Document:

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                                                                   Exhibit 10.10

                               WARRANT AGREEMENT
                               -----------------

This WARRANT AGREEMENT, dated as of August 15, 2000, is made between
VELOCITYHSI, INC., a Delaware corporation (the "Company"), and BANC OF AMERICA
                                                -------
MORTGAGE CAPITAL CORPORATION, a North Carolina corporation (the "Warrant
                                                                 -------
Holder").
------

     WHEREAS, in consideration of the payment of ONE HUNDRED TWELVE THOUSAND
FIVE HUNDRED DOLLARS ($112,500), the Company proposes to issue to the Warrant
Holder, Common Stock Purchase Warrants, as hereinafter described (the
"Warrants"), to purchase an aggregate of FOUR HUNDRED FIFTY THOUSAND (450,000)
 --------
shares of Common Stock, par value $0.01 per share (the "Common Stock"), of the
                                                        ------------
Company (the Common Stock issued or issuable on exercise of the Warrants being
herein called the "Warrant Shares"), pursuant to this Warrant Agreement (this
                   --------------
"Agreement").
 ---------

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:

     SECTION 1. Purchase of Warrants. Concurrently with the execution hereof,
                --------------------
the Warrant Holder is delivering to the Company aggregate consideration of One
Hundred Twelve Thousand Five Hundred Dollars ($112,500) against the delivery by
the Company of certificates evidencing the Warrants (the "Warrant
                                                          -------
Certificates").
------------

     SECTION 2. Warrant Certificates. Warrant Certificates to be delivered to
                --------------------
the Warrant Holder pursuant to this Agreement shall be in registered form only
and shall be substantially in the form set forth in Exhibit A attached hereto.
                                                    ---------
Warrant Certificates shall be signed on behalf of the Company by its Chairman of
the Board or its President or a Vice President and by its Secretary or an
Assistant Secretary. Each such signature upon the Warrant Certificates may be in
the form of a facsimile signature of the present or any future Chairman of the
Board, President, Vice President, Secretary or Assistant Secretary and may be
imprinted or otherwise reproduced on the Warrant Certificates, and, for that
purpose, the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Vice President, Secretary or
Assistant Secretary, notwithstanding the fact that at the time the Warrant
Certificates shall be delivered or disposed of he shall have ceased to hold such
office.

     In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificates so
signed shall have been disposed of by the Company, such Warrant Certificates
nevertheless may be delivered or disposed of as though such person had not
ceased to be such officer of the Company; and any Warrant Certificate may be
signed on behalf of the Company by any person who, at the actual date of the
execution of such Warrant Certificate, shall be a
<PAGE>

proper officer of the Company to sign such Warrant Certificate, although at the
date of the execution of this Agreement any such person was not such officer.

     SECTION 3. Registration. The Company shall number and register the Warrant
                ------------
Certificates in a register as they are issued. The Company may deem and treat
the registered holder(s) of the Warrant Certificates as the absolute owner(s)
thereof (notwithstanding any notation of ownership or other writing thereon made
by anyone), for all purposes, and shall not be affected by any notice to the
contrary.

     SECTION 4. Registration of Transfers and Exchanges. Subject to compliance
                ---------------------------------------
with the terms of clause (iv) of the Warrant Certificate, the Company shall from
                  -----------
time to time register the transfer of any outstanding Warrant Certificates in a
Warrant register to be maintained by the Company upon surrender thereof
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder or holders
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee(s) and the surrendered Warrant
Certificate shall be cancelled and disposed of by the Company. Warrant
Certificates may be exchanged at the option of the holder(s) thereof when
surrendered to the Company at its office for another Warrant Certificate or
other Warrant Certificates of like tenor and representing in the aggregate a
like number of Warrants. Warrant Certificates surrendered for exchange shall be
cancelled and disposed of by the Company.

     SECTION 5. Warrants; Exercise of Warrants.  Subject to the terms of this
                ------------------------------
Agreement, each Warrant Holder shall have the right, which may be exercised
commencing at the opening of business on the date hereof and until 5:00 p.m.,
Los Angeles time, on August 15, 2005 (the "Expiration Date"), to receive from
                                           ---------------
the Company the number of fully paid and nonassessable Warrant Shares which the
holder may at the time be entitled to receive on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares.  In the
alternative, each holder may exercise its right, during the Exercise Period, to
receive Warrant Shares on a net basis, such that, without the exchange of any
funds, the holder shall receive that number of Warrant Shares otherwise issuable
upon exercise of its Warrants less that number of Warrant Shares having an
                              ----
aggregate current market price (as defined in Section 10(e) below) at the time
                                              -------------
of exercise equal to the aggregate Exercise Price that would otherwise have been
paid by the holder of such Warrants.  Each Warrant not exercised prior to the
Expiration Date shall become void, and all rights thereunder and all rights
under this Agreement in respect of Warrants not exercised prior to the
Expiration Date shall cease as of the Expiration Date.

A Warrant may be exercised upon surrender to the Company at its office
designated for such purpose (the address of which is set forth in Section 14
                                                                  ----------
hereof) of the certificate or certificates evidencing the Warrants to be
exercised with the form of election to purchase in or substantially in the form
thereof attached thereto duly filled in

                                       2
<PAGE>

and signed, and upon payment to the Company of the exercise price (the "Exercise
                                                                        --------
Price") which is $1.20 per share on the date hereof, but which is subject to
-----
adjustment as herein provided, for the number of Warrant Shares in respect of
which such Warrants are then exercised. Payment of the aggregate Exercise Price
shall be made (i) in cash or by certified or official bank check payable to the
order of the Company or by wire transfer, (ii) through the surrender of debt or
preferred equity securities of the Company having a principal amount or
liquidation preference, as the case may be, equal to the aggregate Exercise
Price to be paid (the Company will pay the accrued interest or dividends on such
surrendered debt or preferred equity securities in cash at the time of surrender
notwithstanding the stated terms thereof), or (iii) in the manner provided in
the first paragraph of this Section 5.
                            ---------

Subject to the provisions of Section 6 hereof and clause (iv) of the Warrant
                             ---------            -----------
Certificate, upon such surrender of Warrants and payment of the Exercise Price
the Company shall issue and cause to be delivered with all reasonable dispatch
to or upon the written order of the Warrant Holder and in such name or names as
the Warrant Holder may designate, a certificate or certificates for the number
of full Warrant Shares issuable upon the exercise of such Warrants together with
cash as provided in Section 11; provided, however, that if any consolidation,
                    ----------  --------  -------
merger or lease or sale of assets is proposed to be effected by the Company as
described in subsection (j) of Section 10 hereof, or a tender offer or an
             --------------    ----------
exchange offer for shares of Common Stock of the Company shall be made, upon
such surrender of Warrants and payment of the Exercise Price as aforesaid, the
Company shall, as soon as possible, but in any event not later than two (2)
business days thereafter, issue and cause to be delivered the full number of
Warrant Shares issuable upon the exercise of such Warrants in the manner
described in this sentence, together with cash in lieu of fractional shares as
provided in Section 11.  Such certificate or certificates shall be deemed to
            ----------
have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the Exercise Price.

     The Warrants shall be exercisable, at the election of the holders thereof,
either in full or from time to time in part and, in the event that a certificate
evidencing Warrants is exercised in respect of fewer than all of the Warrant
Shares issuable on such exercise at any time prior to the date of expiration of
the Warrants, a new certificate evidencing the remaining Warrant or Warrants
(excluding the Warrant Shares, if any, retained by the Company in payment of the
Exercise Price as provided in the first paragraph of this Section 5) will be
                                                          ---------
issued and delivered pursuant to the provisions of this Section 5 and of Section
                                                        ---------        -------
2 hereof.
-

     All Warrant Certificates surrendered upon exercise of Warrants shall be
cancelled and disposed of by the Company. The Company shall keep copies of this
Agreement and any notices given or received hereunder available for inspection
by the holders during normal business hours at its office.

                                       3
<PAGE>

     SECTION 6.  Payment of Taxes. The Company will pay all documentary stamp
                 ----------------
taxes attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; provided, however, that the Company shall not be required to pay
             --------  -------
any tax or taxes which may be payable in respect of any transfer of any Warrant
Certificates or any certificates for Warrant Shares into a name other than that
of the registered holder of a Warrant Certificate surrendered upon the exercise
of a Warrant, and the Company shall not be required to issue or deliver such
Warrant Certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.

     SECTION 7.  Mutilated or Missing Warrant Certificates.  In case any of the
                 -----------------------------------------
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant Certificate and
indemnity, if requested, also reasonably satisfactory to it.  Applicants for
such substitute Warrant Certificates shall also comply with such other
reasonable regulations and pay such other reasonable charges as the Company may
prescribe.

     SECTION 8.  Reservation of Warrant Shares.  The Company will at all times
                 -----------------------------
reserve and keep available, free from preemptive rights, out of the aggregate of
its authorized but unissued Common Stock or its authorized and issued Common
Stock held in its treasury, for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon exercise of Warrants, the maximum number
of shares of Common Stock which may then be deliverable upon the exercise of all
outstanding Warrants.

The Company or, if appointed, the transfer agent for the Common Stock (the
"Transfer Agent") and every subsequent transfer agent for any shares of the
 --------------
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants.  The Company will furnish such Transfer Agent a copy of all notices of
adjustments and certificates related thereto transmitted to each holder pursuant
to Section 13 hereof.
   ----------

     Before taking any action which would cause an adjustment pursuant to
Section 10 hereof to reduce the Exercise Price below the then par value (if any)
----------
of the Warrant Shares, the Company will take any corporate action which may, in
the opinion of its counsel, be necessary in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares at the Exercise
Price as so adjusted.

                                       4
<PAGE>

     The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon issue, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issue thereof resulting from any action taken by the
Company, excluding any taxes described in Section 6 hereof which the Company
                                          ---------
shall not be obligated to pay and any related liens, charges and security
interests.

     SECTION 9.  Obtaining Securities Exchange Listings. The Company will from
                 --------------------------------------
time to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed on
the principal securities exchanges and markets within the United States of
America, if any, on which other shares of Common Stock are then listed.

     SECTION 10. Adjustment of Exercise Price and Number of Warrant Shares
                 ---------------------------------------------------------
Issuable. The Exercise Price and the number of Warrant Shares issuable upon the
--------
exercise of each Warrant are subject to adjustment from time to time upon the
occurrence of the events and the development of the conditions enumerated in
this Section 10. For purposes of this Section 10, the term "Common Stock" means
     ----------                       ----------            ------------
shares now or hereafter authorized of any class of common stock of the Company
and any other capital stock of the Company, howsoever designated, that has the
right (subject to any prior rights of any class or series of preferred stock) to
participate in any distribution of the assets or earnings of the Company without
limit as to per share amount.

     (a)  Adjustments for Changes in Capital Stock.

     If and on each occasion that the Company:

               (1)  pays a dividend or makes a distribution on its Common Stock
          in shares of its Common Stock;

               (2)  subdivides its outstanding shares of Common Stock into a
          greater number of shares;

               (3)  combines its outstanding shares of Common Stock into a
          smaller number of shares;

               (4)  makes a distribution on its Common Stock in shares of its
          capital stock other than Common Stock; or

               (5)  issues by reclassification of its Common Stock any shares of
          its capital stock;

                                       5
<PAGE>

then the Exercise Price in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which he would have owned immediately following such action if such
Warrant had been exercised immediately prior to such action.

          The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.

          If, after an adjustment, a holder of a Warrant, upon exercise of its
Warrant, shall be entitled to receive shares of two or more classes of capital
stock of the Company, the Company shall determine the allocation of the adjusted
Exercise Price between the classes of capital stock. After such allocation, the
exercise privilege and the Exercise Price of each class of capital stock shall
thereafter be subject to adjustment on terms comparable to those applicable to
Common Stock in this Section 10.
                     ----------

          Such adjustment shall be made successively if and on each occasion
that any event described above shall occur.

          (b)  Adjustments for Rights Issues.

          If and on each occasion that the Company distributes any rights,
options or warrants to all holders of its Common Stock entitling them for a
period expiring within 60 days after the record date mentioned below to purchase
shares of Common Stock at a price per share less than the Exercise Price in
                                            ----
effect on that record date, the Exercise Price shall be adjusted in accordance
with the formula:

                                O + N x P
                                    -----
               E'  =  E  x           E
                                --------
                                    O + N

               where:
               -----

               E' = the adjusted Exercise Price.

               E =  the current Exercise Price.

               O =  the number of shares of Common Stock outstanding on the
                    record date.

               N =  the number of additional shares of Common Stock offered.

               P =  the offering price per share of the additional shares.

                                       6
<PAGE>

          The adjustment shall be made successively if and on each occasion that
any such rights, options or warrants are issued and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive the rights, options or warrants. If, at the end of the period during
which such rights, options or warrants are exercisable, not all rights, options
or warrants shall have been exercised, the Exercise Price shall be immediately
readjusted to what it would have been if "N" in the above formula had been the
number of shares actually issued.

          (c)  Adjustments for Common Stock Issuances.
               --------------------------------------

          If and on each occasion that the Company issues shares of Common Stock
for a consideration per share less than Exercise Price in effect on the date the
                              ----
Company fixes the offering price of such additional shares, the Exercise Price
shall be adjusted in accordance with the formula:

                                          P
                                          -
               E'  =   E    x     O   +   E
                                  ---------
                                          A

               where:
               -----

               E' = the adjusted Exercise Price.

               E  =  the then current Exercise Price.

               O  =  the number of shares outstanding immediately prior to the
                     issuance of such additional shares.

               P  =  the aggregate consideration received for the issuance of
                     such additional shares.

               A  =  the number of shares outstanding immediately after the
                     issuance of such additional shares.

          The adjustment shall be made successively if and on each occasion that
any such issuance is made and shall become effective immediately after such
issuance.

          This subsection (c) shall not apply to:
               --------------

               (1)  any of the transactions described in subsection (b) of this
                                                         ----------
          Section 10,
          ----------

               (2)  the exercise of Warrants, or the conversion or exchange of
          other securities convertible or exchangeable for Common Stock,

                                       7
<PAGE>

          (3)  Common Stock issued to the Company's employees under bona fide
                                                                    ---------
     employee benefit plans adopted by the Board of Directors and approved by
     the holders of Common Stock when required by law, if such Common Stock
     would otherwise be covered by this subsection (c) (but only to the extent
                                        --------------
     that the aggregate number of shares excluded by this clause (3) and issued
                                                          ----------
     from time to time after the date of this Warrant Agreement shall not exceed
     fifteen percent (15%) in the aggregate of all shares of Common Stock
     actually outstanding at the time of the most recent grant of options under
     any such plan and provided that the issuance of shares upon the exercise of
     options to acquire 694,992 shares of Common Stock which were issued prior
     to the date hereof shall not be counted for purposes of such fifteen
     percent (15%) limitation),

          (4)  Common Stock issued upon the exercise of rights, options or
     warrants issued to the holders of Common Stock,

          (5)  Common Stock issued to shareholders of any person which merges
     into the Company in proportion to the stock holdings of such person
     immediately prior to such merger, upon such merger,

          (6)  the sale of up to 1,721,816 shares of Common Stock at a price of
     $0.50 per share to seven officers and employees of the Company as described
     in the Company's Prospectus dated August 8, 2000 issued in connection with
     the distribution by BRE Properties, Inc. of shares of Common Stock to its
     shareholders of record on August 7, 2000, a copy of which the Warrant
     Holder acknowledges receiving from the Company (the "Prospectus"), or
                                                          ----------

          (7)  the issuance of an aggregate of 395,000 shares of Common Stock to
     six employees of BRE Properties, Inc. without the payment of cash
     consideration as described in the Prospectus.

     (d)  Adjustments for Convertible Securities Issuances.
          ------------------------------------------------

     If and on each occasion that the Company issues any securities convertible
into or exchangeable for Common Stock (other than securities issued in
transactions described in subsection (b) or (c) of this Section 10) for a
                          ---------------------         -----------
consideration per share of Common Stock initially deliverable upon conversion or
exchange of such securities less than the Exercise Price in effect on the date
                            ----
of issuance of such securities, then the Exercise Price shall be adjusted in
accordance with the formula:

                                  P
                                  -
          E'  =   E   x   O   +   E
                          ---------
                          O   +   D

          where:
          -----

                                       8
<PAGE>

          E' =  the adjusted Exercise Price.

          E  =  the then current Exercise Price.

          O  =  the number of shares outstanding immediately prior to the
                issuance of such securities.

          P  =  the aggregate consideration received for the issuance of
                such securities.

          D  =  the maximum number of shares deliverable upon conversion of or
                in exchange for such securities at the initial conversion or
                exchange rate.

     The adjustment shall be made successively if and on each occasion that any
such issuance is made and shall become effective immediately after such
issuance.

     If all of the Common Stock deliverable upon conversion or exchange of such
securities has not been issued when such securities are no longer outstanding,
then the Exercise Price shall promptly be readjusted to the Exercise Price which
would then be in effect had the adjustment upon the issuance of such securities
been made on the basis of the actual number of shares of Common Stock issued
upon conversion or exchange of such securities. This subsection (d) does not
                                                     --------------
apply to convertible securities issued to shareholders of any person which
merges into the Company in proportion to the stock holdings of such person
immediately prior to such merger, upon such merger.

     (e)  Current Market Price.
          --------------------

     For purposes of this Agreement, the current market price per share of
Common Stock on any date is the average of the Quoted Prices of the Common Stock
for the ten (10) consecutive trading days before the date in question. The
"Quoted Price" of the Common Stock is the last reported sales price of the
Common Stock as reported by the Nasdaq National Market, or if the Common Stock
is listed on a securities exchange, the last reported sales price of the Common
Stock on such exchange which shall be for consolidated trading if applicable to
such exchange, or if neither so reported or listed, the last reported bid price
of the Common Stock. In the absence of one or more such quotations, the Board of
Directors of the Company shall determine the current market price on a
reasonable basis and in good faith.

     (f)  Consideration Received.
          ----------------------

     For purposes of any computations respecting consideration received pursuant
to subsections (c) and (d) of this Section 10, the following shall apply:
   ---------------     ---         ----------
                                       9
<PAGE>

          (1)  in the case of the issuance of shares of Common Stock for cash,
     the consideration shall be the amount of such cash; provided, however, that
                                                         --------  -------
     in no case shall any deduction be made for any commissions, discounts or
     other expenses incurred by the Company for any underwriting of the issue or
     otherwise in connection therewith;

          (2)  in the case of the issuance of shares of Common Stock for a
     consideration in whole or in part other than cash, the consideration other
     than cash shall be deemed to be the fair market value thereof as determined
     on a reasonable basis and in good faith by the Board of Directors
     (irrespective of the accounting treatment thereof), whose determination
     shall be conclusive and shall be described in a Board resolution; and

          (3)  in the case of the issuance of securities convertible into or
     exchangeable for shares, the aggregate consideration received therefor
     shall be deemed to be the consideration received by the Company for the
     issuance of such securities plus the additional minimum consideration, if
                                 ----
     any, to be received by the Company upon the conversion or exchange thereof
     (the consideration in each case to be determined in the same manner as
     provided in clauses (1) and (2) of this subsection (f)).
                 -----------     ---         ---------------

     (g)  When De Minimis Adjustments May Be Deferred.
          -------------------------------------------

     No adjustment in the Exercise Price need be made unless the adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price. Any adjustments that are not made shall be carried forward and
taken into account in any subsequent adjustments.

     All calculations under this Section 10 shall be made to the nearest
                                 ----------
cent or to the nearest 1/100th of a share, as the case may be.

     (h)  When No Adjustments Required.
          ----------------------------

     No adjustments need be made for rights to purchase Common Stock pursuant to
a Company plan for reinvestment of dividends or interest .

     No adjustments need be made for a change in the par value or no par value
of the Common Stock.

     To the extent that the Warrants become convertible into cash, no
adjustments need be made thereafter as to the cash. Interest will not accrue on
the cash.

                                      10
<PAGE>

     (i)  Notices of Adjustments.
          ----------------------

     Whenever the Exercise Price is adjusted, the Company shall provide the
notices required by Section 14 hereof.
                    ----------

     (j)  Notices of Certain Transactions.
          -------------------------------

          If:

               (1)  the Company takes any action that would require an
          adjustment in the Exercise Price pursuant to subsections (a), (b), (c)
                                                       ---------------  ---  ---
          or (d) of this Section 10;
             ---         ----------

               (2)  the Company takes any action that would require a
          supplemental Warrant Agreement pursuant to subsection (k) of this
                                                     --------------
          Section 10;
          ----------

               (3)  the Company takes and action that would entitle the
          holder(s) of Warrants or Warrant Shares to any rights pursuant to
          subsection (n) of this Section 10; or
          --------------         ----------

               (4)  there is a liquidation, winding up or dissolution of the
          Company;

then, in each such case, the Company shall mail to Warrant holders a written
notice stating the proposed record date for a dividend or distribution or the
proposed effective date of a subdivision, combination reclassification,
consolidation, merger, transfer, lease, liquidation, winding up or dissolution.
The Company shall mail the written notice at least twenty (20) days before such
date. Failure to mail the notice or any defect in it shall not affect the
validity of the transaction.

     (k)  Reorganization of Company.
          -------------------------

     If the Company consolidates or merges with or into, or transfers or leases
all or substantially all its assets to, any person, then, upon consummation of
such transaction, the Warrants shall automatically become exercisable for the
kind and amount of securities, cash or other assets which the holder of a
Warrant would have owned immediately after the consolidation, merger, transfer
or lease if the holder had exercised the Warrant immediately before the
effective date of the transaction. Concurrently with the consummation of such
transaction, the corporation formed by or surviving any such consolidation or
merger, if other than the Company, or the person to which such sale or
conveyance shall have been made, shall enter into a supplemental Warrant
Agreement so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided for in this
Section
-------

                                      11
<PAGE>

10. The successor Company shall mail to Warrant holders a written notice
--
describing the supplemental Warrant Agreement.

     If the issuer of securities deliverable upon exercise of the Warrants under
the supplemental Warrant Agreement is an affiliate of the formed, surviving,
transferee or lessee corporation, that issuer shall join in the supplemental
Warrant Agreement.

     If this subsection (k) applies, subsections (a), (b), (c) and (d) of this
             --------------          ---------------  ---  ---     ---
Section 10 shall not apply.
----------

     (l)  When Issuances or Payments May Be Deferred.
          ------------------------------------------

     In any case in which this Section 10 shall require that an adjustment in
                               ----------
the Exercise Price be made effective as of a record date for a specified event,
the Company may elect to defer until the occurrence of such event (i) issuing to
the holder of any Warrant exercised after such record date the Warrant Shares
and other capital stock of the Company, if any, issuable upon such exercise over
and above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Price, and (ii) paying
to such holder any amount in cash in lieu of a fractional share pursuant to
Section 11; provided, however, that the Company shall deliver to such holder a
----------  --------  -------
due bill or other appropriate instrument evidencing such holder's right to
receive such additional Warrant Shares, other capital stock and cash upon the
occurrence of the event requiring such adjustment.

     (m)  Adjustment in Number of Shares.
          ------------------------------

     Upon each adjustment of the Exercise Price pursuant to this Section 10,
                                                                 ----------
each Warrant outstanding prior to the making of the adjustment in the Exercise
Price shall thereafter evidence the right to receive upon payment of the
adjusted Exercise Price that number of shares of Common Stock (calculated to the
nearest hundredth) obtained from the following formula:

          N'  =   N   x   E
                          -
                          E'

          where:
          -----

          N' =  adjusted number of Warrant shares issuable upon exercise of a
                Warrant by payment of the adjusted Exercise Price.

          N  =  the number of Warrant Shares previously issuable upon exercise
                of a Warrant by payment of the Exercise Price prior to
                adjustment.

          E' =  the adjusted Exercise Price.

                                      12
<PAGE>

               E =  the Exercise Price prior to adjustment.

          (n)  Certain Other Distributions.
               ---------------------------

          If and on each occasion that the Company distributes to all holders of
its Common Stock any of its assets, debt securities, preferred stock or other
assets or securities of the Company, or any rights, options or warrants to
purchase debt, securities, preferred stock, assets or other securities of the
Company, then, thereafter, the holder of any Warrant, upon the exercise of the
rights represented by such Warrant, will be entitled to receive the number of
Warrant Shares being purchased upon such exercise, and, in addition, and without
further payment, the other assets, securities and other property which such
holder would have received by way of such distribution if such holder (i) had
exercised such Warrant immediately prior to the making of such distribution so
as to be entitled thereto, and (ii) had retained all such distributions payable
in respect of such holder's Warrant Shares or in respect of any assets or
property paid as distributions in respect of such Warrant Shares.

          (o)  Form of Warrants.
               ----------------

          Irrespective of any adjustments in the Exercise Price or the number or
kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.

          SECTION 11.  Fractional Interests.  The Company shall not be required
                       --------------------
to issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of all of the Warrants so presented. If
any fraction of a Warrant Share would, notwithstanding the provisions of this
Section 11, be issuable on the exercise of any Warrants (or specified portion
----------
thereof), the Company shall pay an amount in cash equal to the Exercise Price on
the day immediately preceding the date the Warrant is presented for exercise,
multiplied by such fraction.

          SECTION 12.  Piggyback Registration Rights.
                       -----------------------------

          (a)  Registration Rights.  If at any time during the "Registration
               -------------------
Period" (as hereinafter defined) the Company proposes to file a registration
statement under the Securities Act of 1933, as amended (the "Securities Act")
                                                             --------------
relating to a proposed sale to the public of its Common Stock, whether or not
for its own account and whether or not pursuant to the exercise of any demand
registration rights held by other security holders (but excluding registrations
relating solely to employee stock option or purchase plans or to transactions
employing Forms S-4 or S-8, a registration in which the only stock

                                       13
<PAGE>

being registered is Common Stock issuable upon conversion of securities which
are also being registered, and any registration on any form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Warrant Shares), the
Company will each such time give prompt written notice to the Warrant Holders of
its intention to do so and of the Warrant Holders' rights under this Section 12,
                                                                     ----------
at least twenty five (25) days prior to the anticipated filing date of the
registration statement. Such notice shall offer all Warrant Holders the
opportunity to include in such registration statement such number of Warrant
Shares as each such Warrant Holder may request. For purposes hereof, the term
"Registration Period" shall mean the period expiring on the seventh anniversary
 -------------------
of the effective date of a registration statement covering shares of the
Company's Common Stock which are being offered pursuant to a firm commitment
underwritten offering in which an affiliate of the Warrant Holder is the lead
underwriter.

     (b)  Registration Procedures.  Upon the written request of any Warrant
          -----------------------
Holder made within ten (10) days after receipt of the Company's notice (which
request shall specify the number of Warrant Shares intended to be disposed of by
such Warrant Holder), the Company will use its best efforts to effect the
registration under the Securities Act and the qualification under any applicable
state securities or Blue Sky laws of all Warrant Shares which the Company has
been so requested to register by the Warrant Holders; provided that: (i) if the
registration involves an underwritten public offering, all Warrant Holders
requesting that their Warrant Shares be included in the Company's registration
statement must, upon request by the underwriter(s), sell their Warrant Shares to
such underwriter(s) selected by the Company or the security holders for whose
account the registration is being effected on the same terms and conditions as
apply to the Company or the selling security holders on whose account the
registration is being effected; and (ii) if a registration involves an
underwritten public offering, any Warrant Holders requesting to be included in
such registration may elect in writing at least ten (10) days prior to the
effective date of the registration statement filed in connection with such
registration, not to register any Warrant Shares thereunder. The Company shall
have the right to terminate or withdraw any registration initiated by it prior
to the effectiveness of the registration statement whether or not any Warrant
Holder has elected to include any Warrant Shares in the registration.

     (c)  Priority on Registration.  Further, and notwithstanding the
          ------------------------
foregoing, if a registration involves an underwritten offering and the managing
underwriter advises the Company in writing that, in its opinion, the total
number of shares to be included in such registration, including the Warrant
Shares requested to be included pursuant to this Section 12, exceeds the maximum
                                                 ----------
number of shares of Common Stock specified by the managing underwriter that may
be distributed without adversely affecting the price, timing or distribution of
such shares of Common Stock, then the Company shall include in such registration
only such maximum number of shares which, in the reasonable opinion of such
underwriter or underwriters can be sold in the following order of priority: (i)
first, all of the shares of Common Stock that the Company proposes to sell for
its own account or, in the case of a demand registration effected for the
account of

                                       14
<PAGE>

other security holders, all of the shares of Common Stock that such security
holders propose to sell for their own account, and (ii) second, the Warrant
Shares and all other shares requested to be included by other holders of Common
Stock (except those exercising a demand right) and, in the case of a demand
registration, all shares to be included for the account of the Company. To the
extent that shares of Common Stock to be included in the registration must be
allocated among the Warrant Holders and/or other security holders and/or the
Company, such shares shall be allocated pro rata among the Warrant Holders and
all other holders of Common Stock who requested inclusion in the registration
(except those holders, if any, exercising a demand right) and, in the case of a
demand registration, the Company, based upon the number of Warrant Shares or
other securities that such holders and/or the Company shall have requested be
included in the registration.

     (d)  Exception to Registration Rights.  Notwithstanding the foregoing
          --------------------------------
provisions of this Section 12, no Warrant Holder shall have the right to include
                   ----------
Warrant Shares in a registration statement if the Warrant Shares may be sold by
the Warrant Holder without registration pursuant to the provisions of Rule
144(k) under the Securities Act.

     SECTION 13.  Notices to Warrant Holders.  Upon any adjustment of the
                  --------------------------
Exercise Price pursuant to Section 10, the Company shall promptly thereafter (i)
                           ----------
cause to be filed with the Company a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company (who may be the regular auditors of the Company) setting forth the
Exercise Price and the number of Warrant Shares after such adjustment, also
setting forth in reasonable detail the method of calculation and the facts upon
which such calculations are based, and also setting forth the number of Warrant
Shares (or portion thereof) issuable after such adjustment in the Exercise
Price, upon exercise of the Warrant and payment of the adjusted Exercise Price,
which certificate shall be conclusive evidence of the correctness of the matters
set forth therein, and (ii) cause to be given to each of the registered holders
of the Warrant Certificates at its address appearing on the Warrant register
written notice of such adjustments by first-class mail, postage prepaid. Where
appropriate, such written notice may be given in advance and included as a part
of the notice required to be mailed under the other provisions of this
Section 13.
----------

     In case:

     (a)  the Company shall authorize the issuance to all holders of shares of
Common Stock of rights, options or warrants to subscribe for or purchase shares
of Common Stock or of any other subscription right, options or warrants; or

     (b)  the Company shall authorize the distribution to all holders of shares
of Common Stock of evidences of its indebtedness or assets (other than ordinary
cash dividends payable out of earnings or surplus and other than dividends
payable in shares

                                       15
<PAGE>

of Common Stock and other distributions referred to in subsection (a) of Section
10 hereof); or

     (c)  of any consolidation or merger to which the Company is a party and for
which approval of any shareholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrants (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or of a tender offer or exchange offer for shares
of Common Stock; or

     (d)  of the voluntary or involuntary dissolution, liquidation or winding up
of the Company; or

     (e)  the Company proposes to take any action (other than actions of the
character described in Section 10(a)) which would require an adjustment of the
                       --------------
Exercise Price pursuant to Section 10;
                           ----------

then the Company shall cause to be given to each of the registered holders of
the Warrant Certificates at its address appearing on the Warrant register, at
least twenty (20) days prior to the applicable record date hereinafter
specified, or promptly in the case of events for which there is no record date,
by first-class mail or overnight courier, postage prepaid, a written notice
stating (i) the date as of which the holders of record of shares of Common Stock
to be entitled to receive any such rights, options, warrants or distribution are
to be determined, or (ii) the initial expiration date set forth in any tender
offer or exchange offer for shares of Common Stock, or (iii) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up is expected to become effective or consummated, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up.  The failure to give the
notice required by this Section 13 or any defect therein shall not affect the
                        ----------
legality or validity of any distribution, right, option, warrant, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding up, or the
vote upon any action.

     Nothing contained in this Agreement or in any of the Warrant Certificates
shall be construed as conferring upon the holders thereof the right to vote or
to consent or to receive notice as shareholders in respect of the meetings of
shareholders or the election of Directors of the Company or any other matter, or
any rights whatsoever as shareholders of the Company.

     SECTION 14.  Notices to Company and to Warrant Holders.  Any notice or
                  -----------------------------------------
demand authorized by this Agreement to be given or made by the registered holder
of any Warrant Certificate to or on the Company shall be sufficiently given or
made when

                                       16
<PAGE>

and if deposited in the mail, first class or registered, postage prepaid,
addressed to the office of the Company expressly designated by the Company as
its office for purposes of this Agreement (until the Warrant Holders are
otherwise notified in accordance with this Section 14 by the Company), as
                                           ----------
follows:

                    VelocityHSI, Inc.
                    2175 North California Boulevard
                    Suite 810
                    Walnut Creek, CA 94596
                    Attention: President

     Any notice pursuant to this Agreement to be given by the Company to the
registered holder(s) of any Warrant Certificates shall be sufficiently given
when and if deposited in the mail, first-class or registered, postage prepaid,
addressed (until the Company is otherwise notified in accordance with this
Section 14 by such holder) to such holder at the address appearing on the
Warrant register of the Company, which address shall initially be the address
appearing on the signature page hereof.

     SECTION 15.  Amendments, etc.  The Company may not at any time supplement
                  ---------------
or amend this Agreement without the prior written consent of the holder of the
Warrant Certificate.

     SECTION 16.  Successors.  Each of the covenants and provisions of this
                  ----------
Agreement by or for the benefit of each party hereto shall bind and inure to the
benefit of the successors in title and assigns of each of such party.

     SECTION 17.  Governing Law.  This Agreement and each Warrant Certificate
                  -------------
issued hereunder shall be deemed to be a contract made under the laws of the
State of California and for all purposes shall be construed in accordance with
the internal laws of the State of California.

     SECTION 18.  Benefits of This Agreement.  Nothing in this Agreement shall
                  --------------------------
be construed to give to any person or corporation other than the Company and the
registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company and the registered holders of the Warrant
Certificates.

     SECTION 19.  Termination.  This Agreement shall terminate on the Expiration
                  -----------
Date.  Notwithstanding the foregoing, this Agreement will terminate on any
earlier date if all Warrants have been exercised or redeemed.

     SECTION 20.  Counterparts.  This Agreement may be executed in any number of
                  ------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original and all such counterparts shall together constitute but one and
the same instrument.

                                       17
<PAGE>

           [THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK]

                                       18
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this WARRANT Agreement
to be duly executed as of the day and in the year first above written.

                                           The Company:
                                           -----------

                                           VELOCITYHSI, INC.

                                           By:  /s/ Charles P. Wingard
                                              ---------------------------------
                                                Charles P. Wingard
                                                Senior Vice President, Chief
                                                Financial Officer and Secretary

                                           The Warrant Holder:
                                           ------------------

                                           BANC OF AMERICA MORTGAGE
                                           CAPITAL CORPORATION

                                           By: /s/ Richard D. Ford
                                              ----------------------------------
                                               Richard D. Ford
                                               Senior Vice President

                                           Address: 600 Montgomery Street,
                                                    21/st/ Floor
                                                    San Francisco, California
                                                    94123

                                       19
<PAGE>

                                   EXHIBIT A

NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE PURSUANT TO THE TERMS OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND NONE OF THEM MAY BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

                   EXERCISABLE ON OR BEFORE AUGUST 15, 2005

         No. 1                                       450,000 Warrants

                              Warrant Certificate

                               VELOCITYHSI, INC.

This Warrant Certificate certifies that Banc of America Mortgage Capital
Corporation, or registered assigns, is the registered holder of Four Hundred
Fifty Thousand (450,000) Warrants expiring August 15, 2005 (the "Warrants") to
                                                                 --------
purchase Common Stock, par value $0.01 per share (the "Common Stock"), of
                                                       ------------
VelocityHSI, Inc., a Delaware corporation (the "Company").  Each Warrant
                                                -------
entitles the holder upon exercise to receive from the Company on or before 5:00
p.m. Los Angeles Time on August 15, 2005 (the "Expiration Date"), one fully paid
                                               ---------------
and nonassessable share of Common Stock (a "Warrant Share") at the initial
                                            -------------
exercise price (the "Exercise Price") of $1.20 payable in lawful money of the
                     --------------
United States of America upon surrender of this Warrant Certificate and payment
of the Exercise Price at the office of the Company designated for such purpose,
but only subject to the conditions set forth herein and in the Warrant Agreement
referred to herein.

          Notwithstanding the foregoing, Warrants may be exercised without the
exchange of funds pursuant to the net exercise provisions of Section 5 of the
                                                             ---------
Warrant Agreement. The Exercise Price and number of Warrant Shares issuable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events set forth in the Warrant Agreement referred to herein.

          No Warrant may be exercised after the Expiration Date, and to the
extent not exercised by such time such Warrants shall become void.

          The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring on the Expiration Date entitling the
holder on exercise to receive shares of Common Stock, and are issued pursuant to
a Warrant Agreement dated as of August 15, 2000 (the "Warrant Agreement"), duly
                                                      -----------------
executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the

                                      A-1
<PAGE>

rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and the holders (the words "holders" or "holder" meaning the
registered holders or registered holder) of the Warrants. A copy of the Warrant
Agreement may be obtained by the holder hereof upon written request to the
Company.

          Warrants may be exercised at any time on or before the Expiration Date
The holder of Warrants evidenced by this Warrant Certificate may exercise them
by surrendering this Warrant Certificate, with the form of election to purchase
attached hereto properly completed and executed, together with payment of the
Exercise Price in cash at the office of the Company designated for such purpose.
In the event that upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the holder hereof or, upon compliance with the
provisions of clause (iv) hereof, the holder's assignee, a new Warrant
              -----------
Certificate evidencing the number of Warrants not exercised. No adjustment shall
be made for any dividends on any Common Stock issuable upon exercise of this
Warrant.

          The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price set forth on the face hereof may, subject to certain
conditions, be adjusted. If the Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.

          The holders of the Warrants are entitled to certain registration
rights with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in the Warrant Agreement.

          Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.

          Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Company a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.

          The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any

                                      A-2
<PAGE>

distribution to the holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.

          Each new Warrant Certificate issued in the manner contemplated by this
Warrant Certificate and each certificate representing a Warrant Share or other
securities issued upon exercise of the Warrants represented by this Warrant
Certificate shall be stamped or otherwise imprinted with a legend in
substantially the following form:

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
     UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NONE OF THEM MAY BE SOLD,
     TRANSFERRED, ASSIGNED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION
     OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
     REGISTRATION IS NOT REQUIRED.

          The holder of this Warrant Certificate, by acceptance hereof,
represents as follows:

          (i)    The Warrants have been acquired, and the Warrant Shares
issuable upon exercise of the Warrants (collectively the "Acquired Securities")
                                                          -------------------
will be acquired, for investment purposes only for the holder's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part of the Acquired Securities in contravention of applicable law, and the
holder has no present intention of selling, granting any participation in, or
otherwise distributing any of the Acquired Securities in contravention of
applicable laws. The holder does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or any third person with respect to any of the Acquired Securities.

          (ii)   The holder is, and upon the acquisition of the Acquired
Securities upon exercise of the Warrants will be, an "Accredited Investor"
within the meaning of Rule 501 of Regulation D of the Rules and Regulations of
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"). The holder has not been organized for the
              --------------
purpose of acquiring the Acquired Securities.

          (iii)  The holder understands that the Acquired Securities it has
acquired or may acquire are "restricted securities" within the meaning of Rule
144 under the Securities Act ("Rule 144") inasmuch as they have been or will be
acquired from the Company in a transaction not involving a public offering and
that under the federal securities law and applicable regulations the Acquired
Securities may be resold without registration under the Securities Act only in
certain limited circumstances. In this connection, the holder represents that it
is familiar with Rule 144 and understands the resale limitations imposed thereby
and by the Securities Act. The holder acknowledges that its investment in the
Acquired Securities may be an illiquid investment requiring the holder to bear
the economic risk of the investment for an indefinite period.

                                      A-3
<PAGE>

          (iv)    Without in any way limiting the representation set forth
above, the holder agrees not to make any disposition of all or any portion of
the Acquired Securities unless and until the transferee has agreed in writing
for the benefit of the Company to be bound by the terms of this Warrant
(provided that the holder is making such disposition in a transaction other than
pursuant to Rule 144 or under an effective registration statement under the
Securities Act and in accordance with any applicable state securities laws), and
(a) the holder shall have notified the Company of the proposed disposition, and
(b) if requested by the Company, the holder shall have furnished to the Company
an opinion of counsel, in form and substance reasonably satisfactory to the
Company, rendered by a law firm experienced in matters involving the sale of
securities under federal and state securities laws, that such disposition will
not require registration of the Acquired Securities under the Securities Act or
registration or qualification under any state securities or "blue sky" law.

          In the event certificates for Warrant Shares are delivered upon the
exercise of the Warrants, the Company may cause a legend or legends to be placed
on such certificates to make appropriate reference to the foregoing
representations and to restrict transfer of the Warrant Shares in the absence of
compliance with applicable federal or state securities laws.

          IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be signed by its President and by its Secretary.

          Dated: August 15, 2000.

                                        VELOCITYHSI, INC.

                                        By: /s/ Charles P. Wingard
                                           ---------------------------------
                                            Charles P. Wingard
                                            Senior Vice President, Chief
                                            Financial Officer and Secretary

                                      A-4
<PAGE>

                         Form of Election to Purchase

                   (To Be Executed Upon Exercise Of Warrant)

          The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive __________ shares of Common
Stock and herewith tenders payment for each such share to the order of
VELOCITYHSI, INC. in the amount of $1.20 in accordance with the terms hereof,
unless the holder is exercising Warrants pursuant to the net exercise provisions
of Section 5 of the Warrant Agreement. The undersigned requests that a
   ---------
certificate for such shares be registered in the name of the undersigned, and
that such shares be delivered to the following address:
______________________________________. If said number of shares is less than
all of the shares of Common Stock purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the remaining balance of
such shares be registered in the name of the undersigned and that such Warrant
Certificate be delivered to the following address:
________________________________________.

                                        Signature:

Date: _______________                   _______________________<PAGE>

                                             Portions denoted with asterisks
                                             (****) have been omitted and filed
                                             separately with the Securities and
                                             Exchange Commission pursuant to a
                                             request for confidential treatment.

                     DEVELOPMENT AND COOPERATION AGREEMENT

     This Development and Cooperation Agreement (this "Agreement") is entered
into effective as of July 24, 2000 (the "Effective Date") between Applied
Materials, Inc., a Delaware corporation ("Applied"), and Therma-Wave, Inc., a
Delaware corporation ("Therma-Wave").

                                   Background

     A.   Therma-Wave has developed certain metrology tools useful in the
Semiconductor Field (as defined below).

     B.   Applied desires that Therma-Wave undertake certain development work,
in accordance with Applied's specifications, to develop metrology tools for
integration into Applied's process tools, and Therma-Wave desires to undertake
such work.

     C.   Applied desires that Therma-Wave manufacture certain metrology tools
pursuant to a separate manufacturing agreement between the parties, and Therma-
Wave desires to undertake such manufacturing.

     D.   Applied desires to be appointed the exclusive OEM (as defined below)
of the Integrated Metrology Tools (as defined below), and Therma-Wave desires to
make such appointment.

     E.   Therma-Wave desires to be appointed as a Preferred Partner (as defined
below) of Applied for Integrated Metrology Tools, and Applied desires to make
such appointment.

                                   Agreement

1.   Definitions.  As used in this Agreement:

     1.1  "Affiliate" of a Party (or third party) means any person or entity
that controls, is controlled by, or is under common control with such Party (or
third party), but only as long as such control exists. For these purposes
"control" means ownership of more than fifty percent (50%) of the outstanding
voting stock or other equity interests in a person or entity or the power to
otherwise direct the affairs of a person or entity.

     1.2  ****

     1.3  "Applied Information" has the meaning given in Section 8.1.
                                                         -----------

     1.4  "Applied's Initial Notice" has the meaning given in Section 2.1(a).
                                                              --------------

     1.5  "Applied Interim Improvements" has the meaning given in Section
                                                                  -------
7.2(b).
------
<PAGE>

                                                     **** Confidential Treatment

     1.6       "Background Technology" of a Party means all algorithms, designs,
drawings, formula, know-how, ideas, inventions, plans, processes, software,
techniques, tools, and other technology that (a) is (i) owned by such Party or
licensed to such Party and (ii) is in existence in electronic or written form or
as a prototype or product on or prior to the Effective Date or (b) is developed,
acquired, or licensed by such Party after the Effective Date independently of
the work undertaken pursuant to this Agreement.  In the event of any dispute
over whether certain technology is Background Technology or not, the Party
claiming that such technology is its Background Technology will have the burden
of proof by clear and convincing evidence.

     1.7       "Change in Control" has the meaning given in the Escrow
Agreement.

     1.8       "Committed Tools" has the meaning given in Section 3.2(b).
                                                          --------------

     1.9       "Deliverables" has the meaning given in Section 2.2(c).
                                                       --------------

     1.10      "Delivery Date" means the date by which Applied has approved all
of the Development Plans for the **** Integrated Metrology Tools described
on Exhibit A.
   ---------

     1.11      "Development Plan" means a written plan for developing an
Integrated Metrology Tool. Each Development Plan will include project
milestones, a list of Deliverables, and a date by which the Parties shall have
agreed upon Lab Specifications. The Specifications will be considered a part of
the Development Plan.

     1.12      "Escrow Agreement" means that certain Technology Escrow Agreement
entered into pursuant to the Supply Agreement, among the Parties and the escrow
agent named therein.

     1.13      "Exclusivity Period" means the period commencing on the Effective
Date and ending at the end of the **** period contemplated in
Section 5.1, unless extended or earlier terminated as provided herein.
-----------

     1.14      "Improvements" means any and all enhancements, modifications,
updates, and improvements to an Integrated Metrology Tool, or to the initial
Specifications furnished by Applied for an Integrated Metrology Tool, that are
made in the course of performance under this Agreement and are validly
copyrighted, patented, or protected as a trade secret.

     1.15      "Inspection Business" has the meaning given in Section 2.5(d).
                                                              --------------

     1.16      "Integrated Metrology Tool" means a metrology tool that does not
qualify as a Standalone Metrology Tool.

     1.17      "Integration Improvements" has the meaning given in Section 7.3.
                                                                   -----------

     1.18      "Intellectual Property Rights" means all present and future (a)
patents, patent applications, and other industrial property rights, (b)
copyrights, mask work rights, and other rights associated with works of
authorship, (c) trade secret rights, and (d) other forms of intellectual or
industrial property rights and proprietary rights of any kind or nature, in each
case under the laws of any jurisdiction in the world, including rights under and
with respect to all applications, registrations, extensions, renewals,
continuations, combinations, divisions, and

                                       2
<PAGE>

                                                     **** Confidential Treatment

reissues of the foregoing. For the avoidance of doubt, Intellectual Property
Rights does not include rights in trademarks and trade names and similar rights.

     1.19      "Joint Relations Committee" has the meaning given in Section
                                                                    -------
2.5(a).
------

     1.20      "Jointly Developed Improvements" has the meaning given in Section
                                                                         -------
7.2(c)(i).
---------

     1.21      "Lab Specifications" means the specifications for an Integrated
Metrology Tool prototype, describing such Integrated Metrology Tool prior to its
integration into Applied's process tools. The Lab Specifications for a
particular Integrated Metrology Tool will be considered part of the
Specifications for such Integrated Metrology Tool.

     1.22      "License Limit Period" means the period commencing on the
Effective Date and ending ****.

     1.23      "Listed ****" means, collectively, the entities listed on Exhibit
                                                                         -------
B-1, and their respective successors and Affiliates. Applied may in its sole
---
discretion from time to time by notice to Therma-Wave add or remove entities
from the list of Listed **** on Exhibit B-1; provided that the number of Listed
                                -----------
**** listed on Exhibit B-1 shall never exceed ****.
               -----------

     1.24      "Metrology Tool" means either a Standalone Metrology Tool or an
Integrated Metrology Tool, or both, as the context may require.

     1.25      "Minimum Purchase Requirement" has the meaning given in Section
                                                                       -------
5.1.
---
     1.26      "Non-Qualified Therma-Wave Tool" means an Integrated Metrology
Tool that the Parties have mutually agreed in writing does not satisfy the
Specifications.

     1.27      "NRE Payment" has the meaning given in Section 5.4(a).
                                                      --------------

     1.28      "OEM" means any original equipment manufacturer, value-added
reseller, or any other reseller that sells Therma-Wave tools or products.

     1.29      "Party" means either Applied or Therma-Wave (and "Parties" means
Applied and Therma-Wave collectively).

     1.30      "Preferred Partner" means a supplier to Applied that receives
preferred treatment for opportunities to work in cooperation with Applied to
develop products to supply Applied's needs for Integrated Metrology Tools.  Such
Preferred Partner treatment will include (a) cooperation to help promote the
Preferred Partner's Integrated Metrology Tools, both within Applied's internal
organization and to Applied's customers, (b) open access to discuss Applied's
needs and requirements for Integrated Metrology Tools, and (c) preferred
opportunities to supply Applied's needs for Integrated Metrology Tools as
described in Section 3.
             ---------

     1.31      "Procedure" has the meaning given in Section 7.2(a).
                                                    --------------

                                       3
<PAGE>

                                                     **** Confidential Treatment

     1.32      "Project Manager" means the project manager of a Party appointed
pursuant to Section 2.5(b).
            --------------

     1.33      "Qualified Therma-Wave Tool" means an Integrated Metrology Tool
manufactured by Therma-Wave that is designated as a Qualified Therma-Wave Tool
pursuant to Section 2.1(d) and for which Therma-Wave meets, initially and on a
            --------------
continuing basis, the Specifications.

     1.34      "Semiconductor Field" means the field of semiconductors, wafer
fabrication, metrology, inspection and review, masks, micromachines, and flat
panel displays, including related equipment, services, software, and components.

     1.35      "Specifications" means Applied's specifications for Integrated
Metrology Tools to be developed or supplied pursuant to this Agreement, which
will include Applied's functional and technical requirements as well as
Applied's performance, quality, quantity, availability, delivery, and price
criteria, as such specifications may be updated by Applied from time to time by
written notice to Therma-Wave.  The Specifications will include the Lab
Specifications (when approved hereunder) and the specifications for integrating
the Integrated Metrology Tool into Applied's process tools.

     1.36      "Standalone Metrology Tool" means a metrology tool that (a) is
not adapted to share a load lock, stage, wafer-holding, or wafer-handling
component with any other semiconductor processing, inspection, or review tool;
(b) is not adapted to otherwise mechanically connect or mechanically interface
with any other semiconductor processing, inspection, or review tool; and (c)
does not include any capability for non-metrology semiconductor processing.

     1.37      "Supply Agreement" means that certain Global Supply Agreement
entered into between the Parties as of the Effective Date, pursuant to which
Therma-Wave will manufacture Metrology Tools for Applied.

     1.38      "****" means, collectively, the entities listed on Exhibit B-2,
                                                                  -----------
and their respective successors and Affiliates. Therma-Wave may in its sole
discretion from time to time by notice to Applied add or remove entities from
the list of **** on Exhibit B-2; provided that the number of **** listed on
Exhibit B-2 shall never exceed ****.
-----------

     1.39      "Therma-Wave Information" has the meaning given in Section 8.2.
                                                                  -----------

     1.40      "Therma-Wave Interim Improvements" has the meaning given in
Section 7.2(a).
-------------

     1.41      "Third Party Standards" has the meaning given in Section 3.3(a).
                                                                --------------

     1.42      "Uncommitted Tools" has the meaning given in Section 3.2(a).
                                                            --------------

                                       4
<PAGE>

2.   Development Effort.  For each Integrated Metrology Tool to be developed
under this Agreement, the following terms will apply.

     2.1  Specifications and Development Plan

          (a) Notice; Initial Specifications.  Applied will deliver to
Therma-Wave a written notice ("Applied's Initial Notice"), consisting of
Applied's initial Specifications for each Integrated Metrology Tool and a
request for Therma-Wave to prepare a Development Plan for the Integrated
Metrology Tool. Exhibit A will serve as Applied's Initial Notice for the
                ---------
Integrated Metrology Tools described thereon, subject to Applied's delivering to
Therma-Wave no later than sixty (60) days after the Effective Date, the initial
Specifications for the Integrated Metrology Tools listed thereon.

          (b) Therma-Wave Response. Therma-Wave will respond to Applied's
Initial Notice within ten (10) days after receipt thereof, indicating whether or
not Therma-Wave will prepare a Development Plan and develop the Integrated
Metrology Tool described in the Specifications. Promptly after Therma-Wave's
receipt of Applied's Initial Notice, unless Therma-Wave declines to prepare a
Development Plan as provided above, the Parties will mutually agree upon a
reasonable date by which Therma-Wave will deliver to Applied a proposed
Development Plan for review, comment, and written approval and the date by which
the Development Plan must be acceptable to Applied. Notwithstanding the
foregoing, Therma-Wave shall prepare Development Plans for the Integrated
Metrology Tools described on Exhibit A, and, subject to Applied's furnishing the
                             ----------
applicable initial Specifications as specified in Section 2.1(a), participating
                                                  --------------
in planning as specified in Section 2.1(c), and approving the Development Plan
                            --------------
for the applicable Integrated Metrology Tool, Therma-Wave shall develop the
Integrated Metrology Tools described on Exhibit A.
                                        ---------

          (c) Development Plan Preparation. Except as provided below, if Therma-
Wave's response under Section 2.1(b) is positive, within the timeframe agreed
                      --------------
upon pursuant to Section 2.1(b) Therma-Wave will prepare and deliver to Applied
                 --------------
a Development Plan for Applied's review, comment, and written approval.
Notwithstanding the foregoing, for the Integrated Metrology Tools described on
Exhibit A for which Applied has delivered initial Specifications as of the
---------
Effective Date, within forty-five (45) days after the Effective Date Therma-Wave
will deliver to Applied for Applied's review, comment, and written approval a
Development Plan for each such Integrated Metrology Tool, and such proposed
Development Plans will provide for completion of prototype development by the
applicable dates set forth on Exhibit A.  The Parties recognize that creation of
                              ---------
Development Plans will require cooperation from each Party and face-to-face
interactions by the engineers of both Parties, and both Parties agree to use
diligent efforts to schedule and implement the necessary interactions between
their engineers.  Each Development Plan will specify the tasks, if any, that
Applied will perform in connection with the development effort to be undertaken
thereunder.

          (d) Qualified Therma-Wave Tool Designation.  If Applied approves a
Development Plan, the Integrated Metrology Tool covered thereby will be
designated a Qualified Therma-Wave Tool.

                                       5
<PAGE>

     2.2  Development Work

          (a)  Development Commitment.  If Applied approves a Development Plan,
Therma-Wave will develop the Integrated Metrology Tool covered thereby in
accordance with the Development Plan and the Specifications.

          (b)  Lab Specifications.  As part of the development work under each
Development Plan, Therma-Wave will prepare and deliver to Applied, for Applied's
review, comment, and written approval, Lab Specifications for the applicable
Integrated Metrology Tool by the date set forth in the Development Plan.

          (c)  Deliverables. As part of the development work under each
Development Plan, Therma-Wave will deliver to Applied the items to be delivered
under the Development Plan (the "Deliverables") at the location, on the date,
and in the form and manner specified in the Development Plan and the
Specifications.

          (d)  Testing and Acceptance.  Each Development Plan will identify the
acceptance test procedures and acceptance criteria for the Deliverables
thereunder and the role of each Party in testing the Deliverables.  The
acceptance criterion will be whether the Deliverables conform to the applicable
Specifications.  When testing under the Development Plan demonstrates that the
Deliverables meet the applicable Specifications, Applied will accept the
Deliverables.

          (e)  Failure to Meet Project Milestones. If Therma-Wave fails to meet
the project milestones set forth in the Development Plan, including any failure
to achieve Applied's acceptance of a Deliverable by the date required under the
Development Plan, and Therma-Wave has not cured such failure within thirty (30)
days after receipt of notice of such failure, then Applied will have the option,
in Applied's discretion, to elect any combination of the following: (i) to
revoke, by written notice to Therma-Wave, the designation of the applicable
Integrated Metrology Tool as a Qualified Therma-Wave Tool; (ii) to allow Therma-
Wave an additional cure period in which to meet the project milestone; (iii) to
cease work with Therma-Wave on such Integrated Metrology Tool; and (iv) to
commence working with a third party for development of such Integrated Metrology
Tool.

          (f)  Changes to Specifications.  Applied may at any time after
delivery of the initial Specifications to Therma-Wave propose changes to such
Specifications. Within a reasonable time not to exceed five (5) days after
receipt of such proposal, Therma-Wave will inform Applied whether Therma-Wave
agrees to such changes and if so, whether the requested change will require a
change to the schedule set forth in the applicable Development Plan. Any dispute
over the proposed changes to the Specifications or Development Plan will be
promptly submitted to the Joint Relations Committee, which will attempt in good
faith to resolve the dispute. If Therma-Wave rejects Applied's proposed changes
to the Specifications or if Applied rejects Therma-Wave's proposed changes to
the Development Plan, Applied will have the option, in Applied's discretion (i)
to continue with the original Development Plan and Specifications; or (ii) to
elect any combination of the following: (A) to revoke, by written notice to
Therma-Wave, the designation of the applicable Integrated Metrology Tool as a
Qualified Therma-Wave Tool; (B) to cease work with Therma-Wave on such
Integrated Metrology Tool;
                                       6
<PAGE>

                                                     **** Confidential Treatment

and (C) to commence working with a third party for development of such
Integrated Metrology Tool.

     2.3  Additional Therma-Wave Tools.  During the term of this Agreement, if
Therma-Wave at any time has developed an idea for an Integrated Metrology Tool
to the point where Therma-Wave in good faith believes that such Integrated
Metrology Tool would be commercially viable or may have a useful commercial
application in the Semiconductor Field (and in any event before undertaking any
development effort in conjunction with or on behalf of any third party), Therma-
Wave will promptly notify Applied.  If Applied requests, Therma-Wave will
propose a Development Plan, covering development of such Integrated Metrology
Tool to meet Applied's Specifications, for Applied's review, comment, and
written approval pursuant to Section 2.1.  If at any time Applied notifies
                             -----------
Therma-Wave in writing using the subject heading "Notice Pursuant to Section 2.3
of the Development and Cooperation Agreement" that Applied is not interested in
further investigation or development of such Integrated Metrology Tool, then
notwithstanding Section 4.1 Therma-Wave may undertake development of and sell
                -----------
such Integrated Metrology Tool, provided that such proposed Integrated Metrology
Tool does not utilize or incorporate any Improvements or other technology owned
by Applied or owned jointly by the Parties under this Agreement.

     2.4  Non-Qualified Therma-Wave Tools

          (a) Mutual Designation as Non-Qualified Therma-Wave Tool

              (i)    During the term of this Agreement, if the Parties mutually
agree in writing that an Integrated Metrology Tool does not satisfy Applied's
Specifications, such Integrated Metrology Tool will be designated a Non-
Qualified Therma-Wave Tool.

              (ii)   If at any time Therma-Wave reasonably believes that a
Qualified Therma-Wave Tool no longer meets Applied's Specifications and Therma-
Wave desires that it be designated as a Non-Qualified Therma-Wave Tool, Therma-
Wave may notify Applied of its desire, and the Parties will meet to discuss
designating such Qualified Therma-Wave Tool as a Non-Qualified Therma-Wave Tool.
If the Parties cannot agree after such discussion, the matter will be escalated
to a meeting of the Joint Relations Committee for determination. If the Parties'
representatives on the Joint Relations Committee cannot agree on whether to
designate such Qualified Therma-Wave Tool as a Non-Qualified Therma-Wave Tool
after their initial meeting, they will reconsider the matter at their next
meeting, and this process will be repeated until the matter is resolved. If at
the end of eighteen (18) months after the first meeting of the Joint Relations
Committee to discuss the matter, the Joint Relations Committee cannot agree on
whether or not to designate such Qualified Therma-Wave Tool as a Non-Qualified
Therma-Wave Tool, and if at such time Therma-Wave still reasonably believes that
such Qualified Therma-Wave Tool no longer meets Applied's Specifications, then
Therma-Wave may designate such Qualified Therma-Wave Tool as a Non-Qualified
Therma-Wave Tool by written notice to Applied.

              (iii)  Following any designation of an Integrated Metrology Tool
as a Non-Qualified Therma-Wave Tool pursuant to this Section 2.4(a), Therma-Wave
                                                     --------------
may sell the Non-Qualified Therma-Wave Tool to a third party, provided that, for
**** following such designation as a Non-Qualified Therma-Wave Tool, before
selling or making

                                       7
<PAGE>

                                                     **** Confidential Treatment

available to any third party such Non-Qualified Therma-Wave Tool, Therma-Wave
must completely remove from such Non-Qualified Therma-Wave Tool any Improvements
or other technology owned by Applied or owned jointly by the Parties under this
Agreement. Following such **** period, pursuant to the license to be granted
under Section 7.4(e)(i) (if any Improvements owned by Applied or owned jointly
      ----------------
by the Parties under this Agreement are incorporated in such Non-Qualified
Therma-Wave Tool) Therma-Wave may sell such Non-Qualified Therma-Wave Tool to a
third party without removing from it any Improvements owned by Applied or owned
jointly by the Parties under this Agreement.

          (b) Tools Subject of Applied Internal Development.  Following any
designation of an Integrated Metrology Tool as a Non-Qualified Therma-Wave Tool
pursuant to Section 4.3(a), Therma-Wave may, subject to the prior written
            --------------
approval of Applied (which approval will not be unreasonably withheld) and
pursuant to the license granted under Section 7.4(e)(ii) (if any Improvements
                                      ------------------
owned by Applied or owned jointly by the Parties under this Agreement are
incorporated in such Non-Qualified Therma-Wave Tool) sell the Non-Qualified
Therma-Wave Tool to a third party.

     2.5  Communication

          (a) Joint Relations Committee.  The Parties will establish a "Joint
Relations Committee" comprised of representatives from each Party.  The Joint
Relations Committee will meet once each calendar quarter and otherwise as needed
during the term of the Agreement to discuss, without limitation, the Parties'
performance under the Agreement, Therma-Wave products and product developments,
developments in the Parties' industries, prospects for future business, changes
to the initial agreed upon Specifications for an Integrated Metrology Tool, and
the designation of Qualified Therma-Wave Tools as Non-Qualified Therma-Wave
Tools.

          (b) Project Managers.  Therma-Wave will be responsible for overall
project management of the development work to be undertaken pursuant to this
Agreement, regardless of whether Applied personnel are involved. Nonetheless,
each Party will appoint a Project Manager for supervising such development work.
The initial Project Managers for each Integrated Metrology Tool will be
specified in the applicable Development Plan. Each Party may substitute its
Project Manager upon written notice to the other Party, provided that the
replacement is qualified and competent. It will be the responsibility of the
Project Managers to ensure orderly and timely conduct of the development work
and to use commercially reasonable efforts to resolve any disputes relating to
the Development Plans and Specifications between the Parties as they arise. The
Project Managers will be empowered to grant written approvals with respect to
the Development Plans, the Specifications, and any acceptance tests. Nothing in
this Agreement will be construed as providing Project Managers with the
authority to amend this Agreement.

          (c) Applied Point of Contact.  Notwithstanding the preceding clauses
                                                                       -------
(a) and (b), Therma-Wave shall direct all communications with Applied relating
---     ---
to development work contemplated in this Agreement to the head of Applied's
Factory Efficiency Technologies Department (presently ****, Vice President and
General Manager, Factory Efficiency Technologies), and will direct
communications to other Applied personnel, including Project Mangers, only to
the extent authorized by such individual.

                                       8
<PAGE>

          (d)  Inspection Business. If at any time during the term of this
Agreement Therma-Wave intends to enter into the business of designing,
developing, producing, or selling equipment for semiconductor inspection and
review, including equipment (i) for viewing wafers or detecting defects on
wafers, (ii) for locating defects on wafers, or (iii) for viewing or
characterizing defects on wafers (the "Inspection Business"), Therma-Wave will
provide Applied with immediate written notice in order to allow the Parties a
reasonable opportunity to discuss opportunities to work together in the
Inspection Business.

     2.6  Subcontractors.  Notwithstanding the use of any subcontractors,
Therma-Wave will at all times have the sole responsibility to act as the primary
developer in connection with the development of the Integrated Metrology Tools
and shall be liable for all obligations set forth in this Agreement as being
obligations of Therma-Wave, and Therma-Wave agrees that this responsibility
cannot be transferred to any third party.  Before permitting any subcontractor
to perform work on the development of an Integrated Metrology Tool, Therma-Wave
will ensure that such subcontractor has entered into a valid, binding, and
enforceable written agreement with Therma-Wave that contains an effective
assignment to Applied of all Intellectual Property Rights that are to be owned
by Applied hereunder.

     2.7  Workplace Rules.  Each Party will cause its and its subcontractors'
personnel to comply fully with the working hours, working rules, non-
discrimination, and safety and security policies and procedures established by
the other Party when they are on the other Party's premises.

     2.8  Funding; Expenses.  Therma-Wave will fund the development work
undertaken pursuant to this Agreement, provided that Applied will bear its own
expenses incurred in connection with its activities supporting the development
work.

3.   Preferred Partner Designation

     3.1  Designation.  During the term of this Agreement Therma-Wave will be a
Preferred Partner of Applied for Integrated Metrology Tools (other than Non-
Qualified Therma-Wave Tools).

     3.2  Preferred Supply Opportunities

          (a) Uncommitted Tools.  With respect to Integrated Metrology Tool
applications for which Applied or its Affiliates do not have, as of the
Effective Date, any existing contractual commitment with a third party
("Uncommitted Tools"), Applied will, and will cause its Affiliates to, give
Therma-Wave the following opportunity:  prior to entering into an agreement with
any third party to develop an Uncommitted Tool for Applied, Applied will notify
Therma-Wave and request a proposed Development Plan pursuant to Section 2.1(a)
                                                                --------------
within a reasonable timeframe specified by Applied.  Therma-Wave will respond as
required by Section 2.1(b).  For each Uncommitted Tool, if (i) Therma-Wave does
            --------------
not timely notify Applied that Therma-Wave will submit a proposed Development
Plan, (ii) within the timeframe agreed upon pursuant to Section 2.1(b) Therma-
                                                        --------------
Wave has not proposed a Development Plan that is acceptable to Applied, or (iii)
Therma-Wave fails to develop such Uncommitted Tool in accordance with Section 2,
                                                                      ---------
then Applied's obligations under this Section 3.2 with respect to such
                                      -----------
Uncommitted Tool will be deemed discharged, and Applied will be free to engage
any third party to develop

                                       9
<PAGE>

                                                     **** Confidential Treatment

and supply such Uncommitted Tool. If Applied approves Therma-Wave's Development
Plan, Therma-Wave will develop such Uncommitted Tool in accordance with the
provisions set forth in Section 2, and when development of such Uncommitted Tool
                        ---------
is complete and the Uncommitted Tool is ready for commercial sale, Applied will
offer any Uncommitted Tool that is designated a Qualified Therma-Wave Tool to
Applied's customers as the recommended Integrated Metrology Tool, as
appropriate, for such tool's specific application, provided that Therma-Wave
continues to meet Applied's Specifications for such Integrated Metrology Tool.

          (b)  Committed Tools.  With respect to Integrated Metrology Tool
applications other than Uncommitted Tools ("Committed Tools"), Applied will, and
will cause its Affiliates to, cooperate with Therma-Wave to provide Therma-Wave
with a good faith opportunity, in accordance with the process set forth in
Section 2, to develop products that meet Applied's Specifications for such
---------
Committed Tools, subject to Applied's obligations to third parties.  For each
Qualified Therma-Wave Tool that is a Committed Tool, Applied will offer such
Qualified Therma-Wave Tool to Applied's customers as an option on Applied's
process tools, provided that Therma-Wave continues to meet Applied's
Specifications for such Integrated Metrology Tool.  Applied may in its sole
discretion determine the prices that Applied will charge Applied's customers for
Qualified Therma-Wave Tools that are Committed Tools; however, Applied agrees
that it will not ****.

          (c)  Exceptions.  Notwithstanding the foregoing, the following
exceptions shall apply.

               (i)   Existing Project. The Parties agree that this Section 3.2
                                                                   -----------
will not apply to any work related to Applied's project, under discussion with a
third party as of the Effective Date, ****.

               (ii)  Specific Customer Requests. If an Applied customer requires
Applied to use a third party's Integrated Metrology Tool, Applied will not be
obligated to treat Therma-Wave as a Preferred Partner for that Integrated
Metrology Tool for that customer, Applied's obligations set forth in this
Section 3 will not apply, and, for the purposes of applying the **** in Section
---------                                                               -------
4.2(b), any such Integrated Metrology Tool purchases from such third-party
-----
supplier will be included in the denominator of such ****, but only if Applied
does not have an agreement with such third-party supplier of such
non-Therma-Wave Integrated Metrology Tools as of the Effective Date.

     3.3  Conditions on Preferred Partner Status

          (a)  Conditions.  As a condition to Therma-Wave's continued status as
a Preferred Partner (i) Therma-Wave must develop Integrated Metrology Tools that
satisfy and continue to satisfy all of Applied's Specifications and (ii) Therma-
Wave must make regular improvements, in accordance with a mutually agreed upon
improvements roadmap, designed to ensure that the Therma-Wave Integrated
Metrology Tools meet or exceed the functional, technical, performance, quality,
quantity, availability, delivery, and price standards of competing products
available in the market (the "Third Party Standards") and that such Therma-Wave

                                       10
<PAGE>

Integrated Metrology Tools maintain the highest level of technological
advancement in the industry.

          (b)  Developments to Meet Third Party Standards. If at any time a
third party has available an Integrated Metrology Tool that exceeds the
functional, technical, performance, quality, quantity, availability, delivery,
or price standards of Therma-Wave's Integrated Metrology Tools, Applied may
notify Therma-Wave of such Third Party Standards and request pursuant to Section
                                                                         -------
2.1(a) a proposed Development Plan for an Integrated Metrology Tool to meet or
------
exceed the Third Party Standards. Upon receipt of such notice, Therma-Wave shall
respond in accordance with Section 2.1(b) indicating whether or not Therma-Wave
                           --------------
will develop, within the reasonable timeframe mutually agreed upon by Applied
and Therma-Wave, a new or improved Integrated Metrology Tool that will meet or
exceed the Third Party Standards.  If Therma-Wave undertakes such development, a
Qualified Therma-Wave Tool that is affected by the Third Party Standards will
remain subject to Sections 3.1 and 3.2 and the condition in Section 4.2(b)
                  ------------     ---                      --------------
during the development effort.  Applied may terminate the development effort if
Therma-Wave does not obtain Applied's written approval of a Development Plan
within the time specified in Section 2.1 or if Therma-Wave does not otherwise
                             -----------
perform in accordance with the approved Development Plan or Section 2.  After
                                                            ---------
Applied delivers a notice as provided above in this Section 3.3(b), if Therma-
                                                    --------------
Wave does not undertake such development, or if Applied terminates such
development effort as provided above, any Qualified Therma-Wave Tool that is
affected by the Third Party Standards shall no longer be subject to Sections 3.1
                                                                    ------------
and 3.2 and such Qualified Therma-Wave Tool shall not be counted in determining
    ---
Applied's satisfaction of the condition in Section 4.2(b).
                                           --------------

     3.4  Sole Remedy.  During the Exclusivity Period (including any extensions
thereof), if Applied breaches its obligations under this Section 3, then, as
                                                         ---------
Therma-Wave's sole and exclusive remedy, notwithstanding Section 4.1, Therma-
                                                         -----------
Wave may undertake development of, and sell to any third party, the Integrated
Metrology Tool that is affected by Applied's breach, provided that (a) with
respect to any sale of such Integrated Metrology Tool to any party, such
Integrated Metrology Tool does not utilize or incorporate any Improvements or
other technology owned solely by Applied and additionally (b) with respect to
any sale (whether direct or indirect) to a Listed **** such Integrated Metrology
Tool does not utilize or incorporate any Improvements or other technology owned
jointly by the Parties under this Agreement.

4.   OEM Exclusivity

     4.1  Designation. Applied will be Therma-Wave's exclusive OEM of Integrated
Metrology Tools during the Exclusivity Period. Accordingly, Therma-Wave agrees
that during the Exclusivity Period, it will not, and will cause its Affiliates
not to (a) except as otherwise expressly permitted pursuant to Sections 2.3 and
                                                               ------------
3.4, undertake or participate in any development or commercialization project,
---
whether alone or in conjunction with any third party, relating to development or
commercialization of any Integrated Metrology Tool in the Semiconductor Field,
or (b) except as otherwise expressly permitted in Section 2.3, 2.4(a), 2.4(b),
                                                  -----------  ------  ------
and 3.4, market, sell, or distribute (whether directly to end users or through
    ---
other resellers) in the Semiconductor Field any Integrated Metrology Tool listed
on Exhibit A or any Qualified Therma-Wave Tool (it being understood that once an
   ---------
Integrated Metrology Tool listed on Exhibit A becomes a Qualified Therma-Wave
                                    ---------
Tool, if the Integrated Metrology Tool later

                                       11
<PAGE>

                                                     **** Confidential Treatment

becomes a Non-Qualified Therma-Wave Tool, clause (b) will no longer apply to
                                          ----------
such Integrated Metrology Tool as and to the extent provided in Section 2.4(a)
                                                                --------------
or 2.4(b) as the case may be).
   ------

     4.2  Extension of Exclusivity Period.  Following the end of the initial
Exclusivity Period, the Exclusivity Period will automatically be extended for
successive six (6) month periods provided that the following conditions are met:

          (a)  First Extension. To extend the Exclusivity Period for the six (6)
months immediately following the initial Exclusivity Period, Applied must have
either satisfied the Minimum Purchase Requirement set forth in Section 5 (by
                                                               ---------
itself or together with its Affiliates) or made the NRE Payment required as a
result of not meeting such requirement;

          (b)  Subsequent Extensions. To extend the Exclusivity Period for each
six (6) month period following the initial extension described in clause (a)
                                                                  ----------
above, Applied (and its Affiliates) must have purchased from Therma-Wave during
the immediately preceding twelve (12) months at least **** of all of Applied's
(and Applied's Affiliates') requirements for Integrated Metrology Tools for
which there is a Qualified Therma-Wave Tool that Therma-Wave is able to supply.
For the purpose of calculating Applied's and Applied's Affiliates' purchases,
all Integrated Metrology Tools purchased from Therma-Wave by Applied and
Applied's Affiliates, including purchases from Therma-Wave on their behalf by
their respective contract manufacturers, shall be included. For the purpose of
calculating the applicable requirements of Applied and Applied's Affiliates, all
Integrated Metrology Tools for which there is an equivalent Qualified Therma-
Wave Tool that Therma-Wave is able to supply that are purchased by Applied and
Applied's Affiliates, including purchases on their behalf by their respective
contract manufacturers, shall be included.

          (c)  Reports. Within thirty (30) days after the end of each six (6)
month period referenced in Section 4.2(a) above, Applied shall furnish to
                           --------------
Therma-Wave a written report setting forth the applicable purchases and
requirements of Applied and Applied's Affiliates and stating whether or not the
* has been met.

          (d)  Termination.  If Applied fails to meet the condition set forth in
clause (b) above during an applicable six (6) month period, then either Party
----------
may, within sixty (60) days after the end of such six (6) month period,
terminate this Agreement upon notice to the other Party.

     4.3  Applied Internal Development; Exclusivity Termination; Manufacturing
Offer

          (a)  Internal Development. During the Exclusivity Period, if Applied
sells an internally-developed Integrated Metrology Tool that directly competes
with a particular Qualified Therma-Wave Tool in the Semiconductor Field, Applied
will notify Therma-Wave, and upon such notice the applicable Qualified Therma-
Wave Tool will be designated as a Non-Qualified Therma-Wave Tool, provided that
Therma-Wave will continue to make available for purchase by Applied such former
Qualified Therma-Wave Tool on the terms and prices applicable under the Supply
Agreement.

                                       12
<PAGE>

                                                     **** Confidential Treatment

          (b)  Manufacturing Offer.  During the Exclusivity Period, if Applied
internally develops any Integrated Metrology Tool component or application as a
by-product of Applied's engineering activities, Applied will offer to Therma-
Wave the opportunity to manufacture such Integrated Metrology Tool component or
application for Applied on terms and conditions as may be agreed upon by the
Parties on a case-by-case basis.

          (c)  Notification. If, within a reasonable time after Applied's point
of contact described in Section 2.5(c) obtains actual knowledge that Applied has
                        --------------
developed internally an Integrated Metrology Tool that directly competes with a
particular Qualified Therma-Wave Tool in the Semiconductor Field and that a
prototype of such Integrated Metrology Tool has reached the "Alpha exit" stage
of development, Applied does not notify Therma-Wave of such development, Therma-
Wave may, as Therma-Wave's sole and exclusive remedy terminate this Agreement
upon written notice to Applied.

          (d)  Direct Competition.  For purposes of this Section 4.3 one tool
                                                         -----------
"directly competes" with another tool if the primary application for which it is
designed is to measure the same parameter using the same measurement technique
as the other tool.  For the avoidance of doubt, and as an non-exclusive example
only, for purposes of this Agreement, optical measurement techniques (including
spectrometry, ellipsometry, and reflectometry), electrical measurement
techniques, and mechanical measurement techniques will be considered to be
different measurement techniques.

     4.4  Direct Competition in ****. If Applied offers for commercial sale an
**** that (i) directly competes with a **** that Therma-Wave then offers for
commercial sale and (ii) is not offered by Applied for commercial sale as of the
Effective Date, except for **** that Applied offers for sale that perform (in
addition to other functions) functions comparable to those of a **** but are not
marketed as a substitute for such ****, then Therma-Wave may, as Therma-Wave's
sole and exclusive remedies, do the following:

          (a)  Therma-Wave may deliver to Applied a written notice specifying
the activities of Applied that Therma-Wave believes constitute the direct
competition described above, and during a period of thirty (30) days following
Applied's receipt of such notice (i) the Parties will meet to discuss the issue
with a view toward determining whether such direct competition is taking place
and (ii) Applied may cure the problem by ceasing the activities specified in
such notice.

          (b)  If the Parties have not agreed within the thirty (30) day period
described in Section 4.4(a) whether or not Applied's activities constitute the
             --------------
direct competition described above, and if within such thirty (30) day period
Applied has not cured the problem by ceasing the activities specified in Therma-
Wave's notice, then Therma-Wave may institute a binding arbitration pursuant to
Paragraph 13.2 of the Escrow Agreement, pursuant to which the arbitrator will be
instructed to determine solely whether or not the activities specified in
Therma-Wave's notice constitute the direct competition described above in this
Section 4.4.  If the arbitrator determines that such activities constitute such
-----------
direct competition, then Therma-Wave may terminate this Agreement and the Escrow
Agreement (pursuant to Paragraph 6 of the Escrow Agreement).

                                       13
<PAGE>

                                                     **** Confidential Treatment

The provisions of Section 4.3(d) will apply to this Section 4.4 for purposes of
                  --------------                    -----------
determining whether one tool "directly competes" with another tool.

5.   Minimum Purchase Requirements

     5.1  General. Subject to the terms of the Supply Agreement, Applied will
purchase from Therma-Wave Metrology Tools in the amounts and for the time
periods set forth below (the "Minimum Purchase Requirement"). The first time
period set forth below will commence on the earlier of (a) the Delivery Date and
(b) one-hundred and twenty (120) days after the Effective Date. All purchases of
Metrology Tools by Applied and its Affiliates (including purchases on their
behalf by either of their respective contract manufacturers) will count toward
the satisfaction of the Minimum Purchase Requirement, (for the first period,
whether or not such purchases occur before or after the commencement date
described in the foregoing sentence).

                                     ****

The purchase price for the prototypes of each Qualified Therma-Wave Tool shall
be negotiated and set forth in the applicable Development Plan.  All other
prices and terms and conditions of purchase shall be determined in accordance
with the Supply Agreement.  For purposes of satisfying the Minimum Purchase
Requirement, a purchase shall be deemed to have been made once Therma-Wave has
shipped the product to Applied.

     5.2  Specific Purchases in First Period. During the first time period set
forth above, Applied will purchase, as part of the Minimum Purchase Requirement,
(a) **** of each of the Integrated Metrology Tools set forth on Exhibit A for
                                                                ---------
which an approved Development Plan exists as of the commencement of the first
time period set forth above, other than **** for which Applied will purchase
****, and (b) **** in Integrated Metrology Tools in addition to the purchases
contemplated in clause (a). The purchases in the foregoing
                ----------
clauses (a) and (b) will count toward Applied's Minimum Purchase Requirement of
-----------     ---
**** in the first time period set forth above.  Applied will make the purchases
in clauses (a) and (b) even if the total price of such purchases exceeds ****.
   -----------     ---

     5.3  Conditions on Minimum Purchase Requirements.  Applied's obligations
under Sections 5.1 and 5.2 are conditioned upon (a) Therma-Wave meeting the
      ------------     ---
requirements of the Development Plans and Applied's Specifications for
Integrated Metrology Tools and Applied's specifications and criteria for
Standalone Metrology Tools, including the product availability milestones set
forth on Exhibit A; (b) Therma-Wave accepting and fulfilling all orders from
         ---------
Applied and its Affiliates for Metrology Tools in accordance with the Supply
Agreement; and (c) Therma-Wave complying with the terms and conditions of this
Agreement and the Supply Agreement.  If Applied gives Therma-Wave a written
notice of such failure and a thirty (30) day cure period to correct such
failure, and if Therma-Wave does not correct the failure within such cure
period, Therma-Wave's failure to meet the requirements of clause (a) will result
                                                          ----------
in a reduction of the Minimum Purchase Requirement for the affected period by an
amount to be agreed upon in good faith by the Parties within thirty (30) days
after the expiration of such cure period.  In addition, (i) Therma-Wave's
failure to accept and fulfill orders from Applied and its Affiliates as required
by clause (b) will excuse Applied from its Minimum Purchase Requirement for the
   ----------
affected period to the extent that such failure by Therma-Wave causes Applied to
fall short of the Minimum Purchase Requirement; and (ii) Therma-Wave's failure
to

                                       14
<PAGE>

                                                     **** Confidential Treatment

comply with the other terms of this Agreement or the terms of the Supply
Agreement will excuse Applied from its Minimum Purchase Requirement for any
period during which such failure occurs to the extent that such failure by
Therma-Wave causes Applied to fall short of the Minimum Purchase Requirement.

     5.4  NRE Payments

          (a)  NRE Payment Requirement. If Applied fails to meet the Minimum
Purchase Requirement set forth in the table above in any of these periods, and
such failure is not otherwise excused hereunder, Applied will pay Therma-Wave a
non-recurring fee (an "NRE Payment") equal to **** of the difference between the
Minimum Purchase Requirement for such period and the total aggregate purchase
price of Metrology Tools actually purchased by Applied and Affiliates during
such period.

          (b)  Determination of Amount. If an NRE Payment is required hereunder,
Therma-Wave will deliver to Applied a calculation of the NRE Payment to be made,
setting forth in detail the method of calculation and the basis of such
calculation. If Applied disputes such calculation, Applied will notify Therma-
Wave, and the Parties will meet to discuss and agree upon the NRE Payment to be
made. Applied will pay each NRE Payment within thirty (30) days after the
Parties agree upon the calculation of such NRE Payment amount or, if there is no
dispute, within thirty (30) days after receipt of Therma-Wave's calculation of
such NRE Payment amount. Once paid, an NRE Payment is not refundable.

          (c)  Discount on Future Purchases. After an NRE Payment is made,
Applied and its Affiliates will receive a discount of **** from the prices for
Integrated Metrology Tools, which prices shall equal the prices Applied had been
paying before the requirement to make such NRE Payment arose. Such discount
shall apply to all purchases of Metrology Tools from Therma-Wave above the
Minimum Purchase Requirements for periods after an NRE Payment is made, until
the earlier of (i) the date that the aggregate amount of the discounts received
equals the aggregate NRE Payments made or (ii) the termination of this
Agreement.

6.   Manufacturing.  As of the Effective Date, the Parties have entered into the
Supply Agreement.

7.   Ownership

     7.1  Background Technology and Initial Specifications.  As between the
Parties, Applied will have and retain exclusive ownership of all of Applied's
Background Technology and the initial Specifications furnished by Applied.  As
between the Parties, Therma-Wave will have and retain exclusive ownership of all
of Therma-Wave's Background Technology.  Neither Party has, by virtue of this
Agreement, any right, title, or interest to or in the other Party's Background
Technology.

     7.2  Improvements Prior to Acceptance of Prototype

          (a)  Therma-Wave Interim Improvements. Therma-Wave will exclusively
own all right, title, and interest (including all Intellectual Property Rights)
in and to all Improvements developed solely by Therma-Wave employees in the
course of work performed by

                                       15
<PAGE>

Therma-Wave pursuant to each Development Plan during the period beginning when
Applied delivers to Therma-Wave the initial Specifications for the underlying
Integrated Metrology Tool and ending when Applied accepts a product prototype
that satisfies the Lab Specifications for such Development Plan pursuant to
Section 2.2(b) (the "Therma-Wave Interim Improvements"). To the extent that an
--------------
application, registration, or other governmental procedure (collectively, a
"Procedure") is required to obtain, perfect, or protect any Intellectual
Property Right that Therma-Wave may own pursuant to this Section 7.2(a) (for
                                                         --------------
example, filing a patent application) and Therma-Wave desires to pursue such
Procedure, Therma-Wave shall first consult with Applied.

          (b)   Applied Interim Improvements. Applied will exclusively own all
right, title, and interest (including all Intellectual Property Rights) in and
to all Improvements developed solely by Applied employees in the course of work
performed by Applied pursuant to each Development Plan during the period
beginning when Applied delivers to Therma-Wave the initial Specifications for
the underlying Integrated Metrology Tool and ending when Applied accepts a
product prototype that satisfies the Lab Specifications for such Development
Plan pursuant to Section 2.2(b) (the "Applied Interim Improvements").  To the
                 --------------
extent that a Procedure is required to obtain, perfect, or protect any
Intellectual Property Right that Applied may own pursuant to this Section 7.2(b)
                                                                  --------------
and Applied desires to pursue such Procedure, Applied shall first consult with
Therma-Wave.

          (c)  Jointly Developed Improvements

               (i)   Joint Ownership; Assignment. The Parties intend that each
Party hereto will have an equal and undivided one-half (1/2) joint ownership
interest in all right, title, and interest (including all Intellectual Property
Rights) in and to all Improvements jointly developed by Therma-Wave employees
and Applied employees in performing work under each Development Plan during the
period beginning when Applied delivers to Therma-Wave the initial Specifications
for the underlying Integrated Metrology Tool and ending when Applied accepts a
product prototype that satisfies the Lab Specifications for such Development
Plan pursuant to Section 2.2(b) (the "Jointly Developed Improvements").  Neither
                 --------------
Party will have any duty of accounting to the other Party with respect to such
joint ownership interest.  Each Party hereby unconditionally and irrevocably
assigns to the other Party an undivided, equal, half ownership interest, as set
forth above in this clause (i) with respect to the portions of the Jointly
                    ----------
Developed Improvements that are developed by the assigning Party.

               (ii)  Applications and Registrations. To the extent that a
Procedure is required to obtain, perfect, or protect any Intellectual Property
Right that the Parties may jointly own pursuant to this Section 7.2(c) and
                                                        --------------
either Party desires to pursue such Procedure, such Party shall first consult
with the other Party. If the other Party desires to participate in such
Procedure, the Parties will then jointly and cooperatively pursue such
Procedure, in which event they shall bear all costs equally and jointly own any
rights thereby obtained. If a Party declines to participate in such Procedure,
the other Party shall then have the right to pursue such Procedure alone, in
which case such other Party shall bear all costs of and, notwithstanding clause
                                                                         ------
(i) above, exclusively own all rights resulting from, such Procedure.
---

               (iii) Actions Against Third Party Infringers. Each Party shall
promptly notify the other Party if such former Party becomes aware of any
possible infringement

                                       16
<PAGE>

                                                     **** Confidential Treatment

or misappropriation by a third party of any of the Jointly Developed
Improvements or Intellectual Property Rights in which the Parties share a joint
ownership interest under this Section 7.2(c). If either Party desires to take
                              --------------
any action against such an infringing or misappropriating third party, such
Party shall first notify the other Party and consult with such other Party
regarding such action. If the other Party desires to participate in such action,
the Parties will then jointly and cooperatively pursue such action, in which
event they will bear all costs equally and share in any damages or other
recoveries equally. Either Party may at any time decide not to participate
further in any such action, in which case any further costs will be borne by,
and all damages and other recoveries shall be received and retained by, the
Party that continues to pursue such action. If a Party declines to participate
in any such action, the other Party will then have the right to pursue such
action alone, and will bear all costs of and receive and retain all damages and
other recoveries from such action. Notwithstanding the foregoing, if a Party
declines to participate in such an action or withdraws from such an action, such
Party will nevertheless, at the request of the other Party, cooperate with the
other Party, at the cost of the other Party and subject to any reasonable
conditions (including indemnification against counterclaims by the third party),
to the extent necessary to enable the other Party to pursue such action
effectively.

               (iv) Assignment of Ownership of Jointly Developed Improvements.
Neither Party shall transfer or assign its interest in any Jointly Developed
Improvement without the prior written consent of the other Party, which consent
shall not be unreasonably withheld; provided that (1) either Party may assign
its interest in any Jointly Developed Improvement to an Affiliate of such Party,
provided that such Affiliate is not (A) in the case of Therma-Wave as assignor,
an **** or (B) in the case of Applied as assignor, a ****; (2) Applied may
assign its interest in any Jointly Developed Improvement in connection with a
sale of all or part of Applied's business provided that the assignee is not a
****; and (3) Therma-Wave may assign its interest in any Jointly Developed
Improvement in connection with a sale of all or a part of Therma-Wave's business
that constitutes a Change in Control, provided that the assignee is not a Listed
****. For the purposes of this clause (iv), if a Party's consent to a transfer
or assignment is required, it shall not be unreasonable for a Party to withhold
consent to a transfer or assignment if (A) in the case of Therma-Wave as
assignor, Applied believes that the transferee or assignee is an **** or (B) in
the case of Applied as assignor, the transferee or assignee is a ****. In
addition the consenting Party may condition its consent upon the transferee or
assignee agreeing in writing to such conditions as the consenting Party may
impose in order to preserve its competitive position including requiring the
transferee or assignee to agree to be bound by the restrictions of this clause
                                                                        ------
(iv) with respect to any future transfer or assignment.
----
     7.3  Improvements After Completion of Prototypes.  Applied will own, and
Therma-Wave hereby unconditionally and irrevocably assigns to Applied, all
right, title, and interest (including all Intellectual Property Rights) in and
to all Improvements made by either Party in the course of work performed
pursuant to each Development Plan after Applied accepts a product prototype that
satisfies the Lab Specifications for such Development Plan (the "Integration
Improvements").

                                       17
<PAGE>

                                                     **** Confidential Treatment

     7.4  Licenses

          (a)  Therma-Wave Interim Improvements. Therma-Wave hereby grants to
Applied a fully paid-up, royalty-free, perpetual, irrevocable, worldwide
license, under all of Therma-Wave's Intellectual Property Rights in the Therma-
Wave Interim Improvements, to use, import, offer for sale, and sell Integrated
Metrology Tools (that incorporate or utilize Therma-Wave Interim Improvements)
in the Semiconductor Field. Except as otherwise provided in Section 7.5, Applied
                                                            -----------
agrees that Applied will not at any time use Therma-Wave Interim Improvements
under this license to develop Integrated Metrology Tools that directly compete
(as such term is defined in Section 4.3(d)) with Therma-Wave products available
                            -------------
for commercial sale by Therma-Wave at the time Applied would otherwise commence
such development. The foregoing license shall be nontransferable and
nonsublicensable without the prior written consent of Therma-Wave, which consent
shall not be unreasonably withheld, except that Applied may assign its rights
under the foregoing license without Therma-Wave's consent (1) to an Applied
Affiliate, provided that such Affiliate is not a **** and (2) in connection with
a sale of all or part of Applied's business provided that the assignee or
sublicensee is not a ****. For the purposes of this clause (a), if Therma-Wave's
                                                    ----------
consent to an assignment or sublicense is required, it shall not be unreasonable
for Therma-Wave to withhold consent to an assignment or sublicense if the
assignee or sublicensee is a *****. In addition, Therma-Wave may condition its
consent upon the assignee or sublicensee agreeing in writing to such conditions
as Therma-Wave may impose in order to preserve its competitive position
including requiring the assignee or sublicensee to agree to be bound by the
restrictions of this clause (a) with respect to any future assignment or
                    ----------
sublicense. Except to the extent expressly provided in clause (e) below, and
                                                       ----------
except with respect to Integrated Metrology Tools that Therma-Wave is expressly
permitted to sell pursuant to Sections 2.3, 2.4(a), 2.4(b), or 3.4 this license
                              -------- ---  ------  ------
will be exclusive (without reservation) during the License Limit Period. After
the License Limit Period this license will be nonexclusive.

          (b)  Applied Interim Improvements. Applied hereby grants to Therma-
Wave a fully paid-up, royalty-free, perpetual and irrevocable (except as
provided in Section 7.7(c)), worldwide license, under all of Applied's
            ---------------
Intellectual Property Rights in the Applied Interim Improvements to make, have
made (by any party other than a Listed ****), use, import, offer for sale, and
sell Standalone Metrology Tools (that incorporate or utilize Applied Interim
Improvements) designed, developed, and sold by Therma-Wave. Except in
conjunction with Applied, Therma-Wave agrees that Therma-Wave will not at any
time use Applied Interim Improvements under this license to develop Standalone
Metrology Tools that directly compete (as such term is defined in Section
                                                                  -------
4.3(d)) with Applied's products available for commercial sale by Applied at the
------
time Therma-Wave would otherwise commence such development. The foregoing
license shall be nontransferable and nonsublicensable without the prior written
consent of Applied, which consent shall not be unreasonably withheld, except
that Therma-Wave may assign its rights under the foregoing license without
Applied's consent (1) to a Therma-Wave Affiliate, provided that such Affiliate
is not an **** and (2) in connection with a sale of all or a part of Therma-
Wave's business that constitutes a Change in Control, provided that the assignee
or sublicensee is not a Listed ****.   For the purposes of this clause (b), if
                                                                ----------
Applied's consent to an assignment or sublicense is required, it shall not be
unreasonable for Applied to withhold consent to an assignment or sublicense if
Applied believes that the assignee or sublicensee is an ****. In addition,
Applied

                                       18
<PAGE>

                                                     **** Confidential Treatment

may condition its consent upon the assignee or sublicensee agreeing in writing
to such conditions as Applied may impose in order to preserve its competitive
position including requiring the assignee or sublicensee to agree to be bound by
the restrictions of this clause (b) with respect to any future assignment or
                         ----------
sublicense. This license will be exclusive during the License Limit Period;
provided that, Applied reserves the right to make, have made (by any party other
than a ****), use, import, offer for sale, and sell ****, subject to Therma-
Wave's rights in Section 4.4. After the License Limit Period this license will
                 -----------
be nonexclusive.

          (c)  Jointly Developed Improvements

               (i)  License to Applied. Therma-Wave hereby grants to Applied a
fully paid-up, royalty-free, perpetual, irrevocable, worldwide license, under
all of Therma-Wave's Intellectual Property Rights in the Jointly Developed
Improvements, to use, import, offer for sale, and sell Integrated Metrology
Tools (that incorporate or utilize Jointly Developed Improvements) in the
Semiconductor Field. During the License Limit Period, except as otherwise
provided in Section 7.5, Applied agrees that Applied will not use Jointly
            -----------
Developed Improvements to develop Integrated Metrology Tools that directly
compete (as such term is defined in Section 4.3(d)) with Therma-Wave products
                                    -------------
available for commercial sale by Therma-Wave at the time Applied would otherwise
commence such development. The foregoing license shall be nontransferable and
nonsublicensable without the prior written consent of Therma-Wave, which consent
shall not be unreasonably withheld, except that Applied may assign its rights
under the foregoing license without Therma-Wave's consent (1) to an Applied
Affiliate, provided that such Affiliate is not a **** and (2) in connection with
a sale of all or part of Applied's business provided that the assignee or
sublicensee is not a ****. For the purposes of this clause (i), if Therma-Wave's
                                                    ----------
consent to an assignment or sublicense is required, it shall not be unreasonable
for Therma-Wave to withhold consent to an assignment or sublicense if the
assignee or sublicensee is a ****. In addition, Therma-Wave may condition its
consent upon the assignee or sublicensee agreeing in writing to such conditions
as Therma-Wave may impose in order to preserve its competitive position
including requiring the assignee or sublicensee to agree to be bound by the
restrictions of this clause (i) with respect to any future assignment or
                     ----------
sublicense. Except to the extent expressly provided in clause (e) below, and
                                                       ----------
except with respect to Non-Qualified Therma-Wave Tools that Therma-Wave is
expressly permitted to sell pursuant to Section 2.4(a)(iii) (after the ****
                                        -------------------
period described therein) or 2.4(b), this license will be exclusive (without
                             ------
reservation) during the License Limit Period. After the License Limit Period
this license will be nonexclusive.

               (ii) License to Therma-Wave. Applied hereby grants to Therma-Wave
a fully paid-up, royalty-free, perpetual and irrevocable (except as provided in
Section 7.7(c)), worldwide license, under all of Applied's Intellectual Property
--------------
Rights in the Jointly Developed Improvements to make, have made (by any party
other than a Listed ****), use, import, offer for sale, and sell Standalone
Metrology Tools (that incorporate or utilize Jointly Developed Improvements)
designed, developed, and sold by Therma-Wave. Except in conjunction with
Applied, during the License Limit Period, Therma-Wave agrees that Therma-Wave
will not use Jointly Developed Improvements to develop Standalone Metrology
Tools that directly compete (as such term is defined in Section 4.3(d)) with
                                                        ---------------
Applied products

                                       19
<PAGE>

                                                     **** Confidential Treatment

available for commercial sale by Applied at the time Therma-Wave would otherwise
commence such development. The foregoing license shall be nontransferable and
nonsublicensable without the prior written consent of Applied, which consent
shall not be unreasonably withheld, except that Therma-Wave may assign its
rights under the foregoing license without Applied's consent (1) to a Therma-
Wave Affiliate, provided that such Affiliate is not an **** and (2) in
connection with a sale of all or a part of Therma-Wave's business that
constitutes a Change in Control, provided that the assignee or sublicensee is
not a Listed ****. For the purposes of this clause (ii), if Applied's consent
                                            -----------
to an assignment or sublicense is required, it shall not be unreasonable for
Applied to withhold consent to an assignment or sublicense if Applied believes
that the assignee or sublicensee is an ****. In addition, Applied may condition
its consent upon the assignee or sublicensee agreeing in writing to such
conditions as Applied may impose in order to preserve its competitive position
including requiring the assignee or sublicensee to agree to be bound by the
restrictions of this clause (ii) with respect to any future assignment or
sublicense. This license will be exclusive during the License Limit Period;
provided that, Applied reserves the right to make, have made (by any party other
than a ****), use, import, offer for sale, and sell **** subject to Therma-
Wave's rights in Section 4.4. After the
                 -----------
License Limit Period this license will be nonexclusive.

          (d)  Integration Improvements.  Applied hereby grants to Therma-Wave a
nonexclusive, fully paid-up, royalty-free, perpetual and irrevocable (except as
provided in Section 7.7(c)), worldwide license under all of Applied's
            --------------
Intellectual Property Rights in each Integration Improvement to make, have made
(by any party other than a Listed ****), use, import, offer for sale, and sell
Standalone Metrology Tools (that incorporate or utilize Integration
Improvements) designed, developed, and sold by Therma-Wave, which license shall
become effective for each Integration Improvement upon the first commercial
shipment of the applicable Integration Improvement with an Applied process tool.
Except in conjunction with Applied, during the License Limit Period, Therma-Wave
agrees that Therma-Wave will not use Integration Improvements under this license
to develop Standalone Metrology Tools that directly compete (as such term is
defined in Section 4.3(d)) with Applied products available for commercial sale
           -------------
by Applied at the time Therma-Wave would otherwise commence such development.
The foregoing license shall be nontransferable and nonsublicensable without the
prior written consent of Applied, which consent shall not be unreasonably
withheld, except that Therma-Wave may assign its rights under the foregoing
license without Applied's consent (1) to a Therma-Wave Affiliate, provided that
such Affiliate is not an **** and (2) in connection with a sale of all or a part
of Therma-Wave's business that constitutes a Change in Control, provided that
the assignee or sublicensee is not a Listed ****. For the purposes of this
clause (d), if Applied's consent to an assignment or sublicense is required, it
shall not be unreasonable for Applied to withhold consent to an assignment or
sublicense if Applied believes that the assignee or sublicensee is an ****. In
addition, Applied may condition its consent upon the assignee or sublicensee
agreeing in writing to such conditions as Applied may impose in order to
preserve its competitive position including requiring the assignee or
sublicensee to agree to be bound by the restrictions of this clause (d) with
                                                             ----------
respect to any future assignment or sublicense. This license will be exclusive
during the License Limit Period; provided that, Applied reserves the right to
make, have made (by any party other than a ****)use, import, offer for sale, and
sell ****

                                       20
<PAGE>

                                                     **** Confidential Treatment

**** subject to Therma-Wave's rights in Section 4.4. After the License Limit
                                        -----------

Period this license will be nonexclusive.

          (e)  Therma-Wave License Following Certain Occurrences

               (i)   Mutual Designation as Non-Qualified Therma-Wave Tool.
Effective after the **** period described in Section 2.4(a)(iii) with respect
                                             -------------------
to each Non-Qualified Therma-Wave Tool that Therma-Wave is permitted to sell
to third parties thereunder, Applied hereby grants to Therma-Wave a
nonexclusive, fully paid-up, royalty-free, perpetual (except as provided in
Section 7.7(c)) license under all of Applied's Intellectual Property Rights in
---------------
each Applied Interim Improvement, Jointly Developed Improvement, and
Integration Improvement (in each case that are incorporated into the
applicable Non-Qualified Therma-Wave Tool and are in existence as of the date
on which such Integrated Metrology Tool is designated as a Non-Qualified
Therma-Wave Tool) to make, have made (by any party other than a Listed ****),
offer for sale, sell, and import the applicable Non-Qualified Therma-Wave
Tools that (1) are designed, developed, and sold by Therma-Wave, (2) are made
commercially available by Therma-Wave as of the effective date of such
designation as a Non-Qualified Therma-Wave Tool, and (3) incorporate or
utilize such Applied Interim Improvements, Jointly Developed Improvements, or
Integration Improvements.

               (ii)  Tools Subject of Applied Internal Development. With respect
to each Non-Qualified Therma-Wave Tool that Therma-Wave is permitted to sell to
third parties under Section 2.4(b), effective upon Applied's giving Applied's
                    --------------
prior written approval, which approval will not be unreasonably withheld,
Applied grants to Therma-Wave a nonexclusive, fully paid-up, royalty-free,
perpetual (except as provided in Section 7.7(c)) license under all of Applied's
                                 ---------------
Intellectual Property Rights in each Applied Interim Improvement, Jointly
Developed Improvement, and Integration Improvement (in each case that are
incorporated into the applicable Non-Qualified Therma-Wave Tool and are in
existence as of the date on which such Integrated Metrology Tool is designated
as a Non-Qualified Therma-Wave Tool) to make, have made (by any party other than
a Listed ****), offer for sale, sell, and import the applicable Non-Qualified
Therma-Wave Tools that (1) are designed, developed, and sold by Therma-Wave, (2)
are made commercially available by Therma-Wave as of the effective date of such
designation as a Non-Qualified Therma-Wave Tool, and (3) incorporate or utilize
such Applied Interim Improvements, Jointly Developed Improvements, or
Integration Improvements.

               (iii) Termination for Convenience by Applied. Effective only if
and when Applied terminates this Agreement pursuant to Section 11.2(b), Applied
                                                       ---------------
grants to Therma-Wave a nonexclusive, fully paid-up, royalty-free, perpetual
(except as provided in Section 7.7(c)), license under all of Applied's
                       --------------
Intellectual Property Rights in each Applied Interim Improvement, Jointly
Developed Improvement, and Integration Improvement (in each case in existence as
of the effective date of termination) to make, have made (by any party other
than a Listed ****), offer for sale, sell, and import Integrated Metrology Tools
that (1) are designed, developed, and sold by Therma-Wave and (2) are made
commercially available by Therma-Wave as of the effective date of such
termination, and (3) incorporate or utilize such Applied Interim Improvements,
Jointly Developed Improvements, or Integration Improvements.

               (iv)  Transfer of Foregoing Licenses. The licenses granted or to
be granted to Therma-Wave under this Section 7.4(e) shall be nontransferable and
                                     --------------
nonsublicensable

                                       21
<PAGE>

                                                     **** Confidential Treatment

without the prior written consent of Applied, which consent shall not be
unreasonably withheld, except that Therma-Wave may assign its rights under the
foregoing license without Applied's consent (1) to a Therma-Wave Affiliate,
provided that such Affiliate is not an **** and (2) in connection with a sale of
all or a part of Therma-Wave's business that constitutes a Change in Control,
provided that the assignee or sublicensee is not a Listed ****. For the purposes
of this clause (iv), if Applied's consent to an assignment or sublicense is
        -----------
required, it shall not be unreasonable for Applied to withhold consent to an
assignment or sublicense if Applied believes that the assignee or sublicensee is
an ****. In addition, Applied may condition its consent upon the assignee or
sublicensee agreeing in writing to such conditions as Applied may impose in
order to preserve its competitive position including requiring the assignee or
sublicensee to agree to be bound by the restrictions of this clause (iv) with
                                                             ------ ----
respect to any future assignment or sublicense.

     7.5  Exclusive Manufacturing Appointments. During the Exclusivity Period,
Therma-Wave will be Applied's exclusive manufacturer of Integrated Metrology
Tools that incorporate Therma-Wave Interim Improvements or Jointly Developed
Improvements, subject to the following exceptions:

          (a)  Upon the occurrence of a Release Event (as such term is defined
in the Escrow Agreement), and only with respect to the affected Products (as
defined in the Escrow Agreement), Applied may exercise its rights pursuant to
the Escrow Agreement;

          (b)  Subject to Applied performing its obligations to Therma-Wave
pursuant to Section 3.2 as to each particular proposed Integrated Metrology Tool
            -----------
product, Therma-Wave further grants to Applied a fully paid-up, royalty-free,
perpetual, irrevocable, worldwide license, under all of Therma-Wave's
Intellectual Property Rights in the Therma-Wave Interim Improvements and Jointly
Developed Improvements, to use, reproduce, and modify Therma-Wave Interim
Improvements and Jointly Developed Improvements to make and have made (by any
party, other than a ****, subject to the following sentence) such Integrated
Metrology Tool product in the Semiconductor Field that does not directly compete
(as such term is defined in Section 4.3(d)) with Therma-Wave products available
                            ---------------
for commercial sale by Therma-Wave at the time Therma-Wave is given the
opportunity to develop such Integrated Metrology Tool product pursuant to
Section 3.2. With respect to any third party that becomes a ***** after the
-----------
Effective Date, if Applied has a supply agreement with such third party as of
the date that such third party becomes a ****, the foregoing restriction on
Applied's engaging **** to make for Applied Integrated Metrology Tools using
Therma-Wave Interim Improvements and Jointly Developed Improvements shall not
apply to such third party.

For the avoidance of doubt, Applied acknowledges that except as provided in the
Escrow Agreement, the Supply Agreement, and Section 7.5(b) Applied does not have
                                            --------------
the right to itself utilize, or license a third party to utilize, the Therma-
Wave Interim Improvements to manufacture Integrated Metrology Tools in the
Semiconductor Field.

     7.6  Cooperation.  Each Party agrees to take such action and execute such
documents as are reasonably requested by the other Party to effect the
allocation of ownership rights set forth in this Section 7, including providing
                                                 ---------
documents in such recordable form as is deemed required or necessary by the
other Party.

                                       22
<PAGE>

                                                     **** Confidential Treatment

     7.7  Change in Control

          (a)  Notification. Therma-Wave will immediately notify Applied in
writing upon entering into any Change in Control transaction.

          (b)  Listed ****. If Therma-Wave enters into any Change
in Control transaction with a Listed ****, Applied shall be entitled to
immediately exercise the rights and remedies set forth in the Escrow Agreement
and the Supply Agreement in addition to its rights and remedies set forth
herein.

          (c)  Licenses. If Therma-Wave enters into any Change in Control
transaction with a Listed ****, the following shall apply:

               (i)   Therma-Wave's licenses to Integration Improvements under
Sections 7.4(d) and 7.4(e) shall immediately and automatically terminate and be
---------------     ------
of no further force or effect.

               (ii)  Therma-Wave's licenses to Applied Interim Improvements
under Sections 7.4(b) and 7.4(e) shall immediately and automatically terminate
      ---------------     ------
to the extent that they permit Therma-Wave to make, have made, use, import,
offer for sale, and sell Integrated Metrology Tools.

               (iii) Therma-Wave's licenses to Jointly Developed Improvements
under Sections 7.4(c) and 7.4(e) shall immediately and automatically terminate
      ---------------     ------
to the extent that they permit Therma-Wave to make, have made, use, import,
offer for sale, and sell Integrated Metrology Tools.

               (iv)  Notwithstanding anything to the contrary in this Agreement,
Applied's license to Jointly Developed Improvements under Section 7.4(c) shall
                                                          --------------
automatically become exclusive (without reservation) in perpetuity with respect
to Integrated Metrology Tools.

               (v)   Notwithstanding anything to the contrary in this Agreement,
Therma-Wave's license to Applied Interim Improvements under Section 7.4(b) and
                                                            --------------
Therma-Wave's license to Jointly Developed Improvements under Section 7.4(c)
                                                              --------------
shall automatically become nonexclusive.

8.   Confidentiality; Protection of Trade Secrets

     8.1  Applied Information.  Therma-Wave acknowledges that, in the course of
working with Applied in connection with the development work to be performed
hereunder and in the course of working with Applied prior to the execution of
this Agreement in contemplation of the development work to be performed
hereunder, Therma-Wave and its employees, agents, and contractors have and will
receive, observe, and otherwise have access to confidential and proprietary
information (whether in tangible or electronic form or otherwise) related to
Applied and Applied's products, tools, technology, processes, business plans,
and customers (the "Applied Information").  Without limiting the foregoing,
Applied Information includes (a) the Specifications and other items described in
Section 7.1 and (b) all materials and information related to Applied Interim
-----------
Improvements, Jointly Developed Improvements, and Integration

                                       23
<PAGE>

Improvements. Therma-Wave further acknowledges that Applied regards the Applied
Information as valuable trade secrets of Applied and that the unauthorized use
of such Applied Information would cause severe and irreparable damage to
Applied. Notwithstanding the foregoing, Applied Information does not include
information that Therma-Wave can prove by clear and convincing evidence: (i) is
in the public domain, through no fault of Therma-Wave; (ii) was known to Therma-
Wave prior to being disclosed by Applied to Therma-Wave; (iii) is disclosed to
Therma-Wave by a third party who is entitled to so disclose the information; or
(iv) is developed by Therma-Wave employees who did not perform work pursuant to
or had any involvement with any Development Plan and did not have access to or
disclosure of any Applied Information.

Accordingly, Therma-Wave agrees that:

               (a)  Therma-Wave shall not use or reproduce Applied Information
                    for any purpose other than performing development and
                    integration work for the benefit of Applied as contemplated
                    under this Agreement or for exercising the rights and
                    licenses granted to Therma-Wave pursuant to this Agreement;

               (b)  Therma-Wave shall hold all Applied Information in strict
                    confidence and shall not disclose Applied Information to any
                    third party (other than independent contractors retained by
                    Therma-Wave and approved by Applied to perform such work who
                    have signed confidentiality agreements acceptable to
                    Applied), and Therma-Wave shall restrict access to Applied
                    Information to those of its employees, agents, and
                    contractors who have a need to know such information in
                    order to perform such work;

               (c)  Therma-Wave shall take all reasonable and necessary steps to
                    protect the Applied Information from inadvertent or
                    unintentional disclosure to third parties and shall protect
                    the Applied Information from unauthorized access,
                    disclosure, or use with at least the same degree of care as
                    Therma-Wave uses to protect its own most valuable trade
                    secret information, and in any event no less than reasonable
                    care;

               (d)  Therma-Wave shall reproduce, on all copies of documents and
                    materials containing Applied Information made by Therma-Wave
                    or its employees, agents, or contractors, all proprietary
                    rights notices of Applied or any of its Affiliates appearing
                    on the original copy of such document or material;

               (e)  Except for Applied Information for which Therma-Wave has a
                    continuing license hereunder, Therma-Wave shall, at
                    Applied's request, promptly return to Applied or destroy all
                    documents and materials in tangible form, and permanently
                    erase all data in electronic form, containing any Applied
                    Information, and certify in writing signed by an executive
                    officer of Therma-Wave that Therma-Wave has fully complied
                    with this obligation;

               (f)  Before any employee, agent, or contractor of Therma-Wave who
                    worked in any capacity and for any period of time, or had
                    any involvement with performing work, pursuant to a
                    Development Plan, or who otherwise

                                       24
<PAGE>

               received disclosure of Applied Information, participates in or
               assists with, directly or indirectly, any other project involving
               the development of an Integrated Metrology Tool in the
               Semiconductor Field in conjunction with or on behalf of any third
               party, Therma-Wave shall ensure that such employee, agent, or
               contractor executes a nondisclosure agreement with Applied, in
               the form provided by Applied for such purpose; and

          (g)  Without limiting the foregoing, no Therma-Wave employee, agent,
               or contractor may work on or be involved with a Qualified Therma-
               Wave Tool and a Non-Qualified Therma-Wave Tool at the same time.

Therma-Wave will obtain the prior written agreement of each employee, agent, and
contractor who performs work pursuant to a Development Plan, will otherwise have
any involvement with integrating Metrology Tools into Applied's process tools,
or will otherwise receive disclosure of Applied Information, that such person
will comply with the terms of Therma-Wave's standard form nondisclosure
agreement, which shall in any event be no less protective of Applied Information
than these confidentiality provisions.  The restrictions in clauses (a), (b),
                                                            -----------  ---
(c), (d), and (e) above will survive termination or expiration of the Agreement
---  ---      ---
in perpetuity, and the restrictions in clauses (f) and (g) above will not
                                       -----------     ---
survive termination or expiration of the Agreement.  Therma-Wave acknowledges
and agrees that Therma-Wave has no right, title, or interest of any nature in
any Applied Information, other than a limited, non-transferable, non-
sublicensable, non-exclusive license during the term of the Agreement to use and
reproduce Applied Information solely to the extent necessary to perform
development and integration work for the benefit of Applied as contemplated
under this Agreement.

Without Applied's specific, prior written consent, Therma-Wave will not disclose
to Applied any Therma-Wave confidential information except as embodied in
Metrology Tools sold to Applied and Deliverables furnished to Applied.

     8.2  Therma-Wave Information.  Applied acknowledges that, in the course of
working with Therma-Wave in connection with the development work to be performed
hereunder and in the course of working with Therma-Wave prior to the execution
of this Agreement in contemplation of the development work to be performed
hereunder, Applied and its employees, agents, and contractors have and will
receive, observe, and otherwise have access to confidential and proprietary
information (whether in tangible or electronic form or otherwise) related to
Therma-Wave and Therma-Wave's products, tools, technology, processes, business
plans, and customers (the "Therma-Wave Information").  Without limiting the
foregoing, Therma-Wave Information includes (a) the Therma-Wave Background
Technology described in Section 7.1 and (b) all materials and information
                        -----------
related to Therma-Wave Interim Improvements and Jointly Developed Improvements.
Applied further acknowledges that Therma-Wave regards the Therma-Wave
Information as valuable trade secrets of Therma-Wave and that the unauthorized
use of such Therma-Wave Information would cause severe and irreparable damage to
Therma-Wave.  Notwithstanding the foregoing, Therma-Wave Information does not
include information that Applied can prove by clear and convincing evidence: (i)
is in the public domain, through no fault of Applied; (ii) was known to Applied
prior to being disclosed by Therma-Wave to Applied; (iii) is disclosed to
Applied by a third party who is entitled to so disclose the information; or (iv)
is developed by Applied employees who did not perform work pursuant to or

                                       25
<PAGE>

had any involvement with any Development Plan and did not have access to or
disclosure of any Therma-Wave Information.

Accordingly, Applied agrees that:

               (a)  Applied shall not use or reproduce Therma-Wave Information
                    for any purpose other than performing development and
                    integration work as contemplated under this Agreement or for
                    exercising the rights and licenses granted pursuant to this
                    Agreement and the Escrow Agreement;

               (b)  Applied shall hold all Therma-Wave Information in strict
                    confidence and shall not disclose Therma-Wave Information to
                    any third party (other than independent contractors retained
                    by Applied who have signed confidentiality agreements as
                    provided below), and Applied shall restrict access to
                    Therma-Wave Information to those of its employees, agents,
                    and contractors who have a need to know such information in
                    order to perform such work;

               (c)  Applied shall take all reasonable and necessary steps to
                    protect the Therma-Wave Information from inadvertent or
                    unintentional disclosure to third parties and shall protect
                    the Therma-Wave Information from unauthorized access,
                    disclosure, or use with at least the same degree of care as
                    Applied uses to protect its own most valuable trade secret
                    information, and in any event no less than reasonable care;

               (d)  Applied shall reproduce, on all copies of documents and
                    materials containing Therma-Wave Information made by Applied
                    or its employees, agents, or contractors, all proprietary
                    rights notices of Therma-Wave or any of its Affiliates
                    appearing on the original copy of such document or material;
                    and

               (e)  Except with respect to Therma-Wave Information for which
                    Applied has a continuing license hereunder, Applied shall,
                    at Therma-Wave's request, promptly return to Therma-Wave or
                    destroy all documents and materials in tangible form, and
                    permanently erase all data in electronic form, containing
                    any Therma-Wave Information, and certify in writing signed
                    by an executive officer of Applied that Applied has fully
                    complied with this obligation.

Each employee, agent, and contractor who performs work pursuant to a Development
Plan or will otherwise receive disclosure of Therma-Wave Information will have
agreed to Applied's standard non-disclosure agreement or another form of
confidentiality agreement no less restrictive than these confidentiality
provisions.  The restrictions in clauses (a), (b), (c), (d), and (e) above will
survive termination or expiration of the Agreement in perpetuity.  Except for
the rights transferred and licenses granted pursuant to this Agreement, the
Supply Agreement, and the Escrow Agreement, Applied acknowledges and agrees that
Applied has no right, title, or interest of any nature in any Therma-Wave
Information.

                                       26
<PAGE>

                                                     **** Confidential Treatment

     8.3  Injunctive Relief. Each Party acknowledges and agrees that the other
Party would suffer irreparable harm for which monetary damages would be an
inadequate remedy if there were a breach of obligations under this Section 8.
                                                                   ---------
Each Party further acknowledges and agrees that equitable relief, including
injunctive relief, would be appropriate to protect the other Party's rights and
interests if such a breach were to arise, be threatened, or be asserted, and the
other Party will be entitled to the entry of an order for immediate injunctive
relief without notice to the other Party.

     8.4  Press Releases. Neither Party will, without the prior written approval
of the other Party, issue any press release, advertising, publicity, or public
statement or in any way engage in any other form of public disclosure that
indicates the existence of or terms of this Agreement or the relationship of the
Parties or that implies any endorsement by either Party of the other's products
or services, except as required by applicable law, regulation, governmental body
with jurisdiction, or stock exchange rule, or as reasonably necessary to give
effect to a Party's rights or obligations hereunder. Any requests for approval
under this Section 8.3 must be made in writing and submitted for review and
           -----------
authorization to:

     If to Applied, to:                         If to Therma-Wave, to:

     ****                                       L. Ray Christie
     Managing Director                          Vice President and Chief
     Applied Materials, Inc.                    Financial Officer
     3050 Bowers Avenue m/s 0105                Therma-Wave, Inc.
     Santa Clara, CA 95054                      1250 Reliance Way
     Telephone: (408) 235-****                  Freemont, CA 94539
     Telecopy:  (408) 986-****                  Telephone: (510) 668-2215
                                                Telecopy:  (510) 226-6834

     With a copy to:                            With a copy to:
     ****                                       Martin Schwartz
     Vice President and General Manager,        President and CEO
     Factory Efficiency Technologies            Therma-Wave, Inc.
     Applied Materials, Inc.                    1250 Reliance Way
     3535 Garret Drive, m/s/ 10071              Freemont, CA 94539
     Santa Clara, CA 95054                      Telephone: (510) 668-2228
     Phone: (408) 748-****                      Telecopy:  (510) 226-6834
     Fax: (408) 563-****

9.   Representations and Warranties

     9.1  Mutual Representations and Warranties. Each Party represents and
warrants to the other Party that:

          (a)  such Party is a corporation duly incorporated, validly existing,
               and in good standing under the laws of the jurisdiction in which
               it is organized, with full corporate power and authority to carry
               on its business as it is now being conducted;

                                       27
<PAGE>

          (b)  the execution, delivery, and performance of this Agreement and
               the consummation of the transactions contemplated hereby have
               been duly authorized by such Party, and no other corporate or
               shareholder action or other proceeding on the part of such Party
               or its shareholders is necessary to authorize this Agreement and
               the consummation of the transactions contemplated hereby;

          (c)  this Agreement constitutes a valid and binding obligation of such
               Party, enforceable against such Party in accordance with its
               terms, except that such enforcement may be subject to bankruptcy,
               insolvency, reorganization, moratorium, or similar laws now or
               hereafter in effect relating to creditors' rights; and

          (d)  neither the execution, delivery, and performance of this
               Agreement nor the consummation of the transactions contemplated
               hereby violate any provision of the charter or organizational
               documents of such Party or any applicable law, regulation,
               decree, judgment, or order of any regulatory government agency,
               or any court of competent jurisdiction.

     9.2  By Therma-Wave. Therma-Wave represents and warrants that the Metrology
Tools and any Improvements thereto made by Therma-Wave hereunder (and Applied's
use of such Metrology Tools and Improvements in accordance with this Agreement)
shall not infringe, violate, or misappropriate, and in developing Improvements
and integrating Metrology Tools with Applied's process tools hereunder Therma-
Wave's employees, contractors, and subcontractors will not infringe, violate, or
misappropriate, any Intellectual Property Rights of a third party. Applied
agrees that Applied will not terminate this Agreement for breach of the
foregoing representation and warranty.

     9.3  By Applied. Applied represents and warrants that any Improvements to
Metrology Tools made by Applied hereunder (and Therma-Wave's use of such
Improvements in accordance with this Agreement) shall not infringe, violate, or
misappropriate, and in developing Improvements hereunder Applied's employees,
contractors, and subcontractors will not infringe, violate, or misappropriate,
any Intellectual Property Rights of a third party. Therma-Wave agrees that
Therma-Wave will not terminate this Agreement for breach of the foregoing
representation and warranty.

     9.4  Disclaimers. EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES SET
FORTH IN THIS AGREEMENT AND THE SUPPLY AGREEMENT, NEITHER PARTY MAKES ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED OR OTHERWISE, IN CONNECTION
WITH THIS AGREEMENT, AND EACH PARTY SPECIFICALLY DISCLAIMS THE IMPLIED
WARRANTIES AND CONDITIONS OF TITLE, NONINFRINGEMENT, MERCHANTABILITY AND FITNESS
FOR PARTICULAR PURPOSE. THE FOREGOING DISCLAIMER WILL NOT BE CONSTRUED TO LIMIT
OR NEGATE ANY EXPRESS OR IMPLIED WARRANTY ASSOCIATED WITH THE MANUFACTURING AND
SALE OF METROLOGY TOOLS PURSUANT TO THE SUPPLY AGREEMENT.

                                       28
<PAGE>

10.  Indemnification; Insurance

     10.1  General Indemnity. Each Party (the "Indemnifying Party") will defend,
indemnify, and hold the other Party and its officers, directors, agents, and
representatives (collectively, the "Indemnified Party") harmless from and
against, and will solely and exclusively bear and pay, any and all third party
claims or suits, and all resulting liabilities, losses, penalties, and damages
(whether actual, punitive, consequential, or otherwise) and the associated costs
and expenses (including attorneys' fees, experts' fees, and costs of
investigation), arising from or relating to any negligent, grossly negligent, or
intentional acts, errors, or omissions by such Party or its employees, officers,
agents, or representatives in the performance of this Agreement.

     10.2  Intellectual Property Indemnity. Each Indemnifying Party will defend,
indemnify, and hold the Indemnified Party harmless from and against, and will
solely and exclusively bear and pay, any and all third party claims or suits,
and all resulting liabilities, losses, penalties, and damages (whether actual,
punitive, consequential, or otherwise) and the associated costs and expenses
(including attorneys' fees, experts' fees, and costs of investigation), arising
from or relating to any actual or alleged infringement, violation, or
misappropriation of the Intellectual Property Rights of a third party (a) in the
case of Therma-Wave as Indemnifying Party, by (i) the Metrology Tools or any
Improvements thereto made by Therma-Wave hereunder (or Applied's use of such
Metrology Tools or Improvements in accordance with this Agreement) and (ii)
Therma-Wave's employees, contractors, and subcontractors in developing
Improvements and integrating Metrology Tools with Applied's process tools
hereunder and (b) in the case of Applied as Indemnifying Party by (i) the
Improvements made by Applied hereunder (or Therma-Wave's use of such
Improvements in accordance with this Agreement) and (ii) Applied's employees,
contractors, and subcontractors in developing Improvements hereunder
(collectively "IP Claims"). Without compromising any of Applied's other rights
hereunder, if Therma-Wave becomes aware of any IP Claim respecting the
technology, tools, or uses described in clause (a) above, Therma-Wave will, at
                                        ----------
its own expense, use commercially reasonable efforts to either: (x) procure for
Applied such fully paid rights as are coextensive with the rights granted to
Applied under this Agreement; or (y) replace or modify the affected technology
in a manner reasonably satisfactory to Applied to make it non-infringing without
materially impairing its performance. If Applied's continued use or sale of the
infringing Metrology Tool is enjoined, and if neither of the foregoing remedies
has been achieved within a reasonable time, not to exceed ninety (90) days, on
commercially reasonable terms and conditions, Applied will have no further
obligation under this Agreement with respect to the infringing Metrology Tool.

     10.3  Obligations. The Indemnifying Party will have control of the defense,
litigation, and, subject to the conditions set forth below, settlement of any
third party claims or suits that are subject to Sections 10.1 or 10.2 The
                                                -------------    ----
Indemnified Party will have the right (subject to the conditions set forth
below), but not the obligation, to select counsel of its choice, at its expense,
to participate in the defense of such third party claims or suits. The
Indemnifying Party will not accept a settlement of any such third party claim
without the prior written consent of the Indemnified Party, which consent will
not be unreasonably withheld if such settlement involves solely the payment of
money by the Indemnifying Party and the Indemnifying Party has the ability to
pay the amount required by the settlement.

                                       29
<PAGE>

     10.4  Cooperation by the Indemnified Party. If any claim is made against a
Party within the scope of the indemnities set forth in Sections 10.1 and 10.2,
                                                       -------------     ----
the Indemnified Party will: (i) provide prompt written notice of such third
party claim to the Indemnifying Party; (ii) provide the Indemnifying Party with
such assistance as the Indemnifying Party may reasonably request in connection
with the defense and settlement of such third-party claim, provided that all
costs and expenses incurred by either Party will borne by the Indemnifying
Party; and (iii) promptly comply with all terms of any resolution or settlement
of such claim at the Indemnifying Party's expense. Failure by the Indemnified
Party to comply with the obligations under this Section 10.4 will relieve the
                                                ------------
Indemnifying Party of its obligations under Sections 10.1, 10.2, and 10.3 only
                                            -------------  ----      ----
if and to the extent that the Indemnifying Party can show that its ability to
defend the claim or settle the claim on favorable terms was materially
prejudiced by the Indemnified Party's failure to comply with its obligations
under this Section 10.4.
           ------------

     10.5  Insurance.  During the term of this Agreement and for three (3) years
thereafter, Therma-Wave will maintain: (i) comprehensive general liability
insurance covering bodily injury, property damage, contractual liability,
products liability and completed operations; (ii) Worker's Compensation and
employer's liability insurance; and (iii) auto insurance, in such amounts as are
necessary to insure against the risks to Therma-Wave's operations.  Minimally,
Therma-Wave will obtain and keep in force, insurance of the types and in the
amounts set forth below:

           Insurance                                 Minimum Limits of Liability
           ---------                                 ---------------------------

           Worker's Compensation                              Statutory
           Employer's Liability                               $1,000,000
           Automobile Liability                        $1,000,000 per occurrence
           Comprehensive General Liability
           (including Product Liability)               $1,000,000 per occurrence
           Umbrella/Excess Liability                   $1,000,000 per occurrence

All policies must be primary and non-contributing, and must include Applied as
an additional insured.  Therma-Wave also waives all rights of subrogation.
Therma-Wave will also require and verify that each of its subcontractors carry
at least the same insurance coverage and minimum limits or insurance as Therma-
Wave carries under this Agreement.  Therma-Wave will notify Applied at least
thirty (30) days prior to the cancellation of or implementation of any material
change in the foregoing policy coverage that would affect Applied's interests.
Upon request, Therma-Wave will furnish to Applied as evidence of insurance a
certificate of insurance stating that the coverage would not be canceled or
materially altered without thirty (30) days prior notice to Applied.

11.  Term and Termination

     11.1  Term. The term of this Agreement will begin on the Effective Date and
will continue until terminated as provided herein.

     11.2  Termination. This Agreement may be terminated at any time as follows:

           (a)   by written agreement of the Parties;

                                       30
<PAGE>

                                                     **** CONFIDENTIAL TREATMENT

          (b)  by Applied, at its discretion upon ninety (90) days advance
               written notice to Therma-Wave, at any time following the nine (9)
               month period beginning on the earlier of (i) the Delivery Date
               and (ii) the date one-hundred and twenty (120) days after the
               Effective Date;

          (c)  by either Party pursuant to Section 4.2;
                                           -----------

          (d)  by either Party, at its discretion upon written notice to the
               other Party, if the Supply Agreement terminates for any reason;

          (e)  by Applied at its discretion upon written notice to Therma-Wave,
               if Therma-Wave enters into a Change in Control transaction with a
               Listed ****;

          (f)  by Applied at its discretion if the Delivery Date has not
               occurred by the date six (6) months after the Effective Date,
               except to the extent that the delay in the Delivery Date is
               caused by Applied's failure to deliver the initial Specifications
               to Therma-Wave within sixty (60) days after the Effective Date;

          (g)  by Therma-Wave pursuant to Sections 4.3(c) and 4.4; or
                                          ---------------     ---

          (h)  by either Party, at its discretion upon written notice to the
               other Party, if the other Party materially breaches or defaults
               under any provision of this Agreement (except for any provision
               for which an exclusive remedy is provided herein) and fails to
               cure such breach or default within thirty (30) days after written
               notice of such breach or default is furnished by the non-
               breaching Party.

     11.3 Effects of Termination. If Applied terminates this Agreement pursuant
          to Section 11.2(b) and such termination becomes effective during a
             ---------------
          period in which Applied has a Minimum Purchase Requirement, such
          Minimum Purchase Requirement (and the resulting NRE Payment, if any)
          will be pro-rated based on the number of days in such period that
          elapsed before the effective date of termination.

     11.4 Survival. Upon termination or expiration of this Agreement for any
          reason, (i) Therma-Wave shall promptly return to Applied all copies of
          Applied Information then in its possession or control (except for such
          Applied Information that is subject to a license that survives
          termination or expiration) and shall certify in writing to Applied
          that it has done so and (ii) Applied shall promptly return to Therma-
          Wave all copies of Therma-Wave Information then in its possession or
          control (except for such Therma-Wave Information that is subject to a
          license that survives termination or expiration) and shall certify in
          writing to Therma-Wave that it has done so. To the extent that the
          licenses granted therein become effective during the term of this
          Agreement, Sections 7.4 and 7.5 shall survive termination or
                     ------------     ---
          expiration of this Agreement, subject to Section 7.7. In addition, the
                                                   -----------
          following provisions will survive such termination or expiration and
          remain in effect: Sections 7.1, 7.2, 7.3, 7.6, 7.7, 8, 9, 10, 11.3,
                            ------------  ---  ---  ---  ---  -  -  --  ----
          11.4, and 12.
          ----      --

                                       31
<PAGE>

                                                     **** CONFIDENTIAL TREATMENT

12.  General

     12.1  Force Majeure. A failure by either Party to perform due to causes
beyond the reasonable control and without the fault or negligence of the Party
is deemed excusable during the period in which the cause of the failure
persists. Such causes may include acts of God or the public enemy, acts of the
government in either sovereign or contractual capacity, fires, floods,
earthquakes, epidemics, strikes, freight embargoes, and unusually severe
weather. If Therma-Wave becomes aware of any potential force majeure condition
as described above, Therma-Wave will promptly notify Applied of the condition
and provide relevant details and will resume performance as soon as possible.

     12.2  Notices. Any notice, consent, approval, or other communication to be
given hereunder (other than a purchase order or invoice) must be in writing and
will be delivered (as elected by the Party giving such notice): (i) personally;
(ii) by postage prepaid registered or certified airmail, return receipt
requested; (iii) by express courier service; or (iv) by facsimile with a
confirmation copy deposited prepaid with an express courier service. Unless
otherwise provided herein, all notices will be deemed to have been duly given
on: (a) the date of receipt (or if delivery is refused, the date of such
refusal) if delivered personally, by mail, or by express courier; or (b) one (1)
business day after receipt by telecopy if the telecopy was accompanied by the
mailing of the notice via mail or courier service. Each Party may change its
address for purposes hereof on not less than three (3) days' prior notice to the
other Party. Notice hereunder will be directed:

<TABLE>
<S>                                                                          <C>
           If to Applied, to:                                                If to Therma-Wave, to:

           Attn: ****                                                        L. Ray Christie
           Vice President Legal Affairs and Intellectual                     Vice President and Chief Financial
           Property                                                          Officer
           Applied Materials, Inc.                                           Therma-Wave, Inc.
           2881 Scott Boulevard, M/S 2064                                    1250 Reliance Way
           Santa Clara, CA 95050                                             Fremont, CA  94539
           Telephone: (408) 748-****                                         Telephone:  (510) 668-2215
           Telecopy:  (408) 563-****                                         Telecopy:   (510) 226-6834

           With a copy to:                                                   With a copy to: Martin Schwartz
           ****, Managing Director                                           President and CEO
           Applied Materials, Inc.                                           Therma-Wave, Inc.
           3050 Bowers Avenue, M/S 0105                                      1250 Reliance Way
           Santa Clara, CA  95054                                            Fremont, CA  94539
           Telephone:  (408) 235-****                                        Telephone:  (510) 668-2228
           Telecopy:  (408) 986-****                                         Telecopy:  (510) 226-6834

           With a copy to:
           ****
           Vice President and General Manager,
           Factory Efficiency Technologies
           Applied Materials, Inc.
           3535 Garret Drive M/S 10071
           Santa Clara, CA  95054
           Phone: (408) 748-****
           Fax: (408) 563-****
</TABLE>

                                       32
<PAGE>

                                                     **** CONFIDENTIAL TREATMENT

           12.3  Governing Law. This Agreement will be governed by, be subject
to, and be construed in accordance with the laws of the State of California, as
such laws apply to contracts between California residents performed entirely
within California. The United Nations Convention on Contracts for the
International Sale of Goods will not apply to this Agreement.

           12.4  Assignment. Therma-Wave may assign this Agreement in its
entirety to an Affiliate of Therma-Wave, provided that such Affiliate is not an
****. Except as set forth above or as otherwise provided in Section 7,
                                                            ---------
Therma-Wave may not assign or delegate any right or obligation under this
Agreement, by operation of law or otherwise, without the prior written
consent of Applied, and any purported assignment without such consent will be
void. Applied may assign this Agreement in whole or part at any time to any of
its Affiliates (provided that such Affiliate is not a ****) or if such
assignment is considered necessary by Applied in connection with a sale of all
or part of Applied's business; provided that the assignee is not a ****. Except
as set forth above or as otherwise provided in Section 7, Applied may not
                                               ---------
assign or delegate any right or obligation under this Agreement, by operation
of law or otherwise, without the prior written consent of Therma-Wave, and any
purported assignment without such consent will be void. Upon any permitted
assignment, the assignee shall agree to be bound by the terms of this
Agreement, and unless otherwise agreed in writing by the non-assigning Party,
such assignment shall not relieve the assigning Party of its obligations
hereunder.

           12.5  Cumulative Remedies; No Third Party Beneficiaries. Except where
this Agreement provides for an exclusive remedy, the rights and remedies of the
Parties hereto will be cumulative (and not alternative). No provisions of this
Agreement, express or implied, are intended or will be construed to confer upon
or give to any person other than the Parties any rights, remedies, or other
benefits under or by reason of this Agreement.

           12.6  Compliance with Law. The Parties will at all times comply with
all applicable foreign, U.S., state, and local laws, rules and regulations
relating to the execution, delivery and performance of this Agreement. Each
Party agrees that it will not export or reexport, resell, ship, or divert or
cause to be exported or reexported, resold, shipped, or diverted directly or
indirectly any software, documentation, or technical data incorporating any
software to any country for which the government (or any agency thereof) of the
United States, or any foreign sovereign government with competent jurisdiction
requires an export license or other governmental approval without first
obtaining such license or approval.

           12.7  Waiver. If a Party fails to insist on performance of any of the
terms and conditions, or fails to exercise any of its rights or privileges of
this Agreement, such failure will not constitute a waiver of such terms,
conditions, rights, or privileges.

                                       33
<PAGE>

           12.8  Gratuities. Therma-Wave represents and warrants that it has not
offered or given and will not offer or give any gratuity to induce this or any
other agreement in violation of the U.S. Foreign Corrupt Practices Act or any
similar law.

           12.9  Amendment. This Agreement may not be amended, modified, or
supplemented by the Parties in any manner, except by an instrument in writing
signed by Applied and Therma-Wave.

           12.10 Severability. If the application of any provision or provisions
of this Agreement to any particular facts or circumstances is held to be invalid
or unenforceable by any court of competent jurisdiction, then: (i) the validity
and enforceability of such provision or provisions as applied to any other
particular facts or circumstances and the validity of other provisions of this
Agreement will not in any way be affected or impaired thereby; and (ii) such
provision or provisions will be reformed without further action by the Parties
and only to the extent necessary to make such provision or provisions valid and
enforceable when applied to such particular facts and circumstances.

           12.11 Independent Contractors. Notwithstanding any use of the term
"partner" herein, (a) each Party will be deemed to be an independent contractor
and not an agent, joint venturer, or representative of the other Party; (b)
neither Party may create any obligations or responsibilities on behalf of or in
the name of the other Party; and (c) neither Party will hold itself out to be a
partner, employee, franchisee, representative, servant, or agent of the other
Party.

           12.12 Construction. As used in this Agreement, all terms used in the
singular will be deemed to include the plural, and vice versa, as the context
may require. The words "hereof", "herein", and "hereunder" refer to this
Agreement as a whole, including the attached exhibit(s), as the same may from
time to time be amended or supplemented, and not to any subdivision in this
Agreement. When used in this Agreement, "including" means "including, without
limitation" and "discretion" means sole discretion. Unless otherwise expressly
stated, when a Party's approval or consent is required under this Agreement,
such Party may grant or withhold its approval or consent in its discretion.
References to "Section" or "Exhibit" will be to the applicable section or
exhibit of this Agreement. Descriptive headings are inserted for convenience
only and will not be utilized in interpreting the Agreement. This Agreement has
been negotiated by the Parties and reviewed by their respective counsel and will
be fairly interpreted in accordance with its terms and without any strict
construction in favor of or against either Party.

           12.13 Counterparts and Facsimile. This Agreement may be executed in
any number of counterparts, each of which when so executed and delivered will be
deemed an original, and such counterparts together will constitute one and the
same instrument. The Parties intend that each Party will receive a duplicate
original of the counterpart copy or copies executed by it. For purposes hereof,
a facsimile copy of this Agreement, including the signature pages hereto, will
be deemed to be an original. Notwithstanding the foregoing, the Parties will
deliver original execution copies of this Agreement to one another as soon as
practicable following execution hereof.

                                       34
<PAGE>

           12.14 Entire Agreement. The Parties each represent and warrant that
as to the subject matter hereof: (i) this Agreement, the Supply Agreement, and
the Escrow Agreement including exhibits and schedules thereto, sets forth the
entire agreement between Applied and Therma-Wave; (ii) no promise, inducement,
understanding, or agreement not expressly contained herein has been made; and
(iii) this Agreement merges and supersedes any and all previous agreements,
understandings, and negotiations between the Parties.

           In Witness Whereof, the Parties have caused this Agreement to be
executed and delivered as of the Effective Date.

APPLIED MATERIALS, INC.                    THERMA-WAVE, INC.

By: ________________________________       By: ________________________________

Name: ______________________________       Name: ______________________________

Title: _____________________________       Title: _____________________________

                                       35
<PAGE>

                                                     **** CONFIDENTIAL TREATMENT

                                   Exhibit A

             Schedule for Completion of Integrated Metrology Tools

                                    ****

                                       36
<PAGE>

                                                                    CONFIDENTIAL

                                   Exhibit B

                                     ****

Exhibit B-1  -- Listed ****

****

Exhibit B-2 - ****

****

                                       37

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