Document:

<PAGE>   1
                                                                    EXHIBIT 10.5

                                     LEASE

                  (SINGLE-TENANT SINGLE-BUILDING MODIFIED NET)

                                 by and between

                    CALLAHAN-PENTZ PROPERTIES, McCarthy FOUR

                                  ("Landlord")

                                      and

                                  XICOR, INC.

                                   ("Tenant")

                  For the approximately 30,968 SF Premises at
                     801 Buckeye Court, Milpitas, CA 95035

<PAGE>   2

                                  LEASE SUMMARY

Lease Date:                            March 24, 2000

Landlord:                              Callahan-Pentz Properties, McCarthy Four

Address of Landlord:                   c/o CPS Realty Group
                                       60 Los Gatos Saratoga Road
                                       Los Gatos, CA  95030-5317

Tenant:                                Xicor, Inc.

Address of Tenant:                     1511 Buckeye Drive, MS 114
                                       Milpitas, CA  95035

Contact:                               Klaus Hendig,
                                       Senior Vice President

Telephone:                             (408) 546-3505

Building Address:                      801 Buckeye Court
                                       Milpitas, CA  95035

Premises Square Footage:               approximately 30,968 square feet

Anticipated Commencement Date:         July 1, 2000

Term:                                  Ten (10) years

<TABLE>
<CAPTION>
Monthly Rent:                          Months of Term                   Monthly Rent
                                       --------------                   ------------
<S>                                    <C>                              <C>
                                       1 through 12                     $42,000.00/month

                                       13 through 24                    $43,365.00/month

                                       25 through 36                    $44,774.00/month

                                       37 through 48                    $46,229.00/month

                                       49 through 60                    $47,731.00/month

                                       61 through 72                    $49,283.00/month

                                       73 through 84                    $50,884.00/month

                                       85 through 96                    $52,538.00/month

                                       97 through 108                   $54,246.00/month

                                       109 through 120                  $57,009.00/month
</TABLE>

Security Deposit:                      None

                                        i
<PAGE>   3

              (SINGLE-TENANT BUILDING ON SINGLE-BUILDING PROPERTY)

        1. Parties.

           THIS LEASE (the "Lease"), dated March 24, 2000, is entered into by
and between Callahan-Pentz Properties, McCarthy Four, a California general
partnership ("Landlord"), whose address is c/o CPS Realty Group, 260 Los Gatos
Saratoga Road, Los Gatos, CA 95050-5317 and Xicor, Inc., a California
corporation ("Tenant"), whose address is 1511 Buckeye Drive, Milpitas, CA 95035.

        2. Premises.

           Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord those certain premises consisting of approximately thirty thousand nine
hundred sixty-eight (30,968) square feet, as shown in EXHIBIT A (the "Premises")
in that certain building, commonly known as 801 Buckeye Court (the "Building"),
in the City of Milpitas, County of Santa Clara (the "County"), California,
located on that certain real property consisting of approximately 2.253 acres
and more particularly described in EXHIBIT B (the "Property"). Tenant shall also
have the right to use the Outside Area as defined in Paragraph 3.H. Landlord
shall at all times have exclusive control of the Outside Area and may at any
time temporarily close any part thereof, exclude and restrain anyone from any
part thereof, except the bona fide customers, employees and invitees of Tenant
who use the Outside Area in accordance with the rules and regulations as
Landlord may from time to time promulgate, and may change the configuration or
location of the Outside Area. In exercising any such rights, Landlord shall make
a reasonable effort to minimize any disruption of Tenant's business.

        3. Definitions.

           The following terms shall have the following meanings in this Lease:

        A. Alterations. Any alterations, additions or improvements made in, on
or about the Premises after the Commencement Date, including, but not limited
to, lighting, heating, ventilating, air conditioning, electrical, partitioning,
drapery and carpentry installations.

        B. CC&R's. Those certain covenants, conditions and restrictions recorded
at Page 189, Book E545, of the Official Records of the County, State of
California, on June 5, 1977, as amended.

        C. Commencement Date. The Commencement Date of this Lease shall be the
first day of the Term determined in accordance with Paragraph 4.A.

        D. HVAC. Heating, ventilating and air conditioning.

                                      -1-
<PAGE>   4

        E. Interest Rate. Eight percent (8%) per annum, however, in no event to
exceed the maximum rate of interest permitted by law.

        F. Landlord's Agents. Landlord's authorized agents, partners,
subsidiaries, directors, officers, and employees.

        G. Monthly Rate. The rent payable pursuant to Paragraph 5.A., as
adjusted from time to time pursuant to the terms of this Lease.

        H. Outside Area. All areas and facilities within the Property exclusive
of the Building, including parking areas, sidewalks, landscaped areas, service
areas, trash disposal facilities, and similar areas and facilities, subject to
the reasonable rules and regulations and changes therein from time to time
promulgated by Landlord governing the use of the Outside Area.

        I. Real Property Taxes. Any form of assessment, license, fee, rent 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
Property or any part thereof or the rent and other sums payable hereunder by
Tenant, including, but not limited to, any gross income or excise tax levied by
any of the foregoing authorities with respect to receipt of such rent or other
sums due under this Lease; (ii) upon any legal or equitable interest of Landlord
in the Property or the Premises or any part thereof; (iii) upon this transaction
or any document to which Tenant is a party creating or transferring any interest
in the Property; (iv) levied or assessed in lieu of, in substitution for, or in
addition to, existing or additional taxes against the Property whether or not
now customary or within the contemplation of the parties; or (v) surcharged
against the parking area.

        J. Rent. Monthly Rent plus the Additional Rent defined in Paragraph 5.B.

        K. Security Deposit. That amount paid by Tenant pursuant to Paragraph 7.

        L. Sublet. Any transfer, sublet, assignment, license or concession
agreement, change of ownership, mortgage, or hypothecation of this Lease or the
Tenant's interest in the Lease or in and to all or a portion of the Premises.

        M. Subrent. Any consideration of any kind received, or to be received,
by Tenant from a subtenant if such sums are related to Tenant's interest in this
Lease or in the Premises, excluding, however, bonus money and payments (in
excess of book value) for Tenant's assets including its trade fixtures,
equipment and other personal property, goodwill, general intangibles, and any
capital stock or other equity ownership of Tenant for which Tenant is
compensated separately from the rent paid under any Sublet.

        N. Subtenant. The person or entity with whom a Sublet agreement is
proposed to be or is made.

                                      -2-
<PAGE>   5

        O. Tenant Improvements. Those certain improvements to the Premises to be
constructed by Landlord pursuant to Paragraph 9.

        P. Tenant Improvements Allowance. None.

        Q. Tenant's Personal Property. Tenant's trade fixtures, furniture,
equipment and other personal property in the Premises.

        R. Term. The term of this Lease set forth in Paragraph 4.A., as it may
be extended hereunder pursuant to any options to extend granted herein.

        4. Lease Term.

        A. Term. The Term shall be a period of ten (10) years, commencing on the
date ("Commencement Date") which is sixty (60) days after the date Sun
Microsystems vacates the Premises, but in no event before July 1, 2000, and
terminating ten (10) years thereafter, unless sooner terminated in accordance
with the provisions of the Lease. Landlord and Tenant anticipate that the
Commencement Date will occur on or about July 1, 2000. When the actual
Commencement Date is determined, the parties shall execute a Commencement Date
Memorandum setting forth such date in the form shown in EXHIBIT C. Tenant agrees
that if Landlord, for any reason whatsoever, is unable to deliver possession of
the Premises by May 1, 2000, Landlord shall not be liable to Tenant for any loss
or damage therefrom, nor shall this Lease be void or voidable. In such event,
the Commencement Date, termination date and all other dates of this Lease shall
be extended to conform to the date of Landlord's tender of possession of the
Premises to Tenant and Tenant shall not be obligated to pay Monthly Rent or
other sums due Landlord hereunder until possession of the Premises is tendered
to Tenant. Notwithstanding the foregoing, if Landlord is unable to deliver
possession of the Premises to Tenant by May 1, 2000, Tenant shall be entitled to
two months of free Rent for each month after such date that delivery of
possession is delayed, with any partial months of any such delay to be
compensated for with an equivalent partial two months of free Rent.

        B. Early Entry. If Tenant is permitted to occupy the Premises prior to
the Commencement Date for the purpose of fixturing or any other purpose
permitted by Landlord, such early entry shall be at Tenant's sole risk and
subject to all the terms and provisions hereof, except for the payment of
Monthly Rent which shall commence on the Commencement Date. Landlord shall have
the right to impose such additional conditions on Tenant's early entry as
Landlord shall deem appropriate, and shall further have the right to require
that Tenant execute an early entry agreement containing such conditions prior to
Tenant's early entry.

        5. Rent.

        A. Monthly Rent. Tenant shall pay to Landlord, in lawful money of the
United States, for each calendar month of the Term, net Monthly Rent in
accordance with the schedule set forth below, in advance, on the first day of
each calendar month, without abatement, deduction, claim, offset, prior notice
or demand.

                                      -3-
<PAGE>   6

<TABLE>
<CAPTION>
            Months of Term                          Monthly Rent
            --------------                          ------------
<S>                                                <C>
            1 through 12                            $42,000.00/month

            13 through 24                           $43,365.00/month

            25 through 36                           $44,774.00/month

            37 through 48                           $46,229.00/month

            49 through 60                           $47,731.00/month

            61 through 72                           $49,283.00/month

            73 through 84                           $50,884.00/month

            85 through 96                           $52,538.00/month

            97 through 108                          $54,246.00/month

            109 through 120                         $57,009.00/month
</TABLE>

           Additionally, Tenant shall pay, as and with the net Monthly Rent, the
estimated monthly Operating Expenses. Tenant shall deposit with Landlord upon
execution of this Lease the following amounts to be applied toward the Rent due
for the first month of the Term:

<TABLE>
<S>                                                <C>
            Monthly Rent (net)                      $42,000.00/month

            Operating Expenses                      $3,256.00/month

            TOTAL                                   $45,256.00/month
</TABLE>

        B. Additional Rent. All monies required to be paid by Tenant under this
Lease, including, without limitation, Real Property Taxes pursuant to Paragraph
15, and Operating Expenses pursuant to Paragraph 17, shall be deemed Additional
Rent.

        C. Prorations. If the Commencement Date is not the first (1st) day of a
month, or if the termination date of this Lease is not the last day of a month,
a prorated installment of Monthly Rent based on a thirty (30) day month shall be
paid for the fractional month during which the Lease commences or terminates.

        6. Late Payment Charges.

           Tenant acknowledges that late payment by Tenant to Landlord of Rent
and other charges provided for under this Lease will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of such costs being
extremely difficult or impracticable to fix. Therefore, if any installment of
Rent or any other charge due from Tenant is not received by Landlord within five
(5) business days of the due date, equal to five percent (5%) of the amount
overdue as a late charge. The parties agree that this late charge represents a
fair and reasonable estimate of the costs that Landlord will incur by reason of
the late payment by Tenant. In addition, if any Rent or other sum due hereunder
is not paid by Tenant within thirty (30) days after the date such Rent or other

                                      -4-
<PAGE>   7

payment is due, then Tenant shall pay interest on the amount due at the maximum
rate permitted by law from the date such Rent or other sum was due until paid.

Initials:

/s/   GBP                                        /s/   RK     BG
------------------------------                   ------------------------------
Landlord                                         Tenant

        7. Security Deposit. None.

        8. Holding Over.

           Tenant remains in possession of all or any part of the Premises after
the expiration of the Term, with the express or implied consent of Landlord,
such tenancy shall be month-to-month only and shall not constitute a renewal or
extension for any further term. If Tenant remains in possession either with or
without Landlord's consent, Monthly Rent shall be increased to an amount equal
to one hundred fifty percent (150%) of the Monthly Rent payable during the last
month of the Term, and any other sums due under this Lease shall be payable in
the amount and at the times specified in this Lease. Such month-to-month tenancy
shall be subject to every other term, condition, and covenant contained herein.
If Tenant fails to surrender the Premises upon the expiration of the Term
despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord
harmless from all loss or liability, including without limitation any claim made
by a succeeding tenant, resulting from Tenant's failure to surrender.

        9. Tenant Improvements.

           Landlord shall construct at Landlord's expense the following
improvements to the Premises: (i) upgrade Building structural elements to 1997
Uniform Building Code requirements; (ii) remove all "pony" walls and patch or
replace damaged carpet in the areas where the "pony" walls are removed from and
in other areas of the Building where the carpet is damaged, if necessary; (iii)
upgrade existing restrooms to meet current requirements of the Americans with
Disabilities Act (if reasonably feasible); and (iv) upgrade existing computer
wiring to CAT 5, if not existing or if not complete (collectively, the "Tenant
Improvements").

        10. Condition of Premises.

            Landlord shall deliver the Premises to Tenant with all Building
systems in good condition and repair. If Landlord has agreed to construct any
Tenant Improvements, within ten (10) days after completion of the Tenant
Improvements, Tenant shall conduct a walkthrough inspection of the Premises with
Landlord and complete a punchlist of items needing additional work by Landlord.
Subject to the foregoing, by taking possession of the Premises, Tenant shall be
deemed to have accepted the Premises in good, clean and completed condition and
repair, subject to all applicable laws, codes and ordinances except for the
upgrade of the Building structural elements to the 1997 Uniform Building Code
requirements. Any damage to the Premises caused by Tenant's

                                      -5-
<PAGE>   8

move-in shall be repaired or corrected by Tenant, at its expense. Tenant
acknowledges that neither Landlord nor its Agents have made any representations
or warranties as to the suitability or fitness of the Premises for the conduct
of Tenant's business or for any other purpose, nor has Landlord or its Agents
agreed to undertake any Alterations or construct any Tenant Improvements to the
Premises except as expressly provided in this Lease. If Tenant fails to submit a
punchlist to Landlord within such ten (10) day period, it shall be deemed that
there are no Tenant Improvement items needing additional work or repair.
Landlord's contractor shall complete all reasonable punchlist items within
thirty (30) days after the walk-through inspection or as soon as practicable
thereafter. Upon completion of such punchlist items, Tenant shall approve such
completed items in writing to Landlord. If Tenant fails to approve such items
within fourteen (14) days of completion, such items shall be deemed approved by
Tenant, unless such approval is withheld by Tenant due to unsatisfactory
completion by Landlord's contractor. If such items are not completed within
sixty (60) days after the walk-through inspection, Tenant has the right to
complete the punchlist items and Landlord shall reimburse Tenant for such costs.

        11. Use of the Premises.

        A. Tenant's Use. Tenant shall use the Premises solely for semiconductor
wafer manufacturing offices, research and development and warehousing, and shall
not use the Premises for any other purpose without the prior written consent of
Landlord. Tenant acknowledges that the Property is subject and this Lease is
subordinate to the CC&R's. Tenant acknowledges that it has read the CC&R's and
knows the contents thereof. Throughout the Term, Tenant shall faithfully and
timely perform and comply with the CC&R's and any modification or amendments
thereof, including the payment by Tenant of any periodic or special dues,
assessments, and owners' association fees against the Property. Tenant shall
indemnify and hold Landlord and it Agents harmless from and against any
liability, loss, expense, damage, attorneys' fees and costs arising out of or in
connection with Tenant's failure to perform or comply with the CC&R's.

        B. Compliance.

               (i) Tenant shall not use the Premises or suffer or permit
anything to be done in or about the Premises or the Property which will in any
way conflict with any law, statute, zoning restriction, ordinance or
governmental law, rule, regulation or requirement of public authorities now in
force or which may hereafter be in force, relating to or affecting the
condition, use or occupancy of the Premises or the Property. Tenant shall not
commit any public or private nuisance or any other act or thing which might or
would disturb the quiet enjoyment of any other tenant of Landlord or any
occupant of nearby property. Tenant shall place no loads upon the floors, walls
or ceilings in excess of the maximum designed load determined by Landlord or
which endanger the structure; nor place any harmful liquids in the drainage
systems; nor dump or store waste materials or refuse or allow such to remain
outside the Building proper, except in the enclosed trash areas provided. Tenant
shall not store or permit to be stored or otherwise placed any other material of
any nature whatsoever outside the Building.

               (ii) In particular, Tenant, at its sole cost, shall comply with
all laws relating to the storage, use and disposal of hazardous, toxic or
radioactive matter, including those

                                      -6-
<PAGE>   9

materials identified in 22 California Code of Regulations Sections 66261.1 et
seq., as they may be amended from time to time (collectively "Toxic Materials").
Tenant does store, use or dispose of small quantities of Toxic Materials, such
as, but not limited to, Acetone, Isopropyl Alcohol and other cleaning solvents.
If requested by Landlord, Tenant shall provide a copy of Tenant's Hazardous
Material Business Plan for Landlord's review. Tenant shall be solely responsible
for and shall defend, indemnify and hold Landlord and its Agents harmless from
and against all claims, costs and liabilities, including attorneys' fees and
costs, arising out of or in connection with its storage, use and disposal of
Toxic Materials. Tenant shall further be solely responsible for and shall
defend, indemnify and hold Landlord and its Agents harmless from and against any
and all claims, costs, and liabilities, including attorneys' fees and costs,
arising out of or in connection with the removal, clean-up and restoration work
and materials necessary to return the Premises and the Property and any other
property of whatever nature to their condition existing prior to the appearance
of the Toxic Materials on the Premises. If any governmental agency or the
beneficiary of any deed of trust covering the Property reasonably requires any
testing of the Premises or the Property, including the soil or groundwater of
the Property, to ascertain whether there has been any release of Toxic Materials
in, on or about the Premises or the Property, Landlord shall have the right to
install monitoring wells on or about the Outside Area and to perform such other
tests and investigations of the Premises and the Property for such purpose.
Tenant shall reimburse Landlord as Additional Rent for the reasonable cost of
such tests and investigations and of the installation, maintenance, repair and
replacement of such monitoring wells or other measuring devices if the results
of such tests and investigations disclose the existence of facts which give rise
to the liability of Tenant pursuant to the indemnity provisions of this
Paragraph 11.B(ii). Tenant's obligations hereunder shall survive the termination
of this Lease.

        12. Quiet Enjoyment.

            Landlord covenants that Tenant, upon performing the terms,
conditions and covenants of this Lease, shall have quiet and peaceful possession
of the Premises as against any person claiming the same by, through or under
Landlord.

        13. Alterations.

            After the Commencement Date, Tenant shall not make or permit any
Alterations in, on or about the Premises, except for nonstructural Alterations
not exceeding Twenty Thousand Dollars ($20,000.00) in cost, without the prior
written consent of Landlord, and according to plans and specifications approved
in writing by Landlord, which consent shall not be unreasonably withheld.
Landlord acknowledges that some Tenant Alterations may be beneficial to future
tenants and Landlord may like to retain such Alterations after Tenant surrenders
the Premises upon termination of the Lease. Therefore, Landlord agrees, as part
of the written approval of such Alterations, to inform the Tenant if such
Alterations shall remain after termination or must be removed in accordance with
Paragraph 14. Notwithstanding the foregoing Tenant shall not, without the prior
written consent of Landlord, make any: (i) Alterations to the exterior of the
Building; (ii) Alterations to and penetrations of the roof of the Building; and
(iii) Alterations visible from outside the Premises, including the Outside Area,
to which Landlord may withhold Landlord's consent on wholly aesthetic grounds.

                                      -7-
<PAGE>   10

            All Alterations shall be installed at Tenant's sole expense, in
compliance with all applicable laws and the CC&R's, by a licensed contractor,
shall be done in a good and workmanlike manner conforming in quality and design
with the Premises existing as of the Commencement Date, and shall not diminish
the value of either the Building or the Premises. All Alterations made by Tenant
shall be and become the property of Landlord upon installation and shall not be
deemed Tenant's Personal Property; provided, however, that Landlord may, at its
option, require that Tenant, at Tenant's expense, remove any or all Alterations
installed by Tenant and return the Premises to their condition as of the
Commencement Date of this Lease, normal wear and tear excepted and subject to
the provisions of Paragraph 23. Notwithstanding any other provision of this
Lease, Tenant shall be solely responsible for the maintenance and repair of any
and all Alterations made by it to the Premises. Tenant shall give Landlord
written notice of Tenant's intention to perform work on the Premises at least
twenty (20) days prior to the commencement of such work to enable Landlord to
post and record a Notice of Nonresponsibility or other notice deemed proper
before the commencement of any such work.

        14. Surrender of the Premises.

            Upon the expiration or earlier termination of the Term, Tenant shall
surrender the Premises to Landlord in its condition existing as of the
Commencement Date, normal wear and tear and fire or other casualty excepted,
with all interior walls repaired and repainted if marked or damaged, all carpets
shampooed and cleaned, all broken, marred or nonconforming acoustical ceiling
tiles replaced, all windows washed, the plumbing and electrical systems and
lighting in good order and repair, including replacement of any burned out or
broken light bulb or ballasts, the HVAC equipment serviced and repaired by a
reputable and licensed service firm, and all floors cleaned and waxed, all to
the reasonable satisfaction of Landlord. Except for the Tenant Alterations
approved for retention in accordance with Paragraph 13, Tenant shall remove from
the Premises all of Tenant's Alterations required to be removed pursuant to
Paragraph 13, and all Tenant's Personal Property, and repair any damage and
perform any restoration work caused by such removal. If Tenant fails to remove
such Alterations and Tenant's Personal Property, and such failure continues
after the termination of this Lease, Landlord may retain such property and all
rights of Tenant with respect to it shall cease, or Landlord may place all or
any portion of such property in public storage for Tenant's account. Tenant
shall be liable to Landlord for costs of removal of any such Alterations and
Tenant's Personal Property and storage and transportation costs of same, and the
cost of repairing and restoring the Premises, together with interest at the
Interest Rate from the date of expenditure by Landlord. If the Premises are not
so surrendered at the termination of this Lease, Tenant shall indemnify Landlord
and its Agents against all loss or liability, including attorneys' fees and
costs, resulting from delay by Tenant in so surrendering the Premises.

        Normal wear and tear, for the purposes of this Lease, shall be construed
to mean wear and tear caused to the Premises by a natural aging process and
normal use which occurs in spite of prudent application of the best standards
for maintenance, repair and janitorial practices. It is not intended, nor shall
it be construed, to include items of neglected or deferred maintenance which
would have or should have been attended to during the Term of the Lease if the
best standards had been applied to properly maintain and keep the Premises at
all times in good condition and repair.

                                      -8-
<PAGE>   11

        15. Real Property Taxes.

        A. Payment by Tenant. On or before April 1 and December 1 of each
calendar year during the Term, Tenant shall pay to Landlord, as Additional Rent,
the Real Property Taxes as set forth on the county assessor's tax statement for
the Property. Landlord shall give Tenant at least thirty (30) days' prior
written notice of the amount so due. Upon Landlord's receipt of the Real
Property Tax payment from Tenant, Landlord shall pay the taxes to the county. If
Tenant fails to pay the Real Property Taxes on or before April 1 and December 1,
respectively, Tenant shall pay to Landlord any penalty incurred by such late
payment. Tenant shall pay any Real Property Tax not included within the county
tax assessor's tax statement within ten (10) days after being billed for same by
Landlord. The foregoing dates are based on the dates established by the county
as the dates on which Real Property Taxes become delinquent if not paid. If such
delinquency dates change, the dates on which Tenant must pay such taxes shall be
at least ten (10) days prior to the delinquency dates. If Tenant fails to make
any payment of Real Property Taxes by the date provided hereunder, Landlord
shall have the right to require that Tenant pay one-twelfth (1/12th) of the Real
Property Taxes to Landlord directly, on the first (1st) day of each calendar
month. 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 are to be included
within the definition of Real Property Taxes for purposes of this Lease. Tenant
shall have the right to appeal the assessed value with the County Tax Assessor
at its sole cost and expense provided that it continues to make all required
payments pending the outcome of such appeal.

        B. Taxes on Tenant Improvements and Personal Property. Tenant shall pay
any increase in Real Property Taxes resulting from any and all Alterations and
Tenant Improvements of any kind whatsoever placed in, on or about the Premises
for the benefit of, at the request of, or by Tenant. Tenant shall pay prior to
delinquency all taxes assessed or levied against Tenant's Personal Property in,
on or about the Premises or elsewhere. When possible, Tenant shall cause its
Personal Property to be assessed and billed separately from the real or personal
property of Landlord.

        C. Proration. Tenant's liability to pay Real Property Taxes shall be
prorated on the basis of a 365-day year to account for any fractional portion of
a fiscal tax year included at the commencement or expiration of the Term. With
respect to any assessments which may be levied against or upon the Property, or
which under the laws then in force may be evidenced by improvements or other
bonds or may be paid in annual installments, only the amount of such annual
installment (with appropriate proration for any partial year) and interest due
thereon shall be included within the computation of the annual Real Property
Taxes levied against the Premises.

        16. Utilities and Services

            Tenant shall be responsible for and shall pay promptly all charges
for water, gas, electricity, telephone, refuse pickup, janitorial service and
all other utilities, materials and services furnished directly to or used by
Tenant in, on or about the Premises during the Term, together with

                                      -9-
<PAGE>   12

any taxes thereon. Landlord shall not be liable in damages or otherwise for any
failure or interruption, of any utility service or other service furnished to
the Premises, except that resulting from the willful misconduct of Landlord. In
addition, Tenant shall not be entitled to any abatement or reduction of Rent by
reason of such failure or interruption, no eviction of Tenant shall result from
such failure or interruption and Tenant shall not be relieved from the
performance of any covenant or agreement in this Lease because of such failure
or interruption.

        17. Repair and Maintenance.

        A. Landlord's Obligations. Landlord shall keep in good order, condition
and repair the structural parts of the Building, which structural parts include
only the foundation and subflooring of the Building, except for any damage
thereto caused by the negligence or willful acts or omissions of Tenant or of
Tenant's agents, employees or invitees, or by reason of the failure of Tenant to
perform or comply with any terms of this Lease, or caused by Alterations made by
Tenant or by Tenant's agents, employees or contractors. Landlord shall also
maintain in good, condition and repair, subject to reimbursement by Tenant as
provided in Paragraph 17.C. below, the roof and exterior walls of the Building
(excluding the interior of all walls and the exterior and interior of all
windows, doors, ceiling and plateglass) and the Outside Area. It is an express
condition precedent to all obligations of Landlord to repair and maintain that
Tenant shall have notified Landlord of the need for such repairs or maintenance.
Tenant waives the provisions of Sections 1941 and 1942 of the California Civil
Code and any similar or successor law regarding Tenant's right to make repairs
and deduct the expenses of such repairs from the Rent due under this Lease.

        B. Tenant's Obligations. Tenant shall at all times and at its own
expense clean, keep and maintain in good order, condition and repair every part
of the Premises which is not within Landlord's obligation pursuant to Paragraph
17.A.. Tenant's repair and maintenance obligations shall include all plumbing
and sewage facilities within the Premises, fixtures, interior walls and ceiling,
floors, windows, doors, entrances, plateglass, showcases, skylights, all
electrical facilities and equipment, including lighting fixtures, lamps, fans
and any exhaust equipment and systems, any automatic fire extinguisher equipment
within the Premises, electrical motors and all other appliances and equipment of
every kind and nature located in, upon or about the Premises. Tenant shall also
be responsible for all pest control within the Premises. Tenant shall either
perform HVAC system preventative maintenance or obtain HVAC systems preventive
maintenance contracts with bimonthly or monthly service in accordance with
manufacturer recommendations, which shall be subject to the reasonable approval
of Landlord and paid for by Tenant, and which shall provide for and include
replacement of filters, oiling and lubricating of machinery, parts replacement,
adjustment of drive belts, oil changes and other preventive maintenance,
including annual maintenance of duct work, interior unit drains and caulking at
sheet metal, and recaulking of jacks and vents on an annual basis (which work
also shall be performed by Tenant if Tenant elects to perform the HVAC system
preventive maintenance itself). Tenant shall have the benefit of all warranties
available to Landlord regarding the equipment in such HVAC systems.

        C. Operating Expenses. Tenant shall pay, as Additional Rent, all
reasonable costs and expenses paid or incurred by Landlord in operating,
maintaining and repairing the Property, including the cost of maintaining,
repairing and replacing the Outside Area, the roof and

                                      -10-
<PAGE>   13

exterior walls of the Building (including annual roof inspections and preventive
maintenance work on the roof); appropriate reserves for any such maintenance,
repair and replacement; insurance premiums for any insurance maintained by
Landlord with respect to the Property; and a reasonable management fee for
Landlord's property manager (the "Operating Expenses"). From and after the
Commencement Date, Tenant shall pay to Landlord on the first day of each
calendar month of the Term an amount estimated by Landlord to be the monthly
Operating Expenses. The foregoing estimated monthly charges may be adjusted by
Landlord at the end of any calendar quarter on the basis of Landlord's
experience and reasonably anticipated costs. Any such adjustment shall be
effective as of the calendar month next succeeding receipt by Tenant of written
notice of such adjustment. Within one hundred twenty (120) days following the
end of each calendar year Landlord shall furnish Tenant a statement of the
actual Operating Expenses ("Actual Expenses") for the calendar year and the
payments made by Tenant with respect of such period. If Tenant's payments for
the Operating Expenses do not equal the amount of the Actual Expenses, Tenant
shall pay Landlord the deficiency within ten (10) days after receipt of such
statement. If Tenant's payments exceed the Actual Expenses, Landlord shall
either offset the excess against the Operating Expenses next thereafter to
become due to Landlord, or shall refund the amount of the overpayments to
Tenant, in cash, as Landlord shall elect. There shall be appropriate adjustments
of the Operating Expenses as of the Commencement Date and expiration of the
Term.

        D. Compliance with Governmental Regulations. Tenant shall, at its cost,
comply with, including the making by Tenant of any Alteration to the Premises,
all present and future regulations, rules, laws, ordinances, and requirements of
all governmental authorities (including, without limitation state, municipal,
county and federal governments and their departments, bureaus, boards and
officials) arising from the use or occupancy of, or applicable to, the Premises
or privileges appurtenant to or in connection with the enjoyment of the
Premises.

        18. Liens.

            Tenant shall keep the Building and the Property free from any liens
arising out of any work performed, materials furnished or obligations incurred
by or on behalf of Tenant and hereby indemnifies and holds Landlord and its
Agents harmless from all liability and cost, including attorneys' fees and
costs, in connection with or arising out of any such lien or claim of lien.
Tenant shall cause any such lien imposed to be released of record by payment or
posting of a proper bond acceptable to Landlord within ten (10) days after
written request by Landlord. Tenant shall give Landlord written notice of
Tenant's intention to perform work on the Premises which might result in any
claim of lien at least ten (10) days prior to the commencement of such work to
enable Landlord to post and record a Notice of Nonresponsibility. If Tenant
fails to so remove any such lien within the prescribed ten (10) day period, then
Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord as
Additional Rent for such amounts upon demand. Such reimbursement shall include
all costs incurred by Landlord including Landlord's reasonable attorneys' fees
with interest thereon at the Interest Rate.

                                      -11-
<PAGE>   14

        19. Landlord's Rights to Enter the Premises.

            Tenant shall permit Landlord and its Agents to enter the Premises at
all reasonable times with reasonable notice, except for emergencies in which
case no notice shall be required, to inspect the same, to post Notices of
Nonresponsibility and similar notices and "For Sale" signs, to show the Premises
to interested parties such as prospective lenders and purchasers, to make
necessary repairs, to discharge Tenant's obligations hereunder when Tenant has
failed to do so within a reasonable time after written notice from Landlord, and
at any reasonable time within one hundred and eighty (180) days prior to the
expiration of the Term, to place upon the Building ordinary "For Lease" signs
and to show the Premises to prospective tenants. The above rights are subject to
reasonable security regulations of Tenant, and to the requirement that Landlord
shall at all times act in a manner to cause the least possible interference with
Tenant's business.

        20. Signs.

            Tenant shall be permitted to install Tenant's identification signage
on the exterior monument sign in the Outside Area. Tenant shall have no right to
maintain a Tenant identification sign in any other location in, on or about the
Building or the Outside Area and shall not display or erect any other Tenant
identification sign, display or other advertising material that is visible from
the exterior of the Building. The size, design, color and other physical aspects
of Tenant's identification sign shall be subject to the Landlord's written
approval prior to installation, which shall not be unreasonably withheld, the
CC&R's, and any appropriate municipal or other governmental approvals. The cost
of Tenant's signage, its installation, maintenance and removal, shall be
Tenant's sole expense. If Tenant fails to maintain its sign, or, if Tenant fails
to remove its sign upon termination of this Lease, Landlord may do so at
Tenant's expense and Tenant's reimbursement to Landlord for such amounts shall
be deemed Additional Rent.

        21. Insurance.

        A. Indemnification. Tenant hereby agrees to defend, indemnify and hold
harmless Landlord and its Agents from and against any and all damage, loss,
liability or expense including attorneys' fees and legal costs suffered directly
or by reason of any claim, suit or judgment brought by or in favor of any person
or persons for damage, loss or expense due to, but not limited to, bodily injury
and property damage sustained by such person or persons which arises out of, is
occasioned by or in any way attributable to the use or occupancy of the Premises
or the Property or any part thereof and adjacent areas by Tenant, the acts or
omissions of the Tenant, its agents, employees or any contractors brought onto
the Premises or the Property by Tenant, except to the extent caused by the
negligence or willful misconduct of Landlord or its Agents. Tenant agrees that
the obligations assumed herein shall survive this Lease.

        B. Tenant's Insurance. Tenant agrees to maintain in full force and
effect at all times during the Term, at its own expense, for the protection of
Tenant and Landlord, as their interests may appear, policies of insurance issued
by a responsible carrier or carriers with a rating as provided in paragraph 21F
below which afford the following coverage:

                                      -12-
<PAGE>   15

                  (i) Commercial general liability insurance in an amount not
less than Three Million and no/100ths Dollars ($3,000,000.00) combined single
limit for both bodily injury and property damage which includes blanket
contractual liability broad form property damage, personal injury, completed
operations, products liability, and fire damage legal (in an amount not less
than One Hundred Thousand and no/100ths Dollars ($100,000.00)), naming Landlord
and its Agents as additional insureds.

                  (ii) All-risk or causes of loss-special form property
insurance (including, without limitation, vandalism, malicious mischief,
inflation endorsement, and sprinkler leakage endorsement) on Tenant's Personal
Property located on or in the Premises and any Alterations constructed or
installed on the Premises by Tenant. Such insurance shall be in the full amount
of the replacement cost, as the same may from time to time increase as a result
of inflation or otherwise. As long as this Lease is in effect, the proceeds of
such policy shall be used for the repair and replacement of such items so
insured. Landlord shall have no interest in the insurance proceeds on Tenant's
Personal Property.

                  (iii) Workers' compensation insurance as required by law and
employer's liability insurance with limits of no less than One Million and
no/100ths Dollars ($1,000,000.00);

                  (iv) Boiler and machinery insurance, including steam pipes,
pressure pipes, condensation return pipes and other pressure vessels and HVAC
equipment, including miscellaneous electrical apparatus, in an amount reasonably
satisfactory to Landlord and typical in the industry.

        C. Premises Insurance. During the Term Landlord shall maintain all-risk
or causes of loss-special form property insurance (including inflation
endorsement, sprinkler leakage endorsement, and, if available at commercially
reasonable rates and required by Landlord's lender or if carried by owners of
similar properties, earthquake and flood coverage) on the Building, excluding
coverage of all Tenant's Personal Property located on or in the Premises, but
including the Tenant Improvements, if any are provided for in Paragraph 9 of
this Lease. Such insurance shall also include insurance against loss of rents
(including earthquake and flood coverage if available at commercially reasonable
rates and if required by Landlord's lender or if carried by owners of similar
properties), in an amount equal to the Monthly Rent and Additional Rent, and any
other sums payable under the Lease, for a period of twelve (12) months
commencing on the date of loss. Such insurance shall name Landlord and its
Agents as named insureds and include a lender's loss payable endorsement in
favor of Landlord's lender (Form 438 BFU Endorsement).

        D. Increased Coverage. Upon demand, Tenant shall provide Landlord, at
Tenant's expense, with such increased amount of existing insurance, and such
other insurance as Landlord or Landlord's lender may reasonably require to
afford Landlord and Landlord's lender adequate protection.

        E. Co-Insurer. If, on account of the failure of Tenant to comply with
the foregoing provisions, Landlord is adjudged a co-insurer by its insurance
carrier, then, any loss or damage Landlord shall sustain by reason thereof,
including attorneys' fees and costs, shall be borne

                                      -13-
<PAGE>   16

by Tenant and shall be immediately paid by Tenant upon receipt of a bill
therefor and evidence of such loss.

        F. Insurance Requirements. All insurance shall be in a form reasonably
satisfactory to Landlord and shall be carried with companies that have a general
policy holder's rating of not less than "A" and a financial rating of not less
than "X" in the most current edition of Best's Insurance Guide; shall provide
that such policies shall not be subject to material alteration or cancellation
except after at least thirty (30) days' prior written notice to Landlord except
ten (10) days notice in the event of non-payment of premium; and shall be
primary as to Landlord. Certificates of insurance shall be deposited with
Landlord prior to the Commencement Date, and upon renewal of such policies, not
less than ten (10) days prior to the expiration of the term of such coverage. If
Tenant fails to procure and maintain the insurance required hereunder, Landlord
may, but shall not be required to, order such insurance at Tenant's expense and
Tenant shall reimburse Landlord upon demand. Such reimbursement shall include
all costs incurred by Landlord including Landlord's reasonable attorneys' fees,
with interest thereon at the Interest Rate.

        G. Landlord's Disclaimer. Landlord and its Agents shall not be liable
for any loss or damage to persons or property resulting from fire, explosion,
falling plaster, glass, tile or sheetrock, steam, gas, electricity, water or
rain which may leak from any part of the Building or from the pipes, appliances
or plumbing works therein or from the roof, street or subsurface, or from any
other cause whatsoever, unless caused by or due to the gross negligence or
willful misconduct of Landlord. Landlord and its Agents shall not be liable for
any latent defect in the Premises. Tenant shall give prompt written notice to
Landlord in case of a casualty, accident or major repair needed in the Premises.

        22. Waiver of Subrogation.

            Landlord and Tenant each hereby waive all rights of recovery against
the other on account of loss or damage occasioned to such waiving party for its
property or the property of others under its control to the extent that such
loss or damage is insured against under any insurance policies which may be in
force at the time of such loss or damage. Tenant and Landlord shall, upon
obtaining policies of insurance required hereunder, give notice to the insurance
carrier that the foregoing mutual waiver of subrogation is contained in this
Lease and Tenant and Landlord shall cause each insurance policy obtained by such
party to provide that the insurance company waives all right of recovery by way
of subrogation against either Landlord or Tenant in connection with any damage
covered by such policy.

        23. Damage or Destruction.

        A. Landlord's Obligation to Rebuild. If the Premises are damaged or
destroyed, Landlord shall promptly and diligently repair the same unless it has
the right to terminate this Lease as provided herein and it elects to so
terminate.

        B. Right to Terminate. Landlord shall have the right to terminate this
Lease in the event any of the following events occur:

                                      -14-
<PAGE>   17

               (i) Insurance proceeds are not available to pay one hundred
percent (100%) of the cost of such repair, excluding the deductible;

               (ii) The Premises cannot, with reasonable diligence, be fully
repaired by Landlord within sixty (60) days after the date of the damage or
destruction; or

               (iii) The Premises cannot be safely repaired because of the
presence of hazardous factors, including, but not limited to, earthquake faults,
radiation, chemical waste and other similar dangers.

           If Landlord elects to terminate this Lease, Landlord may give Tenant
written notice of its election to terminate within thirty (30) days after such
damage or destruction, and this Lease shall terminate fifteen (15) days after
the date Tenant receives such notice. If Landlord elects not to terminate the
Lease, subject to Tenant's termination right set forth below, Landlord shall
promptly commence the process of obtaining necessary permits and approvals and
repair of the Premises as soon as practicable, and this Lease will continue in
full force and effect. All insurance proceeds from insurance under Paragraph 21,
excluding proceeds for Tenant's Personal Property, shall be disbursed and paid
to Landlord. Tenant shall be required to pay to Landlord the amount of any
deductibles payable in connection with any insured casualties, unless the
casualty was caused by the sole negligence or willful misconduct of Landlord.

           Tenant shall have the right to terminate this Lease, if the Premises
cannot, with reasonable diligence, be fully repaired within one hundred eighty
(180) days from the date of damage or destruction. The determination of the
estimated repair period shall be made by Landlord in its good faith business
judgment within thirty (30) days after such damage or destruction. Landlord
shall deliver written notice of the repair period to Tenant after such
determination has been made and Tenant shall exercise its right to terminate
this Lease, if at all, within ten (10) days of receipt of such notice from
Landlord.

        C. Limited Obligation to Repair. Landlord's obligation, should it elect
or be obligated to repair or rebuild, shall be limited to the basic Premises and
the Tenant Improvements, and Tenant shall, at Tenant's expense, replace or fully
repair all Tenant's Personal Property and any Alterations installed by Tenant
and existing at the time of such damage or destruction.

        D. Abatement of Rent. Rent shall be temporarily abated proportionately,
but only to the extent of any proceeds received by Landlord from rental
abatement insurance described in Paragraph 21.C. Such abatement shall commence
upon such damage or destruction and end upon substantial completion by Landlord
of the repair or reconstruction which Landlord is obligated or undertakes to do.
Tenant shall not be entitled to any compensation or damages from Landlord for
loss of the use of the Premises, damage to Tenant's Personal Property or any
inconvenience occasioned by such damage, repair or restoration. Tenant hereby
waives the provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the California Civil Code, and the provisions of any similar
law hereinafter enacted.

        E. Damage Near End of Term. Anything herein to the contrary
notwithstanding, if the Premises is destroyed or damaged during the last twelve
(12) months of the Term, then

                                      -15-
<PAGE>   18

Landlord may, at its option, cancel and terminate this Lease as of the date of
the occurrence of such damage. If Landlord does not elect to so terminate this
Lease, the repair of such damage shall be governed by Paragraphs 23.A. and 23.B.

        24. Condemnation.

            If title to all of the Premises or so much thereof is taken for any
public or quasi-public use under any statute or by right of eminent domain so
that reconstruction of the Premises will not, in Landlord's and Tenant's mutual
opinion, result in the Premises being reasonably suitable for Tenant's continued
occupancy for the uses and purposes permitted by this Lease, this Lease shall
terminate as of the date that possession of the Premises or part thereof be
taken. A sale by Landlord to any authority having the power of eminent domain,
either under threat of condemnation or while condemnation proceedings are
pending, shall be deemed a taking under the power of eminent domain for all
purposes of this paragraph.

            If any part of the Premises is taken and the remaining part is
reasonably suitable for Tenant's continued occupancy for the purposes and uses
permitted by this Lease, this Lease shall, as to the part so taken, terminate as
of the date that possession of such part of the Premises is taken. The Rent and
other sums payable hereunder shall be reduced in the same proportion that
Tenant's use and occupancy of the Premises is reduced. If any portion of the
Outside Area is taken, Tenant's Rent shall be reduced only if such taking
materially interferes with Tenant's use of the Outside Area and then only to the
extent that the fair market rental value is diminished by such partial taking.
Each party hereby waives the provisions of Section 1265.130 of the California
Code of Civil Procedure allowing either party to petition the Superior Court to
terminate this Lease in the event of a partial taking of the Property or
Premises.

            No award for any partial or entire taking shall be apportioned.
Tenant assigns to Landlord its interest in any award which may be made in such
taking or condemnation, together with any and all rights of Tenant arising in or
to the same or any part thereof. Nothing contained herein shall be deemed to
give Landlord any interest in or require Tenant to assign to Landlord any
separate award made to Tenant for the taking of Tenant's Personal Property, or
its moving costs.

        25. Assignment and Subletting.

        A. Landlord's Consent. Tenant shall not enter into a Sublet without
Landlord's prior written consent, which consent shall not be unreasonably
withheld. Any attempted or purported Sublet without Landlord's prior written
consent shall be void and confer no rights upon any third person and, at
Landlord's election, shall terminate this Lease. Each Subtenant shall agree in
writing, for the benefit of Landlord, to assume, to be bound by, and to perform
the terms, conditions and covenants of this Lease to be performed by Tenant.
Notwithstanding anything contained herein, Tenant shall not be released from
liability for the performance of each term, condition and covenant of this Lease
by reason of Landlord's consent to a Sublet unless Landlord specifically grants
such release in writing. Consent by Landlord to any Sublet shall not be deemed a
consent to any subsequent Sublet.

                                      -16-
<PAGE>   19

        B. Information to be Furnished. If Tenant desires at any time to Sublet
the Premises or any portion thereof, it shall first notify Landlord of its
desire to do so and shall submit in writing to Landlord: (i) the name of the
proposed Subtenant; (ii) the nature of the proposed Subtenant's business to be
carried on in the Premises; (iii) the terms and provisions of the proposed
Sublet and a copy of the proposed Sublet form containing a description of the
subject premises; and (iv) such financial information, including financial
statements, as Landlord may reasonably request concerning the proposed
Subtenant.

           C. Landlord's Alternatives. At any time within thirty (30) days after
Landlord's receipt of the information specified in Paragraph 25.D., Landlord
may, by written notice to Tenant, elect: (i) to consent to the Sublet by Tenant;
(ii) to refuse its consent to the Sublet, or (iii) elect to terminate this
Lease, or in the case of a partial Sublet, terminate this lease as to the
portion of the Premises proposed to be Sublet. If Landlord consents to the
Sublet, Tenant may thereafter enter into a valid Sublet of the Premises or
portion thereof, upon the terms and conditions and with the proposed Subtenant
set forth in the information furnished by Tenant to Landlord pursuant to
Paragraph 25.B, subject, however, at Landlord's election, to the condition that
seventy-five percent (75%) of any excess of the Subrent over the Rent required
to be paid by Tenant under this Lease shall be paid to Landlord.

           D. Proration. If a portion of the Premises is Sublet, the pro rata
share of the Rent attributable to such partial area of the Premises shall be
determined by Landlord by dividing the Rent payable by Tenant hereunder by the
total square footage of the Premises and multiplying the resulting quotient (the
per square foot rent) by the number of square feet of the Premises which are
Sublet.

           E. Exempt Sublets. Notwithstanding the above, Landlord's prior
written consent shall not be required for an assignment of this Lease to a
subsidiary, affiliate or parent corporation of Tenant, or a corporation into
which Tenant merges or consolidates, provided that (i) at the time of such
assignment, the assignee has a net worth that is equal to or greater than the
net worth of Tenant immediately prior to such assignment; and (ii) the assignee
assumes, in writing, for the benefit of Landlord all of Tenant's obligations
under the Lease. An assignment or other transfer of this Lease to a purchaser of
all or substantially all of the assets of Tenant shall be deemed a Sublet
requiring Landlord's prior written consent.

           26. Default.

           A. Tenant's Default. A default under this Lease by Tenant shall exist
if any of the following occurs:

                   (i) If Tenant fails to pay Rent or any other sum required to
be paid hereunder within five (5) days after receipt of written notice from
Landlord, provided, that such written notice shall be in lieu of, and not in
addition to, the notice required under California Code of Civil Procedure
Section 1161.2;

                   (ii) If Tenant fails to perform any term, covenant or
condition of this Lease except those requiring the payment of money, and Tenant
fails to cure such breach within

                                      -17-
<PAGE>   20

thirty (30) days after written notice from Landlord where such breach could
reasonably be cured within such thirty (30) day period; provided, however, that
where such failure could not reasonably be cured within the thirty (30) day
period, that Tenant shall not be in default if it commences such performance
within the thirty (30) day period and diligently thereafter prosecutes the same
to completion;

               (iii) If Tenant assigns its assets for the benefit of its
creditors;

               (iv) If the sequestration or attachment of or execution on any
material part of Tenant's Personal Property essential to the conduct of Tenant's
business occurs, and Tenant fails to obtain a return or release of such Personal
Property within thirty (30) days thereafter, or prior to sale pursuant to such
sequestration, attachment or levy, whichever is earlier;

               (v) If Tenant fails to continuously or uninterruptedly conduct
its business in the Premises, or shall have abandoned or vacated the Premises;
or

               (vi) If a court makes or enters any decree or order other than
under the bankruptcy laws of the United States adjudging Tenant to be insolvent;
or approving as properly filed a petition seeking reorganization of Tenant; or
directing the winding up or liquidation of Tenant and such decree or order shall
have continued for a period of thirty (30) days.

        B. Remedies. Upon a default, Landlord shall have the following remedies,
in addition to all other rights and remedies provided by law or otherwise
provided in this Lease, to which Landlord may resort cumulatively or in the
alternative:

               (i) Landlord may continue this Lease in full force and effect,
and this Lease shall continue in full force and effect as long as Landlord does
not terminate this Lease, and Landlord shall have the right to collect Rent when
due.

               (ii) Landlord may terminate Tenant's right to possession of the
Premises at any time by giving written notice to that effect, and relet the
Premises or any part thereof. Tenant shall be liable immediately to Landlord for
all costs Landlord incurs in reletting the Premises or any part thereof,
including, without limitation, broker's commissions, expenses of cleaning and
redecorating the Premises required by the reletting (but specifically excluding
remodeling or rehabitation work for a use different from Tenant's use of the
Premise) and like costs. Reletting may be for a period shorter or longer than
the remaining term of this Lease. No act by Landlord other than giving written
notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to
relet the Premises or the appointment of a receiver on Landlord's initiative to
protect Landlord's interest under this Lease shall not constitute a termination
of Tenant's right to possession. On termination, Landlord has the right to
remove all Tenant's Personal Property and store same at Tenant's cost and to
recover from Tenant as damages:

                   (a) The worth at the time of award of unpaid Rent and other
sums due and payable which had been earned at the time of termination; plus

                                      -18-
<PAGE>   21

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

                   (c) The worth at the time of award of the amount by which the
unpaid Rent and other sums due and payable for the balance of the Term after the
time of award exceeds the amount of such Rent loss that Tenant proves could be
reasonably avoided; plus

                   (d) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which, in the ordinary course of things, 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

                   (e) 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 the laws of
the State of California.

        The "worth at the time of award" of the amounts referred to in
Paragraphs 26.B.(ii)(a) and 26.B.(ii)(b) is computed by allowing interest at the
Interest Rate on the unpaid rent and other sums due and payable from the
termination date through the date of award. The "worth at the time of award" of
the amount referred to in Paragraph 26.B.(ii)(c) 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.

               (iii) Landlord may, with or without terminating this Lease,
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. No reentry or taking possession of
the Premises by Landlord pursuant to this paragraph shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Tenant.

        C. Landlord's Default. Landlord shall not be deemed to be in default in
the performance of any obligation required to be performed by it hereunder
unless and until it has failed to perform such obligation within thirty (30)
days after receipt of written notice by Tenant to Landlord specifying the nature
of such default; provided, however, that if the nature of Landlord's obligation
is such that more than thirty (30) days are required for its performance, then
Landlord shall not be deemed to be in default if it shall commence such
performance within such thirty (30) day period and thereafter diligently
prosecute the same to completion.

                                      -19-
<PAGE>   22

        27. Subordination.

            This Lease is subject and subordinate to any ground and underlying
leases and any first mortgages and first deeds of trust (collectively
"Encumbrances") which may now affect the Premises, to the CC&R's and to all
renewals, modifications, consolidations, replacements and extensions thereof;
provided, however, if the holder or holders of any such Encumbrance ("Holder")
shall require this Lease be prior and superior to such Encumbrance, within
fifteen (15) days of written request of Landlord to Tenant, Tenant shall
execute, have acknowledged and deliver any and all documents or instruments, in
the form presented to Tenant, which Landlord or Holder deems necessary or
desirable for such purposes. Landlord shall have the right to cause this Lease
to be and become and remain subject and subordinate to any and all Encumbrances
which 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 lease or upon the foreclosure of any such
mortgage or deed of trust, so long as Tenant is not in default, Holder agrees 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 fifteen (15) days after Landlord's written request,
Tenant shall execute any and all documents required by Landlord or the Holder to
make this Lease subordinate to any lien of the Encumbrance.

            Notwithstanding anything to the contrary set forth in this
paragraph, Tenant hereby attorns and agrees to attorn to any 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.

        28. Notices.

            Any notice or demand required or desired to be given under this
Lease shall be in writing and shall be personally served or in lieu of personal
service may be given by mail. If given by mail, such notice shall be deemed to
have been given when seventy-two (72) hours have elapsed from the time when such
notice was deposited in the United States mail, registered or certified, and
postage prepaid, addressed to the party to be served. At the date of execution
of this Lease, the addresses of Landlord and Tenant are as set forth in
Paragraph 1. After the Commencement Date, the address of Tenant shall be the
address of the Premises. Either party may change its address by giving notice of
same in accordance with this paragraph.

        29. Attorney's Fees.

            If either party brings any action or legal proceeding for damages
for an alleged breach of any provision of this Lease, to recover rent or other
sums due, to terminate the tenancy of the Premises or to enforce, protect or
establish any term, condition or covenant of this Lease or right of either
party, or in the event of any other litigation between the parties arising out
of or in connection with this Lease or the lease of the Premises, the prevailing
party in such action or proceeding shall be entitled to recover its reasonable
attorneys' fees (including attorneys' fees on

                                      -20-
<PAGE>   23

appeal, and costs and expenses incurred in out-of-court negotiations, workouts
and/or settlements or in seeking relief from stay or otherwise seeking to
protect its rights in any bankruptcy proceeding) and all reasonable costs
(including costs of consultants and experts) incurred, which shall be payable
whether or not such action is prosecuted to judgment. In addition, the
prevailing party shall be entitled to its attorneys' fees, costs and expenses
incurred in post-judgment proceedings to collect and enforce a judgment. This
provision is separate and several and shall survive the merger of this Lease
into any judgment on this Lease.

        30. Estoppel Certificates.

            Tenant shall within fifteen (15) days following written request by
Landlord:

               (i) Execute and deliver to Landlord any documents, including
estoppel certificates, in the form prepared by Landlord (a) certifying that this
Lease is unmodified and in full force and effect or, if modified, stating the
nature of such modification and certifying that this Lease, as so modified, is
in full force and effect and the date to which the Rent and other charges are
paid in advance, if any, and (b) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord, or, if there are
uncured defaults on the part of the Landlord, stating the nature of such uncured
defaults, and (c) evidencing the status of the Lease as may be required either
by a lender making a loan to Landlord to be secured by deed of trust or mortgage
covering the Premises or a purchaser of the Premises from Landlord. Tenant's
failure to deliver an estoppel certificate within fifteen (15) days after
delivery of Landlord's written request therefor shall be conclusive upon Tenant
(a) that this Lease is in full force and effect, without modification except as
may be represented by Landlord, (b) that there are now no uncured defaults in
Landlord's performance and (c) that no Rent has been paid in advance.

               (ii) Deliver to Landlord the latest financial statements of
Tenant filed with the Securities and Exchange Commission, and financial
statements of the two (2) years prior to the current financial statements year,
with a report of 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.

        31. Transfer of the Property by Landlord.

            In the event of any conveyance of the Property and assignment by
Landlord of this Lease, Landlord shall be and is hereby entirely released from
all liability under any and all of its covenants and obligations contained in or
derived from this Lease occurring after the date of such conveyance and
assignment and Tenant agrees to attorn to such transferee provided such
transferee assumes Landlord's obligations under this Lease.

        32. Landlord's Right to Perform Tenant's Covenants.

            If Tenant shall at any time fail to make any payment or perform any
other act on its part to be made or performed under this Lease, Landlord may,
but shall not be obligated to and without waiving or releasing Tenant from any
obligation of Tenant under this Lease, make such payment or perform such other
act to the extent Landlord may deem desirable, and in connection

                                      -21-
<PAGE>   24

therewith, pay expenses and employ counsel. All sums so paid by Landlord and all
penalties, interest and costs in connection therewith shall be due and payable
by Tenant on the next day after any such payment by Landlord, together with
interest thereon at the Interest Rate from such date to the date of payment by
Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall
have the same rights and remedies for the nonpayment thereof as in the case of
default in the payment of Rent.

        33. Tenant's Remedy.

            If, as a consequence of a default by Landlord under this Lease,
Tenant recovers a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Property and out of Rent or other income from such property received by
Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Property, and neither Landlord nor its Agents shall be liable for any
deficiency.

        34. Mortgage Protection.

            If Landlord defaults under this Lease, Tenant will notify any
beneficiary of a first deed of trust or mortgagee of a first mortgage covering
the Property, and offer such beneficiary or mortgagee a reasonable opportunity
to cure the default, including time to obtain possession of the Property by
power of sale or a judicial foreclosure, if such should prove necessary to
effect a cure.

        35. Brokers.

            Tenant warrants and represents that it has had no dealings with any
real estate broker or agent in connection with the negotiation of this Lease,
except for CPS Realty Group and that it knows of no other real estate broker or
agent who is or might be entitled to a commission in connection with this Lease.
Tenant agrees to indemnify, defend and hold Landlord and its Agents harmless
from and against any and all liabilities or expenses, including attorneys' fees
and costs, arising out of or in connection with claims made by any other broker
or individual for commissions or fees resulting from Tenant's execution of this
Lease.

        36. Acceptance.

            This Lease shall only become effective and binding upon full
execution hereof by Landlord and delivery of a signed copy to Tenant. Neither
party shall record this Lease nor a short form memorandum thereof.

        37. Modifications for Lender.

            If, in connection with obtaining financing for the Property or any
portion thereof, Landlord's lender shall request reasonable modification to this
Lease as a condition to such financing, Tenant shall not unreasonably withhold,
delay or defer its consent thereto, provided such modifications do not
materially adversely affect Tenant's rights hereunder.

                                      -22-
<PAGE>   25

        38. Options to Extend.

        A. Option Period. Provided that Tenant is not in default hereunder,
either at the time of exercise or at the time the extended Term commences,
Tenant shall have the option to extend the Term of the Lease for one (1)
additional period of five (5) years ("Option Period") on the same terms,
covenants and conditions provided herein, except that upon such renewal the
initial Monthly Rent due hereunder shall be the greater of (i) $42,000.00 per
month or (ii) ninety-five percent (95%) of the then fair market rental value of
the Premises, determined pursuant to Paragraph 38.B. If Tenant elects to
exercise this option, Tenant shall exercise the option by giving Landlord
written notice ("Option Notice") at least one hundred eighty (180) days but not
more than two hundred ten (210) days prior to the expiration of the Term of this
Lease.

        B. Option Period Monthly Rent. The Monthly Rent for the Option Period
shall be determined as follows:

               (i) The parties shall have fifteen (15) days after Landlord
receives the Option Notice within which to agree on the Monthly Rent for the
Option Period. If the parties agree on the Monthly Rent for the Option Period
within fifteen (15) days, they shall immediately execute an amendment to this
Lease stating the Monthly Rent for the Option Period. If the parties are unable
to agree on the Monthly Rent within fifteen (15) days, then, the initial Monthly
Rent for the Option Period shall be the greater of (A) $42,000.00 per month and
(B) ninety-five percent (95%) of the then current fair market rental value of
the Premises as determined in accordance with Paragraph 38.B.(iii). The initial
Monthly Rent shall be subject to such periodic increases in Monthly Rent as are
then customary, in both amount or percentage amounts and frequency, for leases
similar to this Lease taking into consideration the same items considered in
determining the then fair market rental value of the Premises, but in no event
less than three and 25/100ths percent (3.25%) per annum.

               (ii) The then fair market rental value of the Premises shall be
defined to mean the fair market rental value of the Premises as of the
commencement of the Option Period, taking into consideration the uses permitted
under this Lease, the quality, size, design and location of the Premises, and
the rent for comparable buildings located in Oak Creek Business Park.

               (iii) Within fifteen (15) days after the expiration of the
fifteen (15) day period set forth in Paragraph 38.B. (i), each party, at its
cost and by giving notice to the other party, shall appoint a real estate
appraiser with at least five (5) years' full-time commercial appraisal
experience in the area in which the Premises are located to appraise and set the
Monthly Rent. If a party does not appoint an appraiser within ten (10) days
after the other party has given notice of the name of its appraiser, but not
before the lapse of fifteen (15) days, the single appraiser appointed shall be
the sole appraiser and shall set the Monthly Rent. If the two (2) appraisers are
appointed by the parties as stated in this paragraph, they shall meet promptly
and attempt to set the Monthly Rent. If they are unable to agree within thirty
(30) days after the second appraiser has been appointed, they shall attempt to
elect a third appraiser meeting the qualifications stated in this paragraph
within ten (10) days after the last day the two (2) appraisers are given to set
the Monthly Rent. If they are unable to agree on the third appraiser, either of
the parties to this Lease, by giving ten (10) days' notice to the other party,
can apply to the then Presiding Judge of the Santa Clara

                                      -23-
<PAGE>   26

County Superior Court, for the selection of a third appraiser who meets the
qualifications stated in this paragraph. Each of the parties shall bear one-half
(1/2) of the cost of appointing the third appraiser and of paying the third
appraiser's fee. The third appraiser, however selected, shall be a person who
has not previously acted in any capacity for either party.

        Within thirty (30) days after the selection of the third appraiser, a
majority of the appraisers shall set the Monthly Rent. If a majority of the
appraisers are unable to set the Monthly Rent within the stipulated period of
time, the three (3) appraisals shall be added together and their total divided
by three (3); the resulting quotient shall be the Monthly Rent. If, however, the
low appraisal and/or the high appraisal are/is more than ten percent (10%) lower
and/or higher than the middle appraisal, the low appraisal and/or the high
appraisal shall be disregarded. If only one appraisal is disregarded, the
remaining two (2) appraisals shall be added together and their total divided by
two (2); the resulting quotient shall be the Monthly Rent. If both the low
appraisal and the high appraisal are disregarded as stated in this paragraph,
then only the middle appraisal shall be used as the result of the appraisal.
After the Monthly Rent has been set, the appraisers shall immediately notify the
parties and the parties shall amend this Lease to set forth the Monthly Rent for
the Option Period.

        39. General.

        A. Captions. The captions and headings used in this Lease are for the
purpose of convenience only and shall not be construed to limit or extend the
meaning of any part of this Lease.

        B. Executed Copy. Any fully executed copy of this Lease shall be deemed
an original for all purposes.

        C. Time. Time is of the essence for the performance of each term,
condition and covenant of this Lease.

        D. Separability. If one or more of the provisions contained herein,
except for the payment of Rent, is for any reason held invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Lease, but this Lease shall be
construed as if such invalid, illegal or unenforceable provision had not been
contained herein.

        E. Choice of Law. This Lease shall be construed and enforced in
accordance with the laws of the State of California. The language in all parts
of this Lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Landlord or Tenant.

        F. Gender, Singular, Plural.. When the context of this Lease requires,
the neuter gender includes the masculine, the feminine, a partnership or
corporation or joint venture, and the singular includes the plural.

                                      -24-
<PAGE>   27

        G. Binding Effect. The covenants and agreement contained in this Lease
shall be binding on the parties hereto and on their respective successors and
assigns to the extent this Lease is assignable.

        H. Waiver. The waiver by Landlord of any breach of any term, condition
or covenant, of this Lease shall not be deemed to be a waiver of such provision
or any subsequent breach of the same or any other term, condition or covenant of
this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach at the time of acceptance of such
payment. No covenant, term or condition of this Lease shall be deemed to have
been waived by Landlord unless such waiver is in writing signed by Landlord.

        I. Premises Area. Landlord and Tenant agree that each has had an
opportunity to determine to its satisfaction the actual area of the Premises.
All measurements of area contained in this Lease are conclusively agreed to be
correct and binding on the parties, even if a subsequent measurement of one of
these areas determines that it is more or less than the area reflected in this
Lease. Any such subsequent determination that the area is more or less than the
area shown in this Lease shall not result in a change in any of the computations
of Rent or any other matters described in this Lease where area is a factor.

        J. Entire Agreement. This Lease is the entire agreement between the
parties, and there are no agreements or representations between the parties
except as expressed herein. Except as otherwise provided herein, no subsequent
change or addition to this Lease shall be binding unless in writing and signed
by the parties hereto.

        K. Authority. If Tenant is a corporation or a partnership, each
individual executing this Lease on behalf of said corporation or partnership, as
the case may be, represents and warrants that he is duly authorized to execute
and deliver this Lease on behalf of said entity in accordance with its corporate
bylaws, statement of partnership or certificate of limited partnership, as the
case may be, and that this Lease is binding upon said entity in accordance with
its terms. Landlord, at its option, may require a copy of such written
authorization to enter into this Lease.

        L. Exhibits. All exhibits, amendments, riders and addenda attached
hereto are hereby incorporated herein and made a part hereof.

                                      -25-
<PAGE>   28

        M. Lease Summary. The Lease Summary attached to this Lease is intended
to provide general information only. In the event of any inconsistency between
the Lease Summary and the specific provisions of this Lease, the specific
provisions of this Lease shall prevail.

        THIS LEASE is effective as of the date the last signatory necessary to
execute the Lease shall have executed this Lease.

                                              TENANT:

Dated  3/24/00                                Xicor, Inc., a
      -------------------------               California corporation

                                              By: /s/  Raphael Klein
                                                  -----------------------------

                                              Its: CEO
                                                  -----------------------------

                                              By: /s/  Bruce Gray
                                                  -----------------------------

                                              Its: COO
                                                  -----------------------------

Dated: 3/24/00                                LANDLORD:
      -------------------------

                                              Callahan-Pentz Properties,
                                              McCarthy Four,
                                              a California general partnership

                                              By: /s/  George B. Pentz
                                                  -----------------------------
                                                  George B. Pentz,
                                                  Managing General Partner

                                      -26-
<PAGE>   29

                                  THE PREMISES

                                [to be attached]

                                    EXHIBIT A

<PAGE>   30
                                  THE PROPERTY

                                [to be attached]

                                    EXHIBIT B
<PAGE>   31

                          COMMENCEMENT DATE MEMORANDUM

LANDLORD:      Callahan-Pentz Properties, McCarthy Four

TENANT:        Xicor, Inc.

LEASE DATE:    March ____, 2000

PREMISES:      801 Buckeye Court
               Milpitas, CA  95035

        Pursuant to Paragraph 4.A. of the above referenced Lease, the
Commencement Date is hereby established as _________________, 2000.

                                               TENANT:

Dated
      -----------------------                  Xicor, Inc., a
                                               California corporation

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

                                               Its:
                                                  -----------------------------

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

                                               Its:
                                                  -----------------------------

Dated:
      -----------------------                  LANDLORD:

                                               Callahan-Pentz Properties,
                                               McCarthy Four,
                                               a California general partnership

                                               By:
                                                  -----------------------------
                                                  George B. Pentz,
                                                  Managing General Partner

                                    EXHIBIT C<PAGE>   1
                                                                   EXHIBIT 10.11

                                                           Agreement No. .......

                             DEVELOPMENT AGREEMENT

                                 by and between

                              HEWLETT-PACKARD GmbH
                            HERRENBERGER STRASSE 130

                                71034 BOEBLINGEN
                                    GERMANY

                      - hereinafter referred to as "HP" -

                                      and

                                 NEW FOCUS INC.

                                2630 WALSH AVE.

                                 SANTA CLARA CA
                                      USA

                   - hereinafter referred to as "New Focus" -

REGARDING THE DEVELOPMENT OF A TUNABLE LASER SOURCE MODULE

                                                                               1
<PAGE>   2
1.      SUBJECT-MATTER OF THE AGREEMENT

        This agreement pertains to and covers the development of a Tunable Laser
        Source Module (including hard- and software) which is described in
        greater detail in the specifications in Schedule 1 hereto, as well as to
        the manufacture of prototypes and production units by New Focus whilst
        adhering to the project schedule as set forth in Schedule 3 hereof.

2.      BREAK-DOWN OF COSTS / REMUNERATION

2.1     In return for the services outlined in Article 1 above, HP shall effect
        payment in installments as laid out in A.) 5. of Schedule 1 according to
        the development phases described in A.) 4. of Schedule 1 hereto. The
        payments shall become due and payable in accordance with the terms and
        conditions outlined in A.) 5. of Schedule 1.

        All prices quoted are FOB Santa Clara, CA, USA. HP is responsible for
        all taxes, customs, and freight.

2.2     Should the parties agree upon payment by installments which are due
        prior to final and complete performance of the entire development
        service, New Focus undertakes, prior to payment of the respective
        installment, to provide HP with an irrevocable, unconditional and
        absolute guarantee from a bank recognized as guarantor in the amount of
        the respective installment. HP shall return such guarantee to the
        supplier upon written confirmation of acceptance of the prototypes or
        the software.

        Installments by HP shall not include any acceptance of the prototypes,
        developed software or the production units. With payment of the
        installment all performances and expenses of New Focus in regard of the
        respective development phase shall be covered.

2.3     All obligations regarding payment of costs and expenses incurred by New
        Focus in connection with the performance of services to be provided
        shall be deemed discharged upon payment of the agreed remuneration.

3.      DEVELOPMENT

3.1     The prototypes as well as the software shall be manufactured by New
        Focus in accordance with the project schedule (Schedule 3) and the
        development phases contained therein as well as in Schedule 1.

3.2     Prior to the commencement of development, New Focus shall ensure that
        the specifications are complete and that implementation of the contents
        thereof is feasible. Should New Focus detect any defects or omissions
        upon examination of the specifications, it shall inform HP hereof in
        writing without any undue delay.

                                                                               2
<PAGE>   3
3.3     The deadlines outlined in the agreed project schedule (Schedule 3) shall
        be binding upon both parties.

3.3     In order to ensure successful and timely performance of the Development
        agreement for both parties, the parties hereto agree that New Focus
        shall submit to HP a written report detailing key aspects of the project
        at regular monthly intervals. Both parties shall have the option of
        requesting that the other party engage in discussions regarding the
        current stage of development, problems arising in connection therewith,
        matters pertaining to coordination etc.

        New Focus shall, in particular, advise HP of the following in this
        regard:

3.4.1   PROJECT STATUS

        Classification of the system components on which work was performed
        during the period under review. The stage of work carried out and of the
        semi-finished work, as well as a comparison of the target and actual
        situation if the project schedule and/or the specification requirements
        have not (yet) been complied with. Any deviations or postponement of
        deadlines must be justified and the supplier is further required to
        indicate the measures planned for re-establishing the target situation.

3.4.2   FORECAST

        New Focus shall advise HP of the work scheduled for the next period
        under review, also with a view to enabling HP to arrange, in good time,
        for any support which it may be required to provide.

        On HP's request, New Focus shall, during the course of discussions,
        provide HP with copies of HP-specific documentation regarding the
        development of prototypes and software available at the time of such
        discussions.

        Minutes, to be duly countersigned by both parties, shall be kept of all
        such discussions.

3.5     New Focus shall document the development result and the individual
        development steps and make such material available to HP in
        machine-readable form.

4.      RESOURCES

4.1     New Focus avails of a development center which is suitably equipped to
        develop the developed software defined under the subject-matter hereof.
        In the event HP employees are assigned to the development project New
        Focus shall provide appropriate support to these employees.

4.2     HP shall support New Focus as described in Schedule 5.

                                                                               3

<PAGE>   4
5.      MODIFICATIONS/AMENDMENTS TO THE SYSTEM DESCRIPTION/SPECIFICATIONS

5.1     Modifications to the specifications are subject to HP's prior written
        approval. HP may request that New Focus incorporate modifications or
        amendments. New Focus may also request that HP incorporate modifications
        or amendments. Any such  request must be submitted in writing. New Focus
        shall perform the modified services if and to the extent that New Focus
        can be reasonably expected to do so and New Focus has not provided HP
        with written justification as to why it cannot be reasonably expected to
        do so within 1 week of receipt for the modification request.

5.2     Should such modifications affect contractual agreements (relating to
        costs or performance deadlines for example), the parties hereto shall
        accordingly revise such agreements taking the increase/decrease in
        time/expenditure required into consideration. The modifications shall be
        performed within the framework of existing contractual agreements if no
        such demand for review is submitted to the other party to the agreement
        in writing within 2 weeks of receipt of the modification request by New
        Focus. HP undertakes to advise New Focus of the significance of its
        actions prior to commencement of the period in question.

5.3     In the event of a dispute regarding the scope of any increase/decrease
        in time/expenditure required on the basis of modifications, both
        parties hereto shall be entitled to request that an independent,
        publicly-appointed and certified expert decide the issue with binding
        effect for both parties.

5.4     New Focus shall inform HP immediately upon receipt of a modification
        request if work already carried out by New Focus would become unusable
        as a result of this modification.

6.      FAILURE TO ADHERE TO THE PROJECT SCHEDULE

6.1     If, during the development phases, it already becomes apparent that the
        completion date agreed upon in the project schedule (schedule 3) cannot
        be adhered to, New Focus shall advise HP hereof without delay indicating
        the reasons therefor. New Focus shall simultaneously advise HP of the
        period of delay by which the completion date is to be postponed
        vis-a-vis the deadline agreed upon in the project schedule.

6.2     If a deadline agreed upon in the project schedule is already or will
        apparently be exceeded by more than 2 weeks, HP may extend the deadline
        by a reasonable period of time. If this extended period expires to no
        avail, HP shall be entitled to rescind the agreement. This shall not
        apply if New Focus bears no responsibility for the existing or
        foreseeable failure to adhere to the project schedule or for the expiry
        to no avail of the period of grace.

6.3     Irrespective of the right to rescind the agreement pursuant to Article
        6.2 above, the following contractual penalty shall apply:

                                                                               4

<PAGE>   5
        Should New Focus be unable to adhere to the delivery deadlines agreed
        upon in the project schedule (Schedule 3) for the prototypes or the
        software during the respective development phases, HP shall be entitled,
        without providing any further evidence, to demand a contractual penalty
        in the amount of [*] of the net value of each development phase
        according to Schedule 1 for each working day beginning two weeks after
        the delivery deadlines of Schedule 3 or part thereof up to an amount
        not exceeding [*] of the total value of each development phase
        according to Schedule 1 however. This shall not apply if New Focus does
        not bear responsibility for the delay.

7.      EXAMINATION AND DELIVERY BY NEW FOCUS

7.1     Upon completion of development and manufacture of the prototypes
        together with the developed software in accordance with the
        specifications (Schedule 1), New Focus shall subject the prototypes and
        the software to a functional check pursuant to HP specifications in
        regard of the respective development phase according to Schedule 1 with
        a view to establishing conformity with the specifications. A test report
        shall be submitted.

7.2     New Focus shall deliver the tested prototypes and the developed software
        to HP on or before the deadline defined in the project schedule
        (Schedule 3). Tested means that no deviations from the specification
        requirements in regard of the respective development phase according to
        Schedule 1 and no other defects were detected during testing at New
        Focus.

        New Focus shall provide HP with all the necessary documentation/data
        sheets, source codes etc. upon delivery of the prototypes as described
        in Schedule 1.

7.3     New Focus shall produce further prototypes and production units in
        accordance with the terms and provisions hereof according to Schedule 1.

8.      EXAMINATION AND ACCEPTANCE BY HP

8.1     HP shall examine the design of the prototypes. HP shall accept the
        design provided that the prototypes to be manufactured in accordance
        with this design will ensure the fulfillment of the product
        specifications as described in Schedule 1.

8.2     HP shall subject any prototype as well as the developed software to a
        separate functional check within eight weeks of delivery, according to
        Schedule 1. HP shall provide weekly updates/reports on the progress
        and results of the testing. A test report shall be submitted.

8.3     HP shall submit a written acceptance certificate of the prototypes and
        the developed software to New Focus if the prototypes and the developed
        software conform to all of the specification requirements of Schedule 1
        and if no other defects can be detected.

                                                                               5

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.
<PAGE>   6
8.4     Should HP detect deviations from the specifications or defects during
        the course of the functional check, HP shall inform New Focus thereof in
        writing.

        In this event, New Focus shall provide HP with repaired or newly
        manufactured prototypes or developed software which is/are free of the
        respective defect(s) within five working days. New Focus shall ensure
        that the defects are remedied and rectified according to Schedule 4 by
        employees who were already involved in the development of the developed
        software defined under the subject-matter hereof. Subject to mutual
        agreement between the parties, such rectification of defects may be
        carried out by HP. In the case that New focus can not rectify such
        defects within short term New Focus shall provide HP a temporary
        solution.

8.5     Following delivery of the repaired / newly manufactured prototypes or
        developed software, HP shall conduct another functional test. If
        deviations from the specifications (Schedule 1) or defects are still
        detected in the repaired / newly manufactured prototypes or developed
        software and these are not remedied and rectified within 15 working
        days of receipt of appropriate notice thereof from HP, HP may, at its
        discretion, rescind the Agreement, rectify the defect itself or have it
        rectified by a third party at New Focus's expense. Any further claims
        shall remain unaffected thereby.

8.6     In the case that HP does not accept the manufactured prototypes or the
        developed software within a reasonable period of time after delivery,
        New Focus may set forth a deadline in order to declare the acceptance.
        The manufactured prototypes or the developed software shall deemed to
        be accepted if HP does neither declare the acceptance nor informs about
        defects. HP shall not refuse the acceptance because of insignificant
        defects. If HP accepts the manufactured prototypes or the developed
        software without regard of defects, these defects shall be written down
        within the minutes of the acceptance.

8.7     According to Schedule 1 HP shall release the prototypes for production
        and delivery of 30 production units to HP upon acceptance of the
        prototypes. In this case, the New Focus prices for these production
        units as set forth in Schedule 1 shall apply.

        HP shall be entitled to purchase additional production units and
        building blocks thereof (for additional use in other future developed
        products) after completion of the development according to this
        Agreement. The scope of delivery/supply shall form the subject matter
        of a separate agreement (standard purchase Agreement). The parties
        hereto will enter into good faith negotiations in order to conclude
        such an agreement, in which New Focus shall guarantee the same warranty
        as described in clause 10 as well as a product support for a period of
        five years after delivery of the last production unit.

9.      CONTACT PERSONS

9.1     Both parties shall appoint contact persons in Schedule 2 to facilitate
        close cooperative links in an atmosphere of mutual trust. The contact
        persons shall be entitled to issue

                                                                               6
<PAGE>   7
        and receive legally binding statements on behalf of the respective
        party, always provided that this Agreement is not modified thereby.

9.2     New Focus assures that the employees listed in Schedule 2 designated by
        New Focus for support and development for the entire duration of the
        project avail of the requisite knowledge and necessary experience in
        this field.

9.3     During the phase of development the parties hereto shall schedule
        regular meetings every 3 to 4 months in order to discuss any problems
        regarding the fulfillment of this Agreement and for any other purpose as
        described in this clause 9. Such meeting shall be attended by the
        contact persons designated according to 9.1 and/or any other persons as
        deemed appropriate in mutual agreement by the parties hereto. The
        meetings shall alternately take place at the respective business sites
        of the parties hereto.

10.     WARRANTIES

        (a) PRODUCTS AND SERVICES

        New Focus warrants that for twelve (12) months following the acceptance
        of the manufactured prototypes, the developed software and associated
        documentation in accordance with section 8 the manufactured prototypes,
        the developed software and associated documentation shall be free from
        defects in workmanship and materials; the developed software shall be
        free from significant programming errors; the manufactured prototypes
        and the developed software shall conform to the performance
        capabilities, characteristics, specifications, functions and other
        descriptions and standards applicable thereto as set forth in Schedule 1
        hereto; and that, in general, the services to be performed by New Focus
        shall be performed in a timely and professional manner by qualified
        technicians totally familiar with the manufactured prototypes and the
        developed software. In the event that defects are discovered during the
        warranty period, New Focus shall promptly remedy such defects at no
        additional expense to HP, according to Schedule 4.

        This section 10(a) shall in no way limit any of HP's rights under the
        applicable law.

        (b) COMPLIANCE WITH APPLICABLE LAWS

        New Focus warrants that the manufactured prototypes and the developed
        software and all other products, documentation and other materials
        required to be delivered to HP hereunder, the development and use by HP
        thereof, and the performance by New Focus of its obligations hereunder
        shall be in compliance with all applicable laws, rules and regulations
        as of the date of delivery thereof.

                                                                               7

<PAGE>   8
11.  RIGHTS OF USE

11.1 HP is hereby vested with an irrevocable, exclusive, transferable production
     and distribution right regarding the Tunable Laser Source Module (including
     software, the respective prototypes, the production units and any and all
     parts, such parts including, but not limited to, any building blocks) in
     its respective state of processing, such right being unlimited with respect
     to time, contents and geographical scope.

     HP may grant third parties sub-licensing rights and the above mentioned
     rights of use, subject to the agreement of the respective third parties to
     enter into an agreement on the payment of royalty fees with respect to the
     two patents on the design of external cavity diode lasers (US Patent No.:
     5,319,668 and US Patent No.: 5,354,575) held by New Focus.

     With respect to the manufacturing and the supply of the Tunable Laser
     Source Module, HP agrees to exclusively enter into negotiations with New
     Focus on the terms and conditions of a respective agreement, provided that
     HP shall have total discretion as to whether or not entering into such
     agreement.

11.2 New Focus shall grant HP a non-exclusive, international license to all
     industrial property rights, copyrights included, at no extra cost provided
     New Focus is entitled to grant such a license, if and to the extent that
     this is necessary to exercise the rights of use granted to HP as set forth
     under sub-clause 11.1 above.

11.3 With regard to HP's exclusive production and distribution right to the
     subject-matter hereof, New Focus shall not process or otherwise use the
     subject-matter either for its own purposes or for those of third parties.

12.  INDUSTRIAL PROPERTY RIGHTS

12.1 New Focus hereby represents and covenants that it is the unlimited and
     undisputed holder of all copyrights and other intellectual property rights
     (business and trade secrets included) to the development system, thus
     enabling New Focus to grant HP the rights of use pursuant to Article 11
     hereof.

12.2 In the event of any violation of a third party's industrial property right,
     New Focus shall establish HP's right to continued use of the development
     system without payment of any additional remuneration, or, if this should
     not be possible, alter or replace the subject-matter hereof in such a way
     as to circumvent violation of industrial property rights whilst, however,
     conforming to the specification requirements. HP shall be entitled, pending
     the above, to withhold any payments due.

12.3 In the event of any such violation of an industrial property right, New
     Focus shall defend HP against any claims asserted by third parties, if and
     to the extent that HP does not wish to defend itself. Should third parties
     file a claim against HP on account of the violation of industrial property
     rights, New Focus shall indemnify HP against all claims (for damages) and
     shall further bear all costs incurred by HP in connection with such a
     claim (e.g. in connection with legal disputes). This shall apply
     analogously in

                                                                               8
<PAGE>   9
     favor of those persons who, up to such time, have been [*] the
     subject-matter hereof in accordance with Article 11 above.

13.  AUDIT RIGHTS

     At any time HP is entitled to make or cause to be made a special audit
     regarding the production processes and the quality ensurance systems
     established by New Focus, on reasonable request made in writing no less
     than 15 days in advance. New Focus shall make all relevant matters
     available for examination during regular business hours. A written summary
     of the results of any such special audit shall be provided by HP to New
     Focus.

14.  CONFIDENTIALITY

14.1 The parties to this Agreement undertake to treat as confidential all of the
     other party's information identified as such in writing and not to disclose
     or divulge such information to third parties, unless such information was
     released by the other party or became public knowledge without any breach
     of obligations under this Agreement.

     This shall apply in particular to facts and information on operational
     procedures, operating results, production figures, products, business
     policies, duties, claims, organizational and social services or business
     management measures as well as data on purchasing/procurement functions.

     The confidential information provided by HP shall solely be used by New
     Focus for the purpose of this Agreement.

     In doing so, the parties hereto shall apply the same level of care and
     diligence as they would exercise in their own affairs.

14.2 This obligation shall expire for each party hereto four years subsequent to
     receipt of the last confidential fact or item of information from the other
     party.

14.3 New Focus shall take the necessary measures to ensure that the results of
     development are not inadmissibly used, disclosed or copied.

15.  TERMINATION

15.1 This Agreement may be terminated in writing by either party only in the
     event of good cause.

     Good cause shall be deemed to exist, in particular, if one of the parties
     hereto fails to perform its contractual obligations, despite a reminder to
     this effect. Good cause shall also be deemed to exist for HP if composition
     or bankruptcy proceedings are instigated or initiated against New Focus's
     assets or in the event of a lasting modi-

[*] Certain information on this page has been omitted and filed separately with
    the Commission. Confidential treatment has been requested with respect to
    the omitted portions.

                                                                               9
<PAGE>   10
     fication to the ownership rights within New Focus (for example, if New
     Focus will be taken over by competitors).

     Furthermore, HP shall be entitled to terminate the Agreement on
     extraordinary grounds if HP comes to the conclusion that continued
     implementation of the general project which incorporates the developed
     system is no longer feasible in view of the economic and/or technical
     situation.

15.2 Should this Agreement be terminated for reasons in respect of which New
     Focus bears responsibility, New Focus shall only be remunerated for
     services commissioned and performed prior to termination. This is subject
     to the provision that HP is in a position to use the relevant services to
     further use the developed system.

15.3 In all other cases, New Focus shall be entitled to the agreed remuneration
     as determined by the date of termination, subject however, to the
     deduction of expenditure saved, estimated at 90% of the remuneration for
     services not yet performed by New Focus. HP reserves the right to prove
     that additional expenditure was saved.

15.4 In the event of termination of this Agreement, New Focus shall, without
     exception, deliver and surrender to HP without delay all documents which
     HP made available to New Focus within the framework of this Agreement, as
     well as all and any prototypes and/or parts of them already in existence
     at the time of termination and all and any documentation and other
     information including but not limited to the respective source code
     regarding the HP-specific development result available at the time of
     termination. HP shall be vested with the rights to this development result
     in accordance with Article 11 above (rights of use).

15.5 In the event of termination hereof, the obligations set forth under
     Article 14 (confidential information) shall prevail and continue for a
     period of four years subsequent to termination and those set forth under
     Article 10 (warranty) shall also prevail and continue.

16.  SCHEDULES TO THIS AGREEMENT

     The Schedules listed in the following shall be deemed an integral part of
     this Agreement:

     Schedule 1 - Specifications, Development phases, Payment,
     Schedule 2 - Contact persons
     Schedule 3 - Project schedule
     Schedule 4 - Bugfixing
     Schedule 5 - Resources provided by HP

                                                                              10
<PAGE>   11
17.   MISCELLANEOUS PROVISIONS

17.1  No ancillary verbal agreements have been made. Any alterations and
      amendments hereto must be made in writing in order to be valid and must
      expressly indicate that they constitute an alteration or amendment hereto.
      This shall similarly apply to any waiver of this written form requirement.

17.2  Unless otherwise expressly agreed upon herein, any transfer of the rights
      arising in connection herewith to third parties by one of the parties
      hereto shall be subject to the prior written approval of the other party.

17.3  Should one or more of the provisions hereof be or become void or invalid,
      the parties hereto undertake to replace such a provision with a valid
      provision which approximates the economic purpose or intent of the void or
      invalid provision as closely as possible. The validity of the remaining
      provisions shall remain unaffected thereby.

17.4  This Agreement shall be governed by and construed in accordance with the
      laws of the Federal Republic of Germany. The Uniform Laws of the UN
      Convention on Contracts for the International Sale of Goods shall not
      apply. The courts of Stuttgart, Germany, shall have jurisdiction and
      venue over any claims asserted under or in connection herewith.

For HP:                                     For New Focus:

Boeblingen 23/12/96                         Santa Clara 1/9/97

/s/ WERNER BERKEL                           /s/ TIMOTHY DAY
-------------------------------------       -----------------------------------
Name                                        Name

        Business Manager                        Vice President, Engineering
-------------------------------------       -----------------------------------
Area of activity/title                      Area of activity/title

                                                                              11

<PAGE>   12
SCHEDULE 1 - SPECIFICATIONS, DEVELOPMENT PHASES, PAYMENT

A.)  PRODUCT TO BE DEVELOPED:

1.   A 1550 nm tunable laser source module (entire plug-in module) which will be
     based on the patented (US Patent No. [*] and [*]) opto-mechanical design of
     the New Focus ECDL product family for integration into the HP optical
     component test platforms (or additional purposes).

2.   This includes the development and production of the opto-mechanical
     sub-assemblies as well as the assembly and test of the chassis and
     interface electronics. Specifically, New Focus will reduce the cost and
     size of the opto-mechanical head associated with the current New Focus
     products, develop the low cost electronics needed to interface the
     multimeter platform, and refine the packaging of the isolated fiber launch.
     In addition, New Focus will develop an operations approach that allows for
     the production of up to [*] plug-in modules per year. In the event that [*]
     plug-in modules per year are desired an option, which requires additional
     funding and a [*] period to increase capacity to [*] per year, may be
     exercised by HP. The additional funding for this option will be part of a
     separate development contract.

     A focused team operating in a project management infrastructure and
     reporting directly to the New Focus management team will be employed for
     that purpose.

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

                                                                              12
<PAGE>   13
3. New Focus will develop and deliver a final module that will meet all of the
specifications described below.
Condition:     The Module is [*]
               (currently under development at HP)
All Specifications apply over the Operating Temperature Range and under the
Humidity Conditions.

[*]

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

                                                                              13
<PAGE>   14

MODULE KEY FUNCTIONS AND FEATURES

3.1.0 TUNABLE WAVELENGTH LASER SOURCE PARAMETERS

From the customer point of view this source will have the following parameters.
All these parameters must be accessible via the user interface.

[*]

3.1.1 TUNABLE WAVELENGTH LASER SOURCE FUNCTIONALITY

[*]

3.1.2 TUNABLE WAVELENGTH LASER SOURCE EXCEPTIONS/EVENTS

[*]

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

                                                                              14
<PAGE>   15
4.   Development requirement and payment criteria:

     The Development will proceed in accordance with the development phases as
     described below.

A:   MODULE HARDWARE

     Start Contract
     o  Final contract signed from both parties
     o  Agreement on development schedule (see appendix "Development
        Schedule")
     o  Agreement on all product specifications (see appendix "Module
        Specification")

     1.   Design Review

          a)   Complete product documentation available, and documentation is
               supposed to be capable to fulfill the product requirements.
          [*]

     2.   Phase 1 Prototypes

          [*]

     3.   Phase 2 Prototype

          [*]

    4.    Release to Production

          a)   All prototypes out of phase 2 are tested at HP regarding HP
               Environmental Test Manual Class B and meet the product
               requirements (see appendix "Module Specification")
          b)   Stress and lifetime test results are available
          c)   Exhaustive search for design defects complete
          d)   Entire production process works and is documented
          e)   Test tooling complete
          f)   Incoming material inspection in place
          g)   Shipping container in place

    5.    Final Contact close

          [*]

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

                                                                              15
<PAGE>   16
B: MODULE SOFTWARE

1. Design Review

      [*]

2. Prototype (alpha)

      [*]

3. Prototype (beta)

      [*]

4. Release to Production

      [*]

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

                                                                              16
<PAGE>   17
5.  The delivery dates are laid down within the project schedule (Schedule 3).
    The remuneration will be paid [*]. The respective installment will be due
    [*] provided that HP will not detect major deviations in regard of the
    requirements of the respective development phase. The installments are as
    follows.

<TABLE>
                    <S>                                 <C>
                    Start Contract                      $[*]
                    Design Review                       $[*]
                    Phase 1 Prototypes                  $[*]
                    High Power diodes in cavities       $[*]
                    Phase 2 Prototypes                  $[*]
                    Release to Production               $[*]
                    Final Contract close                $[*]
                    30 Production Units                 $[*]
</TABLE>

    The development cost approach is to use non-recurring engineering funding
    from HP to develop the product and production line so that the per unit
    price in 3/98 will be $[*]. The per unit price will be $[*] and the
    development cost will be $[*] to get to [*] fully tested plug in modules
    per year. This $[*] non-recurring engineering effort will include delivery
    of [*] units but the [*] delivered at the end of the project will be $[*]
    each (FOB Santa Clara, CA). This $[*] per unit price is based on a cost for
    the coated diodes of $[*]. If a qualified source of AR coated diodes could
    be identified that would work in our cavity then the per unit price would be
    $[*] plus the cost (to NFI) of the diodes.

    An option to increase the capacity in a separate development contract has
    been offered, but not exercised by HP at this time, that will allow New
    Focus to tool up to the [*]/year numbers associated with the high end of the
    HP marketing numbers. This effort would be covered under a separate
    development project and New Focus would need [*] advance notice before the
    increased capacity could be realized. If this option is chosen the per unit
    price for a quantity of [*] units would be $[*] (FOB Santa Clara, CA) (New
    Focus are essentially only increasing capacity with this approach) and the
    per unit price at [*] units would be $[*] (FOB Santa Clara, CA). In these
    cases the assumed cost of the AR coated diode is $[*] and $[*],
    respectively.

B.) TECHNICAL APPROACH (PROPOSED BY NEW FOCUS):

1.    [*]
2.    [*]
3.    [*]
4.    [*]
5.    Extensive environmental testing of the pigtailed opto mechanical head
6.    Development of compact low cost versions of our analog control electronics
      (ongoing)
7.    Integration of the analog and digital opto-mechanical control electronics
      with the micro-processor interface and communications design provided by
      HP.
8.    [*]

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

                                                                              17
<PAGE>   18
The above Technical Approach is understood as a proposal by New Focus which may
be amended, provided that the development requirements as set out in this
Schedule 1 are fully met.

New Focus will use the HP communications and interface design, which uses a 32
bit-microprocessor, together with New Focus design for opto-mechanical control
to design and develop a complete [*]. To do this New Focus will acquire the [*]
development environment necessary to design with this processor, New Focus will
use [*] and New Focus will work to ensure that there is complete overlap between
the development effort at HP and at NFI.

C.) OPERATIONS APPROACH (PROPOSED BY NEW FOCUS):

New Focus will develop a production line solely dedicated to the assembly and
test of the HP ECDL in Santa Clara CA using some of New Focus' available
manufacturing space. The approach is summarized below:

1.    Develop the operational approach (demand flow/JIT)
2.    Build and capitalize laboratory manufacturing space
3.    Design manufacturing tooling and automation software
4.    Develop method sheets and documentation for operational model

New Focus will expand and improve its present [*] production line (model 6200)
for use in the production of up to [*] HP-ECDLs per year.

D.) PROJECT MANAGEMENT BY NEW FOCUS:

This development effort will require a focused team operating within a tight
schedule. The scope of the project is well understood as are the resources
necessary to accomplish the task. New Focus will create a development team that
will report directly to the VP of Engineering. This team will be solely
dedicated to this project. The team will consist of but not be limited to:

1. Project Manager:                     Extensive experience with ECDL's,
                                        project management, and e-o-engineering

2. Senior Electro-Optics Engineer:      One of our senior laser designers with
                                        extensive control and AR coating
                                        experience

3. Senior Mechanical/Control Engineer:  One of our engineers associated with the
                                        DC servo control of precision
                                        opto-mechanical hardware

4. Electrical Engineer:                 Engineer focusing on low cost
                                        analog/digital electronics and rapid
                                        prototyping

5. Electrical Engineer:                 Engineer focused on firmware and
                                        interface to HP platform

6. Mechanical Engineer:                 Engineer focused on tooling
                                        designs/documentation/incorporation of
                                        fiber launch designs

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

                                                                              18
<PAGE>   19
7. Manufacturing Engineer:              Engineer focused on production line
                                        layout / manufacturing tooling / testing

New Focus will commit additional resources to this project as it moves forward.

SCHEDULE 2 - CONTACT PERSONS

For a better fulfillment of this Agreement both parties name the following
contact persons

By HP:                                  By New Focus

Name: Edgar Leckel                      Name: Timothy Day

Telephone-No.: (49) 7031-142691         Telephone-No.: 408-980-8088

FAX: (49) 7031-147023                   FAX: 408-980-8883

Name: Emmerich Muller                   Name: Michael Brownell

Telephone-No.: (49) 7031-144861         Telephone-No.: 408-980-8088

FAX: (49) 7031-147023                   FAX: 408-980-8883

SCHEDULE 3 - PROJECT SCHEDULE

                                                                              19
<PAGE>   20
[*]

[*] Certain information on this page has been omitted and filed separately with
    the Commission. Confidential treatment has been requested with respect to
    the omitted portions.
<PAGE>   21
[*]

[*] Certain information on this page has been omitted and filed separately with
    the Commission. Confidential treatment has been requested with respect to
    the omitted portions.

<PAGE>   22
SCHEDULE 4 - BUGFIXING

1.   Any bugs in the developed software shall be recorded and verified by HP.
     Following verification, HP shall forward the bug report to New Focus.

     Bugs shall be categorized as follows:

     A.   Serious bugs

          Bugs that result in system crashes (hangs or halts), loss of data,
          destruction of data, corruption of data or cases of unreasonable
          handling effort for which no "workaround" is available (i.e. there is
          no method accepted by HP or by the customer for either avoiding the
          bug or using the developed software).

          Any medium bug as defined in B of this schedule 4 which causes a
          serious bug as defined above within the final optical component
          platforms shall additionally be categorized as a serious bug.

     B.   Medium bugs

          Bugs as specified under A above, but for which a "workaround" is
          available for bug avoidance.

     C.   Minor bugs

          Any bugs not included in categories A and B above.

2.   Any serious bugs in the developed software shall be immediately fixed by
     New Focus. New Focus will begin to fix the bug 24 hours after the
     respective report by HP the latest. New Focus shall fix the bug during 3
     days or during a longer period agreed by HP. If New Focus is unable to
     reproduce or to fix any bug immediately on its own computer system, it
     shall fix the bug - if decided by HP - on-site in customer's place.

3.   Any medium bug in the developed software shall be fixed in a reasonable
     period of time. New Focus shall begin fixing the bug during 48 hours after
     the respective report by HP. New Focus shall fix the bug during two weeks
     or during a longer period agreed by HP.

4.   Any other bugs shall be fixed as soon as possible within the scope of the
     maintenance of the developed software.

5.   New Focus shall update the documentation in accordance with the bug fix.

                                                                              20
<PAGE>   23

6.   New Focus shall ensure that any serious and medium bugs shall be fixed for
     both the current and the previous operating system release.

7.   New Focus will maintain a telephone number with a designated knowledgeable
     contact to HP to call during normal business hours to report problems and
     receive assistance.

8.   The Bugfixing according to this schedule 4 shall be free of charge during
     the warranty period.

                                                                              21
<PAGE>   24
SCHEDULE 5 - RESOURCES PROVIDE BY HP

1.   HARDWARE RELATED DOCUMENTS (see separate Documentation Package)

     a)   Drawings of all mechanical parts of the Module Chassis

          o    Module Bottom Cover

          o    Module Top Cover

          o    Module Sub Panel

          o    Plastic Front Panel

          o    Module Extractor

          o    Fiber Connector Bushing at Front Panel

          o    Module Fiber Interface

     b)   Description of Module Interface and digital Hardware

          o    Printed Circuit Board Outline

          o    Interface Connector to Module/Mainframe Positioning Dwg.

     c)   Schematics of digital parts including part list

     d)   Documentation and File of FPGA Communication Part

2.   SOFTWARE RELATED DOCUMENTS (see separate Documentation Package)

     a)   Description of Communication between Mainframe and Module

     b)   HP Coding Standards

     c)   Documentation and Source Code Template for Operating System, Start-up
          and Communication of Module

3.   HARDWARE SUPPORT

     a)   For first Phase of Development (December 96 - March 97 Time Frame)

          o    HP8153 Mainframe

          o    Dummy and Extendermodule

          -->  Delivery January 1997

     b)   For the rest of the Development (April 97 - March 98)

          o    New OCT Mainframe Prototype

          -->  Delivery End of March

                                                                              22
<PAGE>   25

                                    [GRAPH]

                                      [*]

                                     Page 1

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

<PAGE>   26

                                    [GRAPH]

                                      [*]

                                     Page 2

[*] Certain information on this page has been omitted and
    filed separately with the Commission. Confidential treatment
    has been requested with respect to the omitted portions.

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