a
security interest or rights to remove or repossess such items, without the prior
written consent of Landlord, which consent shall not be unreasonably withheld.

      I.  Landlord  reserves  the  right  to  establish   reasonable  rules  and
regulations for the use of the Building during the course of construction of the
Tenant  Improvements,  including,  but not  limited  to,  construction  parking,
storage  of  materials,  hours  of  work,  use of  elevators,  and  clean-up  of
construction related debris.

      J. Upon  completion  of the Tenant  Improvements,  Tenant shall deliver to
Landlord  the  following,  all  of  which  shall  be  to  Landlord's  reasonable
satisfaction:

            (i) Any certificates  required for occupancy,  including a permanent
and complete Certificate of Occupancy issued by the City of Fremont.

            (ii)  A  Certificate  of  Completion  signed  by the  Architect  who
prepared the Construction Documents, reasonably approved by Landlord.

            (iii)  A cost  breakdown  itemizing  all  expenses  for  the  Tenant
Improvements, together with invoices and receipts for the same or other evidence
of payment.

            (iv) Final and  unconditional  mechanic's  lien  waivers for all the
Tenant Improvements.

            (v)  A  Notice  of  Completion  for  execution  by  Landlord,  which
certificate  once  executed  by  Landlord  shall be  recorded  by  Tenant in the
official  records of the county of Santa Clara, and Tenant shall then deliver to
Landlord a true and correct copy of the recorded Notice of Completion.

            (vi) A true and complete copy of all as-built plans and drawings for
the Tenant Improvements.

5.    Tenant Improvement Allowance.

      A. Subject to Tenant's  compliance  with the provisions of this Exhibit B,
Landlord  shall  provide to Tenant an  allowance  in the  amount of twenty  nine
thousand  eight hundred forty and 00/100 dollars and  ($29,840.00)  (the "Tenant
Improvement  Allowance") to construct and install only the Tenant  Improvements.
The Tenant Improvement Allowance shall be used to design,  prepare, plan, obtain
the approval of, construct and install the Tenant  Improvements and for no other
purpose.  Except as otherwise expressly provided herein,  Landlord shall have no
obligation to contribute the Tenant  Improvement  Allowance unless and until the
Construction  Documents  have been  approved by Landlord and Tenant has complied
with all  requirements  set forth in Paragraph 4.C. of this Exhibit B. The costs
to be paid out of the Tenant Improvement  Allowance shall include all reasonable
costs and expenses associated with the design, preparation,  approval, planning,
construction   and  installation  of  the  Tenant   Improvements   (the  "Tenant
Improvement Costs"), including all of the following:

            (i) All costs of the Preliminary Plans and Specifications, the Final
Plans and Specifications,  and the Construction Documents, and engineering costs
associated  with  completion  of the  State  of  California  energy  utilization
calculations under Title 24 legislation:

            (ii) All costs of  obtaining  building  permits and other  necessary
authorizations from local governmental authorities;

            (iii) All costs of  interior  design and finish  schedule  plans and
specifications including as-built drawings, if applicable;

            (iv) All direct and indirect  costs of procuring,  constructing  and
installing the Tenant Improvements in the Premises,  including,  but not limited
to, the  construction  fee for  overhead  and profit and the cost of all on-site
supervisory and administrative  staff, office,  equipment and temporary services
rendered by the  Contractor in connection  with the  construction  of the Tenant
Improvements;  provided,  however,  that the  construction  fee for overhead and
profit, the cost of all on-site  supervisory and administrative  staff,  office,
equipment and temporary  services  shall not exceed amounts which are reasonable
and customary for such items in the local construction industry;

            (v) All fees payable to the  Architect  and any engineer if they are
required to redesign any portion of the Tenant  Improvements  following Tenant's
and Landlord's approval of the Construction Documents;

            (vi)  Utility connection fees;

            (vii) Inspection fees and filing fees payable to local  governmental
authorities, if any;

            (viii) All costs of all permanently  affixed equipment and non-trade
fixtures  provided  for in the  Construction  Documents,  including  the cost of
installation; and,

The Tenant Improvement  Allowance shall be the maximum  contribution by Landlord
for the Tenant Improvement Costs, and the disbursement of the Tenant Improvement
Allowance is subject to the terms contained hereinbelow.

Landlord will make payments to Tenant from the Tenant  Improvement  Allowance to
reimburse Tenant for Tenant  Improvement  Costs paid or incurred by Tenant.  All
payments of the Tenant  Improvement  Allowance shall be by progress payments not
more frequently than once per month and only after satisfaction of the following
conditions  precedent:  (a) receipt by Landlord of conditional  mechanics'  lien
releases  for the  work  completed  and to be paid  by  said  progress  payment,
conditioned  only on the  payment of the sums set forth in the  mechanics'  lien
release, executed by the Contractor and all subcontractors,  labor suppliers and
materialmen;  (b) receipt by Landlord of unconditional  mechanics' lien releases
from the Contractor and all subcontractors,  labor suppliers and materialmen for
all work other than that being paid by the current progress  payment  previously
completed by the Contractor, subcontractors, labor suppliers and materialmen and
for which Tenant has received funds from the Tenant Improvement Allowance to pay
for such work; (c) receipt by Landlord of any and all  documentation  reasonably
required  by  Landlord  detailing  the  work  that has  been  completed  and the
materials and supplies used as of the date of Tenant's  request for the progress
payment, including,  without limitation,  invoices, bills, or statements for the
work  completed  and the  materials  and supplies  used;  and (d)  completion by
Landlord or  Landlord's  agents of any  inspections  of the work  completed  and
materials and supplies used as deemed reasonably  necessary by Landlord.  Except
for the CM Fee payment (credit),  Tenant Improvement Allowance progress payments
shall be paid to Tenant within  fourteen (14) days from the  satisfaction of the
conditions  set  forth in the  immediately  preceding  sentence.  The  preceding
notwithstanding,  all Tenant  Improvement Costs paid or incurred by Tenant prior
to Landlord's  approval of the  Construction  Documents in  connection  with the
design and planning of the Tenant  Improvements  by Architect shall be paid from
the Tenant Improvement  Allowance,  without any retention,  within fourteen (14)
days  following  Landlord's  receipt  of  invoices,  bills  or  statements  from
Architect evidencing such costs.  Notwithstanding the foregoing to the contrary,
Landlord  shall be  entitled to withhold  and retain  five  percent  (5%) of the
Tenant  Improvement  Allowance or of any Tenant  Improvement  Allowance progress
payment until the lien-free  expiration of the time for filing of any mechanics'
liens  claimed or which might be filed on account of any work  ordered by Tenant
or the Contractor or any  subcontractor  in connection with the construction and
installation of the Tenant Improvements.

      B. Landlord shall not be obligated to pay any Tenant Improvement Allowance
progress payment or the Tenant  Improvement  Allowance  retention if on the date
Tenant is entitled to receive the Tenant Improvement  Allowance progress payment
or the  Tenant  Improvement  Allowance  retention  Tenant is in  default of this
Lease. Such payments shall resume upon Tenant curing any such default within the
time periods which may be provided for in the Lease.

      C. Should the total cost of constructing  the Tenant  Improvements be less
than the Tenant Improvement Allowance, the Tenant Improvement Allowance shall be
automatically reduced to the amount equal to said actual cost.


6. Termination. If the Lease is terminated prior to the date on which the Tenant
Improvements  are  completed,  for  any  reason  due to the  default  of  Tenant
hereunder,  in addition to any other  remedies  available to Landlord  under the
Lease,  Tenant shall pay to Landlord as Additional Rent under the Lease,  within
five (5) days of receipt of a statement therefor,  any and all costs incurred by
Landlord  and not  reimbursed  or otherwise  paid by Tenant  through the date of
termination in connection  with the Tenant  Improvements  to the extent planned,
installed and/or constructed as of such date of termination,  including, but not
limited to, any costs related to the removal of all or any portion of the Tenant
Improvements and restoration costs related thereto. Subject to the provisions of
Section 10.2 of the Lease,  upon the  expiration or earlier  termination  of the
Lease,  Tenant shall not be required to remove the Tenant  Improvements it being
the intention of the parties that the Tenant  Improvements  are to be considered
incorporated into the Building.

7. Lease Provisions; Conflict. The terms and provisions of the Lease, insofar as
they  are  applicable,  in  whole  or in part,  to this  EXHIBIT  B, are  hereby
incorporated  herein  by  reference,  and  specifically  including  all  of  the
provisions of Section 31 of the Lease. In the event of any conflict  between the
terms  of the  Lease  and this  EXHIBIT  B, the  terms of this  EXHIBIT  B shall
prevail.  Any amounts payable by Tenant to Landlord hereunder shall be deemed to
be Additional Rent under the Lease and, upon any default in the payment of same,
Landlord  shall have all rights and remedies  available to it as provided for in
the Lease.


<PAGE>




                                   Exhibit B-1
                       Construction Insurance Requirements


Before  commencing  work, the contractor  shall procure and maintain at its sole
cost and expense until completion and final acceptance of the work, at least the
following minimum levels of insurance.

A.  Workers' Compensation in statutory amounts and Employers Liability Insurance
    in the  minimum  amounts of  $100,000  each  accident  for bodily  injury by
    accident and  $100,000  each  employee  for bodily  injury by disease with a
    $500,000  policy  limit,  covering  each and every worker used in connection
    with the contract work.

B.  Comprehensive  General Liability Insurance on an occurrence basis including,
    but not limited to, protection for Premises/Operations Liability, Broad Form
    Contractual   Liability,    Owner's   and   Contractor's   Protective,   and
    Products/Completed Operations Liability*, in the
    following minimum limits of liability.

    Bodily Injury, Property Damage, and
    Personal Injury Liability             $2,000,000/each occurrence
                                          $3,000,000/aggregate

    * Products/Completed  Operations Liability Insurance is to be provided for a
      period of at least one (1) year after completion of work.

    Coverage should include  protection for Explosion,  Collapse and Underground
Damage.

C.  Comprehensive  Automobile  Liability  Insurance  with the following  minimum
    limits of liability.

    Bodily Injury and Property                  $1,000,000/each occurrence
    Damage Liability                            $2,000,000/aggregate

    This insurance will apply to all owned, non-owned or hired automobiles to be
    used by the Contractor in the completion of the work.

D.  Umbrella  Liability  Insurance in a minimum  amount of five million  dollars
    ($5,000,000),  providing excess coverage on a following-form  basis over the
    Employer's  Liability  limit  in  Paragraph  A and the  liability  coverages
    outlined in Paragraphs B and C.

E.  Equipment and Installation coverages in the broadest form available covering
    Contractor's tools and equipment and material not accepted by Tenant. Tenant
    will  provide   Builders  Risk  Insurance  on  all  accepted  and  installed
    materials.

All  policies  of  insurance,  duplicates  thereof  or  certificates  evidencing
coverage  shall be delivered to Landlord prior to  commencement  of any work and
shall name  Landlord,  and its  partners and lenders as  additional  insureds as
their  interests  may appear.  All insurance  policies  shall (1) be issued by a
company or  companies  licensed to be business in the state of  California,  (2)
provide that no  cancellation,  non-renewal  or material  modification  shall be
effective  without thirty (30) days prior written  notice  provided to Landlord,
(3) provide no  deductible  greater than $15,000 per  occurrence,  (4) contain a
waiver to subrogation clause in favor of Landlord, and its partners and lenders,
and (5) comply  with the  requirements  of Sections  12.2,  12.3 and 12.4 of the
Lease to the extent such requirements are applicable.



<PAGE>








3
98LEASE\PREMRV1.DOC: 06/10/98


                                   Exhibit B-2
                               Building Standards

                            OUTLINE SPECIFICATION FOR
                     NEW OFFICE BUILD-OUT IN R & D BUILDINGS

Office Area

DEMISING PARTITION AND CORRIDOR WALLS:

      Note:  One hr. rated walls where required based on occupancy group.

A.    6" 20-gage  metal studs at 24" O.C.  (or as required by code based on
      roof height) framed full height from finish floor to surface above.

B.    One (1) LAYER 5/8" drywall Type "X" both sides of wall, fire taped only.

INTERIOR PARTITIONS:

A.    3 5/8" 25 gage  metal  studs at 24" O.C.  to bottom of T-Bar  ceiling
      grid approximately 9' 0' high.

B.    One (1) layer 5/8" drywall both sides of wall, smooth ready for paint.

C.    3 5/8" metal  studs  including  all  lateral  bracing as  required by
      code.

PERIMETER DRYWALL (AT OFFICE AREAS):

A.    3 5/8" metal studs @ 24"O.C.  to 12'0" above finished  floor.  (or as
      required by Title-24 for full height  envelope then use demising wall
      spec.)

B.    One (1) layer 5/8" Type "X" drywall taped smooth and ready for paint.


COLUMN FURRING:

A.    Furring channel all sides of 2 1/2" metal studs per details.

B. One (1) layer 5/8" drywall taped smooth and ready for paint.

C.    Columns within walls shall be furred-out.


ACOUSTICAL CEILINGS:

            Note:  Gyp. Bd. ceiling at all restrooms Typ.

A.    2'X 4" standard  white T-Bar grid system as  manufactured  by Chicago
      Metallic of equal.

B.    2'X 4" X 5/8"  white,  no-directional  acoustical  tile to be regular
      second look as manufactured by Armstrong or equal.

PAINTING:

A.    Sheetrock  walls within office to receive two (2) coats of interior  latex
      paint as  manufactured  by Kelly Moore or equal.  Some  portions of second
      coat to be single accent color.

B.    Semigloss paint all restrooms and lunch rooms.


WINDOW COVERING:

A.    1" aluminum  mini-blinds as manufactured  by Levelor,  Bali or equal,
      color to be selected by L.P.C. (brushed aluminum or white).

B.    Blinds to be sized to fit window module.

VCT:

A.    VCT to be 1/8" x 12" x 12" as manufactured by Armstrong -Excelon Series or
      equal.

B.    Slabs shall be water proofed per  manufacturer  recommendations,  at sheet
      vinyl or VCT areas.

LIGHT FIXTURES:

A.    2" X 4" T-bar lay in  3-tube  energy  efficient  fixture  with cool  white
      fluorescent  tubes with  parabolic  lens as  manufactured  by  Lithonia or
      equal. (Approximately 50 F.C.)

LIGHT SWITCHES:

A.    Switching as required by Title 24.

B.    Switch assembly to be Levinton or equal, color - White

ELECTRICAL OUTLET:

A.    110V  duplex  outlet in  demising or  interior  partitions  only,  as
      manufactured by Leviton or equal, color to be White.

B.    Maximum  eight (8) outlets per circuit,  spacing to meet code or minimum 2
      per office,  conference  room,  reception and 2 dedicated  over cabinet at
      lunch room junction boxes above ceiling for large open area with furniture
      partitions.

C.    Transformers to be a minimum of 20% or over required capacity.

D.    Contractors  to inspect  electric  room and to include all  necessary
      metering cost.

E.    No aluminum wiring is acceptable.

TELEPHONE/DATA OUTLET:

A.    One(1)  single  outlet box in wall with  pullwire  from outlet box to area
      above T-bar ceiling per office.

B.    Cover plate for phone outlets by telephone/data vendors.

FIRE SPRINKLERS:

As required by fire codes.

TOPSET BASE:

A.    4" rubber base as  manufactured  by Burke or equal,  standard  colors
      only.

B.    4" rubber base at VCT areas.

TOILET AREAS:

Wet walls to  receive  Duraboard  or Wonder  Board and  ceramic  tile up to 48".
Floors to receive ceramic tile with self covered base as required by code.

CARPET:

Note any of the following carpets are acceptable

Designweave:  Alumni 28 oz.,  Windswept Classic 30 oz. or Stratton Design Series
III 30 oz, Structure II
28 oz.

WOOD DOORS:

Shall be  3'  0" x 9' 0" x 1  3/4"  (unless  otherwise  specified)  solid  core,
      prefinished harmony (rotary N. birch).

DOOR FRAMES:

Shall be ACI or equal, 33/4" or 4 7/8" throat,  brushed,  standard aluminum,
      snap-on trim.

HARDWARE:

1 1/2 pr. butts F179 Stanley, Latchset D10S Rhodes Schlage, Lockset D53PD Rhodes
Schlage,  Dome Type  floor  stop  Gylnn  Johnson  FB13,  Closer  4110LCN  (where
required) brushed chrome.

INSULATION:

By Title 24 insulation.

PLUMBING:

A.    Shall  comply  with all local  codes and  handicapped  code  requirements.
      Fixtures shall be either AAmerican  Standard@,  AKohler@ or ANorris@.  All
      toilet  accessories and grab bars shall be ABobrick@ or equal and approved
      by owner.

B.    Plumbing bid shall include 5 gallon minimum hot water heater, or insta hot
      with mixer valve including all connections.


TOILET PARTITIONS:

Shall be as manufactured by Fiat, global or equal if approved by owner. Color to
      be white or gray.

HVAC:

HVAC units per specifications.

Five (5) year warranty  provided on all HVAC compressor  units. All penetrations
including curbs and sleepers to be hot moped to LPC standard.

WAREHOUSE AREAS:

Floor - seal concrete with water base clear acrylic sealer. Fire Extinguishers -
2A 10 BC surface mount by code x by S.F.

400 W metal halide lighting at warehouse minimum 5-7 foot candles.

Note: All high pile storage requirements are excluded for standard building T.I.



<PAGE>



1
98LEASE\PREM-RVI.doc: 06/22/98


                                    Exhibit C

                 Commencement and Expiration Date Memorandum

                Landlord: Aetna Life Insurance Company
                  Tenant: Premisys Communications, Inc., a Delaware
                          corporation
              Lease Date: June 4, 1998
                Premises: Located at 48634 Milmont Drive, Fremont,
                          California 94538
   Tenant hereby  accepts the Premises as being in the condition  required under
the Lease,  with all Tenant  Improvements  completed (except for minor punchlist
items which Landlord agrees to complete).

   The   Commencement   Date   of   the   Lease   is   hereby   established   as
____________________________ and the Expiration Date is____________________.

                          Tenant: Premisys Communications, Inc.,
                                  a Delaware corporation


                                  By: .....................................
                                  Print Name: .............................
                                  Its: ....................................

Approved and Agreed:

    Landlord:
    Aetna Life Insurance Company,
    a Connecticut corporation

    By: Allegis Realty Investors, LLC
             Its Investment Advisor


        By:  ...........................

        Date: ..........................







<PAGE>



2
98LEASE\PREM-RV1.doc:  06/22/98

                         EXHIBIT D - RULES & REGULATIONS

                                   Page 1 of 2

            Industrial Lease Agreement dated June 4, 1998, between

                         Premisys Communications, Inc.,
                             a Delaware Corporation
                                   ("Tenant"),
                                       and
                          AEtna LIFE INSURANCE COMPANY,
                            a Connecticut corporation
                                  ("Landlord")




   1.    No advertisement,  picture or sign of any sort shall be displayed on or
         outside the Premises without the prior written consent of Lessor, which
         shall not be  unreasonably  withheld.  Lessor  shall  have the right to
         remove any such unapproved item without notice and at Lessee's expense.

   2.    Lessee shall not regularly  park motor  vehicles in designated  parking
         areas after the conclusion of normal daily business activity.

   3.    Lessee  shall not use any method of heating or air  conditioning  other
         than that supplied by Lessor without the consent of Lessor.

   4.    All window  coverings  installed by Lessee and visible from the outside
         of the building require the prior written approval of Lessor.

   5.    Lessee  shall  not use,  keep or  permit to be used or kept any foul or
         noxious gas or substance or any flammable or  combustible  materials on
         or around the Premises.

   6.    Lessee  shall not alter any lock or  install  any new locks or bolts on
         any door at the Premises without the prior consent of Lessor.

   7.    Lessee agrees not to make any duplicate  keys without the prior consent
         of Lessor.

   8.7.  Lessee  shall park motor  vehicles in those  general  parking  areas as
         designated  by Lessor  except for loading and  unloading.  During those
         periods  of  loading  and  unloading,  Lessee  shall  not  unreasonably
         interfere  with  traffic  flow  within  the  Project  and  loading  and
         unloading areas of other Lessees.

   9.8.  Lessee  shall not  disturb,  solicit  or  canvas  any  occupant  of the
         Building or Project and shall cooperate to prevent same.

   10.9. No person shall go on the roof without Lessor's permission.

   11.10.Business  machines and mechanical  equipment  belonging to Lessee which
         cause noise or vibration  that may be  transmitted  to the structure of
         the  Building,  to such a degree  as to be  objectionable  to Lessor or
         other Lessees,  shall be placed and  maintained by Lessee,  at Lessee's
         expense,  on  vibration  eliminators  or other  devices  sufficient  to
         eliminate noise or vibration.

   12.11.All goods,  including  material  used to store goods,  delivered to the
         Premises of Lessee  shall be  immediately  moved into the  Premises and
         shall not be left in parking or receiving areas overnight.

   13.12.Tractor  trailers  which must be unhooked  or parked with dolly  wheels
         beyond the concrete  loading areas must use steel plates or wood blocks
         under  the  dolly  wheels  to  prevent  damage  to the  asphalt  paving
         surfaces.  No parking or storing of such  trailers will be permitted in
         the auto parking areas of the Project or on streets adjacent thereto.

   14.13.Forklifts  which  operate on asphalt  paving areas shall not have solid
         rubber tires and shall only use tires that do not damage the asphalt.

   15.14.Lessee is  responsible  for the  storage  and  removal of all trash and
         refuse.  All such  trash and  refuse  shall be  contained  in  suitable
         receptacles stored behind screened  enclosures at locations approved by
         Lessor.

   16.15.Lessee  shall not store or permit the storage or  placement of goods or
         merchandise in or around the common areas surrounding the Premises.  No
         displays or sales or  merchandise  shall be allowed in the parking lots
         or other common areas.



<PAGE>













98LEASE\PREM-RV1.doc: 6/22/98
                                        1

                                    EXHIBIT F
                   HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE


Your  cooperation  in this matter is  appreciated.  Initially,  the  information
provided by you in this Hazardous Materials Disclosure  Certificate is necessary
for the Landlord to evaluate your proposed uses of the premises (the "Premises")
and to determine  whether to enter into a lease agreement with you as tenant. If
a lease agreement is signed by you and the Landlord (the "Lease Agreement"),  on
an annual basis in accordance  with the  provisions of Paragraph 32 of the Lease
Agreement, you are to provide an update to the information initially provided by
you in this  certificate.  Any questions  regarding this  certificate  should be
directed to, and when completed, the certificate should be delivered to:

Landlord:   c/o Allegis Realty Investors LLC
            455 Market Street, Suite 1540
            San Francisco, California 94105
            Attention:  Rod Chu
            Phone:  (415) 538-4800


     Name of (Prospective)  Tenant:  Premisys  Communications,  Inc., a Delaware
corporation Mailing Address: 48664 Milmont Drive, Fremont, California 94538

Contact Person, Title and Telephone Number(s):

     Contact Person for Hazardous Waste  Materials  Management and Manifests and
Telephone Number(s):


     Address of (Prospective) Premises: 48634 Milmont Drive, Fremont, California
94538
Length of (Prospective) initial Term:  Eighty four (84) months


1.    GENERAL INFORMATION:

      Describe the initial  proposed  operations  to take place in, on, or about
      the Premises, including, without limitation, principal products processed,
      manufactured  or  assembled  services  and  activities  to be  provided or
      otherwise conducted. Existing tenants should describe any proposed changes
      to on-going operations.



2.    USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS

      2.1   Will any  Hazardous  Materials  (as  hereinafter  defined)  be used,
            generated,  stored or  disposed  of in,  on or about  the  Premises?
            Existing  tenants  should  describe any  Hazardous  Materials  which
            continue  to be used,  generated,  stored or  disposed  of in, on or
            about the Premises.

            Wastes                  Yes               No
            Chemical Products       Yes               No
            Other                   Yes               No

            If Yes is marked, please explain:



      2.2   If Yes is  marked in  Section  2.1,  attach a list of any  Hazardous
            Materials  to be used,  generated,  stored or  disposed of in, on or
            about the  Premises,  including the  applicable  hazard class and an
            estimate of the quantities of such Hazardous Materials to be present
            on or about Premisys at any given time; estimated annual throughput;
            the proposed  location(s) and method of storage  (excluding  nominal
            amounts of ordinary household cleaners and janitorial supplies which
            are  not  regulated  by  any  Environmental   Laws,  as  hereinafter
            defined); and the proposed location(s) and method(s) of disposal for
            each Hazardous Material, including, the estimated frequency, and the
            proposed  contractors  or  subcontractors.  Existing  tenants should
            attach a list setting forth the information requested above and such
            list should  include  actual data from on-going  operations  and the
            identification  of any variations in such information from the prior
            year's certificate.

3.    STORAGE TANKS AND SUMPS

      3.1   Is any above or below ground storage of gasoline, diesel, petroleum,
            or other  Hazardous  Materials in tanks or sumps  proposed in, on or
            about the Premises? Existing tenants should describe any such actual
            or proposed activities.

            Yes                     No

            If yes, please explain:



4.    WASTE MANAGEMENT

      4.1   Has your company been issued an EPA Hazardous  Waste  Generator I.D.
            Number?    Existing   tenants   should   describe   any   additional
            identification numbers issued since the previous certificate.

            Yes                     No

      4.2   Has  your  company  filed  a  biennial  or  quarterly  reports  as a
            hazardous waste generator?  Existing tenants should describe any new
            reports filed.

            Yes               No

            If yes, attach a copy of the most recent report filed.

5.    WASTEWATER TREATMENT AND DISCHARGE

      5.1 Will your company discharge wastewater or other wastes to:

                    storm drain?                  sewer?

                    surface water?         no   wastewater   or   other   wastes
discharged.

            Existing  tenants  should  indicate  any actual  discharges.  If so,
            describe the nature of any proposed or actual discharge(s).



      5.2 Will any such wastewater or waste be treated before discharge?

            Yes                     No

            If yes,  describe  the type of treatment  proposed to be  conducted.
            Existing tenants should describe the actual treatment conducted.



6.    AIR DISCHARGES

      6.1   Do you plan for any air  filtration  systems or stacks to be used in
            your  company's  operations  in, on or about the Premises  that will
            discharge  into the air; and will such air  emissions be  monitored?
            Existing  tenants should indicate  whether or not there are any such
            air filtration systems or stacks in use in, on or about the Premises
            which  discharge  into the air and whether  such air  emissions  are
            being monitored.

            Yes                     No

            If yes, please describe:



      6.2   Do you propose to operate any of the  following  types of equipment,
            or any other equipment  requiring an air emissions permit?  Existing
            tenants should  specify any such equipment  being operated in, on or
            about the Premises.

                    Spray booth(s)                Incinerator(s)

                    Dip tank(s)                   Other (Please describe)

                    Drying oven(s)                No  Equipment Requiring Air
                                                  Permits

            If yes, please describe:




      6.3   Please describe (and submit copies of with this Hazardous  Materials
            Disclosure  Certificate)  any  reports  you  have  filed in the past
            (thirty-six)  months  with any  governmental  or  quasi-governmental
            agencies  or  authorities  related  to air  discharges  or clean air
            requirements and any such reports which have been issued during such
            period by any  agencies or  authorities  with respect to you or your
            business operations.

7.    HAZARDOUS MATERIALS DISCLOSURES

      7.1   Has your  company  prepared  or will it be  required  to  prepare  a
            Hazardous Materials management plan ("Management Plan") or Hazardous
            Materials Business Plan and Inventory  ("Business Plan") pursuant to
            Fire  Department  or  other  governmental  or  regulatory  agencies'
            requirements?  Existing  tenants  should  indicate  whether or not a
            Management Plan is required and has been prepared.

            Yes                     No

            If yes,  attach  a copy of the  Management  Plan or  Business  Plan.
            Existing tenants should attach a copy of any required updates to the
            Management Plan or Business Plan.

      7.2   Are any of the Hazardous  Materials,  and in  particular  chemicals,
            proposed to be used in your  operations in, on or about the Premises
            regulated under  Proposition  65?  Existing  tenants should indicate
            whether or not there are any new Hazardous  Materials  being so used
            which are regulated under Proposition 65.

            Yes                     No

            If yes, please explain:



8.    ENFORCEMENT ACTIONS AND COMPLAINTS

      8.1   With respect to Hazardous  Materials or Environmental Laws, has your
            company  ever  been  subject  to  any  agency  enforcement  actions,
            administrative  orders,  or  consent  decrees  or has  your  company
            received requests for information,  notice or demand letters, or any
            other inquiries  regarding its operations?  Existing  tenants should
            indicate  whether or not any such  actions,  orders or decrees  have
            been,  or are in the  process  of being,  undertaken  or if any such
            requests have been received.

            Yes                     No

            If yes,  describe the actions,  orders or decrees and any continuing
            compliance obligations imposed as a result of these actions,  orders
            or decrees and also describe any requests,  notices or demands,  and
            attach  a copy  of  all  such  documents.  Existing  tenants  should
            describe  and  attach a copy of any new  actions,  orders,  decrees,
            requests,  notices or demands  not  already  delivered  to  Landlord
            pursuant to the provisions of Paragraph 32 of the Lease Agreement.




      8.2   Have there ever been, or are there now pending, any lawsuits against
            your  company  regarding  any  environmental  or health  and  safety
            concerns?

            Yes                     No

            If  yes,  describe  any  such  lawsuits  and  attach  copies  of the
            complaint(s), cross-complaint(s),  pleadings and all other documents
            related  thereto as requested by Landlord.  Existing  tenants should
            describe   and   attach   a   copy   of   any   new    complaint(s),
            cross-complaint(s),   pleadings  and  other  related  documents  not
            already   delivered  to  Landlord  pursuant  to  the  provisions  of
            Paragraph 32 of the Lease Agreement.




      8.3   Have there been any problems or complaints  from  adjacent  tenants,
            owners or other  neighbors at your company's  current  facility with
            regard to  environmental  or health  and safety  concerns?  Existing
            tenants  should  indicate  whether  or not there  have been any such
            problems  or  complaints  from  adjacent  tenants,  owners  or other
            neighbors  at, about or near the Premises and the current  status of
            any such problems or complaints.

            Yes               No

            If yes, please  describe.  Existing tenants should describe any such
            problems or complaints  not already  disclosed to Landlord under the
            provisions of the signed Lease  Agreement and the current  status of
            any such problems or complaints.



9.    PERMITS AND LICENSES

      9.1   Attach  copies of all permits and  licenses  issued to your  company
            with respect to its proposed operations in, or on or about Premisys,
            including, without limitation, any wastewater discharge permits, air
            emissions  permits,  and use permits or approvals.  Existing tenants
            should  attach copies of any new permits and licenses as well as any
            renewals of permits or licenses previously issued.


As used herein,  "Hazardous Materials" shall mean and include any substance that
is or contains (a) any  "hazardous  substance"  as now or  hereafter  defined in
 101(14) of the Comprehensive  Environmental Response,  Compensation,  and
Liability Act of 1980, as amended ("CERCLA") (42 U.S.C.  9601 et seq.) or
any regulations  promulgated  under CERCLA;  (b) any "hazardous waste" as now or
hereafter  defined in the Resource  Conservation  and  Recovery  Act, as amended
("RCRA") (42 U.S.C.   6901 et seq.) or any regulations  promulgated  under
RCRA;  (c) any  substance  now or hereafter  regulated  by the Toxic  Substances
Control  Act,  as  amended  ("TSCA")  (15  U.S.C.  
  2601 et  seq.) or any
regulations  promulgated  under  TSCA;  (d)  petroleum,  petroleum  by-products,
gasoline,  diesel  fuel,  or other  petroleum  hydrocarbons;  (e)  asbestos  and
asbestos-containing  material, on any form, whether friable or non-friable;  (f)
polychlorinated  biphenyls;  (g) lead and lead-containing  materials; or (h) any
additional  substance  material  or waste (A) the  presence of which on or about
Premisys  (i)  requires  reporting,   investigation  or  remediation  under  any
Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a
nuisance on the Premises or any adjacent  property or poses or threatens to pose
a hazard to the  health or safety of  persons on the  Premises  or any  adjacent
property,  or (iii) which,  if it emanated or migrated from the Premises,  could
constitute a trespass, or (B) which is now or hereafter classified or considered
to be hazardous or toxic under any Environmental Laws; and "Environmental "Laws"
shall mean and  include (a) CERCLA,  RCRA and TSCA;  and (b) any other  federal,
state or local laws, ordinances,  statutes, codes, rules, regulations, orders or
decrees  now or  hereinafter  in  effect  relating  to (i)  pollution,  (ii) the
protection or regulation of human health,  natural resources or the environment,
(iii) the  treatment,  storage or disposal of Hazardous  Materials,  or (iv) the
emission,  discharge,  release of threatened release of Hazardous Materials into
the environment.

The undersigned  hereby  acknowledges  and agrees that this Hazardous  Materials
Disclosure  Certificate  is being  delivered to Landlord in connection  with the
evaluation of a Lease Agreement and, if such Lease  Agreement is executed,  will
be attached  thereto as an exhibit.  The undersigned  further  acknowledges  and
agrees  that if such Lease  Agreement  is  executed,  this  Hazardous  Materials
Disclosure  Certificate  will be updated  from time to time in  accordance  with
Paragraph 32 of the Lease Agreement.  The undersigned  further  acknowledges and
agrees that the Landlord and its partners,  lenders and representatives may, and
will, rely upon the statements, representations,  warranties, and certifications
made herein and the  truthfulness  thereof in entering into the Lease  Agreement
and the continuance  thereof throughout the term, and any renews thereof, of the
Lease  Agreement.  I (print name)  _______________________________,  acting with
full  authority to bind the  (proposed)  Tenant and on behalf of the  (proposed)
Tenant,  certify,  represent and warrant that the information  contained in this
certificate is true and correct.



(PROSPECTIVE) TENANT:


By:

Title:

Date:



<PAGE>


                                   Addendum 1
                           Option to Extend the Lease


This Addendum 1  ("Addendum")  is  incorporated  as a part of that certain Lease
Agreement   dated  June  4,  1998  (the  "Lease"),   by  and  between   Premisys
Communications,   Inc.,  a  Delaware  corporation  ("Tenant"),  and  AEtna  Life
Insurance Company, a Connecticut  corporation  ("Landlord"),  for the leasing of
those certain premises located at 48634 Milmont Drive, Fremont, California 94538
as more particularly  described in Exhibit A to the Lease (the "Premises").  Any
capitalized  terms used herein and not otherwise  defined  herein shall have the
meaning ascribed to such terms as set forth in the Lease.

1.  Grant of  Extension  Option.  Subject  to the  provisions,  limitations  and
conditions  set  forth  in  Paragraph  5  below,  Tenant  shall  have an  Option
("Option")  to extend  the term of the Lease for five (5) years  (the  "Extended
Term").

2. Tenant's  Option  Notice.  If Landlord does not receive  written  notice from
Tenant of its  exercise  of this  Option on a date  which is not more than three
hundred sixty (360) days nor less than two hundred forty (240) days prior to the
end of the initial  term of the Lease (the  "Option  Notice"),  all rights under
this Option shall  automatically  terminate  and shall be of no further force or
effect.

3. Establishing the Initial Monthly Base Rent for the Extended Term. The initial
monthly  Base Rent for the Extended  Term shall be the then current  market rent
for similar space within the competitive  market area of the Premises (the "Fair
Rental Value"). "Fair Rental Value" of the Premises means the fair market rental
value of the Premises as of the  commencement of the Extended Term,  taking into
consideration all relevant factors, including length of term, the uses permitted
under the Lease,  the  quality,  size,  design  and  location  of the  Premises,
including  the  condition  and value of existing  tenant  improvements,  and the
monthly base rent paid by tenants for premises  comparable to the Premises,  and
located  within  the  competitive  market  area of the  Premises  as  reasonably
determined by Landlord.

Neither  Landlord  nor Tenant  shall have the right to have a court or any other
third party entity  establish the Fair Rental Value.  If Landlord and Tenant are
unable to agree on the Fair Rental Value for the  Extended  Term within ten (10)
days of receipt by  Landlord of the Option  Notice,  Landlord  and Tenant  being
obligated only to act in good faith, this Option shall  automatically  terminate
and the Lease shall terminate at the end of its initial term.

In no event shall the monthly Base Rent for any period of the  Extended  Term be
less than the highest  monthly Base Rent charged  during the initial term of the
Lease. Upon determination of the initial monthly Base Rent for the Extended Term
in  accordance  with  the  terms  outlined  above,  Landlord  and  Tenant  shall
immediately  execute,  at  Landlord's  sole option,  either the  standard  lease
agreement then in use by Landlord, or an amendment to this Lease. Such new lease
agreement or amendment,  as the case may be, shall set forth among other things,
the initial monthly Base Rent for the Extended Term and the actual  commencement
date and expiration date of the Extended Term.  Tenant shall have no other right
to extend the term of the Lease under this Addendum  unless  Landlord and Tenant
otherwise agree in writing.

4.  Condition of Premises and Brokerage  Commissions  for the Extended  Term. If
Tenant timely and properly  exercises this Option, in strict accordance with the
terms contained herein: (1) Tenant shall accept the Premises in its then "As-Is"
condition  and,  accordingly,  Landlord  shall not be  required  to perform  any
additional  improvements  to the Premises;  and (2) Tenant hereby agrees that it
will be solely  responsible  for any and all brokerage  commissions and finder's
fees payable to any broker now or  hereafter  procured or hired by Tenant or who
otherwise claims a commission based on any act or statement of Tenant ("Tenant's
Broker") in connection  with the Option;  and Tenant hereby  further agrees that
Landlord shall in no event or circumstance be responsible for the payment of any
such commissions and fees to Tenant's Broker.

5. Limitations On, and Conditions To, Extension Option.  This Option is personal
to Tenant and may not be assigned,  voluntarily or involuntarily,  separate from
or as part of the Lease. At Landlord's  option,  all rights of Tenant under this
Option  shall  terminate  and be of no force or effect  if any of the  following
individual events occur or any combination thereof occur: (1) Tenant has been in
default at any time during the initial  term of the Lease,  or is  currently  in
default of any provision of the Lease; and/or (2) Tenant has assigned its rights
and  obligations  under all or part of the Lease or Tenant has  subleased all or
part of the Premises; and/or (3) Tenant's financial condition is unacceptable to
Landlord at the time the Option  Notice is  delivered  to  Landlord;  and/or (4)
Tenant has failed to properly  exercise this Option in a timely manner in strict
accordance with the provisions of this Addendum; and/or (5) Tenant no longer has
possession of all or any part of the Premises  under the Lease,  or if the Lease
has been terminated earlier, pursuant to the terms of the Lease.

6. Time is of the Essence. Time is of the essence with respect to each and every
time period described in this Addendum.










                                                                  Exhibit 10.49
                          First Amendment to Lease Agreement

                             Change of Commencement Date






This First  Amendment to Lease  Agreement (the  "Amendment") is made and entered
into to be effective as of July 20, 1998,  by and between  AEtna Life  Insurance
Company, a Connecticut corporation  ("Landlord"),  and Premisys  Communications,
Inc., a Delaware corporation ("Tenant"), with reference to the following facts:


                                   Recitals


A.  Landlord and Tenant have entered into that  certain  Lease  Agreement  dated
    June 4, 1998 (the "Lease"),  for the leasing of certain premises  containing
    approximately  29,840 rentable square feet of space located at 48634 Milmont
    Drive, Fremont,  California (the "Premises") as such Premises are more fully
    described in the Lease.

B.  Landlord and Tenant wish to amend the Commencement Date of the Lease.

NOW,  THEREFORE,  in  consideration  of the  foregoing  and for  other  good and
valuable   consideration,   the  receipt  and   adequacy  of  which  are  hereby
acknowledged, Landlord and Tenant hereby agree as follows:

    1.  Recitals:  Landlord  and  Tenant  agree that the above  recitals  are
        true and correct.

    2. The Commencement Date of the Lease shall be August 1, 1998.

    3.  The last day of the Term of the Lease (the  "Expiration  Date") shall be
        December 31, 2005.

    4. The dates on which the Base Rent will be adjusted are:

        for the period  August 1, 1998 to July 31, 1999 the monthly Base Rent
        shall be $38,792.00;
        for the period  August 1, 1999 to July 31, 2000 the monthly Base Rent
        shall be $39,985.60;
        for the period  August 1, 2000 to July 31, 2001 the monthly Base Rent
        shall be $41,179.20;
        for the period  August 1, 2001 to July 31, 2002 the monthly Base Rent
        shall be $42,372.80;
        for the period  August 1, 2002 to July 31, 2003 the monthly Base Rent
        shall be $43,566.40;
        for the period  August 1, 2003 to July 31, 2004 the monthly Base Rent
        shall be $44,760.00;
        for the period  August 1, 2004 to July 31, 2005 the monthly Base Rent
        shall be $45,953.60; and
        for the period August 1, 2005 to December 31, 2005 the monthly Base Rent
        shall be $47,147.20.

    5.  Effect of Amendment: Except as modified herein, the terms and conditions
        of the Lease  shall  remain  unmodified  and  continue in full force and
        effect. In the event of any conflict between the terms and conditions of
        the Lease and this Amendment, the terms and conditions of this Amendment
        shall prevail.

    6.  Definitions:  Unless otherwise defined in this Amendment,  all terms not
        defined in this Amendment shall have the meaning set forth in the Lease.

    7.  Authority:  Subject to the provisions of the Lease, this Amendment shall
        be binding  upon and inure to the benefit of the parties  hereto,  their
        respective heirs, legal  representatives,  successors and assigns.  Each
        party  hereto and the  persons  signing  below  warrant  that the person
        signing below on such party's  behalf is authorized to do so and to bind
        such party to the terms of this Amendment.
    8.  The terms and  provisions of the Lease are hereby  incorporated  in this
        Amendment.

IN WITNESS WHEREOF,  the parties have executed this Amendment as of the date and
year first above written.

TENANT:

Premisys Communications, Inc.,
a Delaware corporation


By:      John J. Hagedorn

Its:      SVP/CFO

Date:      8/10/98


By:

Its:

Date:


LANDLORD:

AEtna Life Insurance Company,
a Connecticut corporation

By:   Allegis Realty Investors, LLC,
      Its Investment Advisor


      By:       Silvia Melikian
            Vice President

      Date:      8/20/98



<PAGE>


                                                                   EXHIBIT 21.01

                          LIST OF REGISTRANT'S SUBSIDIARIES


                                        Country of       Percentage Owned by
               Name                     Organization          Registrant
------------------------------------  -----------------  -----------------------
Premisys Communications Pte Ltd       Singapore                  100%
Premisys Communications Limited       United Kingdom             100%
Premisys Communications (Canada)Inc   Canada                     100%
Inc.



<PAGE>



      EXHIBIT 23.01

      CONSENT OF INDEPENDENT ACCOUNTANTS

     We hereby  consent to the  incorporation  by reference in the  Registration
Statements on Form S-8 (File No. 333-49991) of Premisys Communications,  Inc. of
our report  dated July 23, 1998, except for Note 10 which is as of September 24,
1998, appearing on page 30 of this Annual Report on Form 10-K.

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Jose, California
September 24, 1998


<PAGE>


EXHIBIT 27.01