Document:

<PAGE>   1
                                                                   EXHIBIT 10.18

 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE
       BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION].

                AMENDED AND RESTATED MASTER SEPARATION AGREEMENT

                                  BY AND AMONG

                          CADENCE DESIGN SYSTEMS, INC.,

                             CADENCE HOLDINGS, INC.

                                   TALITY, LP

                                       AND

                               TALITY CORPORATION

                                   DATED AS OF

                                  _______, 2000
<PAGE>   2
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                          PAGE
                                                                                          ----
<S>                                                                                       <C>
ARTICLE I  DEFINITIONS......................................................................2
        Section 1.1   Affiliate.............................................................2
        Section 1.2   Applicable Law........................................................2
        Section 1.3   Business Day..........................................................2
        Section 1.4   Cadence's Auditors....................................................2
        Section 1.5   Cadence Group.........................................................2
        Section 1.6   Class A Common Stock..................................................2
        Section 1.7   Class B Common Stock..................................................2
        Section 1.8   Class C Common Stock..................................................2
        Section 1.9   Contracts.............................................................2
        Section 1.10  Governmental Approvals................................................2
        Section 1.11  Governmental Authority................................................2
        Section 1.12  Information...........................................................3
        Section 1.13  IPO Closing Date......................................................3
        Section 1.14  Person ...............................................................3
        Section 1.15  Subsidiary............................................................3
        Section 1.16  Tality's Auditors.....................................................3
        Section 1.17  Tality Group..........................................................3
        Section 1.18  Third-Party Approvals.................................................3

ARTICLE II  SEPARATION......................................................................3
        Section 2.1   Separation Date.......................................................3
        Section 2.2   Documents to Be Delivered by Cadence and Tality.......................4
        Section 2.3   Governmental Approvals................................................5
        Section 2.4   Third-Party Approvals.................................................5
        Section 2.5   No Representations or Warranties......................................5

ARTICLE III  THE IPO AND REGISTRATION RIGHTS................................................5
        Section 3.1   Transactions Prior to the IPO.........................................5
        Section 3.2   Cooperation...........................................................6
        Section 3.3   Conditions Precedent to Consummation of the IPO.......................6
        Section 3.4   Registration Rights...................................................7

ARTICLE IV  COVENANTS AND OTHER MATTERS....................................................16
        Section 4.1   Further Instruments..................................................16
        Section 4.2   Agreement for Exchange of Information................................17
        Section 4.3   Auditors and Audits; Annual and Quarterly Statements and Accounting..18
        Section 4.4   Dispute Resolution...................................................20
        Section 4.5   Non-Solicitation of Employees........................................21
        Section 4.6   Employee Agreements..................................................21
        Section 4.7   Government and Third Party Approvals.................................23
        Section 4.8   Relationship with Scottish Enterprise................................23
</TABLE>

                                        i
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<TABLE>
<S>                                                                                        <C>
ARTICLE V  MISCELLANEOUS...................................................................24
        Section 5.1   Limitation of Liability..............................................24
        Section 5.2   Entire Agreement.....................................................25
        Section 5.3   Governing Law........................................................25
        Section 5.4   Termination..........................................................25
        Section 5.5   Notices..............................................................25
        Section 5.6   Counterparts.........................................................26
        Section 5.7   Binding Effect; Assignment...........................................26
        Section 5.8   Severability.........................................................26
        Section 5.9   Failure or Delay Not Waiver; Remedies Cumulative.....................26
        Section 5.10  Amendment............................................................26
        Section 5.11  Authority............................................................26
        Section 5.12  Interpretation.......................................................27
        Section 5.13  Conflicting Agreements...............................................27
        Section 5.14  Payment of Expenses..................................................27
        Section 5.15  Prior Agreement Superseded...........................................27
</TABLE>

                                       ii
<PAGE>   4
                AMENDED AND RESTATED MASTER SEPARATION AGREEMENT

        THIS AMENDED AND RESTATED MASTER SEPARATION AGREEMENT (this "Agreement")
is entered into and effective as of ________, 2000, by and among Cadence Design
Systems, Inc., a Delaware corporation ("Cadence"), and Cadence Holdings, Inc., a
Delaware corporation and wholly owned subsidiary of Cadence ("Holdings" and,
together with Cadence, the "Cadence Parties"), on the one hand, and Tality
Corporation, a Delaware corporation ("Tality"), and Tality, LP, a Delaware
limited partnership (the "Partnership", and, together with Tality, the "Tality
Parties"), on the other hand. Capitalized terms used herein and not defined
elsewhere herein shall have the meanings ascribed to them in Article I.

                                    RECITALS

        WHEREAS, Holdings currently owns approximately 98% of the issued and
outstanding shares of the capital stock of Tality;

        WHEREAS, Tality is the sole general partner of, and owns both a general
and limited partnership interest in, the Partnership;

        WHEREAS, Cadence, on behalf of Holdings, and Holdings have transferred
to the Partnership as a capital contribution, and the Partnership has acquired
through one or more Subsidiaries, certain assets, liabilities and other
obligations relating to the operation of the business of providing design
engineering services, and intellectual property in connection therewith, to
electronic equipment manufacturers, all as described in the Registration
Statement (the "Tality Business"), outside of the United States;

        WHEREAS, each of the Boards of Directors of Cadence, Tality and Holdings
determined that it would be appropriate and desirable for Cadence to transfer
(or cause to be transferred) to the Partnership, on behalf of Holdings, and for
the Partnership to receive and assume, directly or indirectly, as a contribution
from Holdings, certain other assets and liabilities of Cadence and its
Subsidiaries associated with the Tality Business (the "Separation");

        WHEREAS, Cadence, Holdings, the Partnership and Tality currently
contemplate that, immediately following the contribution of such assets to and
assumption of such liabilities by the Partnership, Tality shall commence an
initial public offering ("IPO") of its Class A Common Stock, par value $0.001
per share (the "Class A Common Stock"), pursuant to a registration statement on
Form S-1 promulgated by the Securities and Exchange Commission (the
"Registration Statement");

        WHEREAS, Cadence, Holdings and Tality entered into that certain Master
Separation Agreement, dated as of July 14, 2000, which prior to the date hereof
has governed the matters described above (the "Prior Agreement");

        WHEREAS, each of the parties now desires to amend and restate the Prior
Agreement in its entirety pursuant to Section 5.10 thereof; and

<PAGE>   5

        WHEREAS, the parties intend for this Agreement to set forth the
principal arrangements between them regarding the Separation.

                                    AGREEMENT

        NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

        Section 1.1 "Affiliate" of any Person means any other Person that
controls, is controlled by, or is under common control with, such first Person.
As used herein, "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities or other interests, by
contract or otherwise.

        Section 1.2 "Applicable Law" means all laws and regulations of
Governmental Authorities applicable to the transaction, property or Persons at
issue.

        Section 1.3 "Business Day" means any day that is not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in the
State of California.

        Section 1.4 "Cadence's Auditors" means Cadence's independent certified
public accountants from time to time.

        Section 1.5 "Cadence Group" means Cadence and each of its Subsidiaries
(other than any member of the Tality Group) on and after the Separation Date.

        "Section 1.6 "Class A Common Stock has the meaning set forth in the
recitals.

        "Section 1.7 "Class B Common Stock means the Class B Common Stock, par
value $0.001 per share, of Tality.

        "Section 1.8 "Class C Common Stock means the Class C Common Stock, par
value $0.001 per share, of Tality.

        Section 1.9 "Contracts" means any contract, agreement, lease, license,
sales order, purchase order, instrument or other commitment that is binding on
any Person or any part of its property under Applicable Law.

        Section 1.10 "Governmental Approvals" means any notices, reports or
other filings to be made with, or any consents, registrations, approvals,
permits or authorizations to be obtained from, any Governmental Authority.

        Section 1.11 "Governmental Authority" means any federal, state, local,
foreign or international court or government of competent jurisdiction, or any
political subdivision thereof,

<PAGE>   6
or any department, commission, board, bureau, agency, official or other
regulatory, administrative body of any such government of competent jurisdiction
or political subdivision thereof.

        Section 1.12 "Information" means information, whether or not patentable
or copyrightable, in written, oral, electronic or other tangible or intangible
form, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.

        Section 1.13 "IPO Closing Date" means the date on which the first
closing of the IPO occurs.

        Section 1.14 "Person" means an individual, a partnership, a corporation,
a limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization or a Governmental Authority.

        Section 1.15 "Subsidiary" of any Person means any other Person of which
at least a majority of the securities or other interests having by their terms
ordinary voting power to elect at least a majority of the board of directors or
other body performing similar functions with respect to such other Person is
directly or indirectly owned or controlled (including by contract) by such first
Person. By way of example and not limitation, the Partnership shall be deemed to
be a Subsidiary of Tality.

        Section 1.16 "Tality's Auditors" means the Tality Parties' independent
certified public accountants from time to time.

        Section 1.17 "Tality Group" means Tality and each of its Subsidiaries on
and after the Separation Date.

        "Section 1.18 "Third-Party Approvals means any notices, consents or
authorizations of third parties (other than Governmental Approvals) required to
consummate the Separation.

                                   ARTICLE II

                                   SEPARATION

        Section 2.1 Separation Date. Unless otherwise expressly provided in this
Agreement, any Ancillary Agreement (as defined in Section 2.2), the Agreement of
Limited Partnership of the Partnership or any other agreement among the parties,
the effective time and date of each transfer of assets and property, assumption
of liability, license, undertaking or other agreement in connection with the
Separation shall be 12:00 a.m., Pacific Time, October 1, 2000, or such other

<PAGE>   7

date as may be fixed by the Board of Directors of Cadence or a duly authorized
officer of Cadence (the "Separation Date").

        Section 2.2 Documents to Be Delivered by the Cadence Parties and the
Tality Parties. On the Separation Date, each of the parties shall duly execute
and deliver, or shall cause its appropriate Subsidiaries to duly execute and
deliver, to the other parties all of the following agreements, documents and
other instruments (collectively, together with all agreements and documents
contemplated by such agreements, the "Ancillary Agreements"):

               (a) The General Assignment and Assumption Agreement in
        substantially the form attached hereto as Exhibit A (the "Assignment
        Agreement");

               (b) The Master Intellectual Property Ownership and License
        Agreement in substantially the form attached hereto as Exhibit B (the
        "Master Intellectual Property Agreement");

               (c) The Employee Matters Agreement in substantially the form
        attached hereto as Exhibit C (the "Employee Matters Agreement");

               (d) The Master Corporate Services Agreement in substantially the
        form attached hereto as Exhibit D (the "Master Corporate Services
        Agreement");

               (e) The Real Estate Matters Agreement in substantially the form
        attached hereto as Exhibit E (the "Real Estate Matters Agreement");

               (f) The Master Confidentiality Agreement in substantially the
        form attached hereto as Exhibit F (the "Master Confidentiality
        Agreement");

               (g) The Indemnification and Insurance Matters Agreement in
        substantially the form attached hereto as Exhibit G (the
        "Indemnification and Insurance Matters Agreement");

               (h) The EDA Tools Agreement in substantially the form attached
        hereto as Exhibit H (the "EDA Tools Agreement");

               (i) The Joint Technology Development and Support Agreement in
        substantially the form attached hereto as Exhibit I (the "Joint
        Technology Support Agreement");

               (j) The Joint Sales Agreement in substantially the form attached
        hereto as Exhibit J (the "Joint Sales Agreement");

               (k) The resignation of each individual who is an officer or
        director of Cadence or any member of the Cadence Group, immediately
        prior to the Separation Date, and who shall be an employee of any of the
        Tality Parties from and after the Separation Date; and

               (l) Such other agreements, documents or instruments as the
        parties may agree are necessary or desirable in order to achieve the
        purposes hereof.

<PAGE>   8

        Section 2.3 Governmental Approvals. To the extent that the Separation
requires any Governmental Approvals, the parties shall use all commercially
reasonable efforts to obtain such Governmental Approvals on or prior to the
Separation Date.

        Section 2.4 Third-Party Approvals. The parties shall use all
commercially reasonable efforts to obtain all Third-Party Approvals on or prior
to the Separation Date.

        Section 2.5 No Representations or Warranties. Neither of the Cadence
Parties nor any other member of the Cadence Group makes, either in this
Agreement or any Ancillary Agreement, any representation as to, warranty of or
covenant with respect to:

               (a) the value of any asset, property or other thing of value to
        be transferred to the Partnership or any of its Subsidiaries;

               (b) the kind, character, nature or extent of any liabilities to
        be assumed by the Partnership or any of its Subsidiaries;

               (c) the freedom from encumbrance of any asset, property or other
        thing of value to be transferred to the Partnership or any of its
        Subsidiaries;

               (d) the absence of defenses or freedom from set-offs or
        counterclaims with respect to any claim to be transferred to the
        Partnership or any of its Subsidiaries; or

               (e) the legal sufficiency of any assignment, document or
        instrument delivered hereunder to convey title to any asset, property or
        other thing of value upon its execution and delivery or filing.

        Except as may be expressly set forth herein or in any Ancillary
Agreement, all assets, properties and other things of value to be transferred
to, and all liabilities to be assumed by, the Partnership or any of its
Subsidiaries shall be transferred or assumed, as applicable, "AS IS, WHERE IS,"
and the Partnership and its Subsidiaries shall bear the economic and legal risk
that any conveyance shall prove to be insufficient to vest in the Partnership
and its Subsidiaries good and marketable title, free and clear of any lien,
claim, equity or other encumbrance.

                                   ARTICLE III

                         THE IPO AND REGISTRATION RIGHTS

        Section 3.1 Transactions Prior to the IPO. Subject to the conditions set
forth in Section 3.3, each of the parties shall use all commercially reasonable
efforts to consummate the IPO. Such efforts shall include the following:

               (a) Registration Statement. Tality shall file the Registration
        Statement, and such amendments or supplements thereto as may be
        necessary in order to cause the same to become and remain effective as
        required by Applicable Law or by the managing underwriters for the IPO
        (the "Underwriters"), including filing such amendments to the
        Registration Statement as may be required by the underwriting agreement
        to be entered

<PAGE>   9

        into between Tality and the Underwriters (the "Underwriting Agreement"),
        the Securities and Exchange Commission (the "Commission") or federal,
        state or foreign securities laws. The parties shall also cooperate in
        preparing, filing with the Commission and causing to become effective a
        registration statement registering the Class A Common Stock under the
        Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
        any registration statements or amendments thereof which are required to
        reflect the establishment of, or amendments to, any employee benefit and
        other plans necessary or appropriate in connection with the IPO, the
        Separation or any of the other transactions contemplated by this
        Agreement.

               (b) Underwriting Agreement. Tality shall enter into the
        Underwriting Agreement, in form and substance reasonably satisfactory to
        Cadence and Tality, and shall comply with its obligations thereunder.

               (c) Nasdaq Listing. Tality shall prepare, file and use all
        commercially reasonable efforts to seek to make effective an application
        for quotation of the Class A Common Stock issued in the IPO on the
        Nasdaq National Market (the "Nasdaq"), subject to official notice of
        issuance.

        Section 3.2 Cooperation. Tality shall consult with, and cooperate in all
respects with, Cadence in connection with the pricing of the Class A Common
Stock to be offered in the IPO and shall, at Cadence's direction, promptly take
any and all actions necessary or desirable to consummate the IPO as contemplated
by the Registration Statement and the Underwriting Agreement.

        Section 3.3 Conditions Precedent to Consummation of the IPO. The
obligations of the parties to use all commercially reasonable efforts to
consummate the IPO shall be conditioned on the satisfaction of all of the
following conditions:

               (a) Registration Statement. The Registration Statement shall have
        been declared effective by the Commission, and there shall not have been
        issued or threatened any stop order with respect thereto which remains
        in effect.

               (b) Blue Sky. The actions and filings with regard to state
        securities and blue sky laws of the United States (and any comparable
        laws under any foreign jurisdictions) shall have been taken and, where
        applicable, have become effective or been accepted.

               (c) Nasdaq Listing. The Class A Common Stock to be issued in the
        IPO shall have been accepted for quotation on the Nasdaq, upon official
        notice of issuance.

               (d) Underwriting Agreement. Tality shall have entered into the
        Underwriting Agreement and all conditions to the obligations of Tality
        and the Underwriters thereunder shall have been satisfied or waived.

               (e) Common Stock Ownership. Cadence shall be satisfied in its
        sole discretion that the Cadence Group shall own voting securities of
        Tality having at least 80% of the voting rights of all Tality securities
        outstanding immediately following the IPO Closing Date.

<PAGE>   10

               (f) No Legal Restraints. No order, injunction or decree issued by
        any Governmental Authority of competent jurisdiction or other legal
        restraint or prohibition preventing the consummation of the Separation
        or the IPO or any of the other transactions contemplated by this
        Agreement shall be in effect or been threatened.

               (g) Separation. The Separation Date shall have occurred.

               (h) No Termination. This Agreement shall not have been
        terminated.

        Section 3.4   Registration Rights

               (a) Definitions. For purposes of this Section 3.4 only:

                      (i) "Register", "Registered" and "Registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended, (the "Securities Act"),
and the declaration or ordering of effectiveness of such registration statement.

                      (ii) "Registrable Securities" means (A) any Class A Common
Stock or Class C Common Stock issued or issuable upon conversion of Class B
Common Stock, or in exchange for Limited Partnership Units in the Partnership
originally issued to Cadence, Holdings or any other member of the Cadence Group
(the "LP Units"); (B) all shares of Class A Common Stock held by Cadence Group
members' officers or employees as of the date on which the Registration
Statement was first filed with the Commission; (C) any Class A Common Stock or
Class C Common Stock issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of the
securities described in (A) or (B) above; and (D) all other shares of Class A
Common Stock or Class C Common Stock hereafter acquired by members of the
Cadence Group. Notwithstanding the foregoing, "Registrable Securities" shall
exclude any Registrable Securities sold by a Person in a transaction in which
rights under this Section 4.4 are not assigned in accordance with this Agreement
or any Registrable Securities sold in a public offering, whether sold pursuant
to Rule 144 promulgated under the Securities Act, or in a registered offering,
or otherwise.

                      (iii) "Holder" means any Person owning of record
Registrable Securities (or any security convertible into or exchangeable for
Registrable Securities), that have not been sold in a public offering and any
permitted assignee of such Registrable Securities (or securities convertible
into or exchangeable into Registrable Securities) to whom rights under this
Section 3.4 have been duly assigned in accordance with this Agreement.

                      (iv) "Form S-3" means such form under the Securities Act
as is in effect on the date hereof, or any successor registration form under the
Securities Act subsequently adopted by the Commission, which permits inclusion
or incorporation of substantial information by reference to other documents
filed by Tality with the Commission.

<PAGE>   11

               (b) Demand Registration.

                      (i) Request by Holders. If Tality shall, at any time after
the expiration of the 180-day "lock-up" period pursuant to the Underwriting
Agreement (the "Lock-Up Expiration Date"), receive a written request from
Cadence, Holdings or any subsequent Holder of LP Units originally issued to
Cadence, Holdings or any other member of the Cadence Group (or any Registrable
Securities issued in exchange therefor) holding at least ten percent (10%) of
the aggregate outstanding number of such LP Units that Tality file a
registration statement on form S-1 (or any successor form thereto) under the
Securities Act covering the registration of Registrable Securities pursuant to
this Section 3.4(b), then Tality shall, within ten (10) Business Days after the
receipt of such written request, give written notice of such request ("Request
Notice") to all Holders, and use its best efforts to effect, as soon as
practicable, the registration under the Securities Act of all Registrable
Securities that Holders request to be registered and included in such
registration by written notice given by such Holders to Tality within twenty
(20) days after receipt of the Request Notice, subject only to the limitations
of this Section 3.4(b); provided, however, that the Registrable Securities
requested by all Holders to be registered pursuant to such request must be at
least ten percent (10%) of all Registrable Securities then held by or issuable
to them; provided further, that Tality shall not be obligated to effect any such
registration if Tality has, within the six (6) month period preceding the date
of such request, already effected a registration under the Securities Act
pursuant to this Section 3.4(b) or Section 3.4(d), or in which the Holders had
an opportunity to participate pursuant to Section 3.4(c), other than a
registration from which the Registrable Securities of Holders have been excluded
(with respect to all or any portion of the Registrable Securities the Holders
requested be included in such registration) pursuant to Section 3.4(c)(i).

                      (ii) Underwriting. If the Holders initiating the
registration request under this Section 3.4(b) (the "Initiating Holders") intend
to distribute the Registrable Securities covered by their request by means of an
underwriting, then they shall so advise Tality as a part of their request made
pursuant to this Section 3.4(b)(i) and Tality shall include such information in
the Request Notice. In such event, the right of any Holder to include such
Holder's Registrable Securities in such registration shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the initiating Holders and such Holder) to
the extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall enter into an underwriting agreement in
customary form with the managing underwriter or underwriters selected for such
underwriting by the Holders of a majority of the Registrable Securities being
registered and reasonably acceptable to Tality (including a market stand-off
agreement of up to 180 days if required by such underwriters). Notwithstanding
any other provision of this Section 3.4(b), if the underwriter(s) advise(s)
Tality in writing that marketing factors require a limitation of the number of
securities to be underwritten, then Tality shall so advise all Holders of
Registrable Securities which would otherwise be registered and underwritten
pursuant hereto, and the number of Registrable Securities that may be included
in the underwriting shall be reduced as required by the underwriter(s) and
allocated among the Holders of Registrable Securities on a pro rata basis
according to the number of Registrable Securities of each Holder requesting
registration (including the initiating Holders); provided, however, that the
number of Registrable Securities to be included in such underwriting and
registration shall not be reduced unless all other

<PAGE>   12

securities of Tality and the employees, officers and directors (who are not also
officers or directors of Cadence) of Tality (or any Subsidiary of Tality) are
first entirely excluded from the underwriting and registration. Any Registrable
Securities excluded and withdrawn from such underwriting shall be withdrawn from
the registration.

                      (iii) Maximum Number of Demand Registrations. Tality shall
be obligated to effect only three (3) such registrations pursuant to this
Section 3.4(b).

                      (iv) Deferral. Notwithstanding the foregoing, if Tality
shall furnish to Holders requesting the filing of a registration statement
pursuant to this Section 3.4(b), a certificate signed by the President or Chief
Executive Officer of Tality stating that in the good faith judgment of the Board
of Directors of Tality, it would be materially detrimental to Tality and its
stockholders for such registration statement to be filed, then Tality shall have
the right to defer such filing for a period of not more than ninety (90) days
after receipt of the request of the initiating Holders; provided, however, that
Tality may not utilize this right more than once in any twelve (12) month
period.

                      (v) Expenses. All expenses incurred in connection with any
registration pursuant to this Section 3.4(b), including all federal and "blue
sky" registration, filing and qualification fees, printer's and accounting fees,
and fees and disbursements of counsel for Tality and one counsel for the
Holders, reasonably acceptable to Tality (but excluding underwriters' discounts
and commissions relating to shares sold by the Holders), shall be borne by
Tality. Each Holder participating in a registration pursuant to this Section
3.4(b) shall bear such Holder's proportionate share (based on the total number
of shares sold in such registration other than for the account of Tality) of all
discounts, commissions or other amounts payable to underwriters or brokers in
connection with such offering by the Holders. Notwithstanding the foregoing,
Tality shall not be required to bear any expenses of any registration proceeding
begun pursuant to this Section 3.4(b) if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered, unless the Holders of a majority of the
Registrable Securities agree that such registration constitutes the use by the
Holders of one (1) demand registration pursuant to this Section 3.4(b) (in which
case such registration shall also constitute the use by all Holders of
Registrable Securities of one (l) such demand registration); provided further,
that if at the time of such withdrawal, the Holders have learned of a material
adverse change in the condition (financial or otherwise), business or prospects
of Tality not known to the Holders at the time of their request for such
registration and have withdrawn their request for registration with reasonable
promptness after learning of such material adverse change, then the Holders
shall not be required to pay any of such expenses and such registration shall
not constitute the use of a demand registration pursuant to this Section 3.4(b).

               (c) Piggyback Registrations. Tality shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to filing any
registration statement under the Securities Act for purposes of effecting a
public offering of securities of Tality (including registration statements
relating to secondary offerings of securities of Tality, but excluding
registration statements relating to any registration under Section 3.4(b) or
Section 3.4(d) or to any employee benefit plan or a corporate reorganization)
and shall afford each such Holder an opportunity to include in such registration
statement all or any part of the Registrable Securities

<PAGE>   13
of such Holder. Each Holder desiring to include in any such registration
statement all or any part of such Holder's Registrable Securities shall within
twenty (20) days after receipt of the above-described notice from Tality, so
notify Tality in writing, and in such notice shall inform Tality of the number
of Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by Tality, such Holder shall
nevertheless continue to have the right to include any of such Holder's
Registrable Securities in any subsequent registration statement or registration
statements as may be filed by Tality with respect to offerings of its
securities, all upon the terms and conditions set forth herein.

                      (i) Underwriting. If a registration statement as to which
Tality gives notice under this Section 3.4(c) is for an underwritten offering,
then Tality shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 3.4(c) shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriters selected for such underwriting
(including a market stand-off agreement of up to 180 days if required by such
underwriters). Notwithstanding any other provision of this Agreement, if the
managing underwriter(s) determine(s) in good faith that marketing factors
require a limitation of the number of shares to be underwritten, then the
managing underwriter(s) may exclude Registrable Securities from the registration
and the underwriting, and the number of shares that may be included in the
registration and the underwriting shall be allocated, first to Tality and,
second, to each of the Holders requesting inclusion of their Registrable
Securities in such registration statement on a pro rata basis based on the total
number of Registrable Securities of each such Holder; provided, however, that
the right of the underwriters to exclude Registrable Securities from the
registration and underwriting as described above shall be restricted so that (A)
the number of Registrable Securities included in any such registration is not
reduced below twenty-five percent (25%) of the aggregate number of Registrable
Securities for which inclusion has been requested; and (B) all shares that are
not Registrable Securities and are held by any other Person, including any
employee, officer or director (other than a director who is also an officer or
director of Cadence) of Tality (or any Subsidiary of Tality) shall first be
excluded from such registration and underwriting before any Registrable
Securities are so excluded. If any Holder disapproves of the terms of any such
underwriting, such Holder may elect to withdraw therefrom by written notice to
Tality and the underwriter(s), delivered at least ten (10) Business Days prior
to the effective date of the registration statement. Any Registrable Securities
excluded or withdrawn from such underwriting shall be excluded and withdrawn
from the registration. For any Holder that is a partnership, the Holder and the
partners and retired partners of such Holder, or the estates and family members
of any such partners and retired partners and any trusts for the benefit of any
of the foregoing Persons, and for any Holder that is a corporation, the Holder
and all corporations that are affiliates of such Holder, shall be deemed to be a
single "Holder," and any pro rata reduction with respect to such "Holder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such "Holder," as defined in this
sentence.

<PAGE>   14

                      (ii) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 3.4(c), including fees and disbursements
of one counsel for the Holders, reasonably acceptable to Tality (but excluding
underwriters' and brokers' discounts and commissions relating to shares sold by
the Holders), including all federal and "blue sky" registration, filing and
qualification fees, printers' and accounting fees, and fees and disbursements of
counsel for Tality, shall be borne by Tality.

                      (iii) Not Demand Registration. Registration pursuant to
this Section 3.4(c) shall not be deemed to be a demand registration pursuant to
Section 3.4(b) above. Except as otherwise provided herein, there shall be no
limit on the number of times the Holders may request registration of Registrable
Securities under this Section 3.4(c).

               (d) Form S-3 Registration. In case Tality shall, at any time
after the Lock-Up Expiration Date, receive a written request from Cadence,
Holdings or any subsequent Holder of LP Units originally issued to Cadence,
Holdings or any other member of the Cadence Group (or any Registrable Securities
issued in exchange therefor) holding at least ten percent (10%) of the aggregate
outstanding number of such LP Units that Tality effect a registration on Form
S-3, and any related qualification or compliance with respect to all or a part
of the Registrable Securities owned by such Holder or Holders, then Tality
shall:

                      (i) Notice. Promptly give written notice of the proposed
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable Securities; and

                      (ii) Registration. As soon as practicable, effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within twenty (20) days after Tality provides the notice
contemplated by Section 3.4(d)(i); provided, however, that Tality shall not be
obligated to effect any such registration, qualification or compliance pursuant
to this Section 3.4(d):

                             (A) if Form S-3 is not available to Tality for such
offering by the Holders;

                             (B) if the Holders, together with the holders of
any other securities of Tality entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than $5,000,000;

                             (C) if Tality shall furnish to the Holders a
certificate signed by the President or Chief Executive Officer of Tality stating
that in the good faith judgment of the Board of Directors of Tality, it would be
materially detrimental to Tality and its stockholders for such Form S-3
Registration to be effected at such time, in which event Tality shall have the
right to defer the filing of the Form S-3 registration statement no more than
once during any twelve month period for a period of not more than ninety (90)
days after receipt of the request of the Holder or Holders under this Section
3.4(d);
<PAGE>   15

                             (D) if Tality has, within the six (6) month period
preceding the date of such request, already effected a registration under the
Securities Act other than a registration from which the Registrable Securities
of Holders have been excluded (with respect to all or any portion of the
Registrable Securities the Holders requested be included in such registration)
pursuant to Section 3.4(c)(i); or

                             (E) in any particular jurisdiction in which Tality
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance.

                      (iii) Expenses. Tality shall pay all expenses incurred in
connection with each registration requested pursuant to this Section 3.4(d),
including federal and "blue sky" registration, filing and qualification fees,
printers' and accounting fees and fees and disbursements of counsel, including
one counsel for the Holders, reasonably acceptable to Tality, but excluding
underwriters' or brokers' discounts and commissions relating to shares sold by
the Holders.

                      (iv) Not Demand Registration. Form S-3 registrations shall
not be deemed to be demand registrations as described in Section 3.4(b) above.
Except as otherwise provided herein, there shall be no limit on the number of
times the Holders may request registration of Registrable Securities under this
Section 3.4(d).

               (e) Obligations of Tality. Whenever required to effect the
registration of any Registrable Securities under this Agreement Tality shall, as
expeditiously as reasonably possible:

                      (i) Registration Statement. Prepare and file with the
Commission a registration statement with respect to such Registrable Securities
and use its best efforts to cause such registration statement to become
effective; provided, however, that Tality shall not be required to keep any such
registration statement effective for more than ninety (90) days.

                      (ii) Amendments and Supplements. Prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement.

                      (iii) Prospectuses. Furnish to the Holders whose
Registrable Securities are requested to be included in the registration such
number of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other documents
as they may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by them that are included in such registration.

                      (iv) Blue Sky. Use its best efforts to register and
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that Tality shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.

<PAGE>   16

                      (v) Underwriting. In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting agreement
in usual and customary form, with the managing underwriter(s) of such offering.
Each Holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement.

                      (vi) Notification. Notify each Holder of Registrable
Securities covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.

                      (vii) Opinion and Comfort Letter. Furnish, at the request
of any Holder requesting registration of Registrable Securities, on the date
that such Registrable Securities are delivered to the underwriters for sale, if
such securities are being sold through underwriters, or, if such securities are
not being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (A) an opinion, dated as of
such date, of the counsel representing Tality for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering and reasonably satisfactory to a majority in
interest of the Holders requesting registration, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(B) a "comfort" letter dated as of such date, from the independent certified
public accountants of Tality, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.

               (f) Furnish Information. It shall be a condition precedent to the
obligations of Tality to take any action pursuant to Section 3.4(b), (c) or (d)
that the selling Holders shall furnish to Tality such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be reasonably required to timely effect
the Registration of their Registrable Securities.

               (g) Indemnification. In the event any Registrable Securities are
included in a registration statement under Section 3.4(b), (c) or (d):

                      (i) By Tality. To the extent permitted by Applicable Law,
Tality shall indemnify and hold harmless each Holder, the partners, officers and
directors of each Holder, any underwriter (as determined in the Securities Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Exchange Act, as amended,
against any losses, claims, damages or liabilities (joint or several) to which
they may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively, a "Violation"):

<PAGE>   17

                             (A) any untrue statement or alleged untrue
               statement of a material fact contained in such registration
               statement, including any preliminary prospectus or final
               prospectus contained therein or any amendments or supplements
               thereto;

                             (B) the omission or alleged omission to state
               therein a material fact required to be stated therein, or
               necessary to make the statements therein not misleading, or

                             (C) any violation or alleged violation by Tality of
               the Securities Act, the Exchange Act, any federal or state
               securities law or any rule or regulation promulgated under the
               Securities Act, the Exchange Act or any federal or state
               securities law in connection with the offering covered by such
               registration statement;

and Tality shall reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this subsection 3.4(g)(i) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of Tality (which consent
shall not be unreasonably withheld or delayed), nor shall Tality be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.

                      (ii) By Selling Holders. To the extent permitted by
Applicable Law, each selling Holder shall indemnify and hold harmless Tality,
each of its directors, each of its officers who have signed the registration
statement, each person, if any, who controls Tality within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder within the meaning of the
Securities Act or the Exchange Act, against any losses, claims, damages or
liabilities (joint or several) to which Tality or any such director, officer,
controlling person, underwriter or other such Holder, partner or director,
officer or controlling person of such other Holder may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder shall reimburse any legal or other
expenses reasonably incurred by Tality or any such director, officer,
controlling person, underwriter or other Holder, partner, officer, director or
controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 3.4(g)(ii) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Holder
(which consent shall not be unreasonably withheld

<PAGE>   18

or delayed); and provided further, that the total amounts payable in indemnity
by a Holder under this Section 3.4(g)(ii) in respect of any Violation shall not
exceed the net proceeds received by such Holder in the registered offering out
of which such Violation arises.

                      (iii) Notice. Promptly after receipt by an indemnified
party under this Section 3.4(g) of notice of the commencement of any action
(including any action by a Governmental Authority), such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 3.4(g), deliver to the indemnifying party a written
notice of the commencement thereof and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to an actual or potential conflict
of interests between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall relieve such indemnifying party of liability to the indemnified
party under this Section 3.4(g) to the extent (but only to the extent) the
indemnifying party is materially prejudiced as a result thereof, but the
omission so to deliver written notice to the indemnified party shall not relieve
it of any liability that it may have to any indemnified party otherwise than
under this Section 3.4(g).

                      (iv) Defect Eliminated in Final Prospectus. The foregoing
indemnity agreements of Tality and the Holders are subject to the condition
that, insofar as they relate to any Violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the Commission
at the time the registration statement in question becomes effective or the
amended prospectus filed with the Commission pursuant to Commission Rule 424(b)
(the "Final Prospectus"), such indemnity agreement shall not inure to the
benefit of any Person if a copy of the Final Prospectus was timely furnished to
the indemnified party and was not furnished to the Person asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act.

                      (v) Contribution. In order to provide for just and
equitable contribution to joint liability under the Securities Act in any case
in which either (A) any Holder exercising rights under this Agreement, or any
controlling person of any such Holder, makes a claim for indemnification
pursuant to this Section 3.4(g) but it is judicially determined (by the entry of
a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 3.4(g) provides for indemnification in such case, or (B)
contribution under the Securities Act may be required on the part of any such
selling Holder or any such controlling person in circumstances for which
indemnification is provided under this Section 3.4(g); then, and in each such
case, Tality and such Holder shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that such Holder is responsible for the portion
represented by the percentage that the public

<PAGE>   19

offering price of its Registrable Securities offered by and sold under the
registration statement bears to the public offering price of all securities
offered by and sold under such registration statement, and Tality and other
selling Holders are responsible for the remaining portion; provided, however,
that, in any such case: (1) no such Holder shall be required to contribute any
amount in excess of the public offering price of all such Registrable Securities
offered and sold by such Holder pursuant to such registration statement; and (2)
no Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation.

                      (vi) Survival. The obligations of Tality and Holders under
this Section 3.4(g) shall survive until the fifth anniversary of the completion
of any offering of Registrable Securities in a registration statement,
regardless of the expiration of any statutes of limitation or extensions of such
statutes.

               (h) Termination of Tality's Obligations. Tality shall have no
obligations pursuant to Sections 3.4(b) through (d) with respect to any
Registrable Securities proposed to be sold by a Holder in a registration
pursuant to Section 3.4(b), (c) or (d) more than seven (7) years after the
Separation Date, or, if, in the opinion of independent counsel to Tality (and
acceptable to the Holders), all such Registrable Securities proposed to be sold
by a Holder may then be sold under Rule 144 in one transaction without exceeding
the volume limitations thereunder.

               (i) No Registration Rights to Third Parties. Without the prior
written consent of Cadence, Tality covenants and agrees that it shall not grant,
or cause or permit to be created, for the benefit of any Person any registration
rights of any kind (whether similar to the demand, "piggyback" or Form S-3
registration rights described in this Section 3.4 or otherwise) relating to any
equity securities of Tality, other than rights that are subordinate in right to
those granted hereunder.

                                   ARTICLE IV

                           COVENANTS AND OTHER MATTERS

        Section 4.1 Further Instruments. At the request either of the Tality
Parties, and without further consideration, the Cadence Parties shall execute
and deliver, and shall cause all other members of the Cadence Group to execute
and deliver, to the Partnership and its Subsidiaries such other instruments of
transfer, conveyance, assignment, substitution and confirmation and take such
action as either of the Tality Parties may reasonably deem necessary in order to
effectively transfer, convey and assign to the Partnership and its Subsidiaries
and confirm the Partnership's and its Subsidiaries' title to all of the assets
and rights contemplated to be transferred to the Partnership and its
Subsidiaries pursuant to this Agreement and the Ancillary Agreements to put the
Partnership and its Subsidiaries in actual possession and operating control
thereof and to permit the Partnership and its Subsidiaries to exercise all
rights with respect thereto (including rights under contracts and other
arrangements as to which the consent of any third party to the transfer thereof
shall not have previously been obtained). At the request of either of the
Cadence Parties and without further consideration, the Tality Parties shall
execute and deliver, and shall cause all other members of the Tality Group to
execute and deliver, to Cadence and its Subsidiaries all instruments,
assumptions, novations, undertakings, substitutions or other documents and take
such other action as Cadence may reasonably deem

<PAGE>   20

necessary in order to have the Partnership fully and unconditionally assume and
discharge the liabilities contemplated to be assumed by the Partnership and its
Subsidiaries under this Agreement and the Ancillary Agreements and to relieve
each member of the Cadence Group of any liability or obligation with respect
thereto and evidence the same to third parties. Neither the Cadence Parties nor
the Tality Parties shall be obligated, in connection with the foregoing, to
expend money other than reasonable out-of-pocket expenses, attorneys' fees and
disbursements and recording or similar fees. Furthermore, each party hereto, at
the request of the other party, shall execute and deliver such other instruments
and do and perform such other acts and things as may be necessary or desirable
for effecting completely the consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements.

        Section 4.2 Agreement for Exchange of Information.

               (a) Generally. Each of the parties agrees to provide, or cause to
        be provided, to any of the other parties, at any time before or after
        the Separation Date, as soon as reasonably practicable after written
        request therefor, any Information in the possession or under the control
        of such party that the requesting party reasonably needs (i) to comply
        with reporting, disclosure, filing or other requirements imposed on the
        requesting party (including under applicable securities laws) by a
        Governmental Authority having jurisdiction over the requesting party;
        (ii) for use in any other judicial, regulatory, administrative or other
        proceeding, or in order to satisfy audit, accounting, claims,
        regulatory, litigation or other similar requirements; (iii) to comply
        with its obligations under this Agreement or any Ancillary Agreement; or
        (iv) in connection with the ongoing businesses of the Cadence Parties or
        the Tality Parties, as the case may be; provided, however, that if a
        party determines that providing its Information to the other parties
        could be commercially detrimental to such party, violate any law or
        agreement, or waive any attorney-client privilege, the parties shall
        take all reasonable measures to permit its compliance with such
        disclosure obligation in a manner that avoids any such harm or
        consequence.

               (b) Internal Accounting Controls; Financial Information. After
        the Separation Date, each party shall (i) maintain in effect at its own
        cost and expense adequate systems and controls for its business to the
        extent necessary to enable the other parties to satisfy their reporting,
        accounting, audit and other obligations; and (ii) provide, or cause to
        be provided, to the other parties and their Subsidiaries in such form as
        requested and at no charge to the requesting party, all financial and
        other data and information as the requesting party determines necessary
        or advisable in order to prepare its financial statements and reports or
        filings with any Governmental Authority.

               (c) Ownership of Information. Any Information owned by a party
        that is provided to a requesting party pursuant to this Section 4.2
        shall remain the property of the providing party. Unless specifically
        set forth herein, nothing contained in this Agreement shall be construed
        as granting or conferring ownership or license rights in any such
        Information or varying an attorney-client or other privilege applicable
        to such Information.

<PAGE>   21

               (d) Limitation of Liability. No member of either the Cadence
        Group or the Tality Group shall have any liability to a member of the
        Tality Group or Cadence Group, respectively, in the event that any
        Information exchanged or provided pursuant to this Section 4.2 is found
        to be incomplete or inaccurate, in the absence of gross negligence or
        willful misconduct by the party providing such Information.

               (e) Other Agreements Providing for Exchange of Information. The
        rights and obligations granted under this Section 4.2 are subject to any
        specific limitations, qualifications or additional provisions on the
        sharing, exchange or confidential treatment of Information set forth in
        this Agreement and any Ancillary Agreement, including the Master
        Confidentiality Agreement.

               (f) Production of Witnesses; Records; Cooperation. After the
        Separation Date, except in the case of a legal or other proceeding by a
        party hereto against another party hereto (which shall be governed by
        such discovery rules as may be applicable under Section 4.4 or
        otherwise), each party hereto shall use all commercially reasonable
        efforts to make available to the other parties, upon written request,
        the former, current and future directors, officers, employees, other
        personnel and agents of such party as witnesses and any books, records
        or other documents within its control or which it otherwise has the
        ability to make available, to the extent that any such person (giving
        consideration to business demands of such directors, officers,
        employees, other personnel and agents) or books, records or other
        documents may reasonably be required in connection with any legal,
        administrative or other proceeding in which the requesting party may
        from time to time be involved, regardless of whether any such legal,
        administrative or other proceeding is a matter with respect to which
        indemnification may be sought hereunder. The requesting party shall bear
        all costs and expenses in connection therewith.

        Section 4.3 Auditors and Audits; Annual and Quarterly Statements and
Accounting. For so long as Cadence is required in accordance with United States
generally accepted accounting principles to consolidate Tality's results of
operations and financial position:

               (a) Selection of Auditors. The Tality Parties shall ensure that
        the Tality Auditors are the same as the Cadence Auditors.

               (b) Fiscal Year. The Tality Parties shall ensure that their
        fiscal years for financial, accounting and federal, state and local
        income tax purposes shall be the same as Cadence's fiscal year.

               (c) Date of Auditors' Opinion and Quarterly Reviews. The Tality
        Parties shall use all commercially reasonable efforts to enable and
        cause the Tality Auditors to complete their audit such that they shall
        date their opinion on Tality's audited annual financial statements on
        the same date that the Cadence Auditors date their opinion on Cadence's
        audited annual financial statements, and to enable Cadence to meet its
        timetable for the printing, filing and public dissemination of Cadence's
        annual financial statements. The Tality Parties shall use all
        commercially reasonable efforts to enable and cause the Tality Auditors
        to complete their quarterly review procedures such that they

<PAGE>   22

        shall provide clearance on Tality's quarterly financial statements on
        the same date that Cadence's Auditors provide clearance on Cadence's
        quarterly financial statements.

               (d) Annual, Quarterly and Other Financial Statements. The Tality
        Parties shall provide to Cadence on a timely basis all Information that
        Cadence requests to meet its schedule for the preparation, printing,
        filing and public dissemination of Cadence's annual, quarterly and other
        financial statements. Without limiting the generality of the foregoing,
        the Tality Parties shall provide all required financial Information with
        respect to the Tality Parties and their Subsidiaries to the Tality
        Auditors in a sufficient and reasonable time and in sufficient detail to
        permit the Tality Auditors to take all steps and perform all reviews
        necessary to provide sufficient assistance to the Cadence Auditors with
        respect to financial Information to be included or contained in
        Cadence's annual, quarterly and other financial statements. Similarly,
        the Cadence Parties shall provide to Tality on a timely basis all
        financial Information that Tality reasonably requires to meet its
        schedule for the preparation, printing, filing and public dissemination
        of Tality's annual and quarterly financial statements. Without limiting
        the generality of the foregoing, the Cadence Parties shall provide all
        required financial Information with respect to the Cadence Parties and
        their Subsidiaries to the Cadence Auditors in a sufficient and
        reasonable time and in sufficient detail to permit the Cadence Auditors
        to take all steps and perform all reviews necessary to provide
        sufficient assistance to the Tality Auditors with respect to Information
        to be included or contained in Tality's annual and quarterly financial
        statements.

               (e) Identity of Personnel Performing the Annual Audit and
        Quarterly Reviews. The Tality Parties shall authorize the Tality
        Auditors to make available to the Cadence Auditors both the personnel
        who performed or shall perform the annual audits and quarterly reviews
        of Tality and work papers related to the annual audits and quarterly
        reviews of Tality, in all cases within a reasonable time prior to the
        Tality Auditors' opinion date, so that the Cadence Auditors are able to
        perform the procedures they consider necessary to take responsibility
        for the work of the Tality Auditors as it relates to the Cadence
        Auditors' report on Cadence's financial statements, all within
        sufficient time to enable Cadence to meet its timetable for the
        printing, filing and public dissemination of Cadence's annual and
        quarterly statements. Similarly, the Cadence Parties shall authorize the
        Cadence Auditors to make available to the Tality Auditors both the
        personnel who performed or shall perform the annual audits and quarterly
        reviews of Cadence and work papers related to the annual audits and
        quarterly reviews of Cadence, in all cases within a reasonable time
        prior to the Cadence Auditors' opinion date, so that the Tality Auditors
        are able to perform the procedures they consider necessary to take
        responsibility for the work of the Cadence Auditors as it relates to the
        Tality Auditors' report on Tality's statements, all within sufficient
        time to enable Tality to meet its timetable for the printing, filing and
        public dissemination of Tality's annual and quarterly financial
        statements.

               (f) Access to Books and Records. The Tality Parties shall, as
        requested by Cadence, provide Cadence's internal auditors and their
        designees access to the Tality Parties' and their Subsidiaries' books
        and records so that Cadence may conduct reasonable audits relating to
        the financial statements provided by Tality pursuant hereto

<PAGE>   23

        as well as to the internal accounting controls and operations of Tality
        and its Subsidiaries. Similarly, the Cadence Parties shall provide
        Tality's internal auditors and their designees access to the Cadence
        Parties' and their Subsidiaries' books and records so that Tality may
        conduct reasonable audits relating to the financial statements provided
        by Cadence pursuant hereto as well as to the internal accounting
        controls and operations of Cadence and its Subsidiaries.

               (g) Notice of Change in Accounting Principles. The Tality Parties
        shall provide Cadence with as much prior notice as reasonably
        practicable (but in no event less than 30 days notice) of any proposed
        determination of, or any significant changes in, its accounting
        estimates, principles or methods from those in effect on the Separation
        Date. The Tality Parties shall consult with Cadence and, if requested by
        Cadence, the Tality Parties shall consult with the Cadence Auditors with
        respect to any such proposed determination or change.

        Section 4.4 Dispute Resolution.

               (a) Negotiation/Mediation. If a dispute, controversy or claim (a
        "Dispute") arises between the parties or any of their Subsidiaries
        relating to the interpretation or performance of this Agreement or any
        Ancillary Agreement, or any grounds for the termination hereof, duly
        authorized officers or employees of each party shall meet to attempt in
        good faith to negotiate a resolution of the Dispute prior to pursuing
        other available remedies. The date of receipt of written notice of a
        Dispute given by either of the Tality Parties to either of the Cadence
        Parties, or vice versa, with a request for a meeting between the parties
        shall be referred to herein as the "Dispute Resolution Commencement
        Date." Discussions and correspondence relating to trying to resolve such
        Dispute shall be treated as confidential information developed for the
        purpose of settlement and shall be exempt from discovery or production
        and shall not be admissible in court or any arbitration proceeding. If
        the parties are unable to resolve the Dispute within thirty (30) days
        after the Dispute Resolution Commencement Date, and any of the parties
        wishes to pursue its rights relating to such Dispute, then the Dispute
        shall be mediated by a mutually acceptable mediator appointed pursuant
        to the mediation rules of JAMS/Endispute within thirty (30) days after
        written notice by one party to the other demanding non-binding
        mediation. No party may unreasonably withhold consent to the selection
        of a mediator or the location of the mediation. The Cadence Parties and
        the Tality Parties shall share the costs of the mediation equally
        between them, except that each party shall bear its own costs and
        expenses, including attorneys' fees and expenses, witness fees and
        expenses, travel expenses, and preparation costs. The parties may also
        agree to replace mediation with some other form of non-binding or
        binding alternative dispute resolution ("ADR").

               (b) Arbitration. Any Dispute which the parties cannot resolve
        through mediation within ninety (90) days after the Dispute Resolution
        Commencement Date, unless otherwise mutually agreed in writing, shall be
        submitted to final and binding arbitration under the then current
        Commercial Arbitration Rules of the American Arbitration Association
        (the "AAA"), by one (1) arbitrator in Santa Clara County, California.
        Such arbitrator shall be selected by the mutual agreement of the parties
        or,

<PAGE>   24

        failing such agreement, shall be selected according to the aforesaid AAA
        rules. The arbitrator shall be instructed to prepare and deliver a
        written, reasoned opinion stating his decision within thirty (30) days
        of the completion of the arbitration. The prevailing party in such
        arbitration shall be entitled to expenses, including costs and
        reasonable attorneys' and other professional fees, incurred in
        connection with the arbitration (but excluding any costs and fees
        associated with prior negotiation or mediation). The decision of the
        arbitrator shall be final and non-appealable and may be enforced in any
        court of competent jurisdiction. The use of any ADR procedures shall not
        be construed under the doctrine of laches, waiver or estoppel to
        adversely affect the rights of any party.

               (c) Exceptions. Any Dispute regarding any of the following
        matters is not required to be negotiated, mediated or arbitrated prior
        to seeking relief from a court of competent jurisdiction: breach of any
        obligation of confidentiality; or any other claim where interim relief
        from the court is sought to prevent serious and irreparable injury to
        one of the parties or to others. However, the parties to the Dispute
        shall make a good faith effort to negotiate and mediate such Dispute,
        according to the above procedures, while such court action is pending.

               (d) Continuity of Service and Performance. Unless otherwise
        agreed in writing, the parties shall continue to provide service and
        honor all other commitments under this Agreement and each Ancillary
        Agreement during the course of dispute resolution pursuant to the
        provisions of this Section 4.4 with respect to all matters not subject
        to any particular Dispute.

        Section 4.5 Non-Solicitation of Employees. For a period of one (1) year
following the Separation Date, the Tality Parties agree (and shall cause their
Subsidiaries) not to solicit or recruit or hire employees of any member of the
Cadence Group, without the prior consent of Cadence's Senior Vice President of
Human Resources (or his or her designee). Notwithstanding the foregoing, this
prohibition on solicitation, recruitment or hiring shall not apply to actions
taken by any member of the Tality Group either (a) solely as a result of an
employee's affirmative response to a general recruitment effort carried out
through a public solicitation or (b) as a result of an employee's initiative.

        Section 4.6 Employee Agreements. As used in this Section 4.6, "Employee
Agreement" means the Employee Proprietary Information and Inventions Agreement
and corresponding agreements in foreign countries executed by each employee of
Cadence or any of its Subsidiaries.

               (a) Survival of Employee Agreement Obligations and Cadence's
        Common Law Rights. The Employee Agreements of all Cadence employees
        transferring to Tality or one of its Subsidiaries as of the Separation
        Date shall remain in full force and effect according to their terms;
        provided, however, that none of the following acts committed by former
        Cadence employees within the scope of their employment with Tality or
        one of its Subsidiaries shall constitute a breach of such Employee
        Agreements: (i) the use or disclosure of Confidential Information (as
        that term is defined in the former Cadence employee's Employee
        Agreement) for or on behalf of Tality or one of its Subsidiaries, if
        such disclosure is consistent with the rights granted to Tality and its
        Subsidiaries and

<PAGE>   25

        restrictions imposed on Tality and its Subsidiaries under this Agreement
        or any Ancillary Agreement; (ii) the disclosure and assignment to Tality
        or one of its Subsidiaries of rights in proprietary developments
        authored or conceived by the former Cadence employee after the
        Separation Date and resulting from the use of, or based upon
        intellectual property (whether patented or not) which is retained by
        Cadence, provided that in no event shall such disclosure and assignment
        be regarded as assigning or licensing the underlying intellectual
        property to Tality or one of its Subsidiaries; (iii) the rendering of
        any services, directly or indirectly, to Tality or one of its
        Subsidiaries to the extent such services are consistent with the
        assignment or license of rights granted to Tality and the restrictions
        imposed on Tality and its Subsidiaries under this Agreement, any
        Ancillary Agreement or any other agreement between the parties; and (iv)
        solicitation of the employees of one party by the other party prior to
        the Separation Date (so long as such solicitation does not violate
        Section 4.5). Further, Cadence retains any rights it has under statute
        or common law with respect to actions by its former employees to the
        extent such actions are inconsistent with the rights granted to Tality
        and restrictions imposed on Tality under this Agreement or any Ancillary
        Agreement.

               (b) Assignment, Cooperation for Compliance and Enforcement. To
        the extent permissible under Applicable Law, the following shall apply:

                      (i) Cadence retains all rights under the Employee
               Agreements of all former Cadence employees necessary to permit
               Cadence to protect the rights and interests of Cadence, but
               hereby transfers and assigns to Tality and its Subsidiaries its
               rights under the Employee Agreements of all former Cadence
               employees to the extent required to permit Tality to enjoin,
               restrain, recover damages from or obtain specific performance of
               the Employee Agreements or obtain other remedies against any
               employee who breaches his/her Employee Agreement; provided,
               however, that if such partial transfer and assignment is not
               permissible under Applicable Law, Cadence shall be deemed to have
               transferred and assigned all such rights.

                      (ii) Each of Cadence and Tality agrees, at its own cost
               and expense, to cooperate with the other as follows: (A) Tality
               shall advise Cadence of: (1) any violation(s) of the Employee
               Agreement by former Cadence employees, and (2) any violation(s)
               of the Tality Employee Agreement which affect Cadence's rights;
               and (B) Cadence shall advise Tality of any violations of the
               Employee Agreement by current or former Cadence employees which
               affect Tality's rights; provided, however, that the foregoing
               obligations shall only apply to violations which become known to
               an attorney within the legal department of the party obligated to
               provide notice thereof.

                      (iii) Tality may enforce all rights transferred and
               assigned to it under this Agreement relating to the Employee
               Agreements. In addition, if Cadence has retained any rights under
               the Employee Agreements, Tality shall, if requested by Cadence,
               enforce the Employee Agreements of former Cadence employees to
               the extent necessary to reasonably protect the interests of any
               member of the Cadence Group; provided, however, that Tality shall
               not commence any legal action

<PAGE>   26

               relating thereto without first consulting with Cadence's General
               Counsel (or his/her designee). If Tality, in seeking to enforce
               any Employee Agreement, notifies Cadence that it requires, or
               desires, Cadence to join in such action, then Cadence shall do
               so. In addition, if Cadence commences or becomes a party to any
               action to enforce a Employee Agreement of a former Cadence
               employee, Cadence shall, whether or not it becomes a party to the
               action, cooperate with Tality by making available its files and
               employees who have information or knowledge relevant to the
               dispute, subject to appropriate measures to protect the
               confidentiality of any proprietary or confidential information
               that may be disclosed in the course of such cooperation or action
               and subject to any relevant privacy laws and regulations. Any
               such action shall be conducted at the expense of Tality and
               Cadence and Tality shall agree on a case by case basis on
               compensation, if any, of Cadence for the value of the time of
               Cadence employees as reasonably required in connection with the
               action.

                      (iv) Cadence and Tality understand and acknowledge that
               matters relating to the making, performance, enforcement,
               assignment and termination of employee agreements are typically
               governed by the laws and regulations of the national, federal,
               state or local governmental unit where an employee resides, or
               where an employee's services are rendered, and that such laws and
               regulations may supersede or limit the applicability or
               enforceability of this Section 4.6. In such circumstances,
               Cadence and Tality agree to take action with respect to the
               employee agreements that best accomplishes the parties'
               objectives as set forth in this Section 4.6 and that is
               consistent with applicable law.

        Section 4.7 Government and Third Party Approvals. If and to the extent
that the valid, complete and perfected transfer, assignment or novation of any
asset or liability pursuant to the Assignment Agreement would be a violation of
Applicable Law or require any Third-Party Approval or Governmental Approval in
connection with the Separation or the IPO, then, unless Cadence shall otherwise
determine, the transfer or assignment to, or novation by, the Tality Group, as
the case may be, of such assets or liabilities shall be automatically deemed
deferred and any such purported transfer, assignment or novation shall be null
and void until such time as all such Third-Party Approvals or Governmental
Approvals have been obtained. Notwithstanding the foregoing, any asset allocated
to the Partnership the transfer of which is so delayed shall still be considered
an asset of the Partnership for purposes of determining whether any associated
liability is a liability of the Partnership; provided, however, that if such
Third-Party Approvals or Governmental Approvals have not been obtained within
six months after the Separation Date, the parties shall use all commercially
reasonable efforts to achieve an alternative solution in accordance with the
parties' intentions. Tality shall (and it shall cause its Subsidiaries to)
reimburse Cadence for all additional costs and expenses incurred by Cadence or
any other member of the Cadence Group in connection with the performance of its
obligations under this Section 4.7.

        Section 4.8 [CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH
                    THE COMMISSION.]

<PAGE>   27

                                    ARTICLE V

                                  MISCELLANEOUS

        Section 5.1 Limitation of Liability. IN NO EVENT SHALL ANY MEMBER OF THE
CADENCE GROUP OR TALITY GROUP BE LIABLE TO ANY MEMBER OF THE TALITY GROUP OR
CADENCE GROUP, RESPECTIVELY, FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT,
INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY
OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT
(OTHER THAN AS SET FORTH IN ARTICLE III) OR ANY ANCILLARY AGREEMENT, WHETHER OR
NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED,
HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY'S
INDEMNIFICATION OBLIGATIONS FOR LIABILITIES AS SET FORTH IN THE INDEMNIFICATION
AND INSURANCE MATTERS AGREEMENT.

<PAGE>   28

        Section 5.2 Entire Agreement. This Agreement, the Ancillary Agreements
and the Exhibits and Schedules referenced or attached hereto and thereto,
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof and shall supersede all prior written and oral and all
contemporaneous oral agreements and understandings with respect to the subject
matter hereof and thereof.

        Section 5.3 Governing Law. This Agreement shall be construed in
accordance with and all Disputes hereunder shall be governed by the laws of the
State of Delaware, excluding its conflict of law rules. The Superior Court of
Santa Clara County and/or the United States District Court for the Northern
District of California shall have jurisdiction and venue over all Disputes
between the parties that are permitted to be brought in a court of law pursuant
to Section 4.4.

        Section 5.4 Termination. This Agreement and all Ancillary Agreements may
be terminated at any time prior to the IPO Closing Date by and in the sole
discretion of Cadence without the approval or consent of Tality. This Agreement
may be terminated at any time after the IPO Closing Date by mutual consent of
Cadence and Tality. In the event of termination pursuant to this Section 5.4, no
party shall have any liability of any kind to the other party.

        Section 5.5 Notices. Notices, offers, requests or other communications
required or permitted to be given by either party pursuant to the terms of this
Agreement shall be given in writing to the respective parties to the following
addresses:

        if to the Cadence Parties:

               Cadence Design Systems, Inc.
               2655 Seely Avenue
               Building 5
               San Jose, California 95134
               Attention:  R.L. Smith McKeithen, General Counsel
               Fax:  (408) 944-6855

        if to the Tality Parties:

               Tality Corporation
               2655 Seely Avenue
               Building 9
               San Jose, California 95134
               Attention:  Duane W. Bell, Chief Financial Officer
               Fax:  (408) 894-2605

or to such other address as the party to whom notice is given may have
previously furnished to the other in writing as provided herein. Any notice
involving non-performance, termination, or renewal shall be sent by hand
delivery, recognized overnight courier or, within the United States, may also be
sent via certified U.S. mail, return receipt requested. All other notices may
also be sent by fax, confirmed by first class mail. All notices shall be deemed
to have been given and received on the earlier of actual receipt and three (3)
days from the date of postmark.

<PAGE>   29

        Section 5.6 Counterparts. This Agreement and each of the Ancillary
Agreements, and the Exhibits and Schedules hereto and thereto, and the other
documents referred to herein or therein, may be executed in counterparts, each
of which shall be deemed to be an original but all of which shall constitute one
and the same agreement.

        Section 5.7 Binding Effect; Assignment. This Agreement and each
Ancillary Agreement shall inure to the benefit of and be binding upon the
parties hereto and thereto and their respective legal representatives and
successors, and nothing in this Agreement or any Ancillary Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement. No party may assign
this Agreement or any rights or obligations hereunder, without the prior written
consent of Cadence, in the case of the Tality Parties, or Tality, in the case of
the Cadence Parties (except in connection with a merger, consolidation or sale
of all or substantially all of the party's assets), and any such attempted
assignment shall be void and in violation hereof.

        Section 5.8 Severability. If any term or other provision of this
Agreement or any Ancillary Agreement, or any of the Exhibits and Schedules
attached hereto is determined by a court, administrative agency or arbitrator to
be invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the fullest extent
possible.

        Section 5.9 Failure or Delay Not Waiver; Remedies Cumulative. No failure
or delay on the part of either party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement or any Ancillary Agreement, or the Exhibits or Schedules
attached hereto or thereto are cumulative to, and not exclusive of, any rights
or remedies otherwise available.

        Section 5.10 Amendment. No modification or amendment shall be made to
this Agreement or any Ancillary Agreement, or the Exhibits or Schedules attached
hereto or thereto, except by an instrument in writing signed on behalf of each
of the parties to such agreement.

        Section 5.11 Authority. Each of the parties hereto and each of the
Ancillary Agreements represents to the other that (a) it has the corporate or
other requisite power and authority to execute, deliver and perform this
Agreement or such Ancillary Agreement, as the case may be; (b) the execution,
delivery and performance of this Agreement and each of the Ancillary Agreements
by it have been duly authorized by all necessary corporate or other actions; (c)
it has duly and validly executed and delivered this Agreement and each of the
Ancillary Agreements; and (d) this Agreement and each of the Ancillary
Agreements is a legal, valid and binding obligation, enforceable against it in
accordance with its terms subject to

<PAGE>   30

applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and general equity principles.

        Section 5.12 Interpretation. The headings contained in this Agreement
and each of the Ancillary Agreements, in any Exhibit or Schedule hereto and in
the table of contents to this Agreement and each of the Ancillary Agreements are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement or such Ancillary Agreement. Any capitalized
term used in any Exhibit or Schedule hereto or to any Ancillary Agreement but
not otherwise defined therein, shall have the meaning assigned to such term in
this Agreement or such Ancillary Agreement, as the case may be. When a reference
is made in this Agreement or any Ancillary Agreement to an Article or a Section,
Exhibit or Schedule, such reference shall be to an Article or Section of, or an
Exhibit or Schedule to, this Agreement or such Ancillary Agreement, as the case
may be, unless otherwise indicated. All Exhibits and Schedules hereto and to
each Ancillary Agreement are incorporated into and made a part of this Agreement
and the applicable Ancillary Agreement, respectively. The terms "including" and
"include" employed in this Agreement or any Ancillary Agreement (including any
of the Exhibits and Schedules incorporated into and made a part of this
Agreement or any such Ancillary Agreement) mean "including, without limitation,"
and "includes, without limitation," respectively.

        Section 5.13 Conflicting Agreements. In the event of any irreconcilable
conflict between this Agreement and any Ancillary Agreement or other agreement
executed in connection herewith, the provisions of such Ancillary Agreement
shall prevail to the extent that they specifically address the subject matter of
the conflict.

        Section 5.14 Payment of Expenses. Except as otherwise provided in this
Agreement or any of the Ancillary Agreements or any other agreement related to
the IPO, all costs and expenses of the parties hereto in connection with the
Separation and the IPO (including underwriting discounts and commissions) shall
be allocated between the Tality Parties and the Cadence Parties as determined by
Cadence in its sole and absolute discretion.

        Section 5.15 Prior Agreement Superseded. This Agreement supersedes and
replaces in its entirety the Prior Agreement, which shall no longer be of any
force or effect.

<PAGE>   31
        WHEREFORE, the parties have executed and delivered this Amended and
Restated Master Separation Agreement effective as of the date first set forth
above.

CADENCE DESIGN SYSTEMS, INC.           TALITY, LP

By:                                    By:  TALITY CORPORATION,
   ---------------------------------        AS GENERAL PARTNER
Name: William Porter
Title: Senior Vice President,          By:
Chief Financial Officer                   --------------------------------------
                                       Name: Robert P. Wiederhold
                                       Title: President and Chief
                                              Executive Officer

CADENCE HOLDINGS, INC.                 TALITY CORPORATION

By:                                    By:
   ---------------------------------       -------------------------------------
Name: William Porter                   Name: Robert P. Wiederhold
Title: Treasurer                       Title: President and Chief
                                              Executive Officer<PAGE>   1
                                                                     EXHIBIT 4.2

                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

        THIS FIRST AMENDED AND RESTATED RIGHTS AGREEMENT (the "Agreement") is
entered into as of the 4th day of August, 2000, by and among PDF Solutions,
Inc., a California corporation (the "Company"), the holders of shares of Series
A Preferred Stock (the "Series A Purchasers") and Series B Preferred Stock (the
"Series B Purchasers") listed on Exhibit A hereto, (the Series A Purchasers and
Series B Purchasers are referred to herein collectively as the "Preferred
Purchasers," and certain other shareholders listed on Exhibit B hereto (the
"Founders" and collectively with the Series A Purchasers and Series B Purchasers
the "Purchasers" or the "Investors").

                                    RECITALS

        WHEREAS, the Company, the Series A Purchasers and the Founders have
entered into a Rights Agreement dated as of December 4, 1995 (the "Original
Rights Agreement"). The Company, the Founders, and a majority of the holders of
Series A Preferred Stock desire to amend and restate in its entirety the
Original Rights Agreement in accordance with Section 3.7 thereof.

        WHEREAS, the Company and the Series B Purchasers are entering into a
Series B Preferred Stock Purchase Agreement of even date herewith (the "Purchase
Agreement"), pursuant to which the Company shall sell, and the Series B
Purchasers shall acquire, shares of the Company's Series B Preferred Stock.

        WHEREAS, a condition to the Series B Purchasers' obligations under the
Purchase Agreement is that the Company and the Purchasers enter into this
Agreement in order to provide the Series B Purchasers with (i) certain rights to
register shares of the Company's Common Stock issuable upon conversion of the
Series B Preferred Stock held by the Series B Purchasers and (ii) a right of
participation with respect to certain issuances by the Company of its
securities. The Company desires to induce the Series B Purchasers to purchase
shares of Series B Preferred Stock pursuant to the Purchase Agreement by
agreeing to the terms and conditions set forth herein.

        NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL PROMISES AND COVENANTS
HEREINAFTER SET FORTH, THE PARTIES AGREE that effective and contingent upon
execution of this Agreement by the Company and the holders of a majority of the
Registrable Securities, as that term is defined in the Original Rights
Agreement, not including the stock held by the Founders, and upon closing of the
transactions contemplated by the Purchase Agreement, the Original Rights
Agreement is hereby amended and restated in its entirety to read as set forth in
this Agreement, and the Company, the Founders, and the Investors hereby agree to
be bound by the provisions hereof as the sole agreement of the Company, the
Founders and the Investors with respect to registration rights of the Company's
securities and certain other rights, as set forth herein;

         AND FURTHER AGREE AS FOLLOWS:

<PAGE>   2

                                    SECTION 1

                        Restrictions on Transferability;
                               Registration Rights

        1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:

            "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.

            "Common Shares" shall mean all shares of Common Stock issued to the
Founders as of the date hereof.

            "Conversion Shares" shall mean the Common Stock issued or issuable
upon conversion of the Preferred Shares as defined herein.

            "Holder" shall mean any Investor holding Registrable Securities and
any person holding Registrable Securities to whom the rights under this
Agreement have been transferred in accordance with Section 1.14 hereof.

            "Initiating Holders" shall mean Holders in the aggregate of not less
than fifty percent (50%) of the Registrable Securities as defined for purposes
of that particular section.

            "Major Purchaser" shall mean any Investor (together with its
affiliates) holding more than 100,000 shares of Registrable Securities.

            "Preferred Shares" shall mean shares of the Series A Preferred and
Series B Preferred Stock outstanding as of the date hereof.

            The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.

            "Registration Expenses" shall mean all expenses incurred by the
Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).

            "Registrable Securities" means (i) the Common Shares except that all
such Common Shares shall not be included in the definition of Registrable
Securities for the purposes of Section 1.5 and 1.7; (ii) the Conversion Shares;
and (iii) any Common Stock of the Company issued or issuable in respect of the
Common Shares, Preferred Shares or Conversion Shares or other securities issued
or issuable with respect to the Preferred Shares, Conversion Shares or Common
Shares upon any stock split, stock dividend, recapitalization, or similar event,
or any Common Stock otherwise issued or issuable with respect to the Common
Shares, Conversion

                                      -2-
<PAGE>   3

Shares or Preferred Shares; provided, however, that shares of Common Stock or
other securities shall only be treated as Registrable Securities if and so long
as they have not been (A) sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, or (B) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(1) thereof so that all transfer restrictions
and restrictive legends with respect thereto are removed upon the consummation
of such sale.

            "Restricted Securities" shall mean the securities of the Company
required to bear the legend set forth in Section 1.3 of this Agreement.

            "Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

            "Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Section 1.9).

        1.2 Restrictions. The Preferred Shares, the Conversion Shares and the
Common Shares shall not be sold, assigned, transferred or pledged except upon
the conditions specified in this Agreement, which conditions are intended to
ensure compliance with the provisions of the Securities Act. The Investors will
cause any proposed purchaser, assignee, transferee or pledgee of the Preferred
Shares, the Conversion Shares or the Common Shares to agree to take and hold
such securities subject to the provisions and upon the conditions specified in
this Agreement.

        1.3 Restrictive Legend. Each certificate representing (i) the Preferred
Shares, (ii) the Conversion Shares, (iii) the Common Shares and (iv) any other
securities issued in respect of the securities referenced in clauses (i), (ii)
and (iii) upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 1.4 below) be stamped or otherwise imprinted with legends
in the following form (in addition to any legend required under applicable state
securities laws):

        "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
        INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
        1933. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE
        OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF
        COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO
        IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION
        AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT."

        Each Investor and Holder consents to the Company making a notation on
its records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
this Section 1.

        1.4 Notice of Proposed Transfers. The holder of each certificate
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted

                                      -3-
<PAGE>   4

Securities, unless there is in effect a registration statement under the
Securities Act covering the proposed transfer, the holder thereof shall give
written notice to the Company of such holder's intention to effect such
transfer, sale, assignment or pledge. Each such notice shall describe the manner
and circumstances of the proposed transfer, sale, assignment or pledge in
sufficient detail, and shall be accompanied at such holder's expense by either
(i) an unqualified written opinion of legal counsel who shall, and whose legal
opinion shall be, reasonably satisfactory to the Company, addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, or (ii) a "no
action" letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the holder to the Company. The Company will not require such a legal opinion or
"no action" letter (a) in any transaction in compliance with Rule 144, (b) in
any transaction in which an Investor which is a corporation distributes
Restricted Securities after six (6) months after the purchase thereof solely to
its majority-owned subsidiaries or affiliates for no consideration, or (c) in
any transaction in which an Investor which is a partnership distributes
Restricted Securities after six (6) months after the purchase thereof solely to
partners thereof for no consideration, provided that each transferee agrees in
writing to be subject to the terms of this Section 1.4. Each certificate
evidencing the Restricted Securities transferred as above provided shall bear,
except if such transfer is made pursuant to Rule 144, the appropriate
restrictive legend set forth in Section 1.3 above, except that such certificate
shall not bear such restrictive legend if, in the opinion of counsel for such
holder and the Company, such legend is not required in order to establish
compliance with any provisions of the Securities Act.

        1.5 Requested Registration.

            (a) Request for Registration. In case the Company shall receive from
Initiating Holders a written request that the Company effect any qualification,
compliance or registration the reasonably anticipated aggregate price to the
public of which net of underwriting discounts and commissions, would exceed
$7,500,000, the Company shall:

                (i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and

                (ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance pursuant
to this Section 1.5:

                                      -4-
<PAGE>   5

                     (1) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;

                     (2) Prior to the earlier of (i) six (6) months following
the Company's initial public offering or (ii) July 31, 2003;

                     (3) During the period ending on the date three (3) months
immediately following the effective date of any registration statement
pertaining to securities of the Company (other than a registration of securities
in a Rule 145 transaction or with respect to an employee benefit plan);

                     (4) After the Company has effected two (2) such
registrations pursuant to this subparagraph 1.5(a), such registrations have been
declared or ordered effective and the securities offered pursuant to such
registrations have been sold; or

                     (5) If the Company shall furnish to such Holders a
certificate, signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.5 shall be deferred for a single period
not to exceed one hundred-twenty (120) days from the date of receipt of written
request from the Initiating Holders.

        Subject to the foregoing clauses (1) through (5), the Company shall file
a registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.

            (b) Underwriting. In the event that a registration pursuant to
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested, to the
extent provided in this Agreement.

        The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by a majority in interest of the Initiating Holders (which managing underwriter
shall be reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 1.5, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Company shall so advise all
Holders of Registrable Securities and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders thereof in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities held by such Holders at the
time of filing the registration statement. No Registrable Securities excluded
from the underwriting by reason of

                                      -5-
<PAGE>   6

the underwriter's marketing limitation shall be included in such registration.
To facilitate the allocation of shares in accordance with the above provisions,
the Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares.

        If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. The Registrable Securities and/or
other securities so withdrawn shall also be withdrawn from registration, and
such Registrable Securities shall not be transferred in a public distribution
prior to one hundred eighty (180) days after the effective date of such
registration.

        1.6 Company Registration.

            (a) Notice of Registration. If at any time or from time to time, the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:

                (i) promptly give to each Holder written notice thereof; and

                (ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved in
such registration, all the Registrable Securities specified in a written request
or requests received within twenty (20) days after receipt of such written
notice from the Company by any Holder, but only to the extent that such
inclusion will not diminish the number of securities included by the Company or
by holders of the Company's securities who have demanded such registration.

            (b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration). Notwithstanding any other
provision of this Section 1.6, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration to a minimum of 30% of the total shares to be
included in such underwriting or exclude them entirely in the case of the
Company's initial public offering. The Company shall so advise all Holders and
the other holders distributing their securities through such underwriting
pursuant to piggyback registration rights similar to this Section 1.6, and the
number of shares of Registrable Securities and other securities that may be
included in the registration and underwriting shall be first allocated among all
Preferred Purchasers in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by such Preferred Purchasers at the time
of filing the registration statement, and after satisfaction of the requirements
of the Preferred Purchasers, the remaining shares that may be included in the

                                      -6-
<PAGE>   7

registration and underwriting shall be allocated among the Founders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Founders at the time of filing of the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares
allocated to any Holder or other holder to the nearest 100 shares. If any Holder
or other holder disapproves of the terms of any such underwriting, he or she may
elect to withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities withdrawn from such underwriting shall be withdrawn
from such registration, and shall not be transferred in a public distribution
prior to one hundred eighty (180) days after the effective date of the
registration statement relating thereto (the "Lock-Up Period"); provided,
however, that if such registration is not the Company's initial public offering
such Lock-Up Period shall be one hundred twenty (120) days unless the managing
underwriter determines that marketing factors require a longer period in which
case the Lock-Up period shall be specified by the managing underwriter but shall
not exceed one hundred eighty (180) days.

            (c) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 1.6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.

        1.7 Registration on Form S-3.

            (a) If Initiating Holders request that the Company file a
registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of shares of the Registrable Securities, the reasonably
anticipated aggregate price to the public of which, net of underwriting
discounts and commissions, would exceed $1,000,000, and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form; provided,
however, that the Company shall not be required to effect more than one
registration pursuant to this Section 1.7 in any twelve (12) month period. The
Company will (i) promptly give written notice of the proposed registration to
all other Holders, and (ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company.
The substantive provisions of Section 1.5(b) shall be applicable to each
registration initiated under this Section 1.7.

            (b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act, (ii) during the period
ending on a

                                      -7-
<PAGE>   8

date three (3) months following the effective date of a registration statement
(other than with respect to a registration statement relating to a Rule 145
transaction, an offering solely to employees or any other registration which is
not appropriate for the registration of Registrable Securities), or (iii) if the
Company shall furnish to such Holder a certificate signed by the President of
the Company stating that, in the good faith judgment of the Board of Directors,
it would be seriously detrimental to the Company or its shareholders for
registration statements to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a single period not to exceed one hundred twenty (120) days from
the receipt of the request to file such registration by such Holder or Holders.

        1.8 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not enter into any agreement granting
any holder or prospective holder of any securities of the Company registration
rights with respect to such securities unless such holder derives its rights as
an additional Holder hereunder, or such shares or securities are entitled to be
included in registrations only to the extent that the inclusion of such
securities will not diminish the amount of Holder's Registrable Securities that
are included.

        1.9 Expenses of Registration. All Registration Expenses incurred in
connection with any registration pursuant to Sections 1.5, 1.6 or 1.7 and the
reasonable cost of one special legal counsel to represent all of the Holders
together in any such registration shall be borne by the Company, provided that
the Company shall not be required to pay the Registration Expenses of any
registration proceeding begun pursuant to Section 1.5, the request of which has
been subsequently withdrawn by the Initiating Holders. In such case, the Holders
of Registrable Securities to have been registered shall bear all such
Registration Expenses pro rata on the basis of the number of shares to have been
registered unless the Holders of a majority of the Registrable Securities agree
to forfeit their right to one demand registration pursuant to Section 1.5.
Notwithstanding the foregoing, however, if at the time of the withdrawal, the
Holders have learned of a material adverse change in the condition, business or
prospects of the Company from that known to the Holders at the time of their
request, of which the Company had knowledge at the time of the request, then the
Holders shall not be required to pay any of said Registration Expenses or to
forfeit the right to one demand registration.

        1.10 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:

             (a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
eighty (120) days or until the distribution described in the registration
statement has been completed; and

             (b) Furnish to the Holders participating in such registration and
to the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.

                                      -8-
<PAGE>   9

        1.11 Indemnification.

             (a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.

             (b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein; provided, however, that the liability
of a Holder for indemnification under this Section 1.11(b) shall not exceed the
net proceeds from the offering received by such Holder.

                                      -9-
<PAGE>   10

             (c) Each party entitled to indemnification under this Section 1.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.

        1.12 Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.

        1.13 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:

             (a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act");

             (b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and

             (c) So long as an Investor owns any Restricted Securities, to
furnish to the Investor forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company as an Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing an Investor
to sell any such securities without registration.

                                      -10-
<PAGE>   11

        1.14 Transfer of Registration Rights. The rights to cause the Company to
register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by an Investor (together with any
affiliate); provided, that (a) such transfer may otherwise be effected in
accordance with applicable securities laws, (b) notice of such assignment is
given to the Company, and (c) such transferee or assignee (i) is an affiliate of
such Investor or a constituent partner (including limited partners) of such
Investor, or (ii) acquires from such Investor the lesser of (a) 100,000 or more
shares of Restricted Securities (as appropriately adjusted for stock splits and
the like) or (b) all of the Restricted Securities then owned by such Investor.

        1.15 Standoff Agreement. Each Holder agrees in connection with the
initial public offering of the Company's securities that, upon request of the
Company or the underwriters managing any underwritten initial public offering of
the Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the prior written
consent of the Company or such underwriters, as the case may be, for such period
of time (not to exceed one hundred eighty (180) days from the effective date of
such registration) as may be requested by the Company or such managing
underwriters; provided, however, that the officers and directors of the Company
who own stock of the Company also agree to such restrictions.

        1.16 Termination of Rights. No Holder shall be entitled to exercise any
right provided for in this Section 1:

             (a) after five (5) years following the consummation of the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the initial firm commitment underwritten offering of its
securities to the general public, or

             (b) on or after the closing of a public offering of the Common
Stock of the Company when all shares of the Holder's Registrable Securities may
be sold under Rule 144 during any 90-day period; provided, however, that the
provisions of this subsection (b) shall not apply where the Holder owns more
than two percent (2%) of the Company's outstanding stock until such time as such
Holder owns less than two percent (2%) of the outstanding stock.

                                    SECTION 2

                             Right of Participation

        2.1 Purchasers' Right of Participation.

             (a) Right of Participation. Subject to the terms and conditions
contained in this Section 2.1, the Company hereby grants to each Major Purchaser
the right of participation to purchase its Pro Rata Portion of any New
Securities (as defined in subsection 2.1(b)) which the Company may, from time to
time, propose to sell and issue. A Major Purchaser's "Pro Rata Portion" for
purposes of this Section 2.1 is the ratio that (x) the sum of the number of
shares of the Company's Common Stock then held by such Major Purchaser and the
number of shares of the Company's Common Stock issuable upon conversion of the
Preferred Stock then held by such Major Purchaser, bears to (y) the sum of the
total number of shares of the Company's Common Stock then outstanding, the
number of shares of the Company's Common Stock

                                      -11-
<PAGE>   12

issuable upon the exercise of any issued and outstanding rights, options or
warrants, and the number of shares of the Company's Common Stock issuable upon
conversion of the then outstanding Preferred Stock.

             (b) Definition of New Securities. Except as set forth below, "New
Securities" shall mean any shares of capital stock of the Company, including
Common Stock and Preferred Stock, whether authorized or not, and rights, options
or warrants to purchase said shares of Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible into said
shares of Common Stock or Preferred Stock. Notwithstanding the foregoing, "New
Securities" does not include (i) the Common Shares, the Preferred Shares or the
Conversion Shares, (ii) securities offered to the public generally pursuant to a
registration statement under the Securities Act, (iii) securities issued
pursuant to the acquisition of another corporation by the Company by merger,
purchase of substantially all of the assets or shares or other reorganization
whereby the Company or its shareholders own not less than a majority of the
voting power of the surviving or successor corporation, (iv) shares of the
Company's Common Stock or related options or warrants convertible into or
exercisable for such Common Stock issued to employees, officers and directors
of, and consultants to, the Company, pursuant to any arrangement approved by the
Board of Directors of the Company, (v) shares of the Company's Common Stock or
related options or warrants convertible into or exercisable for such Common
Stock issued to customers and vendors of the Company pursuant to any arrangement
unanimously approved by the Board of Directors of the Company; (vi) shares of
the Company's Common Stock or related options convertible into or exercisable
for such Common Stock issued to banks, commercial lenders, lessors and other
financial institutions in connection with the borrowing of money or the leasing
of equipment by the Company, (vii) stock issued pursuant to any rights or
agreements, including, without limitation, convertible securities, options and
warrants, provided that the Company shall have complied with the rights of
participation established by this Section 2.1 with respect to the initial sale
or grant by the Company of such rights or agreements, or (viii) shares of
capital stock issued in connection with any stock split, stock dividend or
recapitalization by the Company.

             (c) Notice of Right. In the event the Company proposes to undertake
an issuance of New Securities, it shall give each Purchaser written notice of
its intention, describing the type of New Securities and the price and terms
upon which the Company proposes to issue the same. Each Purchaser shall have
twenty (20) days from the date of receipt of any such notice to agree to
purchase shares of such New Securities (up to the amount referred to in
subsection 2.1(a)), for the price and upon the terms specified in the notice, by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.

             (d) Exercise of Right. If any Purchaser exercises its right of
participation under this Agreement, the closing of the purchase of the New
Securities with respect to which such right has been exercised shall take place
within ninety (90) calendar days after the Purchaser gives notice of such
exercise, which period of time shall be extended in order to comply with
applicable laws and regulations. Upon exercise of such right of participation,
the Company and the Purchaser shall be legally obligated to consummate the
purchase contemplated thereby and shall use their best efforts to secure any
approvals required in connection therewith.

                                      -12-
<PAGE>   13

             (e) Lapse and Reinstatement of Right. In the event a Purchaser
fails to exercise the right of participation provided in this Section 2.1 within
said twenty (20) day period, the Company shall have ninety (90) days thereafter
to sell or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within sixty (60) days from the date
of said agreement) to sell the New Securities not elected to be purchased by
such Purchaser at the price and upon the terms no more favorable to the
purchasers of such securities than specified in the Company's notice. In the
event the Company has not sold the New Securities or entered into an agreement
to sell the New Securities within said ninety (90) day period (or sold and
issued New Securities in accordance with the foregoing within sixty (60) days
from the date of said agreement), the Company shall not thereafter issue or sell
any New Securities without first offering such securities to the Purchasers in
the manner provided above.

             (f) Assignment. The right of the Purchasers to purchase any part of
the New Securities may be assigned in whole or in part to any partner,
subsidiary, affiliate or shareholder of a Purchaser, or other persons or
organizations who acquire the lesser of (i) 100,000 or more shares of Restricted
Securities (as adjusted for stock splits and the like) or (ii) all of the
Restricted Securities then owned by such Purchaser.

        2.2 Termination of Participation Right. The rights of participation
granted under Section 2.1 of this Agreement shall terminate on and be of no
further force or effect upon the earlier of (i) the consummation of the
Company's sale of its Common Stock in an underwritten public offering pursuant
to an effective registration statement filed under the Securities Act
immediately subsequent to which the Company shall be obligated to file annual
and quarterly reports with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act or (ii) the registration by the Company of a class of its equity
securities under Section 12(b) or 12(g) of the Exchange Act.

                                    SECTION 3

                                  Miscellaneous

        3.1 Assignment. Except as otherwise provided in this Agreement, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties to this
Agreement.

        3.2 Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

        3.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California in the United States of America
without giving effect to the conflicts of laws principles thereof.

        3.4 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

                                      -13-
<PAGE>   14

        3.5 Notices. Any notice required or permitted by this Agreement shall be
in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, or otherwise delivered by hand or by messenger addressed to
the other party at the address shown below or at such other address for which
such party gives notice under this Agreement. Such notice shall be deemed to
have been given when delivered if delivered personally, or, if sent by mail, at
the earlier of its receipt or three (3) days after deposit in the mail.

        3.6 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.

        3.7 Amendment and Waiver. Any provision of this Agreement may be amended
or waived with the written consent of the Company and the Holders of at least a
majority of the outstanding shares of the Registrable Securities, so long as the
effect is to treat all Holders equally. ****************************************
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each Holder of Registrable Securities and the Company. In addition,
the Company may waive performance of any obligation owing to it, as to some or
all of the Holders of Registrable Securities, or agree to accept alternatives to
such performance, without obtaining the consent of any Holder of Registrable
Securities. In the event that an underwriting agreement is entered into between
the Company and any Holder, and such underwriting agreement contains terms
differing from this Agreement, as to any such Holder the terms of such
underwriting agreement shall govern.

        3.8 Effect of Amendment or Waiver. The Investors and their successors
and assigns acknowledge that by the operation of Section 3.7 of this Agreement
the holders of a majority of the outstanding Registrable Securities, acting in
conjunction with the Company, will have the right and power to diminish or
eliminate any or all rights or increase any or all obligations pursuant to this
Agreement.

        3.9 Rights of Holders. Each holder of Registrable Securities shall have
the absolute right to exercise or refrain from exercising any right or rights
that such holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.

        3.10 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any

                                      -14-
<PAGE>   15

similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any party of any breach or default under
this Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.

        3.11 Aggregation of Stock. All Registrable Securities held or acquired
by affiliated entities or persons shall be aggregated together for the purpose
of determining the availability of any rights under this Agreement.

                            [SIGNATURE PAGE FOLLOWS]

                                      -15-
<PAGE>   16

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

COMPANY:

PDF SOLUTIONS, INC.,
a California corporation

By: /s/ John K. Kibarian
    -------------------------------------------------------
    John K. Kibarian, President and Chief Executive Officer

FOUNDERS:

/s/ John K. Kibarian
-------------------------------------
JOHN K. KIBARIAN

/s/ Kimon Michaels
-------------------------------------
KIMON MICHAELS

/s/ Thomas Cobourn
-------------------------------------
THOMAS COBOURN

/s/ Howard Read
-------------------------------------
HOWARD READ

                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

<PAGE>   17

SERIES A AND SERIES B HOLDERS:

U.S. VENTURE PARTNERS IV, L.P.

By: Presidio Management Group IV, L.P.
      Its General Partner

By: /s/ PHILIP M. YOUNG
   -----------------------------------
   Name:  Philip M. Young
   Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025

SECOND VENTURES II, L.P.

By: Presidio Management Group IV, L.P.
       Its General Partner

By: /s/ PHILIP M. YOUNG
   -----------------------------------
   Name:  Philip M. Young
   Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025

U.S.V.P. ENTREPRENEUR PARTNERS II, L.P.
A Delaware Limited Partnership

By: Presidio Management Group IV, L.P.
       Its General Partner

By: /s/ PHILIP M. YOUNG
   -----------------------------------
   Name:  Philip M. Young
   Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025

                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

<PAGE>   18

2180 ASSOCIATES FUND

By: /s/ JONATHON D. ROOT, M.D.
    ---------------------------------------
    Name:  Jonathon D. Root, M.D.
    Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025

TELOS VENTURE PARTNERS, L.P.

By: /s/ BRUCE R. BOURBON
    ---------------------------------------
    Name:  Bruce R. Bourbon
    Title: Managing Member of the General
           Partner, Telos Management LLC

        2350 Mission College Blvd., Suite 1070
        Santa Clara, CA 95054

THE CASSIN FAMILY TRUST U/D/T/
DTD 1/31/96, BRENDAN J. AND ISABEL
B. CASSIN, TRUSTEES

By:________________________________________
   Name:
   Title:

        3000 Sand Hill Road, Building 3, Suite 210
        Menlo Park, CA 94025

CASSIN FAMILY PARTNERS,
A CALIFORNIA LIMITED PARTNERSHIP

By:________________________________________
   Name:
   Title:

        3000 Sand Hill Road, Building 3, Suite 210
        Menlo Park, CA 94025

                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT
<PAGE>   19

VLG INVESTMENTS 1995

By:________________________________________
   Name:
   Title:

        c/o Venture Law Group
        2800 Sand Hill Road
        Menlo Park, CA 94025

CRAIG W. JOHNSON

/s/ Craig W. Johnson
-------------------------------------------
Craig W. Johnson

        c/o Venture Law Group
        2800 Sand Hill Road
        Menlo Park, CA 94025

PETER COHN

/s/ Peter Cohn
-------------------------------------------
Peter Cohn

        c/o 1020 Marsh Road
        Menlo Park, CA 94025

PETER COHN, AS TRUSTEE OR THE
SUCCESSOR TRUSTEE OR TRUSTEES
U/A/D JUNE 29, 1995, AS AMENDED,
CREATING THE PETER COHN REVOCABLE TRUST

By: /s/ Peter Cohn
    ----------------------------------------

        1020 Marsh Road
        Menlo Park, CA 94025

                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

<PAGE>   20

ORRICK, HERRINGTON & SUTCLIFFE LLP

By: /s/ Peter Cohn
   ----------------------------------------
   Peter Cohn
   Partner

        1020 Marsh Road
        Menlo Park, CA 94025

RICHARD M. LUCAS FOUNDATION

By: /s/ DONALD L. LUCAS
    ---------------------------------------
    Name:  Donald L. Lucas
    Title: Chairman of the Board

        3000 Sand Hill Road, Suite 3-210
        Menlo Park, CA 94025

ST. MARY'S COLLEGE OF CALIFORNIA

By:________________________________________
   Name:
   Title:

        1928 St Mary's Road
        Moraga, CA 94556

ST. FRANCIS GROWTH FUND

By:________________________________________
   Name:
   Title:

        San Francis High School
        1885 Miramonte Avenue
        Mountain View, CA 94049

                                SIGNATURE PAGE TO
                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

<PAGE>   21

LARRY YOSHIDA

  /s/ LARRY YOSHIDA
-------------------------------------------
      Larry Yoshida

            Address: I-3-20 Tamagawa-Bakuen
            Machida City, Tokyo 194-0041
            Japan

DONALD L. LUCAS PROFIT SHARING TRUST

By: /s/ DONALD L. LUCAS
    ---------------------------------------
    Name:  Donald L. Lucas
    Title: Successor Trustee

        Attn:  Donald L. Lucas
        3000 Sand Hill Road, #3-210
        Menlo Park, CA 94025
        (650) 854-4223

                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

<PAGE>   22

RWI GROUP IV, L.P.
By:  RWI GROUP LLC
        Its General Partner

By: /s/ Donald A. Lucas
   --------------------------------
   Name: Donald A. Lucas
   Title: Managing Member

        Attn:  Donald A. Lucas
        720 University Ave., # 103
        Palo Alto, CA 94301
        (650) 833-4980

BRIAN BURR

/s/ BRIAN BURR
___________________________________________
Brian Burr

        c/o 1020 Marsh Road
            Menlo Park, CA 94025

                                SIGNATURE PAGE TO
                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

<PAGE>   23

TETON CAPITAL COMPANY,
A CALIFORNIA LIMITED PARTNERSHIP

By: /s/ Donald L. Lucas
   ---------------------------------------
   Name: Donald L. Lucas
   Title: General Partner

        Attn:  Donald L. Lucas
        3000 Sand Hill Road, #3-210
        Menlo Park, CA 94025
        (650) 854-4223

THE RYDE REVOCABLE TRUST
dated 12/15/94

By: /s/ MAGNUS RYDE
   ---------------------------------------
   Name: Magnus Ryde
   Title: Trustee

        39 Winchester Drive
        Atherton, CA 94027
        (650) 329-9738

                                SIGNATURE PAGE TO
                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

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