<PAGE>
                                                                   EXHIBIT 10.26

                    DEVELOPMENT AND DISTRIBUTION AGREEMENT

     This Agreement (the "Agreement") is entered into as of this 1st day of
October 1991 (the "Effective Date"), by and between KLA Instruments Corporation,
a Delaware corporation, having its principal place of business at 160 Rio
Robles, P.O. Box 49055, San Jose, California 95161 ("KLA"), and Transcription
Enterprises Limited, a California corporation, having a place of business at 101
Albright Way, Los Gatos, California 95030 ("TEL").

                                    RECITALS
                                    --------

     A.   TEL has developed certain software, known as CATS Software, which
converts semiconductor databases into different formats.

     B.   KLA has developed a new database format for its next generation
semiconductor inspection equipment named the Falcon Format.

     C.   KLA desires to have TEL develop software to support the Falcon Format.

     D.   KLA desires to have the exclusive right to distribute the developed
software on the terms and conditions set forth herein.

                                   AGREEMENT
                                   ---------

     NOW, THEREFORE, the parties agree as follows:

     1.   DEFINITIONS.

          The terms used in this Agreement shall have the following definitions:

          1.1  CATS Falcon Driver shall mean the object code version of the CATS
               ------------------
Software developed by TEL pursuant to this Agreement which runs on a central
processing unit embedded within or directly connected to semiconductor
inspection equipment ("Embedded") and converts Pattern Files only to the Falcon
Format under the direction of the Falcon Inspection Process Program. The CATS
Falcon Driver also includes any modifications to the CATS Falcon Driver
developed by TEL or KLA during the term of this Agreement.

          1.2  CATS Falcon Formatter shall mean a new Option to the CATS
               ---------------------
Software developed by TEL which is not embedded within or directly connected to
semiconductor inspection equipment ("Non-embedded") and which converts Pattern
Files to the Falcon Format. The CATS Falcon Formatter also includes any
modifications to the CATS Falcon Formatter developed by TEL during the term of
this Agreement.

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          1.3   CATS Falcon Graphics shall mean the CATS Falcon Option which
                --------------------
allows the End User to view, pick, and measure objects within specified Pattern
Files. The CATS Falcon Graphics shall also include any modifications made by TEL
or KLA to the CATS Falcon Graphics during the term of this Agreement.

          1.4   CATS Falcon Jobdeck Viewing shall mean the CATS Falcon Option
                ---------------------------
developed by TEL which allows the End User to view, pick and measure objects
within and between Pattern Files referenced within a jobdeck. The CATS Falcon
Jobdeck Viewing shall also include any modifications made by TEL or KLA to the
CATS Falcon Jobdeck Viewing during the term of this Agreement.

          1.5   CATS Falcon Option shall mean the object code version of the
                ------------------
software program or the software modules developed by TEL to be used in
conjunction with the CATS Falcon Formatter or the CATS Falcon Driver. The CATS
Falcon Graphics, CATS Falcon Jobdeck Viewing, CATS Falcon Inspection Process
Program Editor and all other options developed by TEL during the term of this
Agreement specifically for use in conjunction with the CATS Falcon Formatter or
the CATS Falcon Driver are CATS Falcon Options. The versions of the CATS Falcon
Options which are designed to be used in conjunction with the CATS Falcon Driver
are hereinafter referred to as "Embedded CATS Falcon Options" and the versions
of the CATS Falcon Options which are designed to be used in conjunction with the
CATS Falcon Formatter are hereinafter referred to as "Non-embedded CATS Falcon
Options."

          1.6   CATS Falcon Inspection Process Program Editor shall mean the
                ---------------------------------------------
CATS Falcon Option developed by TEL which allows the End User to read,
graphically edit and output files in the Falcon Inspection Process Program
Format. The CATS Falcon Inspection Process Program Editor shall also include any
modifications made by TEL or KLA to the CATS Falcon Inspection Process Program
Editor during the term of this Agreement.

          1.7   CATS Falcon Software shall mean collectively the CATS Falcon
                --------------------
Driver and the Embedded CATS Falcon Options.

          1.8   CATS Include File Format shall mean the file format developed by
                ------------------------
TEL which describes the processing steps necessary to create a Falcon Format
Database from Pattern Files. The CATS Include File Format shall also include any
modifications to the CATS Include File Format which are made by TEL or KLA
during the term of this Agreement.

          1.9   CATS Jobdeck Format shall mean the file format describing the
                -------------------
placement of Pattern Files and other operators typically used by E-beam
lithography systems. The CATS Jobdeck Format shall also include any
modifications to the CATS Jobdeck Format which are made by TEL or KLA during the
term of this Agreement.

          1.10  CATS Software shall mean the software developed by TEL for the
                -------------
conversion of semiconductor databases into different formats, including, but not
limited

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to the CATS Falcon Driver, the CATS Falcon Formatter and the CATS Falcon
Options. The CATS Software shall also include any modifications to the CATS
Software which are made by TEL or KLA during the term of this Agreement.

          1.11  End User Documentation shall mean the manuals and other
                ----------------------
documentation, including but not limited to the documentation for the TEL
Formats, developed by TEL for end users and relating to the CATS Falcon
Software; provided, however that any modifications to the End User Documentation
made by KLA pursuant to its rights under Section 3.2.4 shall not be considered
to be End User Documentation.

          1.12  End User shall mean any third party licensed by KLA to use the
                --------
CATS Falcon Driver and/or the Embedded CATS Falcon Options.

          1.13  Falcon Format shall mean the semiconductor inspection equipment
                -------------
database format developed by KLA and described in greater detail in Exhibit A,
                                                                    ---------
and all modifications thereto which KLA shall make during the term of this
Agreement.

          1.14  Falcon Format Database shall mean the files which describe the
                ----------------------
placement of polygons and groups of polygons according to the Falcon Format.

          1.15  Falcon Format Specifications shall mean the specifications set
                ----------------------------
forth on Exhibits A, B, C and D.
         ----------------------

          1.16  Falcon Inspection Process Program Format shall mean the file
                ----------------------------------------
format developed by KLA which contains the parameters necessary to create a
Falcon Format Database from Pattern Files and which is described in greater
detail in Exhibit B, and all modifications thereto which KLA shall make during
          ---------
the term of this Agreement.

          1.17  Falcon Swath Constraints shall mean the requirements which must
                ------------------------
be met by the swaths of the Falcon Format Database in order to ensure that the
proper area as specified by the Falcon Inspection Process Program Format is
covered by the inspection system, and all modifications thereto which KLA shall
make during the term of this Agreement. The Falcon Swath Constraints are
described in greater detail in Exhibit C.
                               ---------

          1.18  Falcon Swath Map Format shall mean the file format developed by
                -----------------------
KLA which provides a description of the placement of the swaths used during a
particular inspection and which is described in greater detail in Exhibit D, and
                                                                  ---------
all modifications thereto which KLA shall make during the term of this
Agreement. The CATS Falcon Driver will generate the Falcon Swath Map; however,
the Falcon Swath Map may also be input to the CATS Falcon Driver.

          1.19  Falcon Swath Map shall mean the file which describes the
                ----------------
placement of swaths used during an inspection according to the Falcon Swath Map
Format.

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          1.20  KLA Base Technology shall mean collectively, the Falcon Format,
                -------------------
the Falcon Inspection Process Program Format, the Falcon Swath Map Format and
the Falcon Swath Constraints and all modifications thereto which KLA shall make
during the term of this Agreement.

          1.21  Pattern Files shall mean the files which describe the placement
                -------------
of polygons and groups of polygons within a specific format.

          1.22  TEL Formats shall mean collectively, the CATS Include File
                -----------
Format and the CATS Jobdeck Format.

     2.   DEVELOPMENT AND ACCEPTANCE OF THE CATS FALCON SOFTWARE.

          2.1   Acceptance of the Deliverables.
                -------------------------------

                TEL shall use all commercially reasonable efforts to deliver the
CATS Falcon Driver, CATS Falcon Graphics, CATS Falcon Jobdeck Viewing and the
CATS Falcon Inspection Process Program Editor (collectively, the "Deliverables")
to KLA for testing on or before November 15, 1991. KLA shall test the
Deliverables to assure that they comply with the Falcon Format Specifications
and that they pass the acceptance test criteria set forth on Exhibit E to this
                                                             ---------
Agreement (the "Acceptance Criteria"). KLA shall use its best efforts to test
the Deliverables and to provide TEL with notice of the results of its testing
within thirty (30) days of its receipt of the Deliverables. If the Deliverables
conform to the Acceptance Criteria, KLA shall give notice to TEL of such
compliance and the Deliverables shall be deemed accepted (the "Acceptance"). In
the event that KLA discovers any nonconformities with the Falcon Format
Specifications in the Deliverables or the Deliverables do not meet the
Acceptance Criteria, KLA will notify TEL in writing and TEL shall use all
commercially reasonable efforts to correct such nonconformities and to conform
the Deliverables to the Acceptance Criteria within thirty (30) days from the
date of notice. If TEL fails to correct the Deliverables so that they comply
with the Falcon Format Specifications and the Acceptance Criteria, then KLA may,
at its discretion, either (a) give notice to TEL of the nonconformities in the
Deliverables or of the failure to meet the Acceptance Criteria and provide TEL
with a period of time to correct such nonconformities and conform to the
Acceptance Criteria; provided, however, that such period of time shall not
exceed eight (8) months; (b) cancel this Agreement, pursuant to Section 17.5
below, by providing notice to TEL or (c) negotiate with TEL to reduce the
royalty payments (as set forth in Section 6 below) by an amount to be mutually
determined by the parties.

          2.2   Acceptance of Major Updates.
                ---------------------------

                KLA shall use its best efforts to test the Major Updates, as
defined in Exhibit I, delivered by TEL and to provide TEL with notice of its
           ---------
testing results within thirty (30) days of receipt of the Major Update. This
test will determine whether the Major Update complies with the End User
Documentation prepared by TEL for such

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Major Update. If the Major Update does not comply with the End User
Documentation prepared by TEL for such Major Update, KLA shall give TEL written
notice of such noncompliance. A Major Update shall be deemed accepted by KLA on
the earlier of (i) thirty (30) days after KLA's receipt of such Major Update,
provided that KLA has not delivered to TEL a written notice of noncompliance
during such thirty (30) day period or (ii) upon written notice to TEL of KLA's
acceptance.

     3.   SCOPE OF RIGHTS.

          3.1  License Grant to TEL. KLA hereby grants to TEL, and TEL accepts,
               --------------------
a world-wide, non-exclusive, royalty-free, non-transferrable license to use the
KLA Base Technology internally as necessary to (i) develop, support and maintain
the CATS Software and (ii) develop, maintain, reproduce, distribute and license
the CATS Falcon Formatter and the Non-embedded CATS Falcon Options to TEL's end
users for use in inputting and outputting Falcon Format Databases for use with
KLA's semiconductor inspection equipment.

          3.2   License Grants to KLA. In consideration of the payment of
                ---------------------
royalties as set forth in Section 6 below, TEL hereby grants to KLA the
following licenses.

                3.2.1  TEL Formats. TEL hereby grants to KLA, and KLA accepts, a
                       -----------
world-wide, non-exclusive, royalty-free, non-transferrable license to:

                       (i)    Use the TEL Formats only internally as necessary
for KLA's performance hereunder;

                       (ii)   Prior to Acceptance, sublicense up to an aggregate
                                                   -----------------------------
of three (3) copies of the TEL Formats to End Users for a term of up to six (6)
-------------------------------------------------------------------------------
months for the limited purpose of creating process programs within their own
------
programming environment; and

                       (iii)  Effective upon Acceptance, sublicense the TEL
Formats to End Users for the limited purpose of creating process programs within
their own programming environment.

                3.2.2  CATS Falcon Driver License. Except as set forth in
                       --------------------------
Sections 4, 7 and 21.1, TEL hereby grants, and KLA accepts a world-wide,
exclusive, non-transferrable license during the term of this Agreement, to do
the following:

                       (i)    Reproduce and embed the CATS Falcon Driver for use
on semiconductor inspection equipment;

                       (ii)   Test the CATS Falcon Driver as a part of
semiconductor inspection equipment;

                                       5
<PAGE>

                      (iii) Prior to Acceptance, distribute and sublicense up to
an aggregate of three (3) copies of the CATS Falcon Driver to End Users for a
term of up to six (6) months for the purpose of evaluation and testing; and

                      (iv)  Effective upon Acceptance, distribute and sublicense
to End Users solely for their own personal or business purposes the CATS Falcon
Driver for use on semiconductor inspection equipment.

               3.2.3  Embedded CATS Falcon Option License. Except as set forth
                      -----------------------------------
in Sections 4, 7 and 21.1 TEL hereby grants, and KLA accepts a world-wide,
exclusive, non-transferable license during the term of this Agreement, to do the
following:

                      (i)   Reproduce and embed the Embedded CATS Falcon Options
(individually, or in any combination) for use on semiconductor inspection
equipment;

                      (ii)  Test the Embedded CATS Falcon Options (individually,
or in any combination) as a part of semiconductor inspection equipment;

                      (iii) Prior to Acceptance, distribute and sublicense up to
                            ----------------------------------------------------
an aggregate of three (3) copies of the Embedded CATS Falcon Options
--------------------------------------------------------------------
(individually, or in any combination) to End Users for a term of up to six (6)
months for the purpose of evaluation and testing; and


                      (iv)  Effective upon acceptance, distribute and sublicense
                            ----------------------------------------------------
to End User solely for their own personal or business purposes the Embedded CATS
--------------------------------------------------------------------------------
Falcon Options (individually, or in any combination) for use on semiconductor
--------------
inspection equipment; provided, however, that KLA may only sublicense the
Embedded CATS Falcon Options to those End Users who have licensed or are
simultaneously licensing a CATS Falcon Driver for use within the same site.

               3.2.4  Documentation. TEL grants to KLA a non-exclusive, world-
                      -------------
wide, royalty-free license to use the End User Documentation for its own
internal purposes and to reproduce, distribute and sublicense the unmodified End
User Documentation to its End Users. In addition, TEL grants to KLA a non-
exclusive, world-wide, royalty-free license to extract portions of and modify as
necessary the End User Documentation associated with the CATS Falcon Software in
order to create supplements of such End User Documentation for distribution to
End Users.

               3.2.5  Internal Use License. Effective upon Acceptance and upon
                      --------------------
TEL's receipt of a list identifying up to six (6) designated Central Processing
Units ("CPUs"), TEL grants to KLA a non-exclusive, world-wide, royalty-free
license to reproduce the CATS Falcon Driver and those CATS Falcon Options which
KLA licenses pursuant to Section 7 for use internally for support and
demonstration purposes on up to six (6) designated CPUs. KLA shall have the
right to transfer these copies internally only after KLA has identified for TEL
the CPU to which it intends to transfer a copy and has

                                       6
<PAGE>

received TEL's consent to such transfer. TEL may, in its sole discretion, permit
KLA to reproduce additional copies of the CATS Falcon Software for use
internally for support and demonstration purposes.

               3.2.6  Proprietary Rights Notice. Each copy of the CATS Falcon
                      -------------------------
Driver, the CATS Falcon Options, and the End User Documentation made by KLA
shall contain and bear a proprietary rights notice in the form which they appear
in the CATS Falcon Driver, the CATS Falcon Options and the End User
Documentation transferred to KLA.

               3.2.7  Demonstration of KLA Semiconductor Inspection Equipment.
                      -------------------------------------------------------
TEL understands that KLA may need to demonstrate its semiconductor inspection
equipment which utilizes the CATS Falcon Software from time to time at its
production facilities. Except as set forth in Sections 4, 7 and 21.1, TEL hereby
grants and KLA accepts a world-wide, exclusive, non-transferable license to
demonstrate production copies of the CATS Falcon Software operating on KLA
semiconductor inspection equipment at KLA's production facilities. Such
demonstration shall not, in any way, include running of production data of the
potential customer for whom the demonstration is conducted.

               3.2.8  Restriction on KLA's Rights. Notwithstanding anything to
                      ---------------------------
the contrary set forth in Sections 3.2.2 and 3.2.3 above, KLA agrees that,
unless it obtains prior written authorization from TEL, it will distribute and
sublicense the CATS Falcon Driver and the Embedded CATS Falcon Options only for
use on or with semiconductor inspection equipment manufactured by or for KLA.

     4.   END OF EXCLUSIVITY.

          If KLA directly or indirectly distributes a product, whether embedded
or non-embedded, which provides substantially equivalent functionality as and
would directly compete with the CATS Falcon Driver or any of the Embedded CATS
Falcon Options, KLA's exclusive right to distribute the corresponding TEL
product shall, upon written notice from TEL, become nonexclusive.

     5.   END USER LICENSING.

          KLA will take all steps necessary to protect TEL's proprietary rights
in the CATS Falcon Software and to ensure that each End User has entered into an
End User agreement containing the minimum terms set forth in Exhibit F, attached
                                                             ---------
hereto, prior to KLA,'s distribution of the CATS Falcon Software. In addition,
KLA will not distribute the CATS Falcon Software to End Users in countries other
than those listed on Schedule F-1, without the prior written authorization of
                     ------------
TEL. KLA agrees to follow all software copy protection procedures developed by
TEL and conveyed to KLA to restrict the End User's use of the CATS Falcon
Software to a designated CPU. KLA agrees to license its End Users to use the
CATS Falcon Software only to create a Falcon Format Database for subsequent use
on either (i) a system which contains a CATS Falcon Driver or (ii) a

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<PAGE>

system which does not contain a CATS Falcon Driver, provided that such End User
has licensed from TEL a CATS Falcon Formatter for use within the same site.

     6.   PAYMENT OF ROYALTIES.

          6.1  Amount of Royalties. In connection with KLA's sublicense of the
               -------------------
CATS Falcon Software to an End User, KLA shall pay TEL a royalty equal to
[***] of the List Price (as defined below) for each module of the CATS Falcon
Software sublicensed by KLA to such End User.

          6.2  List Price. The royalty payments which KLA shall be required to
               ----------
pay pursuant to Section 6.1 above shall be based upon TEL's list price of the
particular module of the CATS Falcon Software which is sublicensed by KLA (the
"List Price"). The List Price shall be used solely to calculate the royalty
payments. KLA shall be entitled to independently determine the fees it will
charge the End Users for the CATS Falcon Software. Throughout the term of this
Agreement, the List Price of the CATS Falcon Driver shall be as follows-

               (i)   [***] for use with CPUs on a system rated at 15 MIPS or
less;

               (ii)  [***] for use with CPUs on a system rated at greater than
15 but less than 75 MIPS; and

               (iii) [***] for use with CPUs on a system rated at 75 MIPS or
more.

     TEL will deliver to KLA a list setting forth its non-discounted published
price for each Non-embedded CATS Falcon Option (the Standard Prices ). This list
shall also specifically state the discount offered by TEL to a licensee for the
license of a particular CATS Falcon Option if such licensee has previously
licensed one or more copies of the same CATS Falcon Option for use at the same
or a different site (the "Discount"). The List Price which KLA will use to
calculate the royalty payments due under Section 6.1 for its license of an
Embedded CATS Falcon Option will be equal to the Standard Price for the
corresponding Non-embedded CATS Falcon Option discounted as follows: if TEL
credits copies of Embedded CATS Falcon Options previously licensed by KLA to a
prospective customer for the purposes of calculating its Discount, the reduction
to the Standard Price to determine the List Price shall be calculated in the
same manner as TEL's calculation of its list price to its prospective customer.
If TEL does not provide such a credit for copies of Embedded CATS Falcon
Options, the reduction of the Standard Price shall be calculated as if each copy
of the Embedded CATS Falcon Option previously licensed to the prospective
customer is a Non-embedded CATS Falcon Option. Thus, the applicable Discount
will be based upon the sum of all Embedded CATS Falcon Options and Non-embedded
CATS Falcon Options previously licensed to the prospective customer from either
TEL or KLA. For example, if the prospective customer has licensed two Embedded
CATS Falcon Options and three Non-embedded

                                       8

[***]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>

CATS Falcon Options, the reduction in the Standard Price will be the Discount
TEL would give to a prospective customer who has licensed five Non-embedded CATS
Falcon Options. The Standard Price used to calculate the List Price shall be
that which is delivered in writing to KLA by TEL and in effect at the time KLA
provides a written quote to a potential customer, regardless of the fact that a
new Standard Price may be sent to KLA by TEL after KLA has provided the
prospective customer with a quote and before the prospective customer has
accepted the quote. Provided, however, that unless a quote is accepted by the
potential customer within ninety (90) clays of its delivery by KLA, the quote
shall expire and any licenses granted pursuant to a new quote will be subject to
a royalty calculated from a List Price which shall be equal to the new Standard
Price, discounted as appropriate. TEL may revise its Standard Prices no more
than two (2) times per calendar year. In addition, TEL may increase a particular
Standard Price by an annual amount which is no more than the greater of (i)
fifteen percent (15%) of the existing Standard Price and (ii) the percentage
change in the San Francisco-Oakland-San Jose, California, All Urban Consumers
Price Index as reported on December 31 of the previous year. A Discount shall be
applied to reduce the Standard Price and KLA's royalty obligation if KLA or TEL
has accepted a purchase order for the particular CATS Falcon Option
notwithstanding the fact that the CATS Falcon Option is not shipped to or
installed at the licensee's site prior to the prospective customer's license of
the additional CATS Falcon Option from KLA. In order to enable KLA to calculate
its royalty obligation for consideration when preparing quotes for its potential
customers, KLA and TEL shall adhere to the following procedure: (i) KLA shall
request information from the licensee regarding which, if any, Embedded CATS
Falcon Options or Non-embedded CATS Falcon Options the prospective customer has
previously licensed from either KLA or TEL; (ii) KLA shall use the information
received from the prospective customer to calculate its potential royalty
payment based upon the Standard Price and the appropriate Discount and shall
prepare a customer quote; (iii) at the time KLA delivers the quote to the
prospective customer, KLA shall send to TEL, via facsimile during normal
business hours addressed to President and Vice President, a request for
confirmation that the Discount which KLA has applied in calculating the royalty
payment (the "Determined Discount") is correct for the prospective customer;
(iv) TEL shall respond, via facsimile within five (5) business days of KLA's
request with confirmation that the Determined Discount KLA applied to calculate
the royalty payment is correct or with information regarding the correct
Discount; (v) if TEL does not respond to KLA's request within three (3) business
days of such request, KLA shall then notify TEL, via facsimile, in the same
manner set forth above, that if KLA does not receive a response to its initial
request within two (2) business days, then KLA may use the Determined Discount
to calculate the royalty payment, and TEL agrees that it will not dispute the
Determined Discount used by KLA to calculate the royalty payment.

          6.3  Payment of Royalties. All royalties due in accordance with the
               --------------------
terms of this Agreement with respect to the CATS Falcon Software which the End
User accepts at KLA's facility, shall be due and payable within thirty (30) days
after the End User has accepted the CATS Falcon Software at KLA's facility. All
royalties due in accordance with the terms of this Agreement with respect to the
Embedded CATS Falcon Options for which there is no End User acceptance procedure
at KLA's facility,

                                       9
<PAGE>

shall be due and-payable within sixty (60) days after KLA has completed the
installation of the particular Embedded CATS Falcon Option at the End User's
facility. With each royalty payment, KLA shall include (i) the name and location
of the End User; (ii)a description of the system on which the CATS Falcon
Software will be used, including the CPU type, CPU serial number, system
identification number, host identification number or equivalent identification
number, network or cluster name and the KLA semiconductor inspection equipment
identification number on which the CATS Falcon Software will be used; (iii) the
List Price used by KLA to calculate the royalty payment and (iv) whether a
portion of the royalty due is being offset by a credit due KLA pursuant to
Section 6.4 below.

          6.4  Refunds. In the event KLA semiconductor inspection equipment
               -------
containing CATS Falcon Software is returned to KLA for a full refund prior to
the End User's acceptance of the KLA semiconductor inspection equipment at the
End User's facility, the amount of the royalty paid TEL in connection with the
sublicense of such CATS Falcon Software shall be credited by KLA against
royalties due TEL pursuant to this Section 6.

          6.5  Right of Audit. KLA shall maintain a complete, clear and accurate
               --------------
record of the number of copies of CATS Falcon Software sublicensed by KLA and
the number of copies of the CATS Falcon Software returned for a refund to KLA as
set forth above. At TEL's request, KLA shall provide TEL with a report of all
sublicenses which KLA has entered into for the CATS Falcon Software; provided,
however, that KLA shall not be obligated to provide such report more than once
per quarter. Such report shall also include a list of all End Users who have
contracted with KLA to receive Standard Maintenance. In addition, to ensure
compliance with the terms of this Agreement, TEL shall have the right to have an
inspection and audit of all the relevant accounting books and records of KLA
conducted by an independent certified public accountant reasonably acceptable to
both parties. The audit shall be conducted during regular business hours at
KLA's offices and in such a manner as not to interfere with KLA's normal
business activities. In no event shall audits be made hereunder more frequently
than once every twelve (12) months. The fee for the audit shall be paid by TEL,
unless the audit reveals that KLA has underpaid TEL by at least ten percent
(10%) of the amount of royalties accrued to TEL since the last audit, in which
case the audit fee will be paid by KLA. KLA shall pay to TEL any royalties which
the audit reveals are owing to TEL within thirty (30) days of its receipt of the
report from the accountant indicating the amounts owing TEL.

          6.6  Royalty Free Copies. No royalty shall be due on copies of the
               -------------------
CATS Falcon Software delivered to KLA or reproduced by KLA pursuant to Section
3.2.5 and used internally by KLA for support and demonstration purposes.

                                       10
<PAGE>

     7.   KLA'S PURCHASE OF A CATS FALCON SOFTWARE LICENSE AND KLA'S SUPPORT AND
DEMONSTRATION COPIES.

          7.1  Delivery of the First Copy of CATS Falcon Software. Within five
               --------------------------------------------------
(5) days after KLA has both (i) signed TEL's standard Software License Agreement
and (ii) issued a purchase order which includes the identification of the
designated CPU as required by such agreement, TEL agrees to deliver to KLA one
(1) copy of the CATS Falcon Software in its present form (the "First Copy"). TEL
shall upgrade the First Copy as the CATS Falcon Software is developed so that
KLA may ensure that TEL is meeting the milestones set forth in the Development
Schedule attached hereto as Exhibit G. Upon Acceptance, TEL shall ensure that
                            ---------
the First Copy shall be identical to the CATS Falcon Software accepted by KLA.
KLA shall receive Standard Maintenance (as defined below) on the First Copy free
of charge for a period of one year following Acceptance. In the event there are
any discrepancies between the terms of this Agreement and the terms of TEL's
standard Software License Agreement regarding the First Copy, the terms of this
Agreement shall prevail.

          7.2  KLA's License of the First Copy. KLA agrees to license the First
               -------------------------------
Copy for a total price of [***] plus any applicable sales taxes (the "License
Fee"). The License Fee shall be allocated as follows:

     CATS Falcon Driver (Basic Fracture and     [***]
      Falcon Output)
     CATS Falcon Graphics                       [***]
     CATS Falcon Jobdeck Viewing                [***]
     CATS Falcon Inspection Process
      Program Editor                            [***]
                                                -------

                                                [***]

     The License Fee shall be paid in two equal installments. The first
installment of [***] shall be due and payable upon TEL's completion, to KLA's
satisfaction, of milestones 5 and 6 set forth in the Development Schedule
attached hereto as Exhibit G. The second installment of [***] shall be due and
                   ---------
payable upon Acceptance.

          7.3  Support and Demonstration Copies. Within five (5) days after
               --------------------------------
Acceptance and after KLA has provided TEL with a list of the designated CPUs in
accordance with Section 3.2.5, TEL shall deliver to KLA one (1) copy of the
Deliverables which KLA may reproduce and use in accordance with its license
grant set forth in Section 3.2.5. If TEL so requests, KLA shall return all
copies of the CATS Falcon Driver which KLA has received from TEL pursuant to
this Section 7.3 or which KLA has made pursuant to its reproduction rights under
Section 3.2.5 (collectively, the "Support Copies") in the event that KLA
directly or indirectly distributes software which provides substantially
equivalent functionality as and would compete directly with the CATS Falcon
Driver. In addition, if TEL so requests, KLA shall return all copies of the
particular CATS Falcon Option which KLA has received from TEL pursuant to this

                                       11

[***]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>

Section 7.3 or which KLA has made pursuant to its reproduction rights under
Section 3.2.5 in the event that KLA directly or indirectly distributes software
which provides substantially equivalent functionality as and would compete
directly with such particular CATS Falcon Option.

     8.   TRAINING.

          8.1  TEL Initial Training. TEL agrees to provide, at no charge, three
               --------------------
(3) months of training for one KLA programmer (the "Designated Programmer") who
is to be involved in the development of the Falcon Format and the CATS Falcon
Software. The training is scheduled to begin within five (5) clays after the
Effective Date. TEL agrees to expose the Designated Programmer to the entire
CATS Software system. KLA acknowledges that the CATS Software may include
support of certain file formats which TEL has licensed from third parties. Prior
to exposing the Designated Programmer to such portions of the CATS Software
containing support of each such file format, TEL shall have the right to require
confirmation from the Designated Programmer that KLA is licensed to have access
to such file format. The Designated Programmer may, at KLA's option, return to
TEL for one (1) month every six (6) months throughout the term of this Agreement
for additional training with the CATS Software, for no fee. Should the
Designated Programmer leave the employ of KLA or transfer from the Falcon Format
project team, KLA may designate another programmer to replace the Designated
Programmer. Prior to exposure to the CATS Software pursuant to this Section 8.1,
the Designated Programmer shall execute an Invention Agreement in the form
attached hereto as Exhibit H.
                   ---------

          8.2  Additional Training. In addition to the training provided
               -------------------
pursuant to Section 8.1, KLA may choose to send an additional programmer (the
"Additional Programmer") to train with TEL for one three (3) month period after
January 1, 1993. If KLA exercises the option to receive additional training, KLA
will pay TEL a one time fee of [***] upon completion of the training. Following
the three (3) month training program, the Additional Programmer shall be
entitled to return to TEL for one (1) month of additional training every six (6)
months throughout the term of this Agreement for no additional fee; provided
however, that if the Additional Programmer and the Designated Programmer both
choose to return to TEL for additional training, they must do so in the same
month of the six-month period. Prior to exposure to the CATS Software pursuant
to this Section 8.2, the Additional Programmer shall execute an Invention
Agreement in the form attached hereto as Exhibit H.
                                         ---------

          8.3  KLA Training. KLA shall be responsible for the installation of
               ------------
the CATS Falcon Software which it sublicenses pursuant to this Agreement. KLA
will also be responsible for the initial customer training at the customer site
and for the distribution and installation of any Updates to the CATS Falcon
Software, as defined in the description of Standard Maintenance attached hereto
as Exhibit I.
   ---------

                                       12

[***]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>

          8.4  TEL Customer Training. TEL agrees to provide basic initial
               ---------------------
customer training, free of charge, for all End Users at TEL's facilities
pursuant to TEL's then-current training policies. In addition, TEL shall
provide, at KLA's Santa Clara County facility, at least five (5) hours of
training for a group of up to six (6) of KLA's field service support employees
upon Acceptance and following delivery to KLA of each Major Update, as defined
in the description of Standard Maintenance set forth in Exhibit I.
                                                        ---------

     9.   MAINTENANCE.

          9.1  End User Maintenance. TEL shall provide each End User with
               --------------------
standard maintenance for the CATS Falcon Software distributed by KLA. Such
standard maintenance is described more fully in Exhibit I hereto and shall be
                                                ---------
referred to hereinafter as the "Standard Maintenance". Each End User shall
receive Standard Maintenance from TEL, free of any charge, for the CATS Falcon
Software which the End User accepts at KLA's facility, for a period of one (1)
year following the End User's acceptance of the CATS Falcon Software at the End
User's facility; provided however, that such acceptance of the CATS Falcon
Software at the End User's facility shall be evidenced in writing and shall be
obtained no later than the time the End User accepts the KLA semiconductor
inspection equipment on which the CATS Falcon Software is embedded. In addition,
each End User shall receive Standard Maintenance from TEL, free of charge, for
any Embedded CATS Falcon Options for which there is no End User acceptance
procedure at KLA's facility, for a period of one (1) year following KLA's
completion of the installation of the Embedded CATS Falcon Option at the End
User's facility. Thereafter, End Users of the CATS Falcon Software shall
contract with KLA to continue to receive Standard Maintenance from TEL;
provided, however, an End User may only receive Standard Maintenance on the
Embedded CATS Falcon Options for so long as it has contracted to receive
Standard Maintenance on the CATS Falcon Driver. TEL shall continue to provide
Standard Maintenance to those End Users who have so contracted with KLA.

          9.2  KLA's Maintenance. KLA shall receive Standard Maintenance for the
               -----------------
First Copy and the Support Copies free of charge, for a period of one (1) year
following Acceptance. Thereafter, should KLA desire to continue to receive the
Standard Maintenance for all or a portion of the First Copy, KLA shall pay the
Standard Maintenance Fees set forth in Section 9.3 for the CATS Falcon Driver
and each of the CATS Falcon Options for which KLA wishes to continue
maintenance. KLA shall continue to receive Standard Maintenance for the modules
of the Support Copies, free of charge, for as long as KLA is purchasing Standard
       --------------
Maintenance for those modules of the First Copy. The maintenance which TEL shall
provide pursuant to this Section 9.2 shall be identical to Standard Maintenance,
except that, as part of the maintenance provided to KLA pursuant to this Section
9.2, TEL will provide First Line Support, as defined below.

          9.3  Maintenance Fees. The annual standard maintenance fee (the
               ----------------
"Standard Maintenance Fee") which KLA shall pay to TEL for each End User with

                                       13
<PAGE>

which it has entered into a contract for extended Standard Maintenance shall be
twelve percent (12%) for domestic sites and fifteen percent (15%) for foreign
sites of the List Price (as defined above), of the module of the CATS Falcon
Software for which the End User desires to continue to receive Standard
Maintenance; provided, if the End User does not contract with KLA to continue to
receive Standard Maintenance at least thirty (30) days prior to the lapse of its
right to receive Standard Maintenance and, the End User wishes to reinstate
Standard Maintenance, KLA shall pay to TEL a one-time reinstatement fee equal to
two hundred percent (200%) of the amount of the Standard Maintenance Fee which
KLA would have paid TEL if the End User had not allowed its receipt of Standard
Maintenance to lapse; and provided further, that should KLA contract with an End
User for less than a full year of Standard Maintenance in order to effectively
coordinate the collection of maintenance fees from the End User, KLA shall pay
to TEL a portion of the Standard Maintenance Fee prorated for such shorter
maintenance period.

          9.4  Payment of Standard Maintenance Fees. KLA agrees that it will pay
               ------------------------------------
to TEL the Standard Maintenance Fee within thirty (30) days after entering into
the contract for extended Standard Maintenance with the End User.

          9.5  KLA's Support Fees. KLA shall provide First Line Support in
               ------------------
connection with the End User's receipt of the Standard Maintenance for the CATS
Falcon Software distributed by KLA As consideration for providing such First
Line Support, KLA shall be entitled to receive a fee equal to twenty percent
(20%) of the Standard Maintenance Fee KLA is required to pay to TEL for such End
User. First Line Support shall include the operation of a telephone support
line, field training, initial contact for bug reports and enhancements, and the
installation of Updates as defined in Exhibit I. KLA shall have the right to
                                      ---------
deduct this amount from the Standard Maintenance Fees owing TEL for such End
User pursuant to Section 9.3.

          9.6  TEL Priority Support. TEL agrees that as a part of its Standard
               --------------------
Maintenance, it will assign at least one full time programmer with at least one
(1) year of experience working with the CATS Software to work on a full-time
basis to correct any bugs reported by KLA or its End Users which have no
workarounds and cause the inspection system to fail to meet its sensitivity,
false defect or throughput specifications.

          9.7  KLA's Support Options.
               ---------------------

               9.7.1  Support of the CATS Falcon Driver. The parties agree that
                      ---------------------------------
(i) if KLA believes, in its sole discretion, that TEL has failed to provide
support and Standard Maintenance to the End Users and/or to KLA, such that the
End Users' or KLA's productivity with the CATS Falcon Driver or the CATS Falcon
Inspection Process Program Editor is substantially affected or (ii) if pursuant
to a request by an End User, KLA requests that TEL develop a particular update
or enhancement relating to the End User's productivity with the CATS Falcon
Driver or the CATS Falcon Inspection Process Program Editor and after discussion
KLA and TEL are unable to agree upon whether such update or enhancement shall be
part of Standard Maintenance or are unable to

                                       14

<PAGE>

arrive at a mutually acceptable schedule for such development by TEL, then KLA
may send up to two (2) programmers (at least one of which must be the Designated
Programmer or the Additional Programmer) (the "Falcon Driver Support
Programmers") to TEL to work on modifying, enhancing and supporting the CATS
Falcon Driver output modules. KLA agrees that the Falcon Driver Support
Programmers will use their best efforts to avoid modifying the CATS Software so
that it adversely affects the existing users of the CATS Software. TEL agrees
that if KLA exercises this support option, that TEL will provide the Falcon
Driver Support Programmers with reasonable support as necessary to enable them
to modify, enhance and support the CATS Falcon Driver or the CATS Falcon
Inspection Process Program Editor. KLA agrees to reimburse TEL for any
reasonable out-of-pocket expenses incurred by TEL as a direct result of
providing this support to the Falcon Driver Support Programmers.

               9.7.2  Additional Support of the CATS Falcon Software. If KLA
                      ----------------------------------------------
believes that an End User's productivity with the Embedded CATS Falcon Options
or the CATS Falcon Driver is substantially affected by TEL's lack of support for
such CATS Falcon Options and/or CATS Falcon Driver, KLA may request
authorization to, and TEL may, in its sole discretion, permit KLA to, send up to
two (2) programmers (at least one of which must be the Designated Programmer or
the Additional Programmer) (the "Option Support Programmers) to TEL to work,
under the supervision of TEL employees, on modifying, enhancing and supporting
the CATS Falcon Options and the CATS Falcon Driver modules relating directly to
Falcon Format applications and not covered by KLA's support option set forth in
Section 9.7.1; provided, however, that TEL shall retain the right at all times
to approve any and all modifications which the Option Support Programmers shall
make, pursuant to this Section 9.7.2, to the CATS Falcon Options and the CATS
Falcon Driver and provided further, that KLA shall reimburse TEL for any
reasonable out-of-pocket expenses incurred by TEL as a direct result of
providing support to the Option Support Programmers.

          9.8  Maintenance Reduction Option. At any time following Acceptance,
               ----------------------------
KLA shall have an option, exercisable once during the term of this Agreement, to
require TEL to maintain two versions of the CATS Falcon Driver. One version
shall be enhanced and upgraded as usual (the "Enhanced Version") and the other
shall be modified only as required to fix bugs (the "Bug Fix Version"). Upon
KLA's exercise of this option, End Users may choose to maintain the CATS Falcon
Driver as either an Enhanced Version or as a Bug Fix Version. Those End Users
who elect to maintain their CATS Falcon Driver as a Bug Fix Version shall only
be entitled to receive bug fix support from TEL. The Standard Maintenance Fee
which KLA is required to pay for those End Users who elect to maintain their
CATS Falcon Driver as a Bug Fix Version shall be reduced by sixty percent (60%).
Those End Users who elect to maintain their CATS Falcon Driver as an Enhanced
Version shall continue to receive Standard Maintenance from TEL and KLA shall
continue to be obligated to deliver Standard Maintenance Fees set forth in
Section 9.3 to TEL for such End Users. An End User shall be entitled to reverse
the exercise of its option by providing written notice to KLA of its intention
to do so. If an End User elects to reverse its election to maintain a Bug Fix
Version, the End User shall again be entitled to receive Standard Maintenance as

                                       15

<PAGE>

described in such Section 9.1, provided that KLA pays TEL a one time
reinstatement fee equal to one hundred and fifty percent (150%) of the
difference between the Standard Maintenance Fee which would have been paid had
the End User continually maintained its CATS Falcon Driver as an Enhanced
Version and the maintenance fee paid for the Bug Fix Version (including any
deductions for fees paid to KLA for acting as First Line Support). The one
hundred and fifty percent (150%) fee shall be in addition to the reduced
maintenance fees paid to maintain the CATS Falcon Driver as a Bug Fix Version.

     10.  ENHANCEMENTS TO THE CATS FALCON FORMATTER.

          TEL agrees that it will release to KLA enhancements to the CATS Falcon
Driver prior to or simultaneously with its release of inspection specific
enhancements to the CATS Software and CATS Falcon Formatter. TEL will release
enhancements to the Embedded CATS Falcon Options prior to or simultaneously with
its release of enhancements to the corresponding Non-embedded CATS Falcon
Options. Additionally, TEL agrees that the enhancements to the CATS Falcon
Driver and the Embedded CATS Falcon Options will be at least functionally
equivalent to the inspection specific enhancements to the CATS Software
configured with the CATS Falcon Formatter and to the Non-embedded CATS Falcon
Options, respectively.

     11.  PROPRIETARY RIGHTS.

          11.1 TEL Ownership. TEL is and shall remain the sole and exclusive
               -------------
owner of all right, title and interest in the TEL Formats, the CATS Software,
the CATS Falcon Software, and the End User Documentation. In the event that KLA
exercises its support options set forth in Section 9.7, TEL shall be the sole
and exclusive owner of all right, title and interest in any modifications which
the Falcon Driver Support Programmers and the Option Support Programmers make to
the CATS Software.

          11.2 KLA Ownership. KLA is and shall remain the sole and exclusive
               -------------
owner of all right, title and interest in the KLA Base Technology.

     12.  LIMITED WARRANTY.

          TEL warrants to KLA that the First Copy and the CATS Falcon Software
accepted by KLA pursuant to Section 2 and that each Major Update (as such terms
are defined on Exhibit I) will, during the "Warranty Period", perform in
               ---------
accordance with the End User Documentation and in accordance with the Falcon
Format Specifications. The "Warranty Period" for the First Copy and the CATS
Falcon Software shall commence on Acceptance and shall terminate one (1) year
after such date. The "Warranty Period" for each Major Update shall commence upon
KLA's acceptance of such Major Update and shall terminate one (1) year after
such date. TEL warrants that the End User Documentation is free of material
errors on the date of Acceptance. KLA agrees to report in writing any failure to
meet this warranty ("Error"). TEL will use all commercially reasonable efforts,
at its own expense, to correct any Error. Errors will be

                                       16

<PAGE>

reported to TEL in a form and with supporting information reasonably requested
by TEL to enable it to verify, diagnose and correct the Error. If TEL is unable
to correct the Error, KLA and TEL may agree upon a reduction in the royalty
payments for the sublicensing of future copies and may agree upon a credit
against future royalties due TEL for the copies previously sublicensed to End
Users to reflect the reduced performance. THIS IS A LIMITED WARRANTY AND IT IS
THE ONLY WARRANTY MADE BY TEL. TEL DOES NOT WARRANT THAT THE USE OF THE CATS
FALCON SOFTWARE WILL BE UNINTERRUPTED OR THAT THE OPERATION OF THE CATS FALCON
SOFTWARE WILL BE ERROR FREE. TEL MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY, INFRINGEMENT AND FITNESS
FOR A PARTICULAR PURPOSE. NO TEL DEALER, AGENT OR EMPLOYEE IS AUTHORIZED TO MAKE
ANY MODIFICATION, EXTENSION OR ADDITION TO THIS WARRANTY.

     13.  KLA'S LIMITATION OF WARRANTY.

          TEL AND KLA AGREE THAT THE KLA BASE TECHNOLOGY PROVIDED TO TEL
PURSUANT TO THIS AGREEMENT IS PROVIDED TO TEL "AS IS". KLA DISCLAIMS ALL OTHER
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE KLA BASE TECHNOLOGY,
INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE
AND NON-INFRINGEMENT OF ANY THIRD PARTY RIGHTS.

     14.  INDEMNIFICATION.

          14.1 TEL's Indemnity. TEL agrees to indemnify and hold harmless KLA,
               ---------------
its officers, directors, employees and agents against any claims, actions or
demands, including reasonable attorneys' fees, by third parties (i) alleging
that the use, reproduction or distribution of the CATS Falcon Software and the
TEL Formats infringe any patents, copyrights, trade secrets, mask work rights or
other proprietary rights of any third parties, (ii) alleging a breach of any
warranty, representation or agreement made by TEL with respect to the CATS
Software, TEL Formats and/or the KLA Base Technology or (iii) alleging a failure
of performance to the extent that TEL has promised such performance of the CATS
Software and/or TEL Formats in any warranty, representation or agreement made
herein by TEL. (This Section 14.1(iii) is meant to provide indemnity for
nonperformance claims brought by third parties against KLA for the
nonperformance of the CATS Software and/or the TEL Formats to the extent the
performance thereof is promised by the warranties, representations and
agreements provided to KLA by TEL hereunder.) TEL shall have no liability under
this Section 14.1, however, to the extent that such claim, action or demand is
based on the use of any CATS Falcon Software or the TEL Formats in combination
with any hardware or software not provided by TEL, or modification to the CATS
Software not made by or authorized in writing by TEL. KLA shall give prompt
written notice to TEL of any such claim, action or demand. If TEL believes that
the CATS Falcon Software and/or the TEL Formats are likely to become

                                       17
<PAGE>

the subject of a claim of infringement, then TEL may, at its option and at its
expense, obtain a commercially reasonable license for KLA which would give KLA
the same rights it currently has under this Agreement or modify the CATS Falcon
Software and/or TEL Formats so that they are functionally equivalent but non-
infringing. If, after using its best efforts, TEL is unable to either obtain a
license for KLA or modify the CATS Falcon Formatter and/or TEL Formats so that
they are functionally equivalent but non-infringing, then TEL may restrict KLA's
future distribution of the infringing product in the territory where
infringement exists. Notwithstanding the above, TEL shall continue to be
obligated to indemnify KLA, as set forth above, against any claims, actions or
demands arising from KLA's prior distribution of the infringing product.

          14.2 KLA's Indemnity. KLA agrees to indemnify and hold harmless TEL,
               ---------------
its officers, directors, employees and agents against any claims, actions, or
demands, including reasonable attorneys' fees, by third parties alleging (i)
that the KLA Base Technology infringes any patents, copyrights, trade secrets,
masks work rights or other proprietary rights of any third parties, or (ii) a
breach of any warranty, representation or agreement made by KLA to any such
third party which is a warranty, representation or agreement for which KLA is
not entitled to receive indemnity from TEL pursuant to Section 14.1(iii) above.
TEL shall give prompt written notice to KLA of any claim, action or demand.

     15.  LIMITATION OF LIABILITY.

          NEITHER KLA NOR TEL WILL BE LIABLE OR OBLIGATED IN ANY MANNER FOR ANY
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF INFORMED OF THE
POSSIBILITY THEREOF IN ADVANCE. IN NO EVENT SHALL TEL'S LIABILITY HEREUNDER TO
KLA (EXCEPT PURSUANT TO SECTIONS 14.1 AND 9) EXCEED THE AMOUNTS PAID TO TEL BY
KLA HEREUNDER

     16.  CONFIDENTIALITY.

          16.1 KLA Confidential Information. TEL agrees to maintain in
               ----------------------------
confidence all information which is disclosed to TEL by KLA either in written
form and marked "Confidential", or orally, if KLA has sent a written summary of
such information to TEL within ten (10) business days of disclosure and marked
such summary "Confidential."

          16.2 TEL Confidential Information. KLA agrees to maintain in
               ----------------------------
confidence all information which is disclosed to the Designated Programmer,
Additional Programmer, Falcon Driver Support Programmer, Option Support
Programmer or to KLA by TEL either in written form and marked "Confidential", or
orally, if TEL has sent a written summary of such information to KLA within ten
(10) business days of disclosure and marked such summary "Confidential".

                                       18
<PAGE>

          16.3 Limitations on Use. The party receiving Confidential Information
               ------------------
(the "Receiving Party") will use the Confidential Information solely to
accomplish the purpose of this Agreement. The Receiving Party shall keep all
Confidential Information on its premises and shall limit access to such
Confidential Information to those employees having a need to use such
Confidential Information within the license of rights hereunder. The Receiving
Party agrees that the Confidential Information will be disclosed or made
available only to full-time employees of the Receiving Party who have agreed in
writing to receive it under terms at least as restrictive as those specified in
this Agreement and only to those full-time employees to whom it is necessary to
disclose the Confidential Information to fulfill the purposes of this Agreement.
The Receiving Party shall keep a record of the location of all copies of the
Confidential Information and a list of all employees who have had access to the
Confidential Information. The Receiving Party will use its best efforts to
maintain the confidentiality of the Confidential Information, but not less than
the measures it uses for its own confidential information of similar type. The
Receiving Party will immediately give notice to the party providing the
Confidential Information (the "Providing Party") of any unauthorized use or
disclosure of the Confidential Information. The Receiving Party will assist, at
no cost, the Providing Party in remedying any such unauthorized use or
disclosure.

          16.4 Limitations. These obligations will not apply to the extent that
               -----------
the Receiving Party can demonstrate that:

               (i)   the disclosed information at the time of disclosure is part
of the public domain;

               (ii)  the disclosed information became part of the public domain,
by publication or otherwise, except by breach of the provisions of this
Agreement;

               (iii) the disclosed information was received from a third party
without similar restrictions and without breach of this Agreement;

               (iv)  the disclosed information was independently developed by
the Receiving Party without reference to the Confidential Information; or

               (v)   the disclosed information was disclosed to others by the
Providing Party without restriction.

     17.  TERMINATION.

          17.1 TEL Change of Control. For purposes of this section, A
               ---------------------
"Competitive Ownership Change" shall be deemed to have occurred if any of the
following events occur with respect to TEL:

               (1)  the direct or indirect sale or exchange of the stock of TEL
such that the shareholders of TEL before such sale or exchange do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of TEL and that such majority beneficial ownership rests in a
company or companies, other than KLA, which manufacture reticle inspection
equipment, wafer inspection equipment or printed circuit board inspection
equipment (a "Competitor"); or


                                      19


<PAGE>

               (2)  a merger between TEL and a Competitor; or

               (3)  the sale, exchange or transfer of all or substantially all
of TEL's assets to a Competitor.

          17.2 Cause. This Agreement shall terminate:
               -----

               (a)  on the sixtieth (60th) day after KLA gives TEL notice of a
material breach by TEL of any term or condition of this Agreement, unless the
breach is cured before that day;

               (b)  on the sixtieth (60th) day after TEL gives KLA notice of a
material breach by KLA of any term or condition of this Agreement, unless the
breach is cured before that day; or

               (c) if TEL experiences a Competitive Ownership Change and an
officer of KLA makes a good faith determination that such Competitive Ownerhip
Change would have a negative impact on KLA's ability to continue to support and
sublicense the CATS Falcon Software, and KLA gives TEL notice that such a
determination has been made.

          17.3 Without Cause. This Agreement may be terminated by either party,
               -------------
without cause, upon ninety (90) days written notice to the other party at any
time after this Agreement has been in effect for five (5) years.

          17.4 Bankruptcy. This Agreement may be terminated immediately by
               ----------
either party, upon prior written notice to the other party, if: (i) a receiver
is appointed for the other party or its property; (ii) the other party becomes
insolvent or unable to pay its debts as they mature in the ordinary course of
business or makes an assignment for the benefit of its creditors; or (iii) any
proceedings are commenced against the other party under any bankruptcy,
insolvency or debtor's relief law and such proceedings are not vacated or set
aside within sixty (60) days from the date of commencement thereof.

          17.5 Termination by KLA. KLA may terminate this Agreement at any time
               ------------------
prior to Acceptance.

          17.6 Effect of Termination. After expiration, termination or
               ---------------------
cancellation (all hereafter collectively referred to as "termination") of this
Agreement:

               (a)  for any reason, other than as set forth in Section 17.2(c)
and 17.5, (i) all licenses granted pursuant to Section 3 shall terminate; (ii)
KLA will erase,

                                       20

<PAGE>

destroy or return to TEL all copies of the Support Copies, End User
Documentation, and TEL Confidential Information in its possession or control,
except for one copy of the most recent version of the End User Documentation
which it may retain solely to provide maintenance services to its End Users who
have purchased CATS Falcon Software from KLA; and (iii) TEL shall return all
copies of the KLA Base Technology and KLA Confidential Information in its
possession or control, except for one copy of the most recent version of the KLA
Base Technology which it may retain solely to provide maintenance services to
its end users and KLA's End Users. The termination of this Agreement shall not
affect the rights of KLA's End Users to use the CATS Falcon Software or the
right of KLA to use the First Copy. TEL will continue to provide Standard
Maintenance to KLA and its End Users as set forth in Section 9 following the
termination of this Agreement.

               (b)  pursuant to the terms of Section 17.2(c), (i) all licenses
granted to TEL pursuant to Section 3.1 shall terminate and TEL shall return all
copies of the KLA Base Technology and KLA Confidential Information in its
possession or control, except for one copy of the most recent version of the KLA
Base Technology which it may retain solely to provide maintenance services to
its end users; (ii) KLA shall receive a full refund of all royalties paid to TEL
pursuant to Section 6 during the two (2) year period immediately preceding the
effective date of the Competitive Ownership Change; and (iii) upon the effective
date of the Competitive Ownership Change, KLA's license grants pursuant to
Section 3.2 shall automatically become perpetual and royalty-free and Section 4
shall terminate.

               (c)  pursuant to the terms of Section 17.5, (i) TEL shall refund
all monies paid to TEL by KLA pursuant to this Agreement; (ii) all licenses
granted pursuant to this Agreement shall terminate; (iii) TEL will destroy or
erase all copies of the KLA Base Technology and KLA Confidential Information in
its possession and control and (iv) KLA will destroy or return to TEL the First
Copy, along with any End User Documentation and TEL Confidential Information;
provided, however, that KLA shall not be obligated to destroy or return the
First Copy, End User Documentation or TEL Confidential Information until KLA has
received a refund of all monies it has paid to TEL pursuant to this Agreement.

     18.  TERM OF THIS AGREEMENT.

          This Agreement will commence on the Effective Date and will continue
Until terminated by either party as provided for herein.

     19.  ARBITRATION.

          Any claim, dispute or controversy arising out of or in connection with
or relating to this Agreement or the breach or alleged breach thereof will be
submitted by the parties to arbitration by the American Arbitration Association
in the City of San Jose, State of California, United States of America, under
the commercial rules then in effect for that Association, except as provided
herein. A transcribed record will be

                                       21
<PAGE>

prepared. One neutral arbitrator will be selected by the Association. The
parties will be entitled to discovery as provided in Sections 1283.05 and 1283.1
of the Code of Civil Procedure of the State of California, or any successor
provision, whether or not the California Arbitration Act is deemed to apply to
the arbitration. The award rendered by the arbitrator will include costs of
arbitration, reasonable attorneys' fees and reasonable costs for expert and
other witnesses, and judgment on such award may be entered in any court having
jurisdiction thereof. Nothing in this Agreement will be deemed as preventing
either party from seeking injunctive relief (or any other provisional remedy)
from any court having jurisdiction over the parties and the subject matter of
the dispute as necessary to protect either party's name, proprietary
information, trade secrets, know-how or any other proprietary rights.

     20.  COMMUNICATIONS AND PUBLIC ANNOUNCEMENTS.

          Neither TEL nor KLA shall furnish any press release or formal written
communication to the public with respect to the transactions contemplated by
this Agreement without the prior approval of the other party as to the content
thereof, which approval should not be unreasonably withheld, provided that the
foregoing shall not be deemed to prohibit any disclosure which a party
reasonably believes is required by applicable law or by any competent
governmental authority.

     21.  GENERAL PROVISIONS.

          21.1 Assignment. KLA shall have the right to assign its rights and
               ----------
obligations under this Agreement to a corporation or entity which is a successor
in interest to KLA or to any corporation or entity which becomes, directly or
indirectly, the owner of the division of KLA which makes use of the rights
granted pursuant to this Agreement; provided, however, that if KLA assigns this
Agreement, voluntarily or by operation of law, to a party which directly markets
a product that directly competes with the CATS Software, then the exclusive
distribution rights set forth in Sections 3.2.2 and 3.2.3 shall become non-
exclusive for such time as the competitive product is marketed by the party to
which this Agreement is assigned. TEL may not assign, voluntarily, by operation
of law, or otherwise, any rights or delegate any duties under this Agreement
(other than the right to receive payments) without KLA's prior written consent.
Any attempt to do so without that consent will be void. This Agreement will bind
and inure to the benefit of the parties and their respective successors and
permitted assigns.

          21.2 Choice of Law. This Agreement will be governed by and construed
               -------------
in accordance with the laws of the United States and the State of California as
applied to agreements entered into and to be performed entirely within
California between California residents.

          21.3 Choice of Forum. The parties hereby submit to the jurisdiction
               ---------------
of, and waive any venue objections against, the United States District Court for
the Northern District of California, San Jose Branch and the Superior and
Municipal Courts of the State of California, Santa Clara County, in any
litigation arising out of the Agreement.

                                       22
<PAGE>

          21.4 Amendment. This Agreement may be amended or supplemented only by
               ---------
a writing that is signed by duly authorized representatives of both parties.

          21.5 Injunctive Relief. Since breach of this Agreement by either
               -----------------
party may cause the non-breaching party to suffer irreparable damage for which
the recovery of money damages would be inadequate, the non-breaching party shall
be entitled to obtain equitable relief to protect its interests therein,
including but not limited to injunctive relief, as well as money damages.

          21.6 Waiver. No term or provision hereof will be considered waived by
               ------
either party, and no breach excused by either party, unless such waiver or
consent is in writing signed by both parties. No consent by either party to, or
waiver of, a breach by either party, whether express or implied, will constitute
a consent to, waiver of, or excuse of any other, different or subsequent breach
by either party.

          21.7 Force Majeure. Neither party will be liable for any failure or
               -------------
delay in performance under this Agreement which might be due, in whole or in
part, directly or indirectly, to any contingency, delay, failure or cause of any
nature beyond the reasonable control of such party (not arising out of breach by
such party of this Agreement). In the event of the happening of such a cause,
the party whose performance is so affected will give prompt, written notice to
the other party, stating the period of time the same is expected to continue.
Such delay will not be excused under this Section for more than one hundred
eighty (180) days.

          21.8 Severability. If any part of this Agreement is found invalid or
               ------------
unenforceable that part will be amended to achieve as nearly as possible the
same economic effect as the original provision and the remainder of this
Agreement will remain in full force.

          21.9 Notice. Any notice provided for or permitted under this
               ------
Agreement will be treated as having been given when (a) delivered personally,
(b) sent by confirmed telex or telecopy, (c) sent by commercial overnight
courier with written verification of receipt, or (d) mailed postage prepaid by
certified or registered mail, return receipt requested, to the party to be
notified, at the address set forth below, or at such other place of which the
other party has been notified in accordance with the provisions of this Section.

     If to KLA:   KLA Instruments Corporation
                  160 Rio Robles
                  P.O. Box 49055
                  San Jose, California 95161-9055
                  Attn: President

                                       23
<PAGE>

     If to TEL:     Transcription Enterprises Limited
                    101 Albright Way
                    Los Gatos, California 95030
                    Attn: President

          21.10  Relationship of Parties. The parties to this Agreement are
                 -----------------------
independent contractors. There is no relationship of agency, partnership, joint
venture, employment or franchise between the parties. Neither party has the
authority to bind the other or to incur any obligation on its behalf.

          21.11  Counterparts. This Agreement may be executed simultaneously in
                 ------------
two or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.

          21.12  Entire Agreement. This Agreement, including all Exhibits to
                 ----------------
this Agreement, constitutes the entire agreement between the parties relating to
this subject matter and supersedes all prior or simultaneous representations,
discussions, negotiations and agreements, whether written or oral.

          21.13  Survival. Sections 11, 12, 13, 14, 15, 16, 17.6, 19, 21.2,
                 --------
21.3, and 21.5 will survive the termination of this Agreement.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.

"KLA"                                   "TEL"

KLA Instruments Corporation             Transcription Enterprises Limited


By: /s/ John W. Mathews                 By:   /s/ Roger Sturgeon
   --------------------                    ------------------------

Name:   John W. Mathews                 Name:     Roger Sturgeon
     ------------------                      ----------------------

Title: V.P. & Gen. Mgr.                 Title:  President
      -----------------                       ---------------------

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