Document:

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                                                                   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

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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.

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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.

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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:

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        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.

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[*] 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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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

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        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.

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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

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     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.

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     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

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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

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<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.

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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.

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<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.

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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.

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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.

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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 [*])
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.<PAGE>   1

                                                                   EXHIBIT 10.12
                                ADDENDUM TO THE

                      DEVELOPMENT AGREEMENT OF 23.12.1996
           REGARDING THE DEVELOPMENT OF A TUNABLE LASER SOURCE MODULE

                                 by and between

                              HEWLETT-PACKARD GmbH

                            HERRENBERGER STRABE 130

                                71034 BOEBLINGEN

                                    GERMANY

                      - hereinafter referred to as "HP" -

                                      and

                                 NEW FOCUS INC.

                                2630 WALSH AVE.

                              SANTA CLARA CA 95051

                                      USA

                   - hereinafter referred to as "New Focus" -

                                                                               1
<PAGE>   2
1.   If not expressly stated to the contrary herein, all provisions set forth
     in the Development Agreement of 23.12.1996 (the "Agreement") shall fully
     apply to this Addendum and shall remain in full force and effect.

2.   Delivery by New Focus of the 30 production units as described in the
     Agreement shall be due on July 31, 1998. The per unit price for these
     production units shall remain unchanged at $[*].--([*] U.S. Dollars).

3.   The parties hereto will agree on separate terms and conditions for a
     contract regarding the production and delivery of the Tunable Laser Source
     Modules as defined in Clause 11.1 of the Agreement. In amendment of
     Schedule 1 A.) 5. of the Agreement, the parties agree on an initial per
     unit price ("HP Purchase Price") of $[*]. -- ([*] U.S. Dollars) for the
     Module. This HP Purchase Price is based on the initial HP U.S. List Price
     for the Module of $[*]. -- ([*] U.S. Dollars). To the extent HP decreases
     or increases the HP U.S. List Price for the Module, New Focus will decrease
     or increase the HP Purchase Price by half of the percentage the HP List
     Price decreased or increased. If and to the extent the HP Purchase Price
     falls below $[*],-- ([*] U.S. Dollars), New Focus shall have the right to
     terminate the contract regarding the production and delivery of the Tunable
     Laser Source Modules. If and to the extent the HP List Price falls below
     $[*] -- ([*] U.S. dollars), HP shall have the right to terminate such
     contract. These rights of termination shall be specified in detail in such
     contract. It is understood between the parties hereto that, in this case,
     HP shall be absolutely free to manufacture the Modules itself or have the
     Modules manufactured and delivered by a third party provided licensing
     agreements as outlined in Clause 7 of this Addendum are strictly adhered
     to. In addition, HP shall not be responsible for any additional development
     costs associated with supplying HP with the PMF Option of the Module due to
     the fact that such additional development costs were already covered by the
     NRE payments documented in the Development Contract of December 23, 1996.

4.   HP agrees to pay to New Focus an amount of $500,000.--(Five Hundred
     Thousand U.S. Dollars) within 30 days of the execution of this Addendum in
     order to ensure timely manufacturing and delivery of the Modules by New
     Focus. Payment shall be subject to New Focus providing HP a guarantee for
     50% ($250,000.--Two Hundred-Fifty Thousand U.S. Dollars) of the above
     amount from an internationally recognized Bank substantially in the form as
     laid out in Schedule 1 hereto.

5.   New Focus shall repay up to 50% ($250,000.--Two Hundred-Fifty Thousand U.S.
     Dollars) of the above amount to the extent that one or more of the
     following applies:

     (i)  New Focus being in delay with any deadline set forth in the
          Agreement, this Addendum or the production and delivery contract;
          provided that a delay with respect to the delivery of the production
          units according to Clause 2 above shall

[*] 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.
                                                                               2
<PAGE>   3
          only trigger repayment if such delay exceeds one month and New Focus
          does not provide HP with reasonably sufficient justification for such
          delay

          and/or HP may not be reasonably expected to accept such delay and/or
          the delay has not been primarily caused by HP.

    (ii)  New Focus being in default of any other material provision of the
          Agreement, this Addendum or the production and delivery contract.

   The following repayment schedule shall be binding:

   $[*].--([*] U.S. Dollars) on [*], 1998
   $[*].--([*] U.S. Dollars) on [*], 1998
   $[*].--([*] U.S. Dollars) on [*], 1998
   $[*].--([*] U.S. Dollars) on [*], 1998
   $[*].--([*] U.S. Dollars) on [*], 1998

   Clauses 5 (i) and 5(ii) of this Addendum shall not apply for any failure or
   delay in the performance of New Focus due to causes including, but not
   limited to, an act of God, an act of civil or military authority, fire,
   epidemic, flood, earthquake, riot, war, sabotage, and governmental action
   which are beyond its reasonable control; provided that New Focus: (i)
   promptly gives HP written notice of such cause and, in any event, within
   fifteen (15) calendar days of discovery thereof; and (ii) uses diligent
   efforts to correct such failure or delay in its performance.

6. In view of HP's exclusive rights of use as described in Clause 11 of the
   Agreement, the Parties agree upon the following:

   (i)   New Focus may solely sell Modules in their completely assembled form
         (as defined by form factor, HW and SW interface) to HP.

   (ii)  Until HP officially informs New Focus of the obsolescence of the
         Module, New Focus shall not in any way manufacture and/or sell the
         Module and/or the building blocks (defined as the complete assembled
         opto-mechanical sub-assembly including but not limited to, the diode
         laser, external cavity, cavity optics, and drive train, in the exact
         configuration) thereof either under its own brand name in a way that
         direct competition to the HP Module is created or to direct HP Module
         competitors (including but not limited to corporations such as Anritsu,
         Photonetics, EXFO, Tektronix, Santec etc.) without the expressed
         written consent of HP.

   Subject to the foregoing, none of HP's rights according to Clause 11 of the
   Agreement and Clause 7 of this Addendum nor any other of HP's rights under
   the Agreement shall be in any way affected hereby.

[*] 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.

                                                                               3
<PAGE>   4
7.    With respect to HP's rights of use pursuant to 11.1 of the Agreement, and
      to the extent HP decides to manufacture the Modules itself or decides to
      have the Modules manufactured and delivered by a third party, the Parties
      shall enter into negotiations regarding the amount of the license fee for
      the New Focus patent in question (U.S. Patent No.: 5,319,668). This
      license fee shall not exceed $[*]. -- ([*] U.S. Dollars) per manufactured
      Module. New Focus warrants that it is the sole owner of U.S. patent No.
      5,319,668 and the therewith related applications [*] and [*] and any other
      patent or patent application claiming the priority of this patent or
      patent application.

      Furthermore, it is the understanding of the parties:

      (i) that no further royalty or license fees shall in any way be payable by
      HP to New Focus for the Module.

      (ii) that HP's use of the patent in question is limited to the Module in
      its completely assembled form (as defined by form factor, HW and SW
      interface).

8.    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.

      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.

For HP:                                For New Focus:

Boeblingen, 10/30/97                   Santa Clara, 11/6/97

/s/ WERNER BERKEL                      /s/ TIMOTHY DAY
-----------------------------          -----------------------------
Werner Berkel                          Timothy Day
Fiber Optic Test/Business Manager      Engineering/Vice President

[*] 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.

                                                                               4
<PAGE>   5
                               MID-PENINSULA BANK

October 23, 1997

Hewlett-Packard GmbH
Herrenberger Str. 130
71034 Boeblingen
Germany

Dear Sirs:

Mid-Peninsula Bank (the "Bank") herewith confirms that it has knowledge that
Hewlett-Packard GmbH (hereinafter referred to as HP), Herrenberger Str. 130,
71034 Boeblingen, Germany has granted to New Focus, Inc. a payment in the amount
of $USD500,000 (Five Hundred Thousand US Dollars). The payment to New Focus,
Inc. is specified within the terms and conditions of the Addendum dated October
28, 1997 to the Development Agreement (the "Agreement") dated December 23, 1996
by and between HP and New Focus, Inc.

The Bank herewith provides assurance to HP as follows. The Bank, acting as a
principal obligor, guarantees to HP prompt payment by New Focus, Inc. of all of
its (repayment) obligations under the terms specified in that certain Addendum
to the Agreement, in an amount not to exceed $USD250,000 (Two Hundred-Fifty
Thousand US Dollars), such amount to exclude accrued interest and/or costs. In
the event that New Focus, Inc. does not make payment to HP in accordance with
Clause 5 of the Addendum to the Agreement, the Bank shall forthwith upon the
first demand of HP, make payment to HP in such amount(s) (not to exceed
$USD250,000 - Two Hundred-Fifty Thousand US Dollars) as was not paid by New
Focus, Inc. (as if the Bank instead of New Focus, Inc. were expressed to be the
principal obligor).

This guaranty shall remain in effect as long as New Focus, Inc. has a potential
payment obligation towards HP under Clause 5 of the Addendum to the Agreement.

Mid-Peninsula Bank

By: /s/ MURRAY B DEY
    ---------------------------------
    Murray B. Dey
    Executive Vice President

                                                                               5
<PAGE>   6
Schedule 1

GUARANTEE

     Whereas

     We, the undersigned, Bank, herewith confirm that we have knowledge that
     Hewlett-Packard GmbH, Herrenberger Str. 130, 71034 Boblingen, Germany has
     granted to New Focus payment of an amount of $500,000 -- (Five Hundred
     Thousand U.S. Dollars).

     Therefore

     We guarantee, as principal obligor, to HP prompt performance by New Focus
     of all its (repayment) obligations under the Addendum. We undertake with HP
     up to a maximum amount of $250,000 -- (Two Hundred-Fifty Thousand U.S.
     Dollars), such maximum amount not including accrued interest and/or costs,
     that whenever New Focus does not pay amount when due in accordance with
     Clause 5 of the Addendum, we shall forthwith on first demand pay that
     amount as if we instead of New Focus were expressed to be the principal
     obligor.

     This guarantee shall be valid until final performance of New Focus of all
     its obligations under the Agreement, the Addendum or the production and
     delivery contract.

[*] 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.

                                                                               6

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