Document:

<PAGE>

                                                                   EXHIBIT 10.27

                              ADDENDUM NUMBER ONE
                                       TO

                     DEVELOPMENT AND DISTRIBUTION AGREEMENT
                                    BETWEEN

                             KLA-TENCOR CORPORATION
                                      AND

                         TRANSCRIPTION ENTERPRISES INC.

This Addendum Number One (the "Addendum") to the Development and Distribution
Agreement between KLA Instruments Corporation and Transcription Enterprises
Limited, dated October 1, 1991 (the "Agreement") is entered into by KLA-Tencor
Corporation, a Delaware corporation that is the successor in interest to KLA
Instruments Corporation, and whose principal place of business is 160 Rio
Robles, San Jose, California 95134-1809 ("K-T"), and Transcription Enterprises
Inc., a Delaware corporation that is the successor in interest to Transcription
Enterprises Limited, a California corporation whose principal place of business
is 101 Albright Way, Los Gatos, California 95030 ("TEL"). This Addendum will be
effective as of October 1, 1999 (the "Effective Date").

                                    RECITALS

A.   Pursuant to the Agreement, TEL has previously developed for K-T an enhanced
     version of its proprietary CATS software that supports K-T's proprietary
     database format known as the "Falcon Format."

B.   K-T would like TEL to develop a new version of TEL's CATS software that
     will continue to support the Falcon Format as well as the new database
     format K-T has developed for its forthcoming inspection systems (the "CATS
     5xx Software"). K-T would also like to redistribute two modules of TEL's
     CATS software that are not specific to K-T.

C.   The parties have agreed to provide for the development of the new software
     as set forth in this Addendum and to incorporate the terms of this Addendum
     into the terms of the Agreement.

                                   AGREEMENT

1.   DEFINITIONS

Except as expressly otherwise defined herein, all definitions set forth in the
Agreement shall likewise be used to interpret this Addendum, except that each
such definition when read into this Addendum shall have the term "5xx"
substituted for the word "Falcon." The following additional definitions shall
also be used to interpret this Addendum.

1.1  "CATS K-T Graphics Extension" shall mean the CATS software which allows the
End-User to view, pick, and measure objects within specified Pattern Files and
which also allows the user to view, pick and measure objects within and between
Pattern Files referenced within a

[***]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
                                       1
<PAGE>

CATS Jobdeck file. The CATS K-T Graphics Extension will also include any
modifications made by TEL or K-T to the CATS K-T Graphics Extension during the
term of the Agreement.

1.2  "Deliverables" shall mean those testable prototype versions of the CATS 5xx
Software, as more fully described in Attachment I.

1.3  "Schedule" shall mean the table of milestones for delivery by TEL of the
Deliverables as set forth in Attachment II.

2.   DEVELOPMENT, DELIVERY AND ACCEPTANCE OF THE CATS 5xx SOFTWARE

TEL agrees to use all commercially reasonable efforts to develop the
Deliverables and deliver them in as set forth in Section 2 of the Agreement,
except that the Deliverables shall be delivered in accordance with the Schedule,
and not the dates set forth in Section 2 of the Agreement.

3.   SCOPE OF RIGHTS

3.1  Rights to Develop, Distribute, Use Internally the CATS 5xx Software. K-T
     -------------------------------------------------------------------
grants to TEL the same rights in the KLA Base Technology for purposes of
developing the CATS 5xx software as it granted under Section 3 of the Agreement
with respect to the CATS Falcon Software. Similarly, TEL grants to K-T the same
rights with respect to the TEL Formats and the resulting CATS 5xx Software as it
previously granted in Section 3 of the Agreement in the TEL Formats and the CATS
Falcon Software, except that the restriction to 6 (six) designated CPU's in
Section 3.2.5 of the Agreement shall not apply to the internal use license TEL
grants to K-T in this Addendum.

3.2  Distribution of CATS K-T Graphics Extension. TEL grants to K-T the same
     -------------------------------------------
rights in the CATS K-T Graphics Extension as it previously granted in the CATS
Falcon Options, as specified in Section 3.2.3 of the Agreement.

3.4  TEL Distribution of CATS 5xx Software. TEL shall have the same rights to
     -------------------------------------
distribute the CATS 5xx Formatter and non-embedded CATS 5xx Options as it had
with respect to the CATS Falcon Formatter and non-embedded CATS Falcon Options,
respectively. TEL understands and acknowledges that K-T shall have no obligation
to TEL to support TEL software products or TEL customers, or to provide TEL with
information or assistance to ensure that TEL software products based on the CATS
5xx Formatter or the non-embedded CATS 5xx Options will operate successfully
with any K-T semiconductor inspection equipment.

3.5  License Keys. TEL authorizes K-T to create and issue license keys for K-T
     ------------
customers to all software developed or delivered under this Addendum as well as
to the software previously delivered under the Agreement, and TEL agrees to
deliver to K-T the license management software necessary to create such license
keys.

4.   END OF EXCLUSIVITY

The provisions of Section 4 of the Agreement shall not apply to the CATS 5xx
Software developed pursuant to this Addendum. in addition, TEL acknowledges and
agrees that K-T shall have the right to develop software products that compete
with the CATS 5xx Software independent of TEL, provided that K-T does not use
TEL Confidential Information to do so.

5.   PAYMENT OF ROYALTIES

                                       2
<PAGE>

5.1  CATS K-T Graphics Extension. With respect to the CATS K-T Graphics
     ---------------------------
Extension, K-T agrees to pay TEL a royalty of [***] for each license of the CATS
K-T Graphics Extension to an End User. This royalty shall apply to KT
sublicenses to End Users with the understanding that such licenses will
authorized End Users to operate no more than five (5) simultaneous graphical
sessions per license while remotely logged on to the workstation incorporated in
the KT Inspection System.

5.2. CATS 5xx Software. With respect to the CATS 5xx Software, K-T shall pay the
     -----------------
following royalties for each module of the CATS 5xx Software licensed to an End-
User:

Royalty per Module Licensed      Aggregate No. of Modules Licensed to Date
---------------------------      -----------------------------------------
1.    [***]                      [***]

2.    [***]                      [***]

3.    [***]                      [***]

5.3  Discounts and Payment Terms. The terms and conditions concerning discounts,
     ---------------------------
credits and payment of royalties in Section 6 of the Agreement shall apply
equally to the calculation and payment of royalties to be made by K-T under this
Addendum.

6.   K-T's PURCHASE of a CATS K-T GRAPHICS EXTENSION LICENSE and a CATS 5XX
SOFTWARE LICENSE, AND K-T'S SUPPORT AND DEMONSTRATION COPIES

K-T shall purchase a first license of the CATS K-T Graphics Extension and the
CATS 5xx Software under the same terms as those set forth in Section 7.1 and 7.2
of the Agreement except that: (i) the period that K-T receives Standard
Maintenance under Section 7.1 for the First Copy shall be two (2) years
following acceptance by K-T of the final Deliverables; and (ii) the license fee
payable under Section 7.2 shall be [***] in the case of the CATS K-T Graphics
Extension and [***] in the case of the CATS 5xx Software, payable upon
acceptance by K-T of the final Deliverables. The provisions of Section of the
Agreement 7.3 shall not apply to this Addendum.

7.   TRAINING.

TEL shall make training available to K-T for the CATS 5xx Software on the same
terms and conditions as set forth in Section 8 of the Agreement, except that for
purposes of this Addendum, the date specified in section 8.2 shall be read as
February 15, 2000.

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

                                       3
<PAGE>

8.   ADDENDUM INCORPORATED INTO AGREEMENT.

The provisions of Sections 9-21 of the Agreement shall apply equally to the
terms of this Addendum, and this Addendum is hereby incorporated and made a part
of the Agreement with this reference.

IN WITNESS WHEREOF, authorized representatives of the parties have executed this
Addendum to the Agreement as of the Effective Date.

KLA-Tencor Corporation             Transcription Enterprises Limited

By: /s/Shuah-Teh Juang             By: /s/Kevin MacLean
    ------------------------          --------------------------
    (signature)                        (signature)

Name:Shuah-Teh Juang               Name: Kevin MacLean
     -----------------------            ------------------------
     (print or type name)                (print or type name)

Title: VP of Engineering           Title:  VP
      ----------------------              ----------------------

Date Signed: 12/27/99              Date Signed: 12/27/99
            ----------------                   -----------------

                                       4
<PAGE>

                                  ATTACHMENT I

                          DESCRIPTION OF DELIVERABLES

The deliverables are described as follows:

The Transcription-Enterprise CATS software suite which supports the database
format as specified in 5XX Database Format Specification.

The software package shall contain:

- Readfile module

- CATS module with direct output capabilities which supports input format such
  as MEBES, MEBES mode V, GDSlI, JEOL, JEOL bitmap, HL700, HL800, Toshiba, IBM,
  and other formats supported by the TE-CATS

- Writefile module

There shall be a software module which can generate TE-CATS license.

The deliverable software shall run on SGI O200 platform. The software package
shall run under IRIX 64 bit operating system.

There shall be a current CATS reference manual with the software delivery. The
reference manual shall describe how the software can be used.

Delivery can be made via Transcription Enterprise FTP site (with notification),
tape, CD-ROM or other current storage medium.

                                       5
<PAGE>

ATTACHMENT II

                               DELIVERY SCHEDULE

The delivery schedule shall be as follows:

Full feature prototype                                        11/30/99
(CATS, advanced features, flat, fracture, job smash, Readfile, Writefile,
 Readtape, 5XX)

Interim delivery                                              2/13/2000
(Full feature software suite with no severity 1 and at most 5 severity 2
 defects reported)

Final delivery                                                3/13/2000
(Full feature software suite with no severity 1 and severity 2 defects reported)

                                       6<PAGE>

                                                                  EXHIBIT 10.37

                 PSM SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT

     This PSM Software Development and License Agreement (this "Agreement") is
entered into as of March 10, 2000 (the "Effective Date"), by and between Cadence
Design Systems, Inc., a Delaware corporation with offices at 555 River Oaks
Parkway, San Jose, CA 95134 ("Cadence"), and Numerical Technologies Inc., a
California corporation with offices at 70 West Plumeria Drive, San Jose, CA
95134-2134 ("NTI").

                                    RECITAL
                                    -------

     Cadence develops and markets electronic design automation ("EDA") software
tools for integrated circuit design and NTI develops and markets phase shifting
software design tools for subwavelength integrated circuit technologies. Cadence
and NTI desire to develop the ("PSM") design methodology ("PSM") jointly, using
each company's relevant expertise, technology, and industry experience, to
create an integrated design solution in the industry for creating full chip,
phase shifting mask. In addition, Cadence desires to receive from NTI, and NTI
desires to grant to Cadence, certain licenses to NTI's PSM software to
facilitate the marketing and distribution of this solution.

     In consideration of the mutual promises herein, Cadence and NTI agree as
follows:

                                   AGREEMENT

1.   DEFINITIONS.  As used in this Agreement:

     1.1  "Agent" of Cadence or NTI means, an individual or entity who is
           -----
authorized to act for or in place of and to bind Cadence or NTI, as the case may
be, with respect to dealings or contractual obligations with third parties .

     1.2  "Affiliate" of Cadence or NTI means, respectively, any entity that
           ---------
controls, is controlled by, or is under common control with such party, where
"control" means ownership of fifty percent (50%) or more of the outstanding
voting securities of the entity in question or the power to otherwise control
the voting or affairs of such entity.

     1.3  "Cadence Combined Products" means the Cadence software products that
           -------------------------
are comprised of one or more Cadence Products and one or more NTI Product
Components and may also include Developed Software.

     1.4  "Cadence Developed Software" means those portions of the Developed
           --------------------------
Software that are developed solely by Cadence.

     1.5  "Cadence Products" means the Cadence software products listed in
           ----------------
Exhibit A attached hereto and any other commercially released place-and-route,
---------
physical design, and physical verification family of products offered by Cadence
or any of its Affiliates (other than products of Avant/1/, Mentor Graphics, or
Synopsys, should Cadence or any of its Affiliates merge with, acquire, or be
acquired by any of these three companies)

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

<PAGE>

primarily for the same intended uses as the products listed in Exhibit A.
                                                               ---------

     1.6  "Critical Error" means (i) an Error that stops, prevents or hinders
           --------------
in a material and substantial way design work or production work; (ii) an Error
that causes design data corruption; or (iii) any other substantial Error for
which there is no reasonably acceptable work around.

     1.7  "Deliverable" means a component of the Developed Software, or any
           -----------
other item, identified as such in the Statement of Work.

     1.8  "Derivative Work" means a derivative work within the meaning of the
           ---------------
U.S. copyright law.

     1.9  "Developed Software" means the new code (which may include, without
           ------------------
limitation, new features of the NTI Product Components and interfaces between
the Cadence Products and the NTI Product Components) to be developed by NTI and
Cadence jointly or individually as described in the Statement of Work and
Specifications or elsewhere in this Agreement.

     1.10 "Development Milestone" means any of the development milestones set
           ---------------------
forth in Exhibit B attached hereto or agreed upon by the parties for the
         ---------
Renewal Term pursuant to Section 14.2.

     1.11 "Documentation" means the manuals and other documentation that NTI
           -------------
generally makes available with the NTI Product Components to end users.

     1.12 "Error Corrections" means any Error corrections, patches, and bug
           -----------------
fixes prepared by or for NTI to any portion of the NTI Product Components or
Developed Software.

     1.13 "Error" means any failure of an NTI Product Component or the Developed
           -----
Software to conform to its specifications or the applicable Documentation or to
provide consistent and accurate results.

     1.14 "Initial Term" means the period beginning on the Effective Date and
           ------------
ending three (3) years after the Effective Date.

     1.15 "Intellectual Property Rights" means (by whatever name or term known
           ----------------------------
or designated) copyrights, trade secrets, patents, and any other intellectual
and industrial property and proprietary rights (excluding trademarks) including
registrations, applications, renewals and extensions of such rights.

     1.16 "NTI Developed Software" means those portions of the Developed
           ----------------------
Software that are developed solely by NTI.

                                      -2-
<PAGE>

     1.17 "NTI Product Components" means the NTI product components that are
          ----------------------
listed in Exhibit C attached hereto (including any Derivative Works thereof
          ---------
developed pursuant to the Statement of Work and Specifications) and all Updates
thereto.

     1.18 "NTI Trademarks" means the NTI trade names, trademarks, and logos set
           --------------
forth in Exhibit D attached hereto.
         ---------

     1.19 "Production Release Milestone" means any of the Cadence production
           ----------------------------
release milestones set forth in Exhibit E attached hereto.
                                ---------

     1.20 "Renewal Term" means the period beginning on the expiration of the
           ------------
Initial Term and ending two (2) years after the expiration of the Initial Term.

     1.21 "Source Code Materials" means, with respect to a software program, the
           ---------------------
human-readable source code for such software program that can be compiled into
machine-executable object code, annotated source code listings, flow charts,
decision tables, schematics, design details, instructions, and other related
technical documentation necessary to understand the design, structure, and
implementation of the software program such that a third party programmer
reasonably skilled in the programming language used for such source code could
maintain, support, and modify the software program without further assistance or
references to other materials.

     1.22 "Specifications" means the technical specifications for the Developed
           --------------
Software set forth in Exhibit B, as such specifications may be revised pursuant
                      ---------
to Section 2.5.

     1.23 "Statement of Work" means the description of the work to be done by
           -----------------
the parties in connection with their joint development of the Developed Software
set forth in Exhibit B, as such description may be revised pursuant to
             ---------
Section 2.5.

     1.24 "Update" means any new release or version of the NTI Product
           ------
Components or Cadence Products, as the case may be, that is designated by a
different version number (e.g., 2.0 instead of 1.0, or 2.1 instead of 2.0) and,
with respect to the NTI Product Components, any new software product that (i)
uses the same methodology as the NTI Product Components and (ii) is designed
primarily for the same intended uses as the NTI Product Components. Moreover,
for the purpose of clarification and avoidance of doubt, to the extent that NTI
or Cadence integrates the source code for the NTI Product Components or Cadence
Products or portions thereof, with additional source code to make new NTI or
Cadence products (other than the NTI Product Components or Cadence Products),
such additional source code shall not constitute Updates but any improvements to
the source code for the NTI Product Components or Cadence Products shall
constitute Updates. Also, any source code created by or for NTI in the course of
creating customized interfaces between the NTI Product Components and third
party products as permitted under this Agreement will not constitute Updates.

2.   DEVELOPMENT AND DELIVERY OF NTI LICENSED TECHNOLOGY.

     2.1  In General.  NTI and Cadence shall work together to jointly develop
          ----------
the Developed Software. NTI and Cadence shall use all commercially reasonable
efforts to develop the

                                      -3-
<PAGE>

Developed Software in accordance with the schedule set forth in the Statement of
Work, the Specifications, and the Development Milestones. Any failure to conform
to the schedule set forth in the Statement of Work shall not be deemed to be a
material breach of this Agreement upon which a party may exercise termination
rights under Section 14.3 (Termination for Breach), unless a party fails to use
all commercially reasonable efforts to meet such schedule.

     2.2  Project Managers.  Each party shall appoint a project manager to act
          ----------------
as liaison with the other party with respect to the development of the Developed
Software. Project managers shall participate in review meetings as set forth in
the Statement of Work or otherwise by mutual agreement. The project managers
shall have primary responsibility for coordinating all major decisions related
to joint development of the Developed Software. Each party may replace its
project manager from time to time as it deems necessary or appropriate upon
written notice to the other party.

     2.3  Engineering Resources; Access to Facilities.  NTI and Cadence shall
          -------------------------------------------
each devote sufficient engineering resources to fulfill its respective
obligations under Section 2.1. Each party shall provide the other party with
access to its facilities as reasonably necessary in the course of development of
the Developed Software. Each party will cause its employees and contractors to
comply with the other party's workplace safety and security rules and policies
when they are on the other party's premises.

     2.4  Software Tools and Technology.  Each party will have a nonexclusive,
          -----------------------------
royalty-free license until the termination of this Agreement or until
development of the Developed Software is complete, whichever occurs first, to
use, reproduce, and modify the other party's software products and tools (in
object code form and, as mutually agreed by the parties in each instance, in
source code form) and other technology as may be reasonably necessary solely for
the purpose of fulfilling its specific development obligations under the
Statement of Work. Each party's use of the other party's software products and
tools and other technology will be subject to the confidentiality provisions in
Section 12.

     2.5  Change Requests.  The parties recognize and acknowledge that the
          ---------------
Statement of Work or the Specifications (or both) may need to be revised as the
work described therein continues. The parties shall cooperate and work in good
faith to adapt any such revisions as needed in accordance with the procedure set
forth in this Section 2.5. Nothing in this Section 2.5 is intended to require
NTI to accept any revisions to the Statement of Work or the Specifications if
such revisions would require NTI to devote substantially greater resources or
incur substantially greater costs than those required under the original
Statement of Work or Specifications.

          (a)  Request Procedure.  If either party requests a change to the
               -----------------
Statement of Work or Specifications, it shall submit such request in writing to
the other party's project manager. The other party shall respond to the request
within five (5) business days, either approving, disapproving, or proposing an
alternative to the requested change. If the responding party disapproves of the
change, it shall set forth the reasons for its disapproval. The requesting party
shall then reply, again within five (5) business days.

                                      -4-
<PAGE>

          (b)  Escalation Procedure.  If the parties are unable to agree upon
               -------------------
all aspects of the requested change within the earlier of fifteen (15) business
days after the original request for change or the exchange of two sets of
requests and responses, then the parties shall, in order to reach agreement,
implement the escalation procedure set forth below.

               (i)   Within five (5) business days after the most recent
response under Section 2.5(a), the requesting party shall again submit a written
request to the other party. Such a request, however, must be the joint work of
the project manager and at least two other people: one business person and one
technical person. Likewise, the responding party shall respond to such change
request only after a consultation among the project manager and at least two
other people: one business person and one technical person. Such response shall
be made within five (5) business days.

               (ii)  If the parties do not agree after following the procedure
set forth in Section 2.5(b)(i), then the requesting party shall arrange, again
within five (5) business days after the latest response, a meeting or conference
call, which shall be held at a mutually convenient time but in no event more
than ten (10) business days from the completion of the procedure in Section
2.5(b)(i). The project manager and at least one technical and one business
person of each party shall participate.

               (iii) If the parties do not agree after following the procedure
set forth in Section 2.5(b)(ii), then the requesting party shall arrange, within
ten (10) business days after the meeting or conference call in Section
2.5(b)(ii), a face-to-face meeting, which shall be held at a mutually convenient
time and location, but in no event later than twenty (20) business days from the
completion of the procedure in Section 2.5(b)(ii). A Senior Executive Officer of
each party, in addition to its project manager and business and technical
people, shall attend such a meeting.

               (iv)  In addition to the escalation procedures set forth above,
the parties remain free to negotiate, and may come to agreement independently
from the escalation procedures.

     2.6  Deliverables.  Each party shall deliver to the other party the
          ------------
Deliverables for which it is responsible under the Statement of Work, in the
format and manner specified in the Statement of Work (or, if none is specified,
in a mutually acceptable format and manner).

     2.7  Testing and Acceptance.  Upon delivery of a Deliverable by one party
          ---------------------
to the other in accordance with the Statement of Work, the parties will jointly
test such Deliverable for conformance to the Specifications and for the absence
of Critical Errors. If the results of such testing indicate, to the reasonable
satisfaction of both parties, that the Deliverable conforms to the
Specifications in all material respects and contains no Critical Errors, such
Deliverable will be deemed accepted by the party not obligated to deliver such
Deliverable and any Milestone based upon acceptance of such Deliverable will be
deemed to have been met.

     2.8  Further Developments.  The parties' project managers will meet
          --------------------
periodically to discuss further improvements to the Developed Software. In
addition, either party may suggest additional development efforts to be
undertaken regarding the Developed Software. In such

                                      -5-
<PAGE>

instances, the parties will discuss in good faith applicable development
schedules, technology contributions, allocation of expenses, ownership, and
rights of use. However, neither party will be bound by any such discussions
unless the parties agree in writing to amend this Agreement or to enter into a
new agreement regarding such additional development work.

3.   LICENSE GRANTS.

     3.1  Software License to Cadence.  NTI hereby grants to Cadence the
          ---------------------------
following nonexclusive (subject to Section 4), worldwide licenses, under all of
NTI's Intellectual Property Rights in and to the NTI Product Components:

          (a)  to use, reproduce, perform and display the NTI Product Components
(in object code form only) for Cadence's internal purposes including integration
work (with Cadence Products only), testing, support, and demonstrations;

          (b) to use, reproduce, perform and display the NTI Product Components
with the Cadence Products (in object code form only) for the purpose of
providing Cadence design and methodology services to Cadence customers, provided
that Cadence may not provide optical proximity correction design services using
the NTI Product Components alone for Cadence customers not using the Cadence
Products for the product design at issue.

          (c)  to reproduce and distribute, and to make, have made, offer for
sale, import and sell, the NTI Product Components, in object code form only,
solely as incorporated or bundled with the Cadence Products and not on a
standalone basis; and

          (d) to reproduce and distribute, and to make, have made, offer for
sale, import and sell, the NTI Product Components, in object code form only, on
a standalone basis only to those Cadence customers who, as of the Effective
Date, already have purchased a license for at least one (1) of the Cadence
Products solely for the purpose of allowing such customers to use the NTI
Product Components with Cadence Products.

     Such licenses shall be subject to the restrictions set forth in Section
3.3.  Cadence may sublicense the rights granted in this Section 3.1 only as
follows: (i) Cadence may sublicense the rights to use, reproduce and distribute
the NTI Product Components incorporated or bundled with the Cadence Products to
its distributors, resellers, OEM customers, VAR customer, and VAD customers; and
(ii) Cadence may sublicense the rights to use and reproduce the NTI Product
Components to its end-user customers, solely for the purpose of allowing such
end-user customers to use the NTI Product Components with Cadence Products.

     3.2  Documentation License to Cadence.  NTI grants to Cadence a
          --------------------------------
nonexclusive (subject to Section 4), worldwide license, under all of NTI's
Intellectual Property Rights in and to the Documentation, to use, reproduce,
perform, display, distribute, and to make, have made, offer for sale, import and
sell the Documentation solely to the extent that the Documentation is to be used
in connection with the Cadence Combined Products or the NTI Product Components
on a stand-alone basis as permitted under Section 3.1(d) above. Cadence may
sublicense the right to reproduce and distribute the Documentation solely to the
extent that it is to be used in connection with the

                                      -6-
<PAGE>

Cadence Combined Products (or the NTI Product Components on a stand-alone basis
as permitted under Section 3.1(d) above) to its distributors, resellers, OEM
customers, VAR customers and VAD customers.

     3.3  Restrictions.  Cadence shall not itself, or through any Affiliate,
          ------------
Agent, or third party: (a) sell, lease, license, or sublicense the NTI Product
Components or the Documentation (except as expressly permitted in Section 3.1
and 3.2), (b) decompile, disassemble, reverse engineer, or otherwise attempt to
derive source code from the NTI Product Components, in whole or in part, except
to the extent such restriction is prohibited by applicable law; (c) modify or
create Derivative Works from the NTI Product Components (except as may be
expressly allowed under Sections 2.4 and 15); or (d) use the NTI Product
Components to provide processing services to third parties (except as expressly
permitted under Section 3.1) or otherwise use the NTI Product Components on a
service bureau basis.

     3.4  Copyright Notices.  Cadence agrees that it will not remove any
          -----------------
copyright notices, proprietary markings, trademarks, or trade names from the NTI
Product Components or Documentation.

     3.5  Software License Terms.  Cadence shall use its then-current standard
          ----------------------
form software license terms for marketing and licensing the NTI Product
Components under this Agreement. Cadence shall include in its standard form
software license terms warranty disclaimer and limitation of liability
provisions for the benefit of NTI. Cadence acknowledges and agrees that the
licenses granted to Cadence under this Agreement and by Cadence to its customers
pursuant to such licenses do not include a license under any NTI patents to make
or have made products made of silicon or other semiconductor materials and
Cadence agrees to include the text message set forth below in the log file of
the NTI Product Components or otherwise to implement procedures reasonably
calculated to ensure that no express or implied licenses are granted to its
customers to make or have made products made of silicon or other semiconductor
materials. NTI agrees that Cadence may refer to NTI as a "third party" in the
standard form license terms. The message to be inserted in the log file is:
"Please be advised that your license to use this software does not give you a
license under any patents of Numerical Technologies, Inc. to make or have made
products made of silicon or other semiconductor materials."

     3.6  Trademark License to Cadence.  Cadence shall display NTI Trademarks
          ----------------------------
with any marketing, promotional, or advertising literature pertaining to the
Cadence Combined Products. NTI grants to Cadence a nonexclusive, worldwide
license to use the NTI Trademarks during the term of this Agreement solely in
connection with the NTI Product Components as part of the Cadence Combined
Products, with the Documentation and in conjunction with any other marketing,
promotional, or advertising literature pertaining to the Cadence Combined
Products. Cadence shall comply with any and all reasonable and customary
guidelines provided by NTI in writing concerning the use of the NTI Trademarks.
To enable NTI to monitor the use of the NTI Trademarks, Cadence shall provide,
as requested by NTI from time to time, samples of all items and materials to
which an NTI Trademark has been applied. Cadence shall obtain no rights with
respect to any of the NTI Trademarks, other than the rights set forth herein. At
NTI's written request, Cadence shall assign to NTI any such right, title, and
interest exceeding the rights granted herein

                                      -7-
<PAGE>

that it may obtain in the NTI Trademarks and the associated goodwill. All
goodwill arising out of any uses of the NTI Trademarks will inure solely to the
benefit of NTI.

4.   EXCLUSIVITY.

     4.1  Limits on NTI's Activities. During the Initial Term of this Agreement
          --------------------------
and any Renewal Term hereunder, subject to Section 4.2:

     (a) NTI shall not, directly or through any of its Affiliates or Agents,
license, distribute, or otherwise provide any of the NTI Product Components or
Developed Software to Avant!, Mentor Graphics, or Synopsys without the express
prior written consent of Cadence, which Cadence may grant or withhold in its
sole discretion.

     (b) NTI shall not, directly or through any of its Affiliates or Agents,
develop, or assist any third party in developing, or otherwise participate in
the development of, interfaces between, or an integrated solution consisting of
(in whole or in part), any of the NTI Product Components or Developed Software
and any Avant!, Mentor Graphics, or Synopsys product;

     (c) NTI shall not, directly or through any of its Affiliates or Agents,
participate in, or assist any third party with, any marketing or sales
activities with Avant!, Mentor Graphics, or Synopsys or the marketing or
distribution of interfaces between, or an integrated solution consisting of (in
whole or in part), any of the NTI Product Components or Developed Software any
Avant!, Mentor Graphics, or Synopsys product;

     (d) NTI shall not assist any end user in integrating the NTI Product
Components or Developed Software with any Avant!, Mentor Graphics, or Synopsys
product (however, it is understood and agreed that it will not be considered a
breach of this Section 4.1 by NTI if Avant!, Mentor Graphics, or Synopsys gains
access to the NTI Product Components or Developed Software through doing
integration work at a customer's facilities); and

     (e) NTI shall include in all agreements with third parties in which the
third party is licensed to redistribute the NTI Product Components or Developed
Software (including OEM, reseller, and distribution agreements) a provision that
the third party's license to redistribute the NTI Product Components or
Developed Software will automatically terminate (subject to reasonable sell-off
terms that allow the licensee, for up to ninety (90) days after the date of
termination, to fulfill customer orders accepted before the date of termination)
if (i) Avant!, Mentor Graphics, or Synopsys enters into an agreement to merge
with, acquire the material assets of, or acquire thirty percent (30%) or more of
the outstanding capital stock of, or purchase all or substantially all of the
assets of a specific business unit of, the third party that is utilizing the NTI
Product Components or Developed Software, (ii) the third party enters into an
agreement to acquire the material assets of, or to merge with or acquire thirty
percent (30%) or more of the outstanding capital stock, of Avant!, Mentor
Graphics, or Synopsys and the resulting combined entity distributes an EDA
product (other than the Cadence Combined Products) that incorporates any of the
NTI Product Components or Developed Software, or (iii) such third party
distributes or licenses the NTI Components or Developed Software or any product
incorporating the NTI Components or Developed Software to Avant!, Mentor
Graphics, or Synopsys.

                                      -8-
<PAGE>

     4.2  Permitted NTI Activities.  Subject to Section 4.1, NTI shall have the
          ------------------------
right to license, distribute, OEM, and sell the NTI Product Components and
Developed Software to any third party other than Avant!, Mentor Graphics, or
Synopsys. Consistent with the foregoing, NTI agrees that it will prohibit any
third party who has the right to distribute NTI Components or Developed Software
from licensing or transmitting the NTI Components or Developed Software (or
both), either on a stand-alone basis or as incorporated into any products, to
Avant!, Mentor Graphics, or Synopsys. Notwithstanding Section 4.1, if Cadence
fails to meet the Production Release Milestones, NTI shall have the unrestricted
right to enter into OEM or distribution license agreements with Synopsys for any
or all of the NTI Product Components. NTI shall notify Cadence in writing (a) if
NTI believes that Cadence has failed to meet any of the Production Release
Milestones, and (b) within two (2) business days after entering into such an
agreement with Synopsys. If, in response to any notice from NTI under clause (a)
above, Cadence notifies NTI in writing (within ten (10) days after receipt of
NTI's notice) that Cadence believes it has met the Production Release Milestones
in question, the parties will attempt to resolve the dispute in accordance with
Section 13. NTI will not enter into any OEM or distribution license agreement
with Synopsys until (i) it has given notice to Cadence as described in clause
(a) above and (ii) either Cadence has acknowledged in writing that it failed to
meet one of Production Release Milestones, or Cadence has failed to notify NTI
within ten (10) days as described above that Cadence believes it has met the
Production Release Milestones in question, or if Cadence does so notify NTI, the
dispute has been resolved in favor of NTI or the parties have been unable to
resolve the dispute in accordance with Section 13. Nothing in this Section 4
prevents NTI from granting patent licenses to any third parties provided that
NTI does not also license the NTI Product Components or Developed Software to
such third parties in violation of Section 4.1.

     4.3  Limits on Cadence's Activities.  During the Initial Term and any
          ------------------------------
Renewal Term, Cadence shall not, directly or through any of its Affiliates or
Agents, license, distribute, or otherwise provide any of the NTI Product
Components or Developed Software to Avant!, Mentor Graphics, or Synopsys,
without the express prior written consent of NTI, which NTI may grant or
withhold in its sole discretion, and Cadence shall not (a) develop, or
participate in the development of, interfaces between, or an integrated solution
consisting of (in whole or in part), any of the NTI Product Components or
Developed Software and any Avant!, Mentor Graphics, or Synopsys product or (b)
assist any end user in integrating the NTI Product Components or Developed
Software with any Avant!, Mentor Graphics or Synopsis product (however, it is
understood and agreed that it will not be considered a breach of this Section
4.3 by Cadence if Avant!, Mentor Graphics, or Synopsys gains access to the NTI
Product Components or Developed Software through doing integration work at a
customer's facilities). Cadence shall not be restricted from developing,
                                      ---
licensing, acquiring, marketing, or distributing any technologies which have
substantially the same functionality as the NTI Product Components or Developed
Software. Cadence shall use commercially reasonable efforts to introduce and
field the Cadence Combined Products as the primary Cadence phase-shift mask
solution for design tools for subwavelength integrated circuit technologies
during the Initial Term. The restrictions and obligations on Cadence in this
Section 4.3 will apply only as long as NTI has not materially breached its
obligations under Sections 4.1 and 4.2.

                                      -9-
<PAGE>

5.   FEES.

     5.1  Payment Amounts During Initial Term.  Subject to Section 5.4,
          -----------------------------------
Cadence shall pay NTI a license fee for license of the NTI Product Components
("License Fee") in the amount of [***] and shall pay NTI a fee for training and
support regarding the NTI Product Components ("Service Fee") in the amount of
[***] during the Initial Term. During the Initial Term, the License Fee and
Service Fee shall be paid in accordance with the schedule set forth in Exhibit F
                                                                       ---------
attached hereto and Section 5.3 below. Other than the fees described in this
Section 5.1, no other royalties or payments shall be payable by Cadence to NTI
for the license of the NTI Product Components during the Initial Term or, to the
extent that Cadence's rights under this Agreement survive the expiration or
termination of this Agreement, after such expiration or termination.

     5.2  Payments Amounts During Renewal Term.  If Cadence exercises its
          ------------------------------------
option to renew the term of this Agreement under Section 14.2, Cadence shall pay
NTI an additional License Fee in the amount of [***] and an additional Service
Fee in the amount of [***] during the Renewal Term. During the Renewal Term, the
License Fee and the Service Fee shall be paid in accordance with a schedule to
be mutually agreed upon by the parties before the commencement of the Renewal
Term. Other than the fees described in this Section 5.2, no other royalties or
payments shall be payable by Cadence to NTI for the license of the NTI Product
Components during the Renewal Term or, to the extent that Cadence's rights under
this Agreement survive the expiration or termination of this Agreement, after
such expiration or termination.

     5.3  Payment Terms.  Payments will be made as indicated in Exhibit F,
          -------------                                         ---------
provided that all Development Milestones scheduled to be completed on or before
the dates of such payments have in fact been completed. If any one or more of
such Development Milestones have not been completed before a scheduled payment
date and the failure to complete such Development Milestones was not caused
directly and primarily by Cadence's failure to perform its obligations under the
Statement of Work, Cadence may withhold the scheduled payment (or payments)
until all such Development Milestones have been completed. If any one or more
such Development Milestones have not been completed before a scheduled payment
date and the failure to complete such Development Milestones was caused directly
and primarily by Cadence's failure to perform its obligations under the
Statement of Work, Cadence will make the scheduled payment (or payments) in
accordance with Exhibit F.
                ---------

     5.4  Reduced Fees.  If during the Initial Term or any Renewal Term NTI
          ------------
executes a distributor or OEM agreement with Synopsys as permitted under Section
4.2, beginning on the effective date of such agreement, the amount of the
License Fees payable thereafter by Cadence under this Section 5 during the
Initial Term and any Renewal Term shall be reduced by [***]. For the purpose of
clarification, in no event shall Cadence be entitled to any refund of License
Fees or Service Fees hereunder.

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

                                     -10-
<PAGE>

     5.5  No Withholding.  Cadence understands and agrees that, in the event
          --------------
of NTI's material breach of its training and support obligations, Cadence shall
not be entitled to withhold payment of License Fees hereunder.

6.   PROPRIETARY RIGHTS.

     6.1  Cadence Products.  The parties agree that, as between the parties,
          ----------------
Cadence retains all right, title, and interest in and to the Cadence Products
and in all Intellectual Property Rights therein.

     6.2  NTI Products.  The parties agree that, as between the parties, NTI
          ------------
retains all right, title, and interest in and to the NTI Product Components and
Derivative Works thereof and in all Intellectual Property Rights therein.

     6.3  IC Design Methodology. The parties agree that Cadence will have the
          ---------------------
right to use through its Design Services Methodology arm (or any successor
thereto), any integrated circuit design methodologies created in the course of
the joint development work to be undertaken pursuant to Section 2, regardless of
which party's employees or contractors participated in such creation. As used in
this Section 6.3, "integrated circuit design methodology" means the unique and
specific organization of the physical design flow for integrated circuit design
using Cadence Combined Products, and the method of operating these Cadence
Combined Products in a step-by-step, specific, repeatable, and documented
fashion including expert guidance, experimental methods, or other procedures
used to achieve a certain integrated circuit design goals. In any event,
"integrated circuit design methodology" shall not include patentable inventions
or copyrightable software which is covered by Sections 6.1, 6.2 and 6.4 of this
Agreement. Cadence shall have no obligation to account for or compensate NTI for
use of such integrated circuit design methodology.

     6.4  Developed Software.  Except to the extent that Developed Software is
          ------------------
covered by Section 6.1, 6.2 or 6.3:

          (a)  Joint Ownership.  Except as set forth in this Section 6.4, the
               ---------------
parties intend that each party hereto will have an equal and undivided one-half
(1/2) joint ownership interest in the Developed Software and all Intellectual
Property Rights related thereto. Each party shall have the right to use and
exploit such jointly owned Developed Software subject to the provisions of
Section 4 and subject to each party's obligation to keep the source code of such
jointly owned Developed Software confidential according to the terms of Section
10. Neither party shall have any duty of accounting to the other party with
respect to such joint ownership interest. Notwithstanding the foregoing
provisions of this Section 6.4, the parties further agree that with respect to
any current or future patents on inventions which are embodied in the Developed
Software or portions thereof for which NTI personnel are the sole inventors or
for which Cadence personnel are the sole inventors, then NTI or Cadence, as the
case may be, shall retain sole ownership of and shall have the exclusive right
to apply for and register such patents. Each party hereby grants to the other
party a nonexclusive, nontransferable (except as set forth in Section 16)
license under such patents to make, have made, use, sell, offer for sale and
import the Developed Software solely as permitted under this Section 6.4 and
subject to the restrictions set forth in this Section 6.4 with respect to the
Developed Software, including the right to grant sublicenses under such patents
within the scope of such party's

                                      -11-
<PAGE>

rights with respect to the Developed Software hereunder, provided that such
patent sublicenses may only be granted in conjunction with a sublicense to the
Developed Software and shall be of the same scope as the sublicense to the
Developed Software. Each party will give the other party reasonable prior notice
in writing of any patent applications based upon the Developed Software for
which such party believes it is entitled to exclusive ownership under this
Section 6.4(a); the parties will attempt to resolve any disputes regarding such
claims of exclusive ownership in accordance with Section 13.

          (b)  Assignment.  Each party hereby unconditionally and irrevocably
               ----------
assigns to the other party the joint ownership interest set forth in Section
6.4(a) with respect to the portions of the Developed Software developed by such
party.

          (c)  Applications and Registrations.  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 the parties may jointly own pursuant to Section 6.4(a) (for
example, registering a copyright on any software included in the Developed
Software) 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 shall 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 Section
6.4(a), exclusively own all rights resulting from, such Procedure.
Notwithstanding the foregoing, each party will notify the other party before
filing any patent application for any portion of the Developed Software,
regardless of whether such portion of the Developed Software is jointly owned or
is exclusively owned by one party pursuant to Section 6.4(a). Such notice will
be subject to the confidentiality provisions in Section 12.

          (d)  Actions Against Third Party Infringers.  Each party shall
               --------------------------------------
promptly notify the other party if such former party becomes aware of any
possible infringement or misappropriation by a third party of any of the
Developed Software or Intellectual Property Rights in which the parties share a
joint ownership interest under Section 6.4(a). If either party desires to take
any action against such an infringing or misappropriating third party, such
party shall first notify the other party hereto 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 born by and
all damages and other recoveries shall be received 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 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.

                                      -12-
<PAGE>

     6.5  Cooperation.  Each party shall execute all documents and take such
          -----------
further actions as may be reasonably required to evidence, perfect, or enforce
any assignment of rights set forth in this Section 6.

7.   TRAINING AND SALES SUPPORT.

     7.1  Training of Cadence Employees.  During the Initial Term and any
          -----------------------------
Renewal Term, NTI will provide to Cadence employees up to two training classes
(one for development engineers and one for application engineers) for a total of
seven (7) days per quarter regarding the NTI Product Components and Developed
Software. All training classes shall be provided at locations to be mutually
agreed upon by the parties. Any additional training shall be provided to Cadence
by NTI at an additional charge to be mutually agreed upon by the parties. For
purposes of this Section 7, "days" do not include travel time to or from
locations where NTI provides training or support pursuant to this Section 7.

     7.2  Joint Sales Calls.  Two (2) NTI employees shall participate with
          -----------------
Cadence in sales calls for up to three (3) weeks per quarter, made to
prospective customers for the Cadence Combined Products during the Initial Term
and any Renewal Term.

     7.3  [***].

     7.4  Joint Marketing Efforts.  NTI and Cadence agree to take reasonable
          -----------------------
commercial steps to coordinate their respective efforts to market the NTI
Product Components and to create joint marketing collateral regarding the NTI
Product Components and Cadence Combined Products.

     7.5  Training of Cadence End Users.  Cadence shall have the sole
          -----------------------------
responsibility for conducting end-user training for the Cadence Combined
Products.

     7.6  Cadence End User Support.  Cadence shall be solely responsible for
          ------------------------
providing product technical support to all end-users of the Cadence Combined
Products.

8.   UPDATES AND SUPPORT OF CADENCE.

     8.1  Updates.  During the Initial and Renewal Terms, NTI shall deliver to
          -------
Cadence any Updates to the NTI Product Components that NTI has prepared upon
commercial release thereof.  NTI agrees that it will not rename the NTI Product
Components in order to avoid providing Cadence with Updates that Cadence is
entitled to under this Section 8.1.  During the Renewal Term (if any), NTI will
use commercially reasonable efforts to furnish Cadence with Updates containing
specific enhancements reasonably requested by Cadence or a customer of Cadence,
if NTI can develop such enhancements without devoting substantial additional
resources or incurring substantial additional costs.

[***]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTION.

                                      -13-
<PAGE>

     8.2  Back-Up Support and Error Corrections.  During the Initial and Renewal
          -------------------------------------
Terms, NTI shall provide to Cadence back-up support for the NTI Product
Components and Developed Software as follows:

          (a)  Error Correction.  NTI will use reasonable commercial efforts
               ----------------
to provide an Update to correct any Errors in the NTI Product Components or
Developed Software reported by Cadence. Such efforts will include, as
appropriate, (i) reviewing the Error with Cadence, (ii) gathering additional
information about the Error, (iii) analyzing the Error to determine its cause,
(iv) providing an Error solution (which may be an Update or a workaround, if
already known), and (v) when required providing an Update that corrects the
Error. When available, Updates will be delivered promptly to Cadence at no
additional cost. NTI will provide Cadence with an estimate of how long it will
take to correct the Errors reported by Cadence (in accordance with Section
8.2(b)) and will keep Cadence informed of the progress of the problem
resolution.

          (b)  Error Classification and Response. Cadence and NTI will jointly
               ---------------------------------
classify Errors reported by Cadence as follows: "Fatal" means an Error that
prevents the product from performing any useful work; "Severe Impact" means an
Error that disables a major or essential function or functions (other than Fatal
Errors); "Degraded Operations" means an Error that disables one or more non-
essential functions; and "Minor" means all other Errors. NTI will use reasonable
commercial efforts to confirm receiving a report of an Error, provide a
workaround or temporary fix including Documentation changes, and provide an
Update correcting the Error as follows:

<TABLE>
<CAPTION>
Severity                     Confirm Report              Temporary Fix                 Update
-----------------------------------------------------------------------------------------------------
<S>                     <C>                       <C>                          <C>
Fatal                   1 business day            Continued effort until       6 days
                                                  corrected
-----------------------------------------------------------------------------------------------------
Severe Impact           1 business day            5 business days              20 days
-----------------------------------------------------------------------------------------------------
Degraded Operations     2 business day            15 business days             60 days
-----------------------------------------------------------------------------------------------------
Minor                   5 business day            To be determined on a        To be determined on a
                                                  case-by-case basis           case-by-case basis
-----------------------------------------------------------------------------------------------------
</TABLE>

NTI will provide to Cadence sufficient advance notice of any planned Updates as
soon as such plans are made by NTI so as to enable Cadence to adapt its
interfaces to the NTI Product Components and Developed Software in a timely
manner.

9.   RIGHT TO MATCH ACQUISITION OFFER.

     9.1  Acquisition Offers. In the event that NTI receives a bona fide offer
          ------------------
to acquire NTI from Synopsys, Mentor Graphics, or Avant! (whether by merger,
stock exchange, sale of substantially all of the assets, or other business
combination) pursuant to which the shareholders of NTI would hold less than
50% of the voting equity securities of the successor or acquiring corporation
following such acquisition (an "Acquisition Offer"), and the Board of
Directors of NTI, after review of such Acquisition Offer, determines it is in
the best interests of NTI's shareholders to accept such offer, then NTI shall
provide written notice of such determination (the "Acquisition Offer Notice")
to Cadence and Cadence shall, subject to the terms and conditions of Sections
9.2 and 9.3 below, have the right to match or exceed such Acquisition Offer as
described below.

                                      -14-
<PAGE>

[***].

     9.2  Counter Acquisition Offer. The Acquisition Offer Notice shall set
          -------------------------
forth the principal financial and other terms of the Acquisition Offer.
Cadence shall have thirty (30) calendar days following receipt of the
Acquisition Offer Notice to respond with a counter Acquisition Offer. The
Board (excluding any Board representative of Cadence should any such
representative exist) shall review all Acquisition Offers received and shall,
in its sole discretion consistent with its fiduciary duties under law and with
the advice of its investment advisors, if any, determine which Acquisition
Offer is in the best interests of NTI and its shareholders (taking into
account which Acquisition Offer is financially superior, which has the
greatest likelihood of consummation and other factors). During this thirty
(30) day period NTI shall not (i) publicly endorse or comment upon any other
Acquisition Offer and (ii) shall not allow any other prospective purchaser to
have access to NTI's records, facilities, or personnel for the purpose of
conducting a due diligence review.

     9.3  Assignability.  The right to match under this Section 9 is not
          -------------
assignable by Cadence without the prior written consent of NTI, except to
Affiliates of Cadence in connection with an assignment of this entire Agreement
as part of an internal restructuring or reorganization of Cadence not involving
any combination with any third party (other than third parties that either are
Affiliates of Cadence as of the Effective Date or are formed in connection with
such internal restructuring or reorganization).

     9.4  Fiduciary Duties.  Notwithstanding anything to the contrary above, the
          ----------------
Board shall review all Acquisition Offers in compliance with its fiduciary
duties under law and any other applicable laws.

     9.5  Remedies.  NTI acknowledges that any breach of this Section 9 by NTI
          --------
would cause irreparable harm to Cadence for which monetary damages would be
inadequate and, therefore, Cadence will be entitled to immediate injunctive
relief, without the requirement of posting bond, to prevent any continuing or
threatened breach of this Section 9 by NTI.

     9.6  Termination.  The rights and obligations under this Section 9 shall
          -----------
terminate upon the earliest to occur of the events described in clauses (i) or
(ii) below (provided, in the case of clause (ii), that NTI shall have complied
with the provisions of this Section 9 prior to consummating the transactions
described in such clause (ii)). The events referred to above are: (i) the
closing of the initial public offering of NTI, and (ii) a sale of substantially
all of the assets of NTI or a merger or consolidation of NTI with or into
another corporation or entity pursuant to which the shareholders immediately
prior to such merger or consolidation hold less than fifty percent (50%) of the
voting equity securities of the surviving or acquiring entity immediately
following such merger or consolidation.

                                      -15-
<PAGE>

10.  LIMITED WARRANTIES AND DISCLAIMER.

     10.1 Limited Warranty.  NTI warrants that, at the time of delivery to
          ----------------
Cadence, the unmodified NTI Product Components (including any and all Updates),
and the Developed Software (excluding any Cadence Developed Software)
(collectively defined for the purposes of this Article 10 as the "NTI Warranted
Software") and delivered to Cadence will be complete and functioning and that,
for a period of six (6) months from the date of delivery or ninety (90) days
from the date of the first commercial shipment by Cadence of such NTI Warranted
Software (whichever is shorter) (the "Warranty Period"), the NTI Warranted
Software delivered to Cadence will have no Critical Errors under normal use.
NTI's entire liability and Cadence's exclusive remedy under this warranty will
be, at NTI's option, to use reasonable commercial efforts to attempt to correct
any Critical Errors or to replace the NTI Warranted Software with functionally
equivalent software. If NTI is unable to correct any Critical Error in the NTI
Warranted Software and delivered to Cadence within sixty (60) days after such
Critical Error is reported to NTI by Cadence, then (a) in the case of a Critical
Error in the initial version of the NTI Warranted Software delivered to Cadence
under this Agreement, Cadence will have the right to terminate this Agreement by
written notice to NTI and NTI will pay to Cadence an amount equal to the sum of
License Fee and Service Fee payments made by Cadence prior to such termination,
or (b) in the case of a Critical Error in an Update to the NTI Product
Components delivered to Cadence under this Agreement, Cadence will have the
right to terminate Section 8 of this Agreement and NTI will pay to Cadence an
amount equal to Service Fee payments made by Cadence since the last Update
delivered but at least the most recent payment, in each case provided that
Cadence reports such Critical Error to NTI within the applicable Warranty
Period. If a Critical Error is caused by the portions of the Cadence Developed
Code, Cadence will provide NTI with engineering resources as necessary to
correct the Critical Error, and (a) NTI will not be responsible for any failure
to correct the Critical Error within sixty (60) days if Cadence fails to provide
such engineering resources and (b) shall be relieved of any obligations under
this Section 10.1 to the extent failure to fulfill the obligation is caused
directly and primarily by such Critical Error.

     10.2 Exclusions.  The warranties under Section 10.1 will not extend to
          ----------
problems that result from: (i) Cadence's failure to implement all Updates to the
NTI Product Components issued to Cadence by NTI (unless such Update causes or
contains the Critical Error); (ii) any alterations of or additions to the NTI
Warranted Software performed by or at the direction of parties other than NTI;
(iii) misuse of the NTI Warranted Software; or (iv) use of the NTI Warranted
Software in conjunction with products not supplied or approved by NTI.

     10.3 Necessary Rights.  NTI represents and warrants to Cadence that NTI
          ----------------
has all rights necessary to grant to Cadence the licenses granted to Cadence in
this Agreement.

     10.4 No Viruses.  NTI represents and warrants to Cadence that the NTI
          ----------
Warranted Software delivered to Cadence under this Agreement, will not contain
any computer software code, routines, or devices (other than as set forth in the
documentation accompanying such software or code) designed to alter, disable,
damage, erase, or impair the use of software or data without the user's
knowledge and consent, and that NTI will use commercially reasonable efforts,
including the

                                      -16-
<PAGE>

use of commercially available virus detection software, to ensure that the media
on which the NTI Warranted Software are delivered to Cadence do not contain any
such code.

     10.5  Year 2000 Compliance.  During the applicable Warranty Period, NTI
           --------------------
warrants that the NTI Warranted Software will accurately process and handle
(including calculating, comparing and sequencing) date and time data from, into,
and between the twentieth and twenty-first centuries, and the years 1999 and
2000, including leap year calculations, to the extent that other information
technology used in combination with the NTI Warranted Software properly exchange
date and time data with it. NTI's entire liability and Cadence's exclusive
remedy under this warranty will be, at NTI's option, to use reasonable
commercial efforts to attempt to correct any failure of the NTI Warranted
Software to be Year 2000 compliant as described above, unless such failure also
constitutes a Critical Error, in which case Cadence will also have the remedies
available under Section 10.1.

     10.6  Exclusive Warranties.  Except for the express warranties stated in
           --------------------
Section 10 above, NEITHER PARTY MAKES ANY OTHER WARRANTY OF ANY KIND, WHETHER
EXPRESS, IMPLIED, OR STATUTORY AND BOTH PARTIES DISCLAIM ANY AND ALL IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NTI
disclaims any warranty that the NTI Warranted Software delivered to Cadence
under this Agreement will be capable of productive use if not used with the
Cadence Products.

11.  INDEMNIFICATION AND LIMITATION OF LIABILITY.

     11.1  Indemnification.
           ---------------

               (a)  NTI and Cadence (the "Indemnifying Party"), as the case may
     be, agrees, at its own expense, to defend or at its option settle, any
     third party claim, suit or proceeding (collectively, "Action") brought
     against the other party (the "Indemnified Party") to the extent such
     Action results from actual or alleged infringement (whether direct,
     contributory, by inducement, or otherwise) by (a) in the case of NTI or
     those portions of the Developed Software which were (for the purposes of
     patent infringement claims) designed or implemented solely by NTI
     employees or independent contractors (unless there was no non-infringing
     way to design or implement such portions of the Developed Software and
     still meet the Specifications) or (for the purposes of copyright, trade
     secret, and other Intellectual Property Right infringement or
     misappropriation) coded solely by NTI employees or independent
     contractors during the course of development under Article 2 of this
     Agreement and delivered to Cadence (collectively defined for the purposes
     of this Section 11.1 as the "NTI Indemnified Software"); and (b) in the
     case of Cadence those portions of the Developed Software which were (for
     the purposes of patent infringement claims) designed or implemented
     solely by Cadence employees or independent contractors (unless there was
     no non-infringing way to design or implement such portions of the
     Developed Software and still meet the Specifications) or (for the
     purposes of copyright, trade secret, and other Intellectual Property
     Right infringement or misappropriation) coded solely by Cadence employees
     or independent contractors during the course of development under Article
     2 of this Agreement and delivered to NTI of any U.S. patent, any patent
     issued in Japan or any European Union country, or any copyright, trade
     secret, trademark, or other Intellectual Property Right worldwide;
     provided, that the Indemnifying

                                      -17-
<PAGE>

Party shall have sole control of any such Action or settlement negotiations, and
the Indemnifying Party agrees to indemnify and hold the Indemnified Party
harmless from, subject to the limitations hereinafter set forth, any settlement
amounts or final judgment entered against the Indemnified Party on such issue in
any such Action (regardless of characterization of types of damage). The
Indemnified Party will (i) notify the Indemnifying Party promptly in writing of
such an Action, (ii) give the Indemnifying Party sole control and authority to
proceed as contemplated herein, and (iii) give the Indemnifying Party proper and
full information and assistance to settle and/or defend any such Action. Failure
by the Indemnified Party to notify the Indemnifying Party promptly in writing of
such an Action will relieve the Indemnifying Party of its obligations under this
Section 11.1 only to the extent that the Indemnifying Party's ability to defend
the Action is prejudiced by such lack of notice. The Indemnifying Party further
agrees to indemnify and hold the Indemnified Party harmless for the Indemnified
Party's reasonable costs and expenses (including reasonable attorneys' fees)
incurred in analyzing and tendering to the Indemnifying Party any such Action,
provided that the Indemnified Party fulfills its obligations under clauses (i),
(ii) and (iii) of this Section 11.1. In addition, in the event that the
Indemnifying Party fails to assume the defense of any such Action, and provided
that the Indemnified Party has fulfilled its obligations under clauses (i), (ii)
and (iii) above, then the Indemnified Party may give the Indemnifying Party
written notice of such failure and an opportunity to cure such failure within
thirty (30) business days. In the event that the Indemnifying Party does not
assume the defense of such Action within such cure period, then the Indemnifying
Party shall further be obligated to indemnify and hold the Indemnified Party
harmless for the Indemnified Party's reasonable costs and expenses (including
reasonable attorneys' fees) incurred in the defense or settlement of such
action.

          (b)  If it is adjudicatively determined, or if NTI reasonably
believes, that the NTI Indemnified Software or any part thereof infringes any
patent, copyright, trade secret, trademark or other Intellectual Property Right
of a third party, then NTI may, and if the sale, distribution, or use of the NTI
Indemnified Software by Cadence is, as a result, enjoined, then NTI shall, at
its option and expense: (a) procure for Cadence the rights under such patent,
copyright, trade secret, trademark or other Intellectual Property Right needed
for Cadence to exercise all of its rights under this Agreement with respect to
the NTI Indemnified Software, or such part thereof; or (b) replace the NTI
Indemnified Software, or parts thereof, with non-infringing suitable products or
parts with the same functionality (or better) as the infringing NTI Indemnified
Software or parts; or (c) suitably modify the NTI Indemnified Software, or part
thereof, to become non-infringing and have the same functionality or better; or
(d) if none of the foregoing is feasible and Cadence's continued use and
distribution of the infringing NTI Indemnified Software (or part thereof) has
been finally enjoined, accept return of such NTI Indemnified Software, or part
thereof, terminate distribution or sale thereof, and pay to Cadence an amount
equal to a portion of the License Fees previously paid (and reduce the License
Fees still to be paid by an amount) commensurate with the value of such NTI
Indemnified Software (or part thereof) compared to the value of all the NTI
Product Components and Developed Software. NTI will not be liable for any costs
or expenses incurred without its prior written authorization, or for any
installation costs of replaced NTI products. Any settlement that restricts
Cadence's ability to continue using or distributing any NTI Indemnified Software
in accordance with this Agreement will not be binding on Cadence unless approved
in writing by an authorized officer of Cadence (which approval will not be
unreasonably withheld). If any settlement restricts Cadence's ability to
continue using or distributing any NTI

                                      -18-
<PAGE>

Indemnified Software in accordance with this Agreement, the parties will
negotiate in good faith a commensurate reduction in the License Fees.

     11.2  Limitation of Liability.  EXCEPT WITH RESPECT TO BREACH OF SECTIONS
           -----------------------
12 (CONFIDENTIALITY), 3 (LICENSE GRANTS), 4 (EXCLUSIVITY) AND 9 (RIGHT TO MATCH
ACQUISITION OFFER) AND EXCEPT WITH RESPECT TO LIABILITY UNDER SECTION 11.1
(INDEMNIFICATION), NEITHER PARTY SHALL HAVE ANY LIABILITY TO THE OTHER PARTY FOR
LOST PROFITS OR BUSINESS OPPORTUNITIES, LOST DATA, OR ANY OTHER INDIRECT,
INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR RELIANCE DAMAGES, HOWEVER CAUSED AND
UNDER ANY THEORY OF LIABILITY, WHETHER BASED IN CONTRACT, TORT (INCLUDING
NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE. THESE LIMITATIONS SHALL APPLY
REGARDLESS OF WHETHER SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY. NTI'S TOTAL, CUMULATIVE LIABILITY UNDER SECTION 11.1 FOR ANY AND ALL
CLAIMS OF INFRINGEMENT OF PATENTS ISSUED IN JAPAN OR ANY EUROPEAN UNION COUNTRY
WILL BE LIMITED TO THE AGGREGATE AMOUNT PAID BY CADENCE TO NTI UNDER THIS
AGREEMENT AND CADENCE'S TOTAL, CUMULATIVE LIABILITY UNDER SECTION 11.1 FOR ANY
AND ALL CLAIMS OF INFRINGEMENT OF PATENTS ISSUED IN JAPAN OR ANY EUROPEAN UNION
COUNTRY WILL BE LIMITED TO ONE HALF THE AGGREGATE AMOUNT PAID BY CADENCE TO NTI
UNDER THIS AGREEMENT.

12.  CONFIDENTIALITY.

     12.1  Definition.  The term "Confidential Information" shall mean any
           ----------
information disclosed by one party to the other party in connection with this
Agreement which is disclosed in writing, electronically, orally or by inspection
and which a party has a reasonable basis to believe is treated as confidential
by the other party.

     12.2  Obligation.  Each party shall treat as confidential all Confidential
           ----------
Information received from the other party, shall not use such Confidential
Information except as expressly permitted under this Agreement, and shall not
disclose such Confidential Information to any third party without the other
party's prior written consent.  Each party shall take reasonable measure to
prevent the disclosure and unauthorized use of Confidential Information of the
other party for a period from the time of disclosure until the later to occur of
(i) the date five (5) years after such disclosure, or (ii) the expiration or
termination of this Agreement.

     12.3  Exceptions.  Notwithstanding the above, the restrictions of this
           ----------
Section 12 shall not apply to information that:

          (a)  was independently developed by the receiving party without any
     use of the Confidential Information of the other party and by employees or
     other agents of (or independent contractors hired by) the receiving party
     who have not been exposed to the Confidential Information as demonstrated
     by written documentation;

                                      -19-
<PAGE>

          (b)  becomes known to the receiving party, without restriction, from a
third party without breach of this Agreement and who had a right to disclose it;

          (c)  was in the public domain at the time it was disclosed or becomes
in the public domain through no act or omission of the receiving party; or

          (d)  was rightfully known to the receiving party, without restriction,
at the time of disclosure.

     12.4  Government Order.  If a receiving party is required under an order or
           ----------------
requirement of a court, administrative agency, or other governmental body to
disclose any Confidential Information, then such receiving party shall provide
prompt notice thereof to the other party and shall use its reasonable commercial
efforts to obtain a protective order or otherwise prevent public disclosure of
such information.

     12.5  Residuals.  This Section 12 is not intended to prevent the receiving
           ---------
party from using Residual Knowledge, subject to any valid patents and copyrights
of the disclosing party. "Residual Knowledge" means ideas, concepts, know-how,
or techniques related to the disclosing party's technology or general skill,
knowledge, talent and expertise that are retained in the unaided memories of the
receiving party's employees who have had access to the Confidential Information
of the disclosing party, but in no event including Confidential Information
relating to the Source Code Materials of the NTI Product Components to the
extent that Cadence employees gain access to such Source Code Materials under
this Agreement or of the Cadence Products to the extent that NTI employees gain
access to such Source Code Materials under this Agreement. An employee's memory
is considered unaided if the employee has not intentionally memorized the
Confidential Information for the purpose of retaining and subsequently using or
disclosing it.

13.       DISPUTE RESOLUTION.

     If NTI and Cadence are unable to resolve any dispute, controversy, or claim
arising from this Agreement between them, then, prior to exercising its right to
terminate under any provision of this Agreement or (in the case of a dispute
over whether Cadence has met the Production Release Milestones) prior to NTI
entering into an OEM or distribution agreement with Synopsys as permitted under
Section 4.2, either NTI or Cadence shall, by written notice to the other, first
have such dispute referred to a Senior Vice President (or equivalent) of NTI and
Cadence, for attempted resolution by good faith negotiations within ten (10)
business days after such notice is received.  If not resolved within such ten
(10) business day period, the parties shall escalate the dispute to their
respective Chief Operating Officers (or equivalent) for resolution within thirty
(30) business days after expiration of the initial ten (10) day period.  Unless
otherwise mutually agreed, the negotiations between the designated officers
shall be conducted by face-to-face meetings within ten (10) business days and at
mutually convenient times within the period stated above.

                                      -20-
<PAGE>

14.       TERM AND TERMINATION.

     14.1  Term.  The term of this Agreement shall commence on the Effective
           ----
Date and, unless terminated earlier as provided under Section 14.3 or renewed as
provided under Section 14.2, shall expire at the end of the Initial Term.

     14.2  Option to Renew.  Cadence shall have the option of renewing this
           ---------------
Agreement for the Renewal Term by giving NTI written notice of its intent to
exercise such option on or before the date that is 270 days before the
expiration of the Initial Term.

     14.3  Termination for Breach.  If either party (the "Breaching Party")
           ----------------------
materially breaches any term or condition of this Agreement, the other party
(the "Non-Breaching Party") may give written notice of such breach to the
Breaching Party.  The Breaching Party will then have ten (10) days to notify the
Non-Breaching Party if the Breaching Party believes it has not materially
breached this Agreement, in which case the parties will attempt to resolve the
dispute in accordance with Section 13.  If the Breaching Party acknowledges in
writing that it has materially breached this Agreement or fails to provide such
notice to the Non-Breaching Party within this ten (10) day period, or if the
parties are unable to resolve the dispute in accordance with Section 13, then
the Breaching Party will have thirty (30) days to cure the breach.  If the
Breaching Party is unable to cure the breach within this thirty (30) day period,
the Non-Breaching Party may terminate this Agreement by written notice to the
Breaching Party at any time within thirty (30) days following the end of such
thirty (30) day period.

     14.4  (a)  Failure to Achieve a Development Milestone. If any Development
                ------------------------------------------
Milestone is not met by the corresponding completion date set forth in Exhibit B
                                                                       ---------
and such failure was not caused directly and primarily by Cadence's failure to
perform its obligations under the Statement of Work, Cadence may notify NTI in
writing of such failure. NTI will then have thirty (30) days to meet the
Development Milestone in question. If NTI meets such Development Milestone
within this thirty (30) day period, this Agreement will remain in full force and
effect. If NTI does not meet such Development Milestone within this thirty (30)
day period, then Cadence may either, at its option, (a) require NTI to deliver
to Cadence the Source Code Materials for that portion of the NTI Product
Components needed to complete or correct the development work necessary to
achieve the Development Milestone that had not been met, or (b) terminate this
Agreement by written notice to NTI. If Cadence elects to receive the Source Code
Materials needed to complete or correct the development work rather than
terminate this Agreement, then (i) NTI shall retain all right, title, and
interest in and to the Source Code Materials initially delivered to Cadence;
(ii) Cadence will have will have a non-exclusive, nontransferable, fully-paid
and royalty-free license to use, reproduce, modify, and create derivative works
from such Source Code Materials solely for the purpose of completing or
correcting the development work necessary to achieve the Development Milestone
that had not been met; (iii) ownership of the Developed Software will be as set
forth in Section 6.4; (iv) Cadence will be entitled to deduct from its next
payment of the License Fee its fully burdened costs of completing or correcting
the development work necessary to achieve the Development Milestone but in no
event shall such deduction exceed the full amount of that particular Development
Milestone payment; (v) Cadence shall not distribute, sell, or sublicense the
Source Code Materials; (vi) the Source Code Materials shall be subject to the
confidentiality provisions set forth in Section 12; and (vii) Cadence shall
restrict disclosure of the Source Code Materials to those within its
organization who need to use it for the purposes allowed under the above
license, and shall keep it in a secure, locked location when not in use. If
Cadence terminates pursuant to Section 14.4(b), Cadence will have the same
rights as provided under Section 3 with respect to the Developed Software for
which development under this Agreement is complete as of the termination date,
and will be obliged to make future payments of License Fees reduced by seventy-
five percent (75%) (and no further payments whatsoever of Service Fees) for
either (a) the remainder of the Initial Term and the Renewal Term (if (i) the
termination took place before the time for Cadence to make its election
regarding the Renewal Term, or (ii) the termination took place after Cadence had
elected to renew the Agreement), or (b) just the remainder of the Initial Term
(if the time for election had passed prior to termination and Cadence had not
elected to extend the Agreement into the Renewal Term).

                                      -21-

<PAGE>

[***]

     14.5  Termination for Force Majeure.  Each party will have the right to
           -----------------------------
terminate this Agreement pursuant to Section 17.8.

     14.6  Effect of Termination.  Except as otherwise specifically set forth in
           ---------------------
this Agreement, the following sections shall survive the expiration or
termination, for any reason, of this Agreement: 1 (Definitions), 6 (Proprietary
Rights), 10 (Limited Warranties and Disclaimer), 11 (Indemnification and
Limitation of Liability), 12 (Confidentiality), 16 (Assignment), and 17
(Miscellaneous). All other Sections and all licenses hereunder shall terminate
upon the expiration or termination, for any reason, of this Agreement except as
provided in Sections 14.4 (only with respect to the portion relating to
termination pursuant to Section 14.4(b)), 14.6, 14.7, 14.8, 14.9, 14.10, 14.11,
15.3 and 15.4 below.

     14.7  Rights Upon Cadence Breach. In the event of termination of the
           --------------------------
Agreement by NTI for a material breach by Cadence, the following shall apply
regarding Cadence's right to continue to ship the NTI Product Components and
Updates thereto after such termination (as to each NTI Product Component or
Update, only if development of such NTI Product Component or Update under this
Agreement is has reached alpha version and only with respect to those Cadence
Combined Products which have reached alpha version):

     (a) Non-Intellectual Property or Payment Related Breach.  If the material
         ---------------------------------------------------
breach by Cadence is not related to NTI's Intellectual Property rights or NTI's
right to receive fees under the Agreement, then after termination Cadence shall
only have the right to ship the then-current version of the NTI Product
Components available at the time of the breach as part of Updates to the Cadence
Combined Products to Cadence customers who, prior to breach, already purchased
the Cadence Combined Product.

     (b) Intellectual Property or Payment Related Breach.  If the Cadence breach
         -----------------------------------------------
is a material breach relating to NTI's Intellectual Property rights or NTI's
right to receive fees under the Agreement, then Cadence shall have no right to
continue shipping any NTI Product Components under any circumstances.

     14.8  Rights upon NTI Breach. In the event of a material breach by NTI,
           ----------------------
Cadence shall have the right either:

     (a) to terminate this Agreement in accordance with Section 14.3 and have
the same rights as provided under Section 3 (as to each NTI Product Component or
Update, only if development of such NTI Product Component or Update under this
Agreement is has reached alpha version and only with respect to those Cadence
Combined Products which have reached alpha version) for the remainder of the
Initial Term and the Renewal Term (if (i) the termination took place before the
time for Cadence to make its election regarding the Renewal Term, or (ii)
termination took place after Cadence had elected to renew the Agreement), or
just the remainder of the Initial Term (if the time for election had passed
prior to termination and Cadence had not elected to extend the Agreement into
the Renewal Term); provided, however that except as provided in Section 14.8(b),
Cadence shall pay NTI a reduced License Fee in the amount of twenty-five percent
(25%) of the original License Fee (including the License Fee owed for the
Renewal Term, if Cadence elects to preserve its rights for the Renewal Term)
owed under this Agreement (any such additional payments will be due in
accordance with the schedule in Exhibit F); or
                                ---------

     (b) if the NTI breach was a material breach of Section 4, to terminate this
Agreement in accordance with Section 14.3 and have the same rights as provided
under Section 3 (as to each NTI Product Component or Update, only if development
of such NTI Product Component or Update under this Agreement has reached alpha
version and only with respect to those Cadence Combined Products which have
reached alpha version) with no further payments of the License Fee whatsoever
for either (a) the remainder of the Initial Term and the Renewal Term (provided
(i) the termination took place before the time for Cadence to make its election
regarding the Renewal Term, or (ii) termination took place after Cadence had
elected to renew the Agreement), or (b) just the remainder of the Initial Term
(provided the time for election had passed prior to termination and Cadence had
not elected to extend the Agreement into the Renewal Term).

                                      -22-
<PAGE>

     14.9  Termination for Cadence's Failure to Achieve Development Milestone.
           ------------------------------------------------------------------
If any Development Milestone is not met by the corresponding completion date set
forth in Exhibit B and such failure was caused directly and solely, or directly
         ---------
and primarily, by Cadence's failure to perform its obligations under the
Statement of Work, NTI may notify Cadence in writing of such failure.  Cadence
will then have thirty (30) days to perform its obligations.  If Cadence performs
its obligations within this thirty (30) day period, this Agreement will remain
in full force and effect.  If Cadence does not perform its obligations within
this thirty (30) day period and the cause of the failure to meet the Development
Milestone was directly and solely Cadence's failure to perform its obligations
under the Statement of Work, NTI may, at its option, by written notice to
Cadence effective immediately either (a) terminate this Agreement or (b)
terminate the exclusivity provisions in Section 4, in which latter case all
future payments of License Fees and Support Fees will be reduced by fifty
percent (50%).  If Cadence does not perform its obligations within this thirty
(30) day period and the cause of the failure to meet the Development Milestone
was directly and primarily Cadence's failure to perform its obligations under
the Statement of Work, then NTI will have no right to terminate this Agreement
but NTI will have the option to terminate effective immediately, by written
notice to Cadence, the exclusivity provisions in Section 4, in which case all
future payments of License Fees and Support Fees will be reduced by fifty
percent (50%).

     14.10 Rights upon Expiration. Upon the expiration of the Renewal Term (or,
           ----------------------
if none, the Initial Term), Cadence shall only have the right to ship the then-
current version of the NTI

                                      -23-
<PAGE>

Product Components available at the time of such expiration to the Cadence
Combined Products to Cadence customers who, prior to such expiration, already
purchased the Cadence Combined Product; provided that, Cadence shall only be
permitted to continue such shipments until the end of life of the release of the
Cadence Combined Products which were being shipped at the time of the
expiration.

     14.11  Updates.  In any case of termination of this Agreement, after such
            -------
termination NTI will have no obligation under this Agreement to provide Updates
to Cadence.

     14.12  Return of Materials.  Upon the expiration or termination of this
            -------------------
Agreement for any reason, and except for copies of such items as may be
reasonably required by NTI to exercise any surviving rights or fulfill any
surviving obligations, NTI shall promptly (i) return to Cadence the originals
and all copies (in tangible form or stored in storage or memory devices) of all
Cadence Materials, all Confidential Information of Cadence and all other
material provided hereunder by Cadence in NTI's possession or control; and (ii)
provide Cadence with a written statement certifying that it has complied with
the foregoing obligations.  Upon the termination of this Agreement for any
reason, and except for such items as may be reasonably required by Cadence to
exercise any surviving rights or fulfill any surviving obligations, Cadence
shall promptly (a) return to NTI the originals and all copies (in tangible form
or stored in storage or memory devices) of all Confidential Information of NTI
and all other material provided hereunder by NTI in Cadence's possession or
control; and (b) provide NTI with a written statement certifying that it has
complied with the foregoing obligations.

     14.13  Remedies Cumulative.  If Cadence elects to terminate this Agreement
            -------------------
due to a material breach by NTI, such termination will be Cadence's sole and
exclusive remedy for such breach. Except as specifically set forth in this
Agreement, termination shall be in addition to all other legal or equitable
remedies available to either party.

15.       ESCROW.

     15.1   Escrow Account.  Within ninety (90) days after the production freeze
            --------------
completion date for each portion of the NTI Product Components and Developed
Software, NTI shall place and maintain current in an escrow account with an
escrow agent in California selected by Cadence and reasonably acceptable to NTI
a complete copy of the Source Code Materials for the NTI Product Components and
Developed Software and any Updates that Cadence is licensed to use hereunder.
Cadence shall have the right at any time to contact the escrow agent for the
purpose of confirming that the Source Code Materials are in the escrow account
and verifying the instructions to the escrow agent to release the Source Code
Materials under the circumstances specified in Section 14.2 below.  Cadence
shall bear all fees, expenses and other charges of the escrow agent to open and
maintain such escrow account.

     15.2   Release.  The escrow agreement between Cadence, NTI and the escrow
            -------
agent will provide that, if (a) Cadence seeks release of the Source Code
pursuant to Section 14.4 (a "Development Default"), or (b) NTI (or its
successors or assigns) liquidates, makes general assignment for the benefit of
creditors, or ceases doing business as a going concern or ceases to support the
NTI Product Components or commits a material and ongoing breach of its support

                                      -24-
<PAGE>

obligations under Section 8.2 above that is not cured within thirty (30) days of
written notice from Cadence (a "Non-Development Default"), then, upon notice
thereof by Cadence to NTI and the escrow agent, the escrow agent shall deliver
the Source Code Materials to Cadence. If NTI disputes Cadence's right to the
Source Code Materials, the matter shall be referred to arbitration or a court of
jurisdiction.

     15.3  Licenses.  If the Source Code Materials are delivered to Cadence as a
           --------
result of a Development Default, Cadence will have the license, rights, and
obligations provided in paragraph (a) below.  If the Source Code Materials are
delivered to Cadence as a result of a Non-Development Default, Cadence will have
the license, rights, and obligations provided in paragraph (b) below.  In either
case, (i) Cadence shall not distribute, sell, or sublicense the Source Code
Materials, (ii) the Source Code Materials shall be subject to the
confidentiality provisions set forth in Section 12, (iii) Cadence shall restrict
disclosure of the Source Code Materials to those within its organization who
need to use it for the purposes allowed under the applicable license, and shall
keep it in a secure, locked location when not in use, and (iv) NTI shall retain
all right, title, and interest in and to the Source Code Materials initially
delivered to Cadence.

               (a) Development Default. NTI hereby grants to Cadence a
                   -------------------
nonexclusive, worldwide, fully paid and royalty-free, perpetual and irrevocable
(except as provided below) license to use, reproduce, modify, and create
Derivative Works from the Source Code Materials in order to (i) complete the
development work described in the Statement of Work, (ii) correct Errors in the
NTI Product Components, maintain the compatibility of the NTI Product Components
with the Cadence Products and third party software used in conjunction with the
NTI Product Components, and provide minor functionality enhancements to the NTI
Product Components consistent with the enhancements being made to the Cadence
Products, and (iii) use, reproduce, distribute, make, have made, offer for sale,
import, sell, and support the NTI Product Components in object code form
pursuant to the licenses granted to Cadence in Section 3.1. The object code
derived from the source code so modified shall be deemed to be Developed
Software and the parties' respective rights in such code will be as provided in
Section 6. The license granted in this paragraph (a) shall survive termination
of this Agreement in accordance with Section 14 if the escrow provisions were
triggered prior to termination or expiration of this Agreement, but Cadence may
not trigger the escrow provisions post-termination or expiration.

               (b) Non-Development Default. NTI hereby grants to Cadence a
                   -----------------------
nonexclusive, worldwide, fully paid and royalty-free, perpetual and irrevocable
(except as provided below) license to use, reproduce, modify, and create
Derivative Works from the Source Code Materials solely to correct Errors in the
NTI Product Components, to maintain the compatibility of the NTI Product
Components with the Cadence Products and third party software used in
conjunction with the NTI Product Components, and to provide minor functionality
enhancements to the NTI Product Components consistent with the enhancements
being made to the Cadence Products. The object code derived from the source code
so modified shall be deemed to be NTI Product Components hereunder and subject
to the same rights and restrictions on use, reproduction, and disclosure that
are contained in this Agreement with respect to the NTI Product Components. The
license granted in this paragraph (b) shall survive termination of this
Agreement in accordance

                                      -25-
<PAGE>

with Section 14 if the escrow provisions were triggered prior to termination or
expiration of this Agreement, but Cadence may not trigger the escrow provisions
post-termination or expiration.

     15.4  Covenant Not To Sue.  In the event of a Source Code escrow release
           -------------------
pursuant to Section 15.2, effective on the date of release and any time
thereafter, each of Cadence and NTI agrees that it will not assert any claim or
bring any action for patent infringement against the other party with regard to
patents on the Developed Software and Derivative Works to the NTI Product
Components made by NTI or by Cadence through exercise of licenses and rights
granted in Section 15.3 which patents have a first effective filing date on or
prior to March 15, 2005  if the direct effect of such claim or action would be
to block further independent development of products that are derived from the
Developed Software or NTI Product Components.  In any event this covenant not to
sue shall not extend to making or having made products made of silicon or other
semiconductor materials.

16.       ASSIGNMENT.

     Neither party may, by operation of law or otherwise, assign any of its
rights or delegate any of its obligations under this Agreement without the prior
express written consent of the other party.  Notwithstanding the foregoing,
either party may assign all (but not part) of its rights and delegate all (but
not part) of its obligations under this Agreement to a third party as part of
any acquisition of such assigning party by such third party, provided that
notice of and details concerning such proposed assignment and delegation is
given to the non-assigning party, and Cadence may assign this Agreement to any
of its Affiliates; provided that, in no event may Cadence assign its rights or
delegate duties under this Agreement to any third party which Cadence has
engaged or is working with to develop, license, acquire, market, or distribute
any technologies which have substantially the same functionality as the NTI
Product Components as is permitted under Section 4.2 of this Agreement.  Subject
to the foregoing, this Agreement will bind and inure to the benefit of the
parties, their respective successors and permitted assigns.  Any permitted
assignment under this Section 16 shall be subject to the assignee agreeing in
writing to be bound by all the terms and conditions of this Agreement.

17.       MISCELLANEOUS.

     17.1  Waivers.  No waiver of any provision of this Agreement shall be
           -------
effective unless in writing and signed by the party to be charged. No failure or
delay by either party in exercising any right, power, or remedy under this
Agreement, except as specifically provided herein, shall operate as a waiver of
any such right, power or remedy.

     17.2  No Limitation.  Use of the word "including" is meant to be
           -------------
illustrative only and not limiting.

     17.3  Descriptive Headings.  The descriptive headings herein are inserted
           --------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.

     17.4  Governing Law.  This Agreement shall be governed by and construed in
           -------------
accordance with the laws of the State of California without application of any
choice of law

                                      -26-
<PAGE>

principles. All disputes under this Agreement shall be brought in the courts
located in Santa Clara County, California.

     17.5  Independent Contractors.  The parties are independent contractors.
           -----------------------
Neither party shall be deemed to be an employee, agent, partner or legal
representative of the other for any purpose and neither shall have any right,
power or authority to create any obligation or responsibility on behalf of the
other.

     17.6  Notices.  All notices and other communications hereunder shall be in
           -------
writing and shall be deemed to have been duly given when delivered in person, by
telecopy with answer back, by express or overnight mail delivered by a
nationally recognized air courier (delivery charges prepaid), or by registered
or certified mail (postage prepaid, return receipt requested) to the respective
parties at their addresses set forth on the first page of this Agreement or to
such other address as the party to whom notice is given may have previously
furnished to the others in writing in the manner set forth above.  Any notice or
communication so delivered shall be deemed effective on delivery or when
delivery is refused.  Any notice or communication to Cadence shall be addressed
to the attention of the General Counsel.

     17.7  Severability.  If any provision of this Agreement is held by a court
           ------------
of competent jurisdiction to be contrary to law, such provision shall be changed
and interpreted so as to best accomplish the objectives of the original
provision to the fullest extent allowed by law and the remaining provisions of
this Agreement shall remain in full force and effect.

     17.8  Force Majeure.  For purposes of this Agreement, "Force Majeure" means
           -------------
a cause beyond a party's reasonable control (and not involving any fault or
negligence of the party affected) including, without limitation, acts of God,
acts of war, revolution, riots, civil commotion, acts of a public enemy,
embargo, acts of government in its sovereign capacity, strikes, lockouts,
boycotts, fire, communication line or utility failures, power failures,
earthquakes, floods, or other natural disasters. Failure by a party to perform
its obligations during the existence of a Force Majeure condition will not
constitute material breach of this Agreement, provided that such party uses
reasonable efforts under the circumstances to notify the other party of the
Force Majeure condition and to resume performance as soon as commercially
practicable. Each party's obligations under this Agreement will be suspended
during a period of non-performance by either party due to a Force Majeure, and
when performance is resumed the term of this Agreement and all applicable
schedules and time frames for performance under this Agreement will be extended
by the same period of time as the period of time during which performance was
suspended. However, should a Force Majeure condition prevent performance for
more than ninety (90) days, the party whose performance is not prevented by such
Force Majeure condition will have the right to terminate this Agreement by
written notice to the other party.

     17.9  Entire Agreement.  This Agreement, including all Exhibits attached
           ----------------
hereto, constitutes the final, complete and exclusive agreement between the
parties with respect to the subject matter hereof, and supersedes any prior or
contemporaneous agreement.

     17.10 Amendment.  No change or amendment will be made to this Agreement
           ---------
except by an instrument in writing signed on behalf of each of the parties
hereto.

                                      -27-
<PAGE>

     17.11  Exhibits.  Each Exhibit attached to this Agreement is deemed a part
            --------
of this Agreement and incorporated herein wherever reference to it is made.

     17.12  No Implied Licenses.  No licenses are to be implied from any term of
            -------------------
this Agreement other than the licenses expressly granted herein.

     17.13  Counterparts.  This Agreement may be executed in counterparts, each
            ------------
of which will be deemed an original.

     IN WITNESS WHEREOF, the parties have caused this PSM Software Development
and License Agreement to be signed by their duly authorized representatives.

NUMERICAL TECHNOLOGIES, INC.        CADENCE DESIGN SYSTEMS, INC.

By:_________________________        By:_____________________________

Name:_______________________        Name:___________________________

Title:______________________        Title:__________________________

                                    -28-
<PAGE>

                          Exhibit A:  Cadence Products

[***]

[***]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTION.

<PAGE>

     Exhibit B: Statement of Work, Specifications and Development Milestones

[***]

[***]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTION.

<PAGE>

                      Exhibit C:  NTI Product Components

[***]

[***]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTION.

<PAGE>

                           Exhibit D : NTI Trademarks

     Registered Trademark:  Virtual Stepper(R)

     Corporate Trademarks:  Numerical Technologies(TM), Inc.

     NumeriTech(TM)

     The Numerical Technologies logo.

     Product Trademarks:

     iNPhase

     TROPIC

     N Abled

     SiVL

     ImagIC

     SiDRC

     SiImage

     RuleGen

     Model Gen

     NOPC

     IC Workbench
<PAGE>

                   Exhibit E:  Production Release Milestones

Production Release Milestone #1
-------------------------------

[***]

Production Release Milestone #2
-------------------------------

[***]

Production Release Milestone #3
-------------------------------

[***]

[***]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTION.

<PAGE>

                    Exhibit F: License Fee Payment Schedule

[***]

[***]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTION.

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